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Some Companies are Built to Survive Rough, Economic Waters in 2014

Among the global oil drillers, there doesn't seem to be much that separates Ensco PLC (NYSE: ESV  ) , Transocean (NYSE: RIG  ) , and Seadrill (NYSE: SDRL  ) in terms of underlying business conditions. Each company reported strong operating results throughout the year, and all three are poised to capitalize on the boom in oil drilling across the globe.

At the same time, there are a few subtle differences between the strategic directions of each company that investors should carefully consider, as well as their financial conditions. For the best mix of strong performance, product mix and strategic focus, and optimized shareholder policies, Ensco wins out.

Deep-water drilling in focus
Oil is getting harder to come by, with many discoveries occurring in harsh environments. Furthermore, industry data suggests an increasing proportion of global oil discoveries are located in deep-water, as opposed to onshore or offshore plays. According to Transocean, of all new field resources discovered in 2012, 12 billion barrels of oil equivalent were discovered at depths of 5,000 feet or greater. This compares to slightly more than 6 billion barrels of oil equivalent discovered at depths between 1,300 and 5,000 feet, and just over 3 billion discovered at depths of less than 1,300 feet.

This is why Transocean has focused itself on deep-water drilling, and to be sure, it's likely the company's efforts will pay off. In the future, Transocean's core asset portfolio will be centered on harsh environments, high-specification jackups, and ultra-deepwater rigs. Ensco shares this philosophy, which makes it an equal winner from the boom in deep-water drilling.

Going forward, Ensco will focus on its ultra-deepwater drillship and an ultra-premium harsh environment jackup. Ensco accepted delivery of the two rigs in question, the ENSCO DS-7 and ENSCO 120, during the third quarter, and both involve multi-year contracts.

This is where Seadrill is at risk of falling behind. It currently operates just 16 combined ultra-deepwater and deep-water floaters. It's got 23 rigs currently under construction, but it will take time for those to pay off.

Shareholder rewards aplenty
Transocean and Ensco share strategic directions, but Ensco investors are at a distinct advantage because of shareholder policies. Transocean investors no doubt enjoy the company's hefty dividend, which stands at nearly 5%. Ensco, however, does its investors even better. The company recently jacked up its dividend by 50% and as a result yields almost 5.5% at recent prices.

Furthermore, Ensco's payout isn't affected by foreign withholding taxes, since Ensco is headquartered in the United Kingdom. Transocean, meanwhile, is headquartered in Switzerland, which means residents of the United States will see their dividends get a 35% cut due to taxes.

Seadrill's dividend towers above the competition, at nearly 10% according to Yahoo! Finance. However, Seadrill maintains a variable dividend policy, meaning the level of future payouts are far from a certainty.

In addition, this uncertainty is more pronounced due to Seadrill's significantly leveraged balance sheet. Seadrill carries a long-term debt to equity ratio of 130%, due to the fact that it's got more than $10 billion in interest-bearing long term debt on its books. This stands in stark contrast to Ensco's much more reasonable 37% long-term debt to equity ratio. Should Seadrill's business see any significant bumps in the road, not even including the potential impacts of rising interest rates, its dividend could be at risk.

For the 'Goldilocks' oil driller, choose Ensco
To be sure, Transocean and Seadrill are highly profitable companies that will share in the boom in global oil drilling. They each maintain strong contract backlogs and reward their shareholders with compelling dividends. However, Ensco's strategic focus on deep-water drilling is likely to pay off more than Seadrill's. In addition, Ensco's dividend provides a higher yield than Transocean's, and even more so when you include the impacts of foreign withholding taxes. As a result, for the best mix of product focus, balance sheet strength, and dividend yield, choose Ensco among the global oil drillers.

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Read/Post Comments (6) | Recommend This Article (1)

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 December 29, 2013, at 8:36 PM, gistanleyjr wrote:

    As an Ensco ESV stockholder I must say, love is a beautiful thing. UR the best deep driller I know.

  • Report this Comment On December 29, 2013, at 8:38 PM, gistanleyjr wrote:

    ORIG is a close second

  • Report this Comment On December 30, 2013, at 9:08 AM, pizzaboy wrote:

    Am I missing something?

