Drilling for Profits in Oil Services

When we invest in the major diversified oil and gas giants, there's not a lot of thought given to the particulars. Oil production just sort of happens, and it's rare to worry about how.

Today, let's worry about how, and consider the companies in the business of making oil production happen. Here, we will discuss three oil and gas services companies involved in offshore and coastal drilling.

Offshore tracts amount to 27% of all oil production in the United States, and 14% of all natural gas production. While you might have expected that figure to shrink after the Deepwater Horizon disaster, that isn't the case, and offshore production is growing.

Transocean: The deepwater play
One of the world's largest offshore drilling companies is Transocean (NYSE: RIG  ) , responsible for about half of the world's deepwater platforms. An under-appreciated market leader in a growing industry, Transocean is trading at only 0.98 times book value.

Transocean's reputation took a pretty big hit with the Deepwater Horizon spill, since it owned the rig, and it was fined $1.4 billion for violations of the Clean Water Act relating to the spill.

The stock recovered a bit when the fine was announced last year, as it was lower than some feared, but it has never again touched the levels it enjoyed in 2010 and before. Trading at only 10.84 times earnings, and with a PEG ratio that is only 0.74, the company looks like a bargain. With a sustainable dividend yield of 6.6%, it is also an interesting income play.

The shallow end
Not that you have to go into deepwater drilling to make good money offshore. Hercules Offshore (NASDAQOTH: HERO  ) has made its money off of drilling in the shallows. The company has recently fallen on hard times over fears of a contract cancellation, which has driven it down to 52-week lows.

While that's revising estimates downward in a big way, the company is worth considering at these levels, trading at only 0.83 times book. Where its earnings in the near term will land is anyone's guess, and the estimates vary wildly, but it will remain profitable and able to weather the current storm, meaning the company remains a candidate for a long-term contrarian play.

On land and sea
In fact, you don't even have to drill offshore to get to the oil underneath the water, as dry land driller Parker Drilling  (NYSE: PKD  ) has proven with its Yastreb Rig in Russia's far east. Getting to the oil in the Okhotsk Sea, they put the rig on land and drilled down and horizontally under the sea.

Parker is expanding both on land and offshore, and its earnings are growing in a big way, trading at just 9 times forward earnings and with a PEG ratio of only 0.62.

Parker Drilling is comparatively small, with less than $1 billion in annual revenue in 2013, but it seems poised for consistently strong growth in both revenue and earnings that put it in an enviable position.

Buying by the numbers
When buying drillers, it's important to be in it for the long haul. A bad contract or two can clobber any driller's stock (see Hercules Offshore), but in the long run, a well-run company that provides good, quality service can weather all but the worst crises.

Transocean makes a lot of sense as a first foray into investing in drillers, as a powerful market leader with a huge fleet of deepwater rigs. Its consistent earnings and large, sustainable dividend are tough to find in any industry.

Hercules Offshore is worth considering as a turnaround play, as its recent bad news has put it in oversold territory. Parker Drilling is perhaps less reliable an earner than Transocean, but it could be the best of the bunch because of its strong growth potential.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (0) | Recommend This Article (3)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3010122, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:13:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jason Ditz

Jason Ditz is the News Editor for He has 10 years of experience in foreign policy research and his work has appeared in Forbes, Toronto Star, Minneapolis Star-Tribune, Providence Journal, Washington Times and the Detroit Free Press.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
HERO $0.00 Down +0.00 +0.00%
Hercules Offshore,… CAPS Rating: **
PKD $3.23 Up +0.37 +12.94%
Parker Drilling Co… CAPS Rating: *****
RIG $13.59 Up +0.66 +5.10%
Transocean CAPS Rating: ***