How Oilfield-Services Stocks Can Bolster Your Returns

Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Don't let pressured stock prices in the oilfield-services sector deter you from considering them to be good long-term holdings. Crude oil prices have been hovering above $90 a barrel, spurring demand from the major oil and gas companies for drilling equipment. In the past, prices of above $80 had been conducive to the drilling of new wells. Selecting holdings from the oilfield-services industry will require an overview of the best choices at this time, whether it be based on their customer relationships, geographical presence, or expansion initiatives.

Ensco, geographically well positioned

Ensco's (NYSE: ESV) bottom-line results are benefiting from rising day rates (pricing) and a modestly increased rig count. What I think sets it apart, though, is its presence in the North American and South American markets, including Brazil, where 32 of its 73 rigs were located as of March 31. This means it is experiencing growth from the recent discoveries in the Gulf of Mexico and high utilization levels there, as well as from its business with Mexican state-owned oil firm Pemex and Brazilian state-owned Petrobras. Both of those customers are expanding their equipment counts and plan to do so over the coming years.

The company has about seven rigs under construction, including ultra-deepwater drillships and jack-ups scheduled for service beginning in late 2014 and early 2015. Ensco's shares may well be a good turnaround choice, given favorable operating conditions. Plus, the board pays out a dividend that amounts to about a 3.5% yield at this price.

Schlumberger, strong discovery and drilling businesses

Schlumberger (NYSE: SLB) earns a large proportion of income from a high-margin reservoir characterization business that provides services for the finding and defining of hydrocarbon deposits. Profits from that, along with its drilling segment have jumped of late. On that note, Schlumberger also operates a production arm that is marked by cyclicality in profitability. In this way, it is similar to Helix Energy, a driller that owns production assets such as well intervention, robotics, and sub-sea construction operations. Overall, Schlumberger appears to be on a growth path.

Geographically, Schlumberger is generating income from North America, though gains have stemmed from the European, Middle East and Latin American markets. The company is poised for continued share-net gains year-over-year, and the shares are thus a worthwhile selection. The forward P/E is about 12.7, based on share-earnings growth of 10% to 15% in 2013.

Transocean, back to the basics

Returning to the traditional offshore and deepwater drilling sector, Transocean's (NYSE: RIG) top and bottom lines are climbing behind increased utilization, particularly for its deepwater fleet. This is in contrast to Ensco, where pricing has been the key factor. Accordingly, revenue and margins are expanding thanks to the improved market conditions versus a year ago.

Once again, demand is likely to rise in Latin American markets, such as Venezuela, where Transocean is contracted with PDVSA, the state-owned firm. Plus, it is seeing improved results in the Middle East and Asia, owing to heightened activity in those regions.

That said, March-quarter earnings were below expectations, inciting a sell-off of Transocean's shares. Shares are now trading at a low P/E multiple, based on around 10% bottom-line growth this year. Plus, the price/book value is around 1.0, indicating caution by investors. Given that earnings are back on track, the shares are a good value pick at this time.

Noble, profit growth and cash distributions

Switzerland-based Noble (NYSE: NE) is experiencing rapid revenue gains, thanks to its broadened relationship with Shell whereby it launched three rigs during 2012. Day rates are on the rise, too, fueling margins.

Noble's customer contingency is, in fact, impressive. Besides Shell, it also serves ExxonMobil, PEMEX, Petrobras, and Saudi Aramco. Regionally, it is situated well in the revitalizing Gulf of Mexico, as well as in Brazil, while it is also present in Mexico, the North Sea and elsewhere. Noble's sizable backlog for the 2017 through 2023 period reflects an aggressive new build strategy, with 11 vessels under construction.

As a result, Noble is in the best shape among the services providers discussed here. Moreover, it recently announced that it will continue to distribute special payouts, specifically $1.00 a share quarterly through May 2014. Accumulate the shares for long-term portfolios.

Summing it up

The core offshore/deepwater drillers, including Ensco, Transocean and Noble, as an industry are trading at below book value (see ratios). Their positions in the market vary by customer, capabilities, and geography. Nevertheless, all hold investment value in my view at their current levels, based on positive operating conditions, including elevated commodity prices and relaxed regulations with regards to drilling permits. The deepwater market holds much promise over the next several years, and these may well be some companies that capture the market opportunities.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. 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!

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