Please ensure Javascript is enabled for purposes of website accessibility

Seadrill Still King of Offshore Drilling

By Travis Hoium - Apr 17, 2013 at 7:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Another lucrative deal shows Seadrill's strength.

The ultra-deepwater drilling market is still sizzling hot, and that's great news to the companies with exposure to the market. After the market closed yesterday, Seadrill (SDRL) announced that it secured a three-year, $662 million contract for the newbuild West Neptune, which isn't due to be delivered until June 2014. The operator leasing the rig plans to use it in the Gulf of Mexico and has an option for an extra year if necessary.  

This contract comes with a dayrate of just over $600,000 for Seadrill, keeping the momentum rig owners have in deep water. The company has 10 ultra-deepwater semi-submersibles and 10 drillships in operation when you include the holdings of Seadrill Partners (SDLP). Five more drillships will be completed by the end of 2014, which will drive earnings higher if these high dayrates continue. Management expects that these new rigs will help drive 50% or greater EBITDA growth by 2015.

High tide lifts all boats
In my opinion, Seadrill is the best company in offshore drilling, but it isn't the only one with major exposure to ultra-deepwater.

Transocean (RIG -0.48%) is selling off shallow-water rigs and building ultra-deepwater rigs to leverage the market. Forty-eight of Transocean's 82 rigs are high-specification floaters, built for ultra-deepwater, deepwater, and harsh environment drilling. It also has six additional ultra-deepwater drillships under construction, which should command similar rates as Seadrill has. Transocean has more upside potential, but operational issues will keep me out of Transocean right now.  

Noble (NEBLQ) also has 14 ultra-deepwater rigs, including five under construction. The challenge for Noble is that it still has 49 jackup rigs, which drag on earnings as shallow-water drilling slows. This market has been less of a drag recently, and the new drillship construction will help help drive earnings, but the company isn't as leveraged to ultra-deepwater as Seadrill and Transocean.

A growing opportunity
Ultra-deepwater has become more and more attractive for oil explorers as they run out of cheaper oil and discover large fields deep beneath the ocean's surface. Anadarko Petroleum recently announced another find in the Gulf of Mexico that is a "potentially giant project" and twice as big as they expected. This is a trend and has grown the demand for rigs at very high rates, which shows no signs of stopping any time soon.

I think Seadrill is the cream of the crop in deepwater drilling and investors can get in with a 9.6 forward P/E ratio and a 9.3% dividend right now. Not bad for a profitable and growing market.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaDrill Limited Stock Quote
SeaDrill Limited
SDRL
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$4.18 (-0.48%) $0.02
Noble Corporation plc Stock Quote
Noble Corporation plc
NEBLQ
Seadrill Partners LLC Stock Quote
Seadrill Partners LLC
SDLP

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.