3 Companies Drilling OPEC's Coffin
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Note: A previous version of this article incorrectly referred to Noble Corp as Noble Energy. The error has been corrected below.
Oil exploration and production in the Gulf of Mexico continues its upward momentum in all aspects. By some estimates, the Gulf could yield 2.5 BOE/day. Given that the US imports about 4 million BOE/day from OPEC countries, Gulf of Mexico oil could seriously hurt OPEC imports in the future. Pleasant thought, but you have to drill for it first. Here are three deep-sea drilling companies that are drilling OPEC’s coffin.
Modern rigs, lots of contracts
The company with the most modern fleet of deep-sea drillers is Seadrill (NYSE: SDRL). The company underwent fleet modernization over the past three years with plans to continue adding new rigs in 2013 and beyond. Of the four different classes of rigs, three are 99%-100% leased through 2013 and the fourth is 80% leased. The company maintains a $21 billion order backlog.
For the fiscal year 2012, average daily revenues varied across the rig classes. Overall revenues and dividends increased but earnings declined. Operating expenses increased, particularly for downtime in their two most lucrative rig classes either for technical reasons or transfers. Other rig classes did not experience significant downtime for technical problems.
Seadrill offers investors both income and capital gains potential. The current dividend yields about 8.9% and the stock grew from around $8 in 2009 to almost $40 today. The stock sells for a little over 15 times earnings, reflecting a promising future. Newer rigs command higher lease rates and Seadrill has more newer rigs with more on order. Those rigs on order have already been contracted even before they’re built. The company holds a significant debt load, but this is for building rigs that, again, already have lease commitments.
In the Gulf and around the world
Noble Corp (NYSE: NE) operates 20 rigs in Mexican and US Gulf of Mexico waters. After its first offshore drilling operation off Cape Hatteras in the 1940s, Noble has grown to an international drilling company operating 68 rigs throughout the world. Even better, Noble has 11 rigs under construction and under contract.
One downside to all the shipbuilding is capital expenditure will likely exceed cash flow for 2013. However, since the new rigs are already contracted, risk is minimized. Further minimizing risk is Noble’s efforts to reduce drillship downtime. So far, they reduced downtime from 6.5% in 2012 to 5% and foresee further improvements in 2013.
The most recent quarter showed improved earnings from the previous year, $0.59 per share versus $0.50 per share. Management also reported higher dayrates for its operating rigs and about $14 billion in backorders. Looking ahead, Noble sees the Gulf of Mexico as one of the prime locations for new oil discoveries and management is upbeat on Noble’s position to capitalize.
Not upbeat, but beat up
On April 20, 2010, Transocean (NYSE: RIG) joined British Petroleum in becoming a household name courtesy of the Deepwater Horizon explosion and environmental disaster. Not the sort of press companies yearn for. The fallout hammered Transocean’s earnings in 2011 and to a lesser extent, 2012. Lawsuits persist and form more dark clouds for 2013.
Transocean, to its credit, continues to drill for oil. In fact, the company plans on divesting its onshore exploration business to concentrate on higher-margin offshore drilling. While these re-alignment efforts won’t show up until next year, Transocean is moving in the right direction. The company currently operates 15 rigs in the Gulf of Mexico, the most of any of its offshore drilling operations. For the four weeks from March 14 to April 18, Transocean added $1.2 billion of new or extended contracts for all rigs in all locations. Clearly, Transocean isn’t going away.
Unfortunately, also not going away are lawsuits or Carl Icahn. Lawsuits continue to entangle the company although a settlement was reached with the Department of Justice. Carl Icahn wants a special dividend. Transocean’s biggest shareholder submitted a shareholder proposal for a $4.00 per share dividend rather than the $2.24 per share offered by Transocean. Given Transocean’s legal headaches from Deepwater Horizon and other incidents, not to mention over $12 billion in debt, I’m not sure even $2.24 is a good idea.
Final Foolish Thoughts
Deepwater drilling rigs command increasingly higher leasing rates due to growing demand. The Gulf of Mexico holds exciting promise as new technology allows previously untouchable oil to be produced. This, in turn will reduce US demand for OPEC oil.
Drilling companies stand to profit from both the growing worldwide demand for oil and the technology to find and extract it.
Overall, I like Seadrill for its income and capital gains potential. Yes, the debt load is high, but I believe it is well covered by solid lease commitments. Noble comes in as my number 2 pick. Transocean, with all of its legal expenses and uncertainties, would best be avoided.
Robert Zimmerman owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and 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!