    "Furthermore, Ensco's payout isn't affected by foreign withholding taxes, since Ensco is headquartered in the United Kingdom. Transocean, meanwhile, is headquartered in Switzerland, which means residents of the United States will see their dividends get a 35% cut due to taxes."

    Div is paid out of Addl paid in capital, hence no w/h tax on rig div.

    After over-leveraged SDRL, imo rig is most attractive driller considering valuation/backlog/logistics. Presume all Macondo risks are priced into valuation.

  • Report this Comment On January 02, 2014, at 10:58 AM, 67Bulldog67 wrote:

    In comparing Ensco to Seadrill, you state that ESV is the better play on UDW drilling. I beg to differ! If you looked at their respective 3rd quarter reports, you would find the following:

    ESV - 62.2% of revenue from floaters

    SDRL - 73.0% of revenue from floaters

    ESV - 36.3% of revenue from jack-ups

    SDRL - 23.8% of revenue from jack-ups

    Note: SDRL has three tender rigs and ESV has some minor other income, so the percentages don't total 100%.

    SDRL currently has 23 floaters, not the 16 you quoted (note, I am counting the NB's that started in the 4th quarter as active rigs). Their floater fleet will almost increase by 50% with the current 11 NB's that will be added by the end of 2015. ESV currently has 26 floaters, only 16 of which are capable of drilling in water depths of 7500 feet or deeper. They have 3 UDW drill ships that will join their fleet by the end of 2015, bringing their floater fleet to 29 units (compared to 34 for SDRL by then).

    One of the problems with ESV is that they have many older, less capable jack-ups. Their total JU fleet is currently 43 units with another 4 NB's in progress. Thus the comparative breakdown of floater fleet as a % of floater plus jack-up fleet is as follows:

    Floater fleet - now & by end of 2015

    SDRL 52.3% 51.5%

    ESV 37.7% 38.2%

    SDRL's floater fleet percentage is going to decline only because they have 11 NB jack-ups and 11 NB floaters under construction. Now admittedly, one could argue that SDRL's rig #'s are inflated somewhat since they count all rigs, including those owned by NATDF & SDLP, of which they own approximately 75%. (also includes 3 current & 1 NB of Sevan Drilling, of which they own just over 50%)

    Not only does SDRL have a greater weighting in the UDW and DW markets than ESV, but their fleet is newer and of a higher quality. ESV currently has 38.5% of their floater fleet that cannot drill in UDW, but I give them credit for attempting to change that with their NB program. However, they have a long way to go before catching SDRL. In fact with SDRL's higher number of NB's under construction, ESV will fall further behind in the # and capabilities of their floater fleet compared to SDRL.

    One last comment on RIG's dividend. Both RIG and Noble Corp. (NE), which just relocated to the UK from Switzerland, both paid dividends out of retained capital, so US investors never had to pay Swiss taxes. Either company's web sights clearly pointed that out.

  • Report this Comment On January 02, 2014, at 11:17 AM, 67Bulldog67 wrote:

    One other comment on SDRL's dividend. Your quote: "Seadrill maintains a variable dividend policy, meaning the level of future payouts are far from a certainty." I believe this is very misleading. During 2012, SDRL made a special dividend payment of 15 cents per share in addition to their regular dividend. This was a way of returning capital to shareholders when they sold off a minority interest in another firm at a big profit.

    Also in December 2012, they paid two dividends - the 4th quarter plus the 1st quarter 2013 dividend - due to uncertainty regarding higher US tax rates on dividends. Then in the 2nd quarter 2013 SDRL raised their dividend from 85 cents to 88 cents; raised it again in the 3rd qtr. to 91 cents, and again to 95 cents with the most recent payment.

    Thus if your definition of a "variable dividend" is one that steadily rises, we are in agreement!

  • Report this Comment On January 03, 2014, at 7:28 PM, Heidikitty wrote:

    Unless things change drastically I am in for the long haul with SDRL! Like the idea of new rigs and quality at that. LONG SDRL

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9/29/2016 4:02 PM
ESV $8.38 Up +0.23 +2.82%
Ensco CAPS Rating: *****
RIG $10.63 Up +0.61 +6.09%
Transocean CAPS Rating: ****
SDRL $2.49 Up +0.18 +7.79%
Seadrill CAPS Rating: ***