High-Yield Offshore Plays For Patient Long-Term Investors

 |  Includes: ESV, NE, RIG
by: Bret Jensen


The offshore sector has been one of the poorest performing areas in the market over the past six months, which should appeal to patient contrarian investors.

In addition, most plays pay an over 5% dividend yield, which should be attractive to income investors.

Below are several high-yield offshore plays with attractive valuations that patient long-term investors should consider.

I have always found a good portion of the money I have made investing over the decades has come from being a contrarian investor. While the herd gravitates to the story and high-momentum stocks like Tesla Motors (NASDAQ:TSLA), I tend to go in the other direction. Show me a beaten-down sector, and I am sifting through the carnage to find what kind of long-term value is available for patient investors willing to buck the consensus.

One of the most reviled and poorly performing sectors in the market over the past six months is the offshore drilling space. Concerns about overcapacity and declining day rates have caused a variety of offshore plays to decline 25%, 30%, 40% or 50% from their highs.

However, with oil hovering over $100/barrel, domestic natural gas prices near four-year highs and major new areas like Mexico opening up their energy industry; the long-term trend for more and deeper offshore drilling activity remains firmly in place.

One thing nice about the sector is the high dividends it pays. Getting paid 5% or more annually while awaiting for the industry to turn around is definitely an attractive attribute.

One of my favorite stocks in the sectors continues to be Transocean (NYSE:RIG). The shares yield a robust 5.7%. The stock was also upgraded at Deutsche Bank on Monday, and the bank now has a $45 a share price target on RIG and calls the stock "oversold". I recently profiled the company, so will not cover it again in detail.

Another offshore play I am currently looking at adding is Noble Corporation (NYSE:NE). This offshore play operates as an offshore drilling contractor for the oil and gas industry. It provides contract drilling services, with a fleet of 77 offshore drilling units, including 14 semisubmersibles, 14 drillships, 49 jackups, 2 ultra-deepwater drillships and 4 high-specification jackup drilling rigs under construction.

Yes, earnings estimates have come down significantly over the past three months. However, the shares are priced at just over 9x forward projected earnings, and just over 7x the current consensus for FY2015's EPS. The stock has a minuscule five-year projected PEG (.53). NE is also selling ~10% below book value.

In addition, bad news seemed fully priced into the shares, given the stock has declined some 30% from its level late last year. The shares pay a generous 5.1% dividend yield, which should appeal to patient value & income investors.

Ensco (NYSE:ESV) is another attractive long-term play in the space. The company is a mirror image to Noble in the kind and diversity of offshore fleet it operates. The shares have also suffered recent declines, with the stock down ~25% over the past six months.

The shares pay a bit more yield (6.1%) than the other two offshore plays profiled in this piece. Revenue growth should be in the 4% to 6% range this year, but that should accelerate to 10% to 12% in FY2015 as new rigs come online. The shares are cheap at just over 8x trailing earnings and ~90% of book value.

Although sentiment on the offshore sector is currently pretty dismal, the tide will turn at some point in the future. The valuations in the space are attractive for long-term investors, and these plays pay generous dividend payouts, making the wait for the shift in sentiment more palatable.

Disclosure: I am long RIG. 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.