Take a Look at These Four Oilfield Services Stocks
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oilfield drilling contractors have a few positives working in their favor: first, the oil and gas industry continues to explore and develop, specifically in deepwater regions. Second, consolidation among companies should help to firm up pricing and utilization. On the other hand, as it expands there is some concern of excess capacity, a situation that tends to go hand in hand with falling energy prices and reduced production. Subsequently, we will delve into four of the largest industry participants for assistance in deciding where to make commitments.
Noble (NYSE: NE)
Noble, Switzerland-based, lists the vast majority of its fleet as operating outside of the U.S.. Its two largest customers are Shell, at more than 60% of revenues, and Brazil’s state-controlled firm, Petrobras. The company is realizing improved equipment utilization and dayrates this year. Importantly, it is pursuing an aggressive expansion strategy, involving the planned construction of new ultra-deepwater and jackup rigs. It has already contracted out most of these and the projects should be completed by late 2014. Noble consistently doles out distributions to shareholders amounting to a modest yield. The stock is a worthwhile selection (buy) for now, in light of its weakened valuation and the likelihood of further earnings growth.
Ensco (NYSE: ESV)
Following last year’s combination with Pride International, Ensco owns the world’s second largest rig fleet. Its backlog is on the upturn and amounts to about $9 billion. The company is growing its proportion of higher-margined deepwater revenues, as opposed to midwater and jackups (offshore). Deepwater drilling contributes more than 50% of total revenues. Dayrates in that operation are climbing in tandem with strong demand for rigs in Brazil with Petrobras, as well as in the Gulf of Mexico and West Africa. Ensco is also seeing healthy utilization in the Midwater and Jackup segments. The company’s positive top- and bottom-line trends appear as if they will persist. Ensco shares are thus a top pick among numerous potentially lucrative holdings in this sector.
Diamond Offshore Drilling (NYSE: DO)
Diamond, too, has a substantial presence in South America, particularly Brazil. It is experiencing a profit slowdown this year. However, the cooling of revenues has been attributable, in significant part, to rig downtime stemming from issues including weather and maintenance, in addition to shipyard projects and mobilizations. On a positive note, its core Mid-water business is benefiting from solid demand, primarily in the North Sea (U.K. and Norway), and a recent offshore discovery. Plus, dayrates for the ultra-deepwater vessels that have continued to operate are running higher. The company has a moderately-sized ultra deepwater newbuild program that should assist results over time. Given its $8.7 billion backlog through 2019, it ought to perform well under a conducive industry operating environment. Accordingly, the stock is a good buy and hold selection.
Helix Energy Solutions Group (NYSE: HLX)
This company recently inked a long-awaited deal to divest its oil and gas properties for $700 million, a move that should free up cash for debt paydown and possibly add stability to earnings. Not a traditional oil and gas driller, Helix offers four types of contracting services: well operations, robotics, subsea construction, and production facilities; it plans to focus on the first two of these moving forward. Its methodologies aim to facilitate the development of offshore reservoirs and maximization of revenues from lesser utilized fields. Heightened regulations in the Gulf of Mexico since the 2010 BP spill had been restraining demand for construction vessels and other offerings somewhat. But, it is now utilizing construction and other assets effectively for the most part. The outlook for Helix is uncertain as it transitions to being solely a contractor. Those willing to bear the lack of earnings visibility may reap benefits from the leaner operation.
In sum, these companies do not receive as much recognition as the major oil producers. Similarly, these firms’ performances are tied to energy prices and demand, while a single company’s fortunes rests on the productivity of its asset base, as well. Where they are geographically based, and with what customers, should be considerations when purchasing the equities.
dctotal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!