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Drill rig owners are clamoring to add as much deepwater drilling capacity as possible, and hundreds of millions of dollars are being invested to try to build the biggest fleet. SeaDrill (NYSE: SDRL ) , Noble (NYSE: NE ) , and Transocean (NYSE: RIG ) are battling it out to add capacity in the highly sought-after ultra-deepwater segment.
On Monday, Transocean finalized a deal to pay $432 million in stock to its joint venture partner for full ownership of two ultra-deepwater rigs currently working off the coast of India. SeaDrill just ordered another ultra-deepwater drillship, adding to five units already under construction. The company is also adding another harsh-environment semi-submersible, which can drill in water depths up to 10,000 feet. These moves come on the back of high demand and strong earnings.
Relatively high oil prices and a number of new fields being discovered in places like Angola have driven the demand for deepwater rigs in recent years. This has pumped up demand from oil producers who are trying to exploit these new resources as easy oil in shallow water becomes scarcer.
Cashing in on the trend
Contracts are coming with strong dayrates for ultra-deepwater as well. Here are some of the latest contracts signed.
- DryShips (NYSE: DRYS ) subsidiary Ocean Rig signed a three-year contract to drill off the coast of West Africa that is worth as much as $652 million.
- A contract for one of SeaDrill's semi-submersibles recently fetched $710 million over three years, about $650,000 a day.
- Ensco signed a deal last month with BP to provide one of its ultra-deepwater drillships for $522,000 a day for five years.
Rates around $600,000 per day are about average at this point and should provide a boon for companies with exposure to the space.
Profits hitting the bottom line
The fruits of this labor are starting to materialize for drilling companies. Transocean recently surprised investors with a $0.68 per-share profit, more than double what analysts had expected. A higher utilization rate helped drive earnings higher, and with more exposure to ultra-deepwater, the strong earnings should continue. A current dividend yield of 6.6% also provides investors with an attractive yield on Transocean's shares.
I don't expect the expansion in ultra-deepwater drilling or the strong dayrates to stop anytime soon. With large fleets to exploit the market, SeaDrill, Transocean, and Noble will continue to perform well in the space and are worth a further look from investors. These deep-sea drilling companies are only one way to experience soaring stock valuations. If you are interested in energy companies that are set to have sky-high returns, make sure to check out this free report explaining why these three stock picks are ready to take off due to high oil prices.