Which Oil Rig Stock Should You Buy?

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

The world will always need more oil, and as the oil fields that are easy to access run dry, the world will have to go to more extreme places to find it. Oil companies are now dependent upon the expertise of professional oil rig companies to run the drilling and extraction operations that they are no longer able to conduct themselves.

But where to invest to play this long term trend?

Well firstly it would be helpful to find out what the rig situation around the world is like.

Area

Last Count

Count

Change from Prior Count

Date of Prior Count

Change from Last Year

Date of Last Year's Count

U.S.

18 Jan 13

1749

-12

11 Jan 13

-259

20 Jan 12

Canada

18 Jan 13

601

+70

11 Jan 13

-53

20 Jan 12

International A

Dec 2012

1253

-14

Nov 2012

+73

Dec 2011

This is the global rig count, as supplied by Baker Hughes. I can see that the global rig count is falling in some area’s but rising in others - overall the count is remaining relatively stable.

It is also handy to know the cost of oil rigs, as this could be a deciding factor in where to invest. Offshore oil rigs can cost up to $500,000 per day, whereas onshore truck-based rigs can cost as little as $1,000. This will lead to higher margins for off shore drilling companies and lower margins and income for those companies who drill onshore. 

So who are the main players?

There are four main players in this industry who I will be comparing.

Transocean (NYSE: RIG)

Rig Fleet:

  • Ultra –Deepwater – 27
  • Deepwater – 16
  • Harsh Environment Floaters - 5
  • Midwater Floaters - 25
  • High Specification Jackups - 9 Plus 4 New Builds
  • Standard Jackups - 51
  • Swamp Barge - 1

Helmerich & Payne (NYSE: HP)

Rig Fleet:
In US

  • Land rigs - 28
  • Offshore rigs - 9

Outside US

  • Rigs - 29 

Rowan (NYSE: RDC)

Rig Fleet:

  • 31 - Jack-up rigs
  • 4 - Drillships (under construction)

Nabours (NYSE: NBR)

Rig Fleet:

  • 4 - Barge rigs
  • 12 – Jack up rigs
  • 40- Platforms
  • 521 - Land drilling rigs
  • 607 - Land work over rigs 

Instantly, Transocean comes out as the bigger player in the group, with the largest fleet of deep water rigs. Although both Nabours and Helmerich have bigger rig fleets, the majority of their fleets are land based, which of course means less revenue. 

Order Pipeline

It's handy to know what to expect from these companies over the next few years in terms of revenue. Due to the high cost of oil rigs, drilling needs to be planned in advance.  This produces a backlog, which helps identify future demand and profits.

Company

Current Order Backlog $US Billion

Transocean

30

Helmerich & Payne

4

Rowan

4.2

Nabours

1.2

Transocean's strength again shows through in its order backlog. The significantly higher revenues commanded by its offshore fleet has led to a huge order backlog.

This strength also shows through with Rowan, who has the second biggest backlog, although it's significantly smaller than Transocean's.

Nabour's poor order backlog really shows the effect the mostly land based fleet is having on the company. Helmerich and Payne have the third biggest backlog, and although it does have a significant amount of its fleet onshore, it has some offshore drilling vessels. These offshore vessels really pull in the revenue.

Profits

What about the profitabiltiy of these companies? Do the high daily rates demanded for oil rigs translate into profits for the companies?

Company

Net Profit Margin

Gross Profit Margin

Transocean

22.4%

-68%

Helmerich & Payne

18.4%

44.5%

Rowan

13.1%

44.8%

Nabours

0.5%

34.8%

Average

 15%

 14%

The quality of the rig fleets does show through into the companies' margins. Transocean has a bad gross margin this year due to its settlement over the Gulf of Mexico spill. Transocean's net margin shows the company’s strengths, as this comes in at a very strong 22.4%.  Helmerich's large fleet and combination of onshore and offshore rigs contributes to a strong margin as well. This is the opposite of Nabours, whose high onshore rig fleet provides very poor margins. Both Transocean and HP have decent gross margins that translate through to the bottom line, and give net margins better than the group average.

Financials

Oil rigs are expensive, and usually companies would have to borrow to fund the costs of building one. So how do the financials of these companies stack up?

Company

Debt to Equity

Quick Ratio

Cash Per Share

Transocean

0.9

1.5

$18

Helmerich & Payne

0.1

2.1

$0.9

Rowan

0.3

2.9

$2.6

Nabours

0.8

2.5

$2.1

Surprisingly, all of these companies had solid balance sheets. Transocean appears to have the weakest, with a gearing level of 90%. The company does have a quick ratio of 1.5, so it has plenty of liquidity on its balance sheet. Helmerich & Payne offers the best balance sheet, gearing is around 10%, and the quick ratio is above 2, offering lots of liquidity to cover sudden shocks. Rowan and Nabours both offer relatively good levels of gearing and high quick ratios. All the companies appear to be very solid financially.

Growth rates and valuation ratios

The last deciding factor I am looking at is the growth rates of the companies and their financial ratios, to determine which of these stocks looks to be a good investment.

Company

Historic 5-yr EPS Growth

This Year EPS Growth

Predicted EPS Growth next year.

Transocean

-40%

-766%

39%

Helmerich & Payne

4.3%

32%

7%

Rowan

-17.7%

-50%

30%

Nabours

-18.8

32%

-24.7%

Overall, growth rates are pretty mixed. Transocean has been significantly affected by the Gulf of Mexico disaster, but this is now behind the company so I would expect a significant improvement in the company's earnings over the next few years - as is highlighted in next year's predicted EPS growth rate. The most stable growth rates stem from Helmerich & Payne. Both Rowan and Nabours lag the group and have provided very erratic growth rates, both past and present.

Company

Forward P/E

Price to free cash flow

Price to Book

Transocean

11.6

13.6

1.3

Helmerich & Payne

11.6

-

1.7

Rowan

14

10.5

0.9

Nabours

12.5

-

0.8

Average

 

 

 

On a valuation basis, the cheapest stock appears to be Helmerich & Payne (there is a trend developing) and Transocean, although Transocean does trade on a lower price to book ratio. Rowan looks relatively expensive based on its price-earnings multiple, however, the stock is still trading below its book cost, signifying the stock is cheap. Nabours is placed right in the middle - an average valuation but a discount to book. Despite this average valuation, the other issues the company is facing makes the stock look overpriced.

Conclusion

Overall each stock has its own merits. However, the two stocks I want to keep away from are Rowan and Nabours. Nabours has too much uncertainty facing it right now as the company grapples with lower on shore US drilling rates, a high debt level, and floundering share price. Rowan, on the other hand, looks to be ok as a company and is trading at a discount to book, but the company needs to generate more cash to provide proper investor returns. Both Transocean and Helmerich & Payne are my two picks. Transocean is the world leader, and now that it has the Gulf of Mexico issue behind it it should really make progress. Helmerich, on the other hand, is smaller, but the company is still in great shape, margins are high, debt is the lowest in the group, and the backlog is strong. Overall I believe Helmerich & Payne is the rig stock to buy.


RupertHargreav 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure