How Geopolitical Risk and Hurricane Season Affects Undersea Drillers Differently
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investing in energy resources is very attractive over the long term. The world demand for energy is set to increase while traditional energy sources are decreasing in supply. This situation will produce strong long term prices. The fracking revolution has pushed natural gas prices down but crude oil is still relatively hard to find. With the big fields fields declining even with water injection and other methods companies and nations are increasingly turning to undersea exploration to find new reserves. These drilling companies are highly profitable and offer a strong position in a growing niche. Their fleets are rented out to national and international oil companies and the different geographical set up of the fleets means that each company is exposed to a different set of Geopolitical and environmental risks.
At the end of 2011 Rowan (NYSE: RDC) had a third of their fleet in the Middle East and a third in the Gulf of Mexico. In 2011 about 31% of revenue came from the North Sea while the Gulf of Mexico and Middle East each provided 28% of revenue. Ensco (NYSE: ESV) has much less exposure to the North Sea. According to the 2011 10-k the Gulf of Mexico has the highest number of rigs with around 25% of the fleet. Brazil and those cold stacked in Singapore each have around 14% of the fleet. The United Kingdom and Saudi Arabia each have around 8% of the fleet. Atwood Oceanics (NYSE: ATW) is a much smaller driller with a market cap of only $2.9 billion. At 84% of projected 2012 revenue, their ultra deep water and deep water fleets provides the majority of income. Based on the second quarter report in 2012 around half of their fleet is found in Australia. Diamond Offshore Drilling (NYSE: DO) has greater fleet diversity with around one half of their fleet being mid water submersibles. The most recent 10-k states that around 40% of the fleet is in Brazil and 11% in Malaysia. The English and Norwegian North Sea is around 11% while around 11% is under construction in South Korea or the Gulf of Mexico. Australia is the next largest location with around 6% of the fleet.
Geopolitical aspects are a clear part of understanding the risk situation of these companies. Rowan Companies (NYSE: RDC) has some of the greatest exposure to the Middle East. This makes the company more sensitive to the risk of an Israeli-Iranian conflict or a and Iran-Iraq conflict. The low exposure to the Gulf of Mexico and the Middle East means that the current hurricane season and Middle Eastern conflicts has relatively little impact on Diamond Offshore Drilling (NYSE: DO). Similarly, Atwood Oceanics (NYSE: ATW) vessels are centered around Australia and West Africa. Ensco (NYSE: ESV) and Rowan (NYSE: RDC) both have a relatively high percentage of their fleet in the Gulf of Mexico with 25% or more of the fleet placed there. The yearly hurricane season should have a greater effect on their stock price.
It has been shown before that Atwood Oceanics (NYSE: ATW) has one of the youngest fleets in the industry. Also, they have one of the fleets which are most dedicated to deep water drilling. Having a fleet specifically oriented toward deep water and ultra-deep water is a clear advantage as a firms continually have to drill deeper to find new deposits. Future demand for ultra-deep water and deep water far exceeds that of mid water and jackup vessels. The backlogs show that around 50% to 84% of the backlogs are for deeper water vessels. The majority of their fleet remains in West Africa and Australia which means that they have relativity little exposure to the geopolitics in the Middle East or the Gulf of Mexico's hurricane season. Though they are one of the smaller drillers the low 12 PE ratio, young fleet, and low amount of hurricane or Middle East risk means that this company is still a strong buy.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Atwood Oceanics. Motley Fool newsletter services recommend Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.