Invest in These Offshore Drillers
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Petroleum is not the easiest resource to acquire. Even as billions of dollars have flooded into the energy markets the growth in green energy is far greater than that of crude production. Over the past decade most of the growth in petroleum production has come from obscure, hard to reach places. Specialized off-shore drilling companies are a great way to profit from acute energy constraints.
Atwood Oceanics (NYSE: ATW) is a very strong offshore driller that boasts 5 year revenue growth of 12.3% and 5 year EPS growth of 11.7%. Atwood continues to develop as a quality player with specialized deepwater assets. 44% of 2014 revenue is expected to come from ultra deepwater floaters versus their 9% contribution in 2011 (PDF download). Their deepwater semi-submersibles with follow on work are booked until 3Q 2013 while their ultra-deepwater semi-submersibles are booked until 1Q 2014. Given their strong backlog, the expected 2013 EPS growth rate of 35.4% is realistic. With their current PE ratio of 11.2, the company is cheap and poised to grow.
Diamond Offshore Drilling (NYSE: DO) is around 3 times larger than ATW and they have been able to maintain a healthy free cash flow yield over the past couple years. DO is not a nimble developing driller but more akin to a dominant and mature player. Their 5 year revenue growth is 2.7% while their 5 year EPS growth is -3.5%. Over the past couple years they have decreased the number of jackup and mid-water rigs while almost doubling the number of ultra-deepwater and deepwater rigs. With a larger fleet and more assets devoted to traditional wells, their expected earnings growth is not as spectacular as ATW. DO is a major player in this industry and has a long operating history, but already trades at a PE ratio of 12.7.
Ensco (NYSE: ESV) has a varied fleet and very new ultra deepwater ships with an average age of 3 years. ESV's emphasis on jackup rigs is seen in their 5 year revenue growth rate of 9.0% and 5 year EPS shrinkage of -12.3%. Their overall average deepwater fleet age of 7 years is much better than DO's average fleet age of 29 years. Premium jackups are in short supply and their premium jackups boasted a 93%-94% utilization rate in the first half of 2012. With a PE of 11.3 and a young fleet, ESV is a good company to consider for investors who want to gain exposure to jackup rigs.
Hercules Offshore (NASDAQ: HERO) is not a deepwater driller, but instead runs a fleet of jackups and liftboats. Ultra-deepwater is the general growing trend, but nevertheless a tighter supply/demand situation has developed in the market for jackups in West Africa and the U.S. Gulf of Mexico (PDF download). HERO hasn't exactly been a star player as it has posted losses and -5.0% revenue growth over the past couple years. Analysts do project a profit in 2013, but at the average EPS estimate of $.28 and current stock price of $5.12 investors are paying a PE ratio of 18.3 for HERO. The company is even less attractive when looking at its debt to equity ratio of 1.0 which is double the ratio of many of their competitors.
There are many ways to profit from the energy constraints of the 21st century. The best off shore drillers offer specialized fleets specifically designed to work in the world's emerging fields. ATW has a growing deepwater and ultra deepwater fleet which puts them in a powerful bargaining position. HERO is best avoided for the time being until it becomes clear that it can be profitable.
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. Is this post wrong? Click here. Think you can do better? Join us and write your own!