2 Drillers Moving Up On Good News

Includes: NE, SDRL
by: Bret Jensen

It is hard to find many positive stories in the energy and materials sectors this trading week. silver and gold prices have collapsed over the last week. Copper is also at 52 week lows, iron and steel are not much better. Almost the entire mining sector has sold off precipitously all week. Energy shares have been hit fairly hard this week by the drop in oil as well. Two exceptions are two cheap drillers that are flat or up over the past five trading sessions on the back on some positive developments even as the overall market has cratered.

Noble (NYSE:NE) - Noble Corporation is an offshore drilling contractor for the oil and gas industry. Its drilling fleet consists of 14 semisubmersibles, 14 drillships, 49 jackups, and 2 submersibles, including 11 units under construction that comprises 5 ultra-deepwater, harsh environment drillships and 6 heavy-duty, harsh environment jackups.

The News - Noble Corp. stated Shell (NYSE:RDS.A) has been in talks to extend its contract to use the Noble Discoverer beyond Feb. 2014, underlining its long-term plans for the offshore Arctic. In addition, the company also announced it has secured contracts for its final two ultra-deepwater drillships under construction, adding $1.3B to its backlog.

Four reasons NE is a good growth play at $36 a share:

  1. The stock is cheap at under 7x operating cash flow and just 14% above book value.
  2. Analysts expect the company to increase revenues by over a 20% CAGR over the next two years and the stock sports a five-year projected PEG of under 1 (.95).
  3. NE is selling for less than 8x 2014's projected earnings. The company also has an A- rated balance sheet (new secured contracts could result in an upgrade to its rating).
  4. The median price target held by the 32 analysts that cover the stock is $45 a share. Credit Suisse has an "Outperform" rating and a $55 share price target on the shares.

Seadrill (NYSE:SDRL) - Seadrill Limited provides offshore drilling services to the oil and gas industry worldwide. The company owns and operates a fleet of 59 offshore drilling units, which consist of 13 semi-submersible rigs, 9 drillships, 21 jack-up rigs, and 16 tender rigs.

The News - The company just secured a contract with LLOG Bluewater for the ultra-deepwater new-build drillship West Neptune for offshore Gulf of Mexico. The three-year contract term is for approximately $660mm.

Four reasons SDRL is a solid value play at $36 a share:

  1. SDRL yields over 8% and has raised normal quarterly dividends approximately 50% over the last couple of years. (Quarterly dividends are not precisely uniformed and the company paid a $1.70 a share dividend for its last quarterly payout).
  2. Earnings are on a nice uptrend. The company earned $2.16 a share in FY2012. However, consensus earnings estimates called for $2.73 a share of profit in FY2013 and $3.63 in FY2014.
  3. The 13 analysts that cover the shares have a $46 median price target on the shares. HSBC Securities upgraded the shares from "Neutral" to "Overweight" in March.
  4. Analysts expect around 10% revenue gains for FY2013 and almost 20% in FY2014 as new rigs come online. The stock sports a minuscule five-year projected PEG (.40).

Disclosure: I am long NE, SDRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.