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Oil Riggers Offer Opportunity

http://www.fool.com/investing/general/2011/07/26/oil-riggers-offer-opportunity.aspx

Alex Pape
July 26, 2011

This article is part of our Rising Star Portfolios series. Follow all of Alex's trades and thoughts on Twitter.

Shares of oil riggers -- the companies that actually do the offshore oil drilling for the big oil names --have been on a roller-coaster over the past 15 months. The Deepwater Horizon oil spill last summer sank stock prices, which then rebounded as investors realized they overreacted, and new regulations proved less costly than expected. Then oil prices took off, pulling the riggers' stock prices even higher.

A unique industry
Oil riggers occupy a singular sector. There are fewer than 10 major players, which might normally suggest an oligopolistic marketplace -- but not here. Despite the concentration within the industry, remember the customer it serves: Big Oil. Even the largest rigger, Transocean (NYSE: RIG  ) pales in comparison to giant industry customers such as ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and BP (NYSE: BP  ) .

As a result, the riggers are price-takers. Assuming a rigger meets safety and reliability expectations, these guys provide a commodity service. Exxon doesn't care who drills its oil (and you don't care at the pump), and it will switch riggers if it can get a better price. And among the riggers, size carries no benefit. Contracts are per-rig, and nothing about having 50 rigs allows a rigger to offer a cheaper per-rig price than a contractor with just five rigs.

In this context, I think it is reasonable to expect that the market will likely value riggers similarly. After all, these companies all do the same thing for the same customers at the same prices, and their size doesn't matter. But riggers' valuations nonetheless vary considerably:

Company

EV

EV/EBITDA

P/E

P/TBV

Div yield

Atwood Oceanics (NYSE: ATW  ) 3,423 9.7 12.8 2.1 0%
Noble (NYSE: NE  ) 13,490 13.1 21.3 1.3 1.7%
Diamond Offshore (NYSE: DO  ) 10,357 6.2 10.8 2.5 4.9%
Transocean 28,084 7.9 48.9 1.5 0%
Ensco (NYSE: ESV  ) 6,93