Off-Shore Drilling Companies: Performance Review

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US oil production has been growing at an astonishing rate. US Oil production increased 14% last year, reaching 8.9 million barrels per day, reverting the declining production of previous years. This oil production revolution has given offshore drilling companies a new and fundamental role in the oil and gas industry.

Let’s see what was the performance of three big drilling companies in the past months: Diamond Offshore (NYSE: DO), Noble (NYSE: NE) and Transocean (NYSE: RIG).

Diamond: no debt but revenue difficulties

Diamond Offshore is struggling to meet expectations. It has posted a 5% decline in its first quarter revenue in 2013 for a total of $729.7 million compared to the same quarter last year. These results come amid heavy investing in renewing its drill ships fleet which cost around $4.3 billion. This is a capital intensive sector and any mistake could produce major setbacks for the company but the general outlook is prosperous for Diamond: its return on capital employed is outstanding at 11.6% compared to Noble and Transocean’s at around 5% for 2012. Another positive aspect for the company is it’s near zero debt, an almost impossible task in this sector: debt to market cap for Transocean is 42% and for Noble 46%. The company is in perfect conditions to grow, investors be aware. The near zero debt is an excellent signal of a strong balance sheet, but the company will have to improve its revenue stream as it showed a decline in the first quarter of 2013.

Noble: strong financials

Noble is another offshore drilling company with a global footprint and has one of the biggest fleets. Given this global presence, the company’s revenue is geographically diversified which lessens some risks. Noble’s strategy for 2015 is to increase its deepwater revenue in line with the current industry trends. The company posted $167.7 million in net income for the first quarter of 2013, a 48% increase compared to the first quarter last year. It has also shown improvement in fleet utilization from 83% to 86% in the same quarter comparison. The company is also developing a fleet modernization scheme that could enable it to charge higher prices for its services. Scale is important in this industry, and Noble has the right attributes to take advantage of this as it has a large and geographically diversified fleet. Moreover, the company posted solid first quarter results which make it a safe bet compared to peers and a good entrance option for the offshore drilling frenzy.

Transocean: deepwater horizon settlement is key

Transocean’s most important problem is the settlement of the Deepwater Horizon oil rig accident. Estimates indicate that the accident has already cost the company $4 billion. Since 2010 its share has lost almost half of its price and has suspended its dividend which drove increasing consternation about the future of the company. But Transocean has other problems to take care of. Although its net income improved in the first quarter of 2013 to $321 million from $10 million on the same quarter last year, the company faces increasing rig maintenance costs which escalated from $1.2 billion in the first quarter of 2012 to $1.4 billion in the same quarter 2013 mainly due to its aging fleet. It will be difficult for this company to modernize its fleet in the middle of the settlement and it will be harder to canalize investments. The best option is leaving the accident and focusing in rebuilding the operational and financial strength it used to have. Transocean is definitely not a good option for investors: it still has not solved the accident issue, it has increasing costs related to the maintenance of its old fleet, a declining stock and it has suspended the dividend.

Offshore drilling: the art of oil extraction

Although this sector is in an excellent standpoint for future growth, it is facing some headwinds especially regarding the Deepwater Horizon rig explosion in 2010 which created new regulatory pressures to offshore drilling programs. Another aspect investors should be aware of is that these companies projects are very sensitive to oil prices. Increasing US oil production from shale rock has not affected global prices yet, but analysts expect that the fracking techniques could be a game changer in the long run, driving down oil and gas prices. This technology is something investors should monitor closely as United States is taking the lead. With that said, I think that Diamond and Noble are great opportunities to take advantage of this oil revolution.

 

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Vanina Egea 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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