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Summary

  • The offshore drilling industry is a growing sector despite an actual soft market, and I believe it is the time to look at this sector from a long investor's perspective.
  • The industry is experiencing some headwinds now, with a momentarily rig oversupply whereas big oils are reducing their capital expenditure, putting pressure on the day-rates.
  • Most analysts think that the softness of the market will end late in 2015, which give investors time to accumulate safely while enjoying an impressive high dividend.

Source: Offshoreenergytoday.com

The complete list of the 12 offshore drillers is:

  1. Atwood Oceanics Inc. (NYSE:ATW)
  2. Awilco Drilling Plc. (OTCPK:AWLCF)
  3. Diamond Offshore Drilling Inc. (NYSE:DO)
  4. Ensco Plc. (NYSE:ESV)
  5. Hercules Offshore, Inc. (NASDAQ:HERO)
  6. Noble Corp. (NYSE:NE), including Paragon Offshore spin off
  7. Ocean Rig UDW Inc. (NASDAQ:ORIG)
  8. Pacific Drilling S.A. (NYSE:PACD)
  9. Rowan Companies Plc. (NYSE:RDC)
  10. Seadrill Ltd. (NYSE:SDRL)
  11. Transocean Ltd. (NYSE:RIG)
  12. Vantage Drilling (NYSEMKT:VTG)

I chose these 12 companies, mainly because they represent the entire play in the offshore drilling sector, which trade actively in the different American stock exchange markets (NYSE, Nasdaq, etc.)
Few other companies are also traded with others international exchange, as the Norway exchange market called the Oslo exchange (Songa offshore (SONG.OL), Archer Ltd. (ARCHER.OL), Odfjell Drilling (ODL.OL), SEVAN Drilling (SEVDR.OL) and others); others as a North Atlantic Drilling (NYSE:NADL) owned in part (70.36%) by Seadrill Ltd. Or Seadrill Partners owned in part (53.20%) by Seadrill Ltd., which is indicated fully here; and finally few others as Parker's drilling (NYSE:PKD), Nabors Industries (NYSE:NBR) or Helmerich & Payne (NYSE:HP) which are not totally pure Industry play and will be treated separately later. At last, Noble Corp. Has recently spun off Paragon Offshore (NYSE:PGN), however, I indicated the consolidated results for the two here.

Furthermore, I have been covering the sector very recently, and most of the companies indicated below. You will be able to get a more personal inquiry and complete diagnosis of any of these stocks, indicated in the table, that you find particularly attractive and believe they deserve a further in-depth scrutiny for a possible future investment.

What is called Offshore Drilling Industry?

Offshore oil drilling is an oil extraction technique which allows oil companies to access deposits of oil buried under the ocean floor. Most typically, offshore drilling sites are situated over the continental shelf, although advancements in drilling technology have made platforms even further out to sea economically and physically feasible.

There are several ways in which an offshore oil drilling operation can be run, and the type of oil rig used is usually dependent on the depth at the location, the type of oil, and prevailing conditions. Classically, fixed rigs are built into place on the ocean floor, with multiple well heads and adjustable parts to allow engineers to extract oil from the surrounding area. Floating rigs are also used, in some regions, and in some areas offshore oil drilling is conducted on ships for even more mobility.

Source: Wisegeek

Rigzone gave a general classification which is based on eight main rig types:

  1. Drill barges (48/25.) ESV owns a few of them.
  2. Drillships (174/93.)
  3. Inland barges (70/20.) Bay Water drilling LLC owns few, but is not really an offshore drilling sector.
  4. Jackups (656/404.)
  5. Platform rigs (250/136.)
  6. Semi-submersibles (248/167.)
  7. Submersibles (2/0.) Noble Corp or now Paragon owns the two rigs and are both cold stacked.
  8. Tender (48/22.) SDRL owns two tenders and one semi-tenders through its 8.2% stake in SanuraKapura.

It is a total of 1,496 rigs in which 867 are actually contracted (57.96%), and the others are either cold stacked, ready stacked, under inspection, undergoing a work over, en route to a new destination or under-construction.

Excluding 1), 3), 7) we have a worldwide total of 1,082 rigs in which 633 are actually contracted (58.50%), The 13 companies indicated here represent 63% of the total rigs contracted worldwide.

