2 Oil And Gas Drilling And Exploration Companies Set For Big Profits

Includes: HP, IEO, PXE, SDRL, XOP
by: Alpha 7 Trading

With the recovery of the economic environment, drilling and exploration companies are coming back on track. Consequently, the outlook for offshore drilling companies remains solid. These companies continue to see deep and ultra-deepwater acreage as growth opportunities to invest capital. Since the first half 2012, ultra-deepwater drilling rigs have been benefiting from steady day rates. However, divergence has led to lower rates for non-premium deepwater units. These companies remain at ease with rates of around $550,000-$650,000/day for the top-end asset classes because of the unique efficiency and safety enhancements they offer.

The Middle East and Asia continue to be attractive regions for drilling & exploration companies and the main source of demand for high specification jack-up rigs. The demand in other markets, such as Australia, West Africa, and South America, promises considerable growth. Mexico is another attractive region, presenting more production opportunities and a desire to upgrade its operating fleet. Seadrill is among the companies that have been forced to conclude specific contract negotiations to free up the capacity for long-term work in Mexico.

Arctic regions are expected to hold around 13% of the globe's undiscovered oil, and roughly 30% of undiscovered gas. Additionally, drilling & exploration companies are making huge investments in this region. Over the last decade, spending in this region has grown at 11% annually and is likely to increase by 8% annually till 2018. Coupled with an aging fleet and few assets suitable to operate in the harsh environment, the fundamentals are solid. The arctic represents one of the few frontier exploration regions, and drilling activity there is expected to be among the most active globally.

In this article, I pick two oil and gas drilling companies which I believe have been making considerable profits from the existing opportunities as well as setting strong footprints for future growth. Both companies are making huge investments to enhance their rigs portfolios. They are also generating strong cash flows to return significant cash to shareholders. Looking like a safe haven for dividend investors, these two companies are Helmerich & Payne (NYSE:HP) and Seadrill Ltd (NYSE:SDRL).

How Helmerich & Payne is a Safe Investment

Helmerich & Payne, Inc. is a contract drilling corporation. At the end of the recent quarter, its fleet portfolio included 305 land rigs in the U.S., nine offshore platform rigs and 29 international land rigs. On top, it is looking to complete one 3,000 horsepower AC drive rig and nine new H&P-designed and operated FlexRigs under long-term contracts by early 2014. Once this work is completed, its global fleet is expected to have a total of 344 land rigs, as well as 314 FlexRigs.

Over the last few months, this drilling giant has seen encouraging signs in the market. Customers are planning to incrementally boost their development efforts and drilling activity with a continued concentration on drilling rig efficiencies and capabilities. On the other end, Helmerich is looking to help its customers lower their drilling costs through stable productivity gains and performance improvement. The company received a total of 13 new build orders since the beginning of the 2014 fiscal year. Recently, Helmerich announced an agreement with three exploration and production companies to build and operate six additional FlexRigs in the U.S.. Every one of these rigs was ordered under the multi-year term contracts and will generate attractive returns for the company.

Since 2008, Helmerich has increased its number of land rigs by around 37%, while the U.S. land rig count as a whole fell by about 15%. The company continues to make capital investments and capital expenditures for fiscal 2014 are expected at around $850 million. This assumes a continued new build cadence of two rigs per month through the end of the fiscal year. With a strong capital investment and performance improvement, the company has a generated record income of $721.5 million from continuing operations and record operating revenues of $3.4 billion for fiscal 2013. Over the past three years, its revenue growth on average stands at 19.6% while the industry average is only at 10%.

Helmerich's record-breaking top and bottom line increases its cash generating potential. In TTM, its free cash flows are $207 million when dividend payments are only at $47. On top, its payout ratio is very low at 10%, though, recently, it has made a huge increase in its dividends from $0.15/share to $0.50/share. Helmerich's strong payout ratio and massive free cash flows provide generous room to hugely increase its dividends.

How Seadrill is a Safe Investment

Seadrill is an offshore drilling contractor that provides drilling & well services to the offshore industry. Seadrill has the highest percentage of its assets in premium classes among all drillers. Ninety-four percent of its floater fleet is 6th generation ultra-deepwater and 100% of its jack-up fleet is a high specification. The company seeks to keep this high exposure to premium asset classes intact with its investments and strategic M&A. This portfolio mix provides through-cycle outperformance by maintaining higher utilization and a stronger net cash flow.

Seadrill's strategic investment in Sevan Drilling ASA reached 50.11% in August of 2013, following the conclusion of the mandatory tender offer for all remaining shares outstanding. The company continues to evaluate opportunistic acquisitions alongside its new-build decisions in order to maintain its position as a global operator focused on premium asset classes. Seadrill stands behind improving the operating and financial standards of Sevan whilst executing the integration plan. In Q3, Seadrill invested an additional $93 million into Seadrill Partners in order to finance the dropdown of the tender rig T-16. In November, it acquired the high specification jack-up rig, Prospector 3, for $235 million. The Prospector 3 is scheduled to be delivered in China during the first quarter of 2014.

At the end of the recent quarter, the company's order backlog was at $19.5 billion, excluding the PEMEX Heads of Agreement and West Aquarius extension. Order backlog is $16 billion for its floater fleet, $3 billion for its jack-up fleet, and $500 million for its tender units. In this current quarter, three ultra-deepwater drillships-the West Auriga, West Vela, and West Tellus-will begin operations, converting a significant amount of backlog into revenues. The company's order backlog provides clarity for future earnings as well as generating visibility for dividend capacity.

Seadrill's dividends look sustainable with strong operational results, solid order backlog, positive market outlook and support received from the financing markets. Its current dividend of $0.95/share is not only sustainable in the long term, but can be further increased as EBITDA is anticipated to grow considerably over the next eight quarters.

Final Notes

Exploration and Drilling companies continue to grow as the energy industry locates new sources of supplies in its efforts to fuel rising global demands for energy. With two of the most advanced fleets in the industry, Seadrill and Helmerich are well set to grasp these opportunities. These two giants are projected to maintain their respective positions as the kings of drilling dividend stocks, and as two of the best dividend stocks out there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.