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In looking for value in the Deep-water Drilling space three companies stand out value wise; Seadrill (NYSE:SDRL), Atwood Oceanics (NYSE:ATW) and Ensco PLC (NYSE:ESV). All three companies are currently undervalued, have strong future backlog orders that will drive revenue growth, but seem to appeal to different markets and investor types.

Global Demand

The future looks strong in the deep-water drilling space as over the next four years, it is estimated that global growth in the offshore E&P sector will increase at an 8% to 10% compound annually. With spending estimates in the range of $250 billion on the development of their offshore reserves, Brazil is leading the way. Second to Brazil in E&P spending is Norway, which is anticipating $220 billion to be spent on the development of the North Sea, Norwegian Sea, and the Barents Sea; while estimates are that U.S. Gulf Of Mexico E&P spending is expected to be around $190 billion over the next four years. Just within these three regions, estimates total $760 billion in E&P spending over the next four years.

Seadrill

Seadrill Ltd is an offshore drilling contractor. It provides drilling and well services to the offshore industry. It has a fleet of drilling units that is outfitted to operate in shallow water, mid-water and deep-water areas, in benign and harsh environments.

  • Currently, Seadrill is trading at just 8.10x earnings. This is 40.91% less than 5 year average of 11.71x earnings.
  • Analysts at MSN are expecting Seadrill to lead the industry with a five year growth rate of 24.90% compared to the industry average of 11.30%.
  • Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 36 analysts is revenue to hit $6.2 billion in 2015. This represents an increase of 26.53% over the next 2 years.
  • This growth rate expectation leads to a PEG ratio of just 0.40 according to finviz.
  • The company currently has a yield of 8.92%.

According to the January 2014 presentation, Seadrill currently has an order backlog of approximately US$20 billion. Solidifying an increase in revenue and earnings over the next few years.

Atwood Oceanics

Atwood Oceanics, Inc. and its subsidiaries are a offshore drilling contractor. It is engaged in international drilling operations and completion of exploratory and developmental oil and gas wells and related support, management and consulting services.

  • Currently, the stock is trading at just 6.22x forward earnings and 9.4x current earnings. This is 10.21% less than 3 year average of 10.36x earnings.
  • Analysts at MSN are expecting Atwood to outpace the industry with a five year growth rate of 20.00% compared to the industry average of 11.30%.
  • Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 14 analysts is revenue to hit $1.6 billion in 2015. This represents an increase of 68.75% over the next 2 years.
  • This growth rate expectation leads to a PEG ratio of just 0.40 according to finviz.
  • Currently, does not offer a dividend.

According to the Atwood Oceanics December 2013 presentation, Atwood has substantial backlog on their books. The company is reporting $1.022 billion in 2014, $1.184 billion in 2015 and $1.442 billion in 2016. This indicates that Atwood has already secured significant revenue over the next three years.

Ensco PLC

Ensco PLC provides offshore contract drilling services to the international oil and gas industry.

  • Currently, the stock is trading at just 7.87x forward earnings and 9.93x current earnings. This is 16.41% less than 5 year average of 11.56x earnings.
  • Analysts at MSN are expecting Ensco to outpace the industry with a five year growth rate of 17.90% compared to the industry average of 11.30%.
  • Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 26 analysts is revenue to hit $5.5 billion in 2015. This represents an increase of 27.91% over the next 2 years.
  • This growth rate expectation leads to a PEG ratio of just 0.67 according to finviz.
  • The company currently has a yield of 4.03%

One of the strengths of the company is the dividend growth.

(click to enlarge)

According to the December 2013 presentation, Ensco PLC currently has an order backlog of approximately US$11 billion. These backlog will help sustain and grow the dividend over the next few years.

Conclusion

All the companies listed above are currently trading at attractive valuations compared to their historical metrics. Each company listed above has significant growth potential with backlog strength driving future earnings. Even though each company listed above is attractively valued and has strong earnings growth ahead, each company has individual strength that will attract different investors in different financial markets.

Seadrill has a 8.92% yield that at this time looks sustainable. So for the investor looking for a strong dividend or insurance to their capital appreciation Seadrill looks to be very attractive.

I view Ensco PLC as having an attractive yield of 4.03% and significant capital appreciation moving forward. As the company is focused on growing the yield this bodes well for the long-term investor. Driven by significant backlogs the company dividend will continue to significantly outpace the 10 bond thus creating value for the shareholder.

For the investor who is looking for growth and is OK without the dividend protection, Atwood Oceanics looks to have significant growth ahead. As stated in my article: Atwood Oceanics: Why this small cap has 60% upside, new-build rigs will contribute significantly to future earnings and should drive value for shareholder moving forward.

Source: Drilling For Value In The Deep