Push to Deepwater Helping Seadrill

The offshore oil drilling market continues to be red hot, particularly ultra-deepwater, which is great for Seadrill (NYSE: SDRL  ) . In the second quarter, total operating revenue rose 13% from a year ago, despite selling its tender fleet during the quarter. Net income spiked to $1.75 billion but that was driven by the tender sale so a better judge of progress is to look at a 5% rise in operating income to $507 million. To top it off, management increased its dividend to $0.91 per share.  

Seadrill's fleet is now even more heavily skewed toward  ultra-deepwater drilling with 70% of contract revenue coming from the floaters segment. That's a good sign for investors because deepwater rigs are commanding high dayrates and long-term contracts. 6 of Seadrill's drillships and 6 semi-submersibles are contracted into 2017 with dayrates as high as $590,000.  

The newbuild program will keep returns high and revenue growing in the future as well. 27 new rigs are under construction, including 11 drillships and 2 harsh environment semi-submersibles. If the market continues like it is Seadrill could nearly double revenue in the next five years.

Deepwater drilling lifts all rigs
The transition to deepwater has been a swift one for some of the industry's largest players. Transocean (NYSE: RIG  ) has taken a similar strategy to drilling as Seadrill, selling 37 jackups  last year for $1.05 billion. It also has six ultra-deepwater rigs coming in the next two years, continuing its transition to a deepwater company. Noble (NYSE: NE  ) will begin generating revenue from two new rigs this quarter and has another three under construction as well.

Where Seadrill has an advantage over Transocean and Noble is with a newer fleet and revenue reliant on ultra-deepwater. That's resulted in the revenue out-performance you see below.

SDRL Revenue TTM Chart

SDRL Revenue TTM data by YCharts

Offshore drilling pays you back
If the deepwater market continues to expand at a rapid rate the industry will easily be able to absorb the supply being built by Seadrill, Transocean, Noble, and others are building. That will help keep revenue and profits growing as these companies expand deepwater fleets and allow them to pay back investors. Seadrill currently leads these companies with an 8.1% dividend yield followed by Transocean at 4.8% and Noble at 2.6%. Each dividend should grow given the strong earnings prospects these companies have. Seadrill is my pick but I think the whole industry will be able to outperform the market going forward.

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