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Why The Future is Bright For These Offshore Drillers

Global energy demand is on the way up, led primarily by emerging markets. Therefore, opportunities abound in the energy sector. In particular, investors would be wise to consider offshore drillers, who are seeing strong upticks in business activity.

Of the publicly traded stocks that provide rigs, as well as other products and services to the offshore drilling industry, there are four that are firing on all cylinders right now and are poised to deliver strong returns going forward. Moreover, they're handsomely rewarding their investors with compelling dividends, and should be given strong consideration by investors interested in the energy sector.

Strong growth lies ahead
Transocean (NYSE: RIG  ) holds the largest worldwide rig fleet, with 80 rigs in operation. In addition, Transocean has an impressive $27.3 billion in backlog, meaning business conditions should remain strong in the future.

Of course, the major risk surrounding Transocean that its investors need to pay attention to is the ongoing legal trouble pertaining to the 2010 Gulf of Mexico oil spill. Some progress on this front has already been made, as Transocean pleaded guilty to violating the Clean Water Act and was forced to pay $400 million earlier this year. In total, the company reached a settlement with the Department of Justice in the amount of $1.4 billion, paid over five years.

That being said, Transocean has more than enough financial flexibility to withstand the financial damages stemming from the spill. Revenue is up 3.5%, and the company booked more than $1 billion in operating profit over the first six months alone.

Seadrill (NYSE: SDRL  ) lags behind Transocean in terms of rigs currently in operation, but it has 25 rigs currently under construction, so investors shouldn't worry that the company is at risk of missing out on the surge in offshore drilling activity.

Furthermore, investors should be enthusiastic because of the company's high efficiency. Seadrill has shed assets that it considers to be non-critical, including selling its tender rig division for $2.9 billion, on which it realized a gain of $1.25 billion.

At the same time, Seadrill generated its best operating results and net income ever in its recently concluded second quarter. In all, net income totaled $1.75 billion. The fact that Seadrill is booking record results while simultaneously streamlining its operations is a huge credit to management, and investors should be excited as a result.

Not to be outdone, Noble (NYSE: NE  ) has grown this year right alongside its competitors. In addition, Noble offers a unique proposition for investors, in that its operations are highly diversified geographically. The company has very effectively spread its bets across the globe. No single geographic area represents more than 31% (the Gulf of Mexico) of the company's revenue. In addition, Noble generated 20% of its revenue from Brazil, 19% from the Middle and Far East, 14% from Europe, and 10% from Mexico.

This strategy has clearly worked to Noble's advantage. The company realized quarter-over-quarter increases in most metrics, including revenue and diluted earnings per share. In all, Noble produced 5% growth in revenue and 17% growth in diluted EPS in its second quarter, as compared to its first-quarter results.

Another high-performing driller is Ensco (NYSE: ESV  ) , an interesting play because of the remarkable progress made since 2008. Quite simply, Ensco has drastically restructured itself over the past five years. In 2008, Ensco was exclusively involved in jackups, which accounted for 96% of its revenue. Today, the company is much more diversified, and jackups represent a much more reasonable 35% of revenue. Floaters now comprise the majority of the company's revenue mix.

It's abundantly clear that Ensco's efforts have paid off. Since 2008, revenues have doubled, to $4.6 billion today. The company's market capitalization has growth from $5 billion in 2008 to $17 billion today, and its annual dividend per share has skyrocketed from $0.10 per share five years ago to its current level of $2.00 per share.

Drill deep for growth and income
Not only are Transocean, Seadrill, Noble, and Ensco poised to profit handsomely from the global surge in offshore drilling, but their management teams are seriously committed to sharing their success with shareholders. This is accomplished primarily in the form of hefty dividends.

While the S&P 500 Index yields approximately 2%, each of these stocks provides a much greater yield. Ensco and Noble yield 3.6% and 2.6% at recent prices, respectively, which are solid yields that compare very favorably to the broader market. Meanwhile, Transocean yields 4.7%, and Seadrill does even better, with a nearly 6% yield according to Yahoo Finance.

As a result, both growth and income investors will find a lot to like from this group. Transocean, Seadrill, Noble, and Ensco have strong growth ahead, and their investors will likely prosper right along with them.

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Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 16, 2013, at 3:30 PM, lrark wrote:

    FYI: SDRL paid it's March dividend in Dec 2012 to get around the expected rate hike in 2013. this skewed the real divvy rate lower , At present the current rate is about 7.7%

  • Report this Comment On September 17, 2013, at 2:57 PM, spokanimal wrote:

    Transocean remaining potential financial exposure to the macondo oil spill is a non-issue.

    They have had over 3 years to quantify and feel out the exposure with the courts and have "reserved" for the anticipated amount(s) that could still be owing.

    It's highly unlikely that there will be any further financial impacts beyond what they have reserved (pre-expensed) for.

    Separately, I would add that many of the "refurbishing" expenses related to macondo are also behind them. In 2011 and 2012, the company had much capaicty offline with required safety upgrades of equipment... most prominantly RIG's blowout preventors. Those were expensive to do and resulted in a lot of down time.

    Transocean is now emerging as a significant, contrarian, value proposition...

    ... which is why it has attracted the likes of a Carl Icahn.


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Related Tickers

9/29/2016 4:02 PM
ESV $8.38 Up +0.23 +2.82%
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Transocean CAPS Rating: ****
SDRL $2.49 Up +0.18 +7.79%
Seadrill CAPS Rating: ***