Diamond Offshore Sparkles in the Deepwater

You know about the tremendous increases in hydrocarbons production that have been generated onshore in just the past few years in the primary U.S. oil-centric unconventional plays. I'm referring primarily to the prolific Eagle Ford of south Texas, North Dakota's Bakken/Three Forks, and the rejuvenated Permian Basin, which essentially straddles the lower border between Texas and New Mexico.

Nevertheless, it's likely that in the future, the biggest discoveries of black gold will occur in progressively deeper offshore waters. I'm referring to the likes of the Gulf of Mexico -- which was once thought to be on the road to depletion -- Brazil's Santos Basin, the Cuanza Basin offshore Angola, the South China Sea, and potentially the Kara Sea of the Russian Arctic.

The offshore energy opportunities
From the perspective of how to play this expanding trend, there are a number of international oil companies that might fit the bill. For instance, unless the Russians return to their devious ways, ExxonMobil (XOM 0.18%) will operate in the Kara and Black seas through a newly hatched joint venture with state-controlled Rosneft.

And there's very little drilling that occurs on our planet that doesn't involve oilfield-services leader Schlumberger in some form or fashion. But from my perspective, it makes eminently good sense to become familiar with the deepwater drillers, such as Transocean (RIG -0.61%) and Diamond Offshore (DO).

In the interest of full disclosure, I must admit to currently owning Transocean shares and to having served, as a wee lad, as a junior officer of a predecessor company of Diamond. So with those admissions as a backdrop, let's take a quick gander at two of the world's largest offshore drillers. Each has its own strengths, and, given the increasing tendency for oil and gas producers to splash around offshore, neither is likely to follow the fate of buggy-whip manufacturers during any of our lifetimes.

Transocean's bevy of big rigs
Swiss-based Transocean is the largest of the deepwater drillers, with 82 rigs under its at least partial ownership and operation. Fully 27 of the units are classified as "ultra-deepwater," meaning they're capable of plying their trade in water depths of 7,500 feet or more. Another 14 are "deepwater" rigs, meaning that they typically operate between 4,500- and 7,500-foot depths. The rest of the fleet consists of harsh-environment rigs, midwater floaters, and jackups -- both standard and high-specification types.

The company currently has at least five rigs working offshore Angola, Brazil, India, Malaysia, Nigeria, the North Sea, Norway, and the U.S. Gulf of Mexico. The last-mentioned locale leads the pack, with 15 busy Transocean rigs.

There are two issues regarding Transocean that bear monitoring by Fools thinking about investing in the company:

• Transocean remains a defendant in a federal trial relating to the horrendous 2010 tragedy aboard its Deepwater Horizon rig in the Gulf of Mexico. The New Orleans trial will probably be followed by litigation precipitated by the Gulf states, claiming damages from the oil gusher that followed the explosion aboard the rig. The ultimate amount of Transocean's liability in these actions is hardly clear.

• Corporate activist Carl Icahn has the company in his crosshairs, as was was the case with Chesapeake Energy (NYSE: CHK) last year. Icahn claims that management "destroyed approximately $11 billion of shareholder value," primarily through its 2007 acquisition of fellow driller Global Santa Fe. He is proposing that his fellow shareholders support him in demanding a $4-per-share special dividend, along with a say-so in the election of three new board members. Where Icahn's pursuit will culminate is also open to question.

More than a Diamond in the rough
The Diamond Offshore story is somewhat less complex. A subsidiary of Loews, Houston-based Diamond operates 44 offshore rigs, including 32 semi-submersibles, seven jackups, and five dynamically positioned drillships. Of the latter group, four are currently under construction. At present, the U.S. Gulf of Mexico and Brazil are each the home of a baker's dozen Diamond Offshore rigs, while an actual dozen are deployed in what the company categorizes as "Australasia," along with three in Africa, and four are in Europe.

For several quarters now, Diamond Offshore's board has declared special cash dividends of $0.75, in addition to the regular quarterly $0.125 dividend. As a result, the company's trailing annual yield stacks up to 3.50%, compared with Transocean's zero. Having broached the companies' metrics, let's look at some key comparisons among Diamond Offshore, Transocean, and, for added perspective, Noble (NEBLQ), another major offshore driller.

Sources: Yahoo! Finance and TMF calculations.

The Foolish takeaway
It's an intriguing set of metrics, I think you'll agree. My conclusion, having trod offshore rig-drill floors immediately upon departing from graduate school, is that Diamond Offshore is the first of the companies whose shares I'd drop into my portfolio. That's based upon its yield (I used the trailing percentage to reflect the effects of the special dividends), its operating margin, and its balance sheet. Indeed, Diamond's cash and its total debt are essentially equal, so the company is net debt free.