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Its always great when a company decides to pay its shareholders what they deserve. Whether it be by an activist or simply a company decision, both outcomes usually lead to share appreciation. Two stocks that I choose because they are handsomely rewarding their shareholders and have a great management team are Diamond Offshore (DO) and Transocean (RIG). I believe both of these stocks on a valuation basis have an overall better risk reward than their competitors in the industry.

Diamond offshore is a $9 billion dollar offshore driller that is currently 50.4% owned by Loews Corporation (L). I like that the Tisch family has a significant ownership because in the case of an economic downturn, Diamond Offshore can be provided with the capital that it may need by some of Loews other businesses. Its Expected to earn $4.80 for this year and trades at a fair valuation of 11.8 times earnings. In addition, out of all of the offshore drillers Diamond is the most conservative with $1.2 billion in cash and $1.5 billion in debt. Diamond Offshore is the only A rated drilling contractor.

Diamond loves to pay their shareholders huge special dividends when it can, and always boasts about it on company presentations. While Diamond's regular dividend is only $.125 per quarter they usually pay a special dividend of $.75 on top of it giving investors a juicy $.875 per quarter or $3.50 (5.5%) annualized. According to Diamond's most recent presentation, the company currently has 8 ultra-deepwater units and is building an additional 5. The company also has 5 deepwater units and is building an additional 2. Diamond is investing heavily in these types of rigs and by 2016 expects 70% of its EBITDA to come from ultra and deepwater rigs. One concern that remains is the recent retirement of Diamonds CEO Lawrence Dickerson. The company has hired Russell Reynolds Associates to search for a new CEO and the situation is currently an unknown.

Transocean is another great offshore driller trading a huge discount due to some ongoing bad publicity given to it due to the 2010 oil spill. I consider these dark clouds to be an opportunistic time to buy shares. Transocean is the largest offshore driller by rig count. The title for largest offshore driller by market cap has been given to Seadrill (SDRL) which is run by the famous John Fredriksen. Expected to earn $4.04 this year, Transocean trades at 10.7 times earnings which is historically low for the company. Lately, activist Carl Icahn has taken interest in the company and has taken a 6% ownership in it. Icahn has recently tried to push for a $4.00 dividend but has since only been approved for an annual dividend $2.24 (4.9%). Even though I am a huge fan of dividends and reinvesting them back into the company, Transocean's business model requires it to maintain cash for updating and building new rigs. Cash on the balance sheet is also necessary to prevent a situation similar to that of 2011 when Transocean was forced to issue shares at a 52 week low. Transocean's current balance sheet is very manageable given Transoceans free cash flow with $3.35 billion in cash and $10.8 billion in debt. Leon Cooperman of Omega Advisors is also a big fan of the company and currently has a position. He stated on a CNBC at the SALT conference that he believes the fleet assets alone are worth $70 per share. Transocean has a fleet of 80 rigs and 7 rigs under construction. Transocean also has a huge backlog of $27 billion dollars which it can use to fund the cost building of these rigs and maintain its dividend. While the overhang of the BP spill may remain a little while longer, eventually the dark clouds will subside and shareholders will be rewarded for their patience.

Every once in a while the market forgets about an industry and allows some of the companies to become cheap and undervalued. At this time I believe many of the offshore are in this situation. The way I am playing these stocks is through options. Those looking to do the same can sell the Diamond Offshore Jan $59.75 strike for $1.68 (2.8%) and the Transocean Jan $42 strike put for $1.18 (2.8%). I believe as the market continues to pullback, selling an option will allow you to own the shares at a better entry level. Please note each put sold is an agreement to purchase 100 shares at the given strike price.

Source: Two Drillers Turned Dividend Juggernauts

Additional disclosure: I am long by being short puts