Complete fleet analysis as of August, 2014:

Company ticker

(1)

UDWDeep water Semi-subMid WaterJackup

Lift boat

tender

Shipyard or AvailableCold StackedTotal Rigs
FloatersJackup and otherIdle or for sale
ATW630603114
AWLCF02000002
DO137186011344
ESV1019046011075
HERO000272451051

NE

1415049010278
ORIG1120000013
PACD80000008
RDC4003004034
RIG2926211509880
SDRL1819029318069
VTG40040108
Total1179339212277224476
  1. By clicking the ticker you will be able to read my recent and complete article regarding the company for further study.

Financial snapshot including backlog:

Revenue Q2 in

$ million

Net Income Q2 in

$ million

Earning Q2 per share

in $

Total debt

in $ billion

Divi.

per annum

in %

EBITDA

Q2

$ million

(2)

EV

$ billion

(5)

Backlog

$ Billion

ATW297.871.91.121.47N/A133.14.493.3

AWLCF

(6)

62.834.531.150.12518.0444.10.8430.7
DO650.089.70.652.494.55260.07.246.2
ESV1,203.0370.31.584.736.08587.015.9811.0
HERO243.06.60.041.21N/A86.681.541.2

NE

(7)

1,200.4234.60.916.015.50578.012.7813.4
ORIG441.469.60.534.404.15231.86.384.8
PACD260.8049.90.232.807.5 (3)137.94.803.3
RDC422.941.20.332.811.3139.05.235.1
RIG2,328.0587.01.6110.467.70975.022.3227.1
SDRL1,221.0890.0

1.82

(1)

10.7310.74624.029.6519.3
VTG219.7210.180.032.782N/A113.03.292.5
  1. Without the deconsolidation of SDLP.
  2. It is an approximation in some cases.
  3. PACD voted a dividend starting Q1 2015 which is about 7.5% maximum.
  4. PGN is a new spin-off from NE and many elements are missing now.
  5. From Yahoo.
  6. Q1 results. The stock is trading in the OTC market.
  7. NE results are including PGN. Dividend will be split between NE and its spin off. We will have to wait for the next quarter results, to figure out exactly what is going on.

Classification of the 12 companies in two groups:

  • Top-tier (over $0.5 billion in revenue per quarter): RIG, SDRL, ESV, NE, DO
  • Mid-tier (under $0.5 billion in revenue per quarter): ATW, AWLCF, HERO, ORIG, PACD, RDC, VTG

Comparative YTD chart for Top-tier offshore drillers:

RIG Chart

RIG data by YCharts

Comparative YTD chart for mid-tier offshore drillers:

ATW Chart

ATW data by YCharts

Commentary:

The offshore drilling industry is a profitable and no-matter-what growing industry that should be a permanent part of your long-holding portfolio. 75% of the companies that are indicated above are serving very attractive dividends, up to 18% for AWILCO, which are secured by a strong multi-year contract backlog.

Land reserves of oil and Natural gas are shrinking rapidly and the only real opportunity for the big oils to maintain an adequate reserve level, is to drill deeper offshore. There is no other alternative, and this industry is not about to suffer any prolonged slowdown.

Most of the offshore drillers above are trading at a discount to fair value right now, due to a softness of the floaters and jackups market, which started around mid-2013, aggravated by an exaggerated negative outlook by some analysts.

This softness is essentially cyclical in nature, and driven by two main factors:

  1. A momentarily rigs over-supply coming into an already saturated market, probably until the second-half of 2015. This situation had a negative effect on the day-rates, especially for the low specified and old rigs.
  2. A strategically reduced capital expenditure in the offshore drilling sector by the big oil companies.

Land reserves of oil and Natural gas are shrinking rapidly around the world, and the only real opportunity for the big oils to maintain barely an adequate reserve level, is to drill deeper offshore where the proficient remaining reserves are still waiting to be discovered. There is no other alternative, and this industry is not about to suffer any prolonged slowdown.

This unique situation should be seen as a great opportunity to accumulate a portfolio at a discount to fair value. Furthermore, your patience will be rewarded by often a very attractive dividend.

At last, I advise the reader to choose at least three different companies based on the nature of the fleet (modernity, age, floaters or jackups, etc.) and also the dividend received. AWILCO is a very small company with a high-secured dividend which should be traded separately. I own RIG, SDRL and ESV, mainly; however, I have initiated few others lately, ORIG, PACD, AWLCF, etc.

Due to the nature of its aging fleet, I have a HOLD rating on DO right now and a BUY rating on HERO (as a trading vehicle only).

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Top 12 Offshore Drilling Companies: A Comparative Fleet Study And Financial Analysis