With the stabilization of the economy, drilling and exploration companies are coming back on track. As a result, the position for drilling and exploration companies remains firm. This industry continues to see deep and ultra-deepwater acreage as a strong growth opportunity for capital investment. The Middle East remains an attractive region and the major source of demand for high specification jack-up rigs. However, other markets like Australia, West Africa, and South America also promise considerable growth for these companies. Mexico and Arctic regions are also presenting attractive opportunities as the latter hold about 13% of the world's undiscovered oil, and about 30% of undiscovered gas.
In this article, I pick three drilling companies I believe have been making substantial profits from existing opportunities as well as establishing strong footprints for future growth. These companies are making gigantic investments to improve their rigs portfolios and generating strong cash flows to return considerable cash to shareholders. Looking like a safe haven for dividend investors, these three companies are Ensco PLC (ESV), Noble Corporation (NE) and Seadrill Ltd. (SDRL).
How Ensco is a Safe Investment
Ensco owns the globe's second largest offshore drilling rig fleet. What's more, it has assembled the most modern ultra-deepwater fleet and leading active premium jack-up fleet of any offshore drilling company. Ensco currently owns an offshore drilling rig fleet of 75 rigs, including six rigs under construction. Its fleet includes ten drillships, 46 independent leg jack-ups and 19 semisubmersible rigs.
As both the floater and jack-up market continue to be strong, demand growth that began in late 2010 and has held steady since then is likely to continue into 2014. On account of this, the company is looking to invest a substantial portion of its projected cash flow for the expansion and enhancement of its fleet drilling rigs. Recently, the company entered into an agreement to build an additional premium jack-up (ENSCO 110) and its eighth ultra-deepwater drillship (ENSCO DS-10), which is scheduled for delivery in 2015. In total, Ensco has six rigs under construction, including two ultra-premium harsh environment jack-up rigs, three ultra-deepwater drillships, and one premium jack-up rig, as part of an ongoing strategy to upgrade and expand its fleet.
With an increase in an average day rates across its fleet and the addition of newly build rigs to its floaters segment, Ensco has been generating solid top and bottom line growth. At the end of the recent quarter, its top line growth was at 14% and its bottom line, at 9%. In the past three years, on average, the company's revenue growth was at 31%, which is far higher than the industry average of 10%. Additionally, the company reached a contracted revenue backlog of $11 billion.
With a strong balance sheet, $11 billion in contracted revenue backlog and a positive outlook for future earnings and cash flow growth, Ensco has increased dividends twice this year. In February of 2013, it raised its dividends by 33%, and this month, it has raised dividends by 50%, which takes its annual dividend to $3/share. With these massive increases, its payout ratio rose only to 55% of its income, which is not only manageable, but also offers room for additional increases. Further, its free cash flows are providing cover to dividend payments, which makes its dividends still more safe and manageable.
Shares of Ensco are also trading at discount and showing a strong upside potential. At the time of writing, it is trading at 10.7 times to earnings and 1.1 times to book ratio while the industry average is at 13.6 times to earnings and 1.3 times to book ratio. I believe that Ensco's strong growth in earnings, record backlog and massive dividend increases will boost investor confidence and thus, shares will continue to rise.
How Noble is a Safe Investment
Noble Corporation is an offshore drilling company for the oil and gas industry. Its business strategy focuses on the active expansion of its international deepwater and high specification jack-up capabilities through acquisitions, modifications and upgrades, as well as the deployment of its drilling assets in key oil and gas producing areas all over the world. It is looking to increase both drilling efficiencies and the ability to complete the ever more complex well programs.
Noble is aggressively working on an expansion plan and, in the recent quarter, it commenced operations on the Noble Globetrotter II under a long-term contract in West Africa. Additionally, the company has completed construction of the Noble Mick O'Brien, which will begin operations under a five-month contract in the Middle East in Q4 of 2013. Meanwhile, Noble is continuing construction on three additional dynamically positioned ultra-deepwater drillships at Hyundai Heavy Industries Co.
Evidence that Noble's expansion strategy is working for them can be seen in that, at the end of the recent quarter, its contract drilling services revenues improved 7% to $1.04 billion. This increase was mainly driven by the commencement of operations of two new ultra-deepwater drillships: Noble Don Taylor and Noble Globetrotter II. Its contract drilling margin also improved to 53.1% from 49.6%. As the company steadily continues to add new ultra-deepwater drillships and high-specification jack-ups to its rapidly transforming offshore fleet, the improved mix of premium rigs will drive further improvement in its contract drilling margins.
This strong growth has allowed Noble to nearly double its dividends from $0.13/share to $0.25/share. Further, its dividend looks safe to me, with a payout ratio of only 22%. Going forward, the company's offshore drilling business remains absolutely positive, with floating rig and jack-up contract opportunities visible in many regions. The company is anticipating rising customer demand for jack-up and high-specification rigs into 2014. Further, eight of its final newly built rigs are likely to be delivered by the end of 2014, largely completing its new-build project backlog, which will add to a growing level of free cash flow as these premium assets begin operations. Thus, I believe Noble has established a strong footprint for future growth, and that shares price will likely follow this trend.
How Seadrill is a Safe Investment
Seadrill is an offshore drilling contractor. The company provides drilling & well services to the offshore industry. Seadrill is one of the best drillers amongst its competitors as it owns the highest percentage of its assets in premium classes. One-hundred percent of its jack-up fleet is high specification and 94% of its floater fleet are 6th generation ultra-deepwater. The company plans to keep this high exposure to premium asset classes intact with its capital investments and strategic M&A. Its stake in Sevan Drilling reached 50.11% by the end of Q2 of 2013, and in the recent quarter, it has invested $93 million in Seadrill Partners to support the tender rig T-16. Further, last month, Seadrill invested $235 million for the acquisition of high specification jack-up rig, Prospector 3, which it will deliver in 2014.
With such a high percentage of its assets in premium classes, Seadrill's order backlog reached $19.5 billion at the end of the recent quarter, which comprised of $3 billion for its jack-up fleet, $16 billion for its floater fleet, and $500 million for tender units. Meanwhile, Seadrill is actively converting its order backlog into revenues. In the past three years, its revenue growth averaged at 11%, while the industry average is standing at 10%. Likewise, the company's five-year revenue CAGR is very high at 23%, while the industry average is only at 10%. With its strong order backlog and high five-year revenue CAGR, the company is on a clear path to increase its earnings and generate dividend sustainability. Further, with the strong operational results, combined with its solid order backlog and positive market outlook, Seadrill looks to be able to sustain its dividend growth moving forward. Seadrill is trading in the range of $41/share, which is its lowest point in the past three months. Its stock looks significantly undervalued as it is trading at only 8.5 times to earnings. This dip in share price offers an attractive opportunity to initiate a position.
Exploration and drilling companies continue to generate solid returns for investors. Year to date, its total returns are standing at 14%. These companies possess the ability to grow their returns as the energy industry locates new sources of supplies, which in turn continues to grow demand for the products and services these drilling companies provide. These three drilling giants are well positioned to grasp these new growth opportunities and, consequently, to generate better returns for investors.