Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)  

The overall market has trended downward for the last two months. Deep Sea drillers have reluctantly followed the trend. Last week the International Energy Authority (IEA) caused the release of 60M barrels of oil from various countries strategic petroleum reserves (SPR)’s (30M from the U.S.) in an attempt to lower oil prices in a world nearing the brink of another recession. The idea was to scare some of the speculators out of the market. The idea was to provide some extra light sweet crude to lower the spread between WTI and Brent. This worked to some extent. However, 60M barrels of oil is just a drop in the bucket in terms of worldwide supply. The effect is not likely to be lasting. Many think both oil and oil drillers will rebound this week. At $90+/barrel, the price of oil does not have to rebound at all for the drillers to rebound. The Deep Sea Drillers get all the business they can handle with oil prices above $70/barrel.

In addition to the U.S. resumption of issuance of deep water drilling permits in the Gulf of Mexico this year, there have been several big new deep water oil discoveries. These should provide a lot more demand for deep water drilling services. These finds include a 700M barrel Gulf of Mexico find by Exxon Mobile (NYSE:XOM), Enersis S.A. (NYSE:ENI), and Petrobras - Petroleo Brasileiro S.A. (NYSE:PBR), a find off the coast of Ghana by Hess (NYSE:HES), an Noble Energy Inc. (NYSE:NBL) find in the Santiago Prospect in the Gulf of Mexico, the Anadarko Petroleum Corp. (NYSE:APC) and Plains Exploration & Production Company (NYSE:PXP) Lucius field of 300M barrels next to XOM’s find, and a Petrobras find in deep water in the Espirito Santo field. Plus the Petrobras Tupi field (5B barrels) still needs a huge amount of development. I am sure I have left other good sized finds out. The point is that there should be lots of work for deep sea drillers, especially ones with new equipment.

With some of the deep water drillers oversold and others still consolidating, this week may be a good time to buy deep water drillers. In addition to the above reasons, this week is the “window dressing” week for money managers for end of quarter/beginning of quarter buying. One beaten down deep water driller is Transocean Ltd. (NYSE:RIG). It has a liability of unknown amount due to the Macondo well disaster. However, it has a reputation as a deep water drilling leader. It is bound to get some attention from money managers this week (and afterward).

With the new deep water drilling rules, the companies with the newer deep water rigs/ships will be the first to get business and the most highly paid. A few of these are Dry Ships (NASDAQ:DRYS), Atwood Oceanics Inc. (NYSE:ATW), and SeaDrill Limited (NYSE:SDRL). Noble Corporation (NYSE:NE) has some newbuilds scheduled too. A few other good possibilities for a deep water lift are Diamond Offshore Drilling Inc. (NYSE:DO), Cameron International Corp. (NYSE:CAM), and National Oilwell Varco Inc. (NYSE:NOV), and Global Industries Ltd. (NASDAQ:GLBL).

The fundamental financial data for the three with the most up to date equipment (DRYS, SDRL, and ATW) are in the table below. I have included RIG too. The data are from TDameritrade and Yahoo Finance.

Stock

DRYS

SDRL

ATW

RIG

Price

$3.96

$33.04

$41.86

$59.81

1yr. Analysts’ Price Target

$6.42

$38.46

$47.13

$85.04

PE

6.47

8.01

11.07

32.09

FPE

4.45

9.98

10.11

9.49

Avg. Analysts’ Recommendation

2.4

2.3

2.6

2.1

This Year EPS Growth Estimate

-25.70%

+5.70%

0%

-27.20%

Next Year EPS Growth Estimate

+6.00%

+11.80%

+4.80%

+45.80%

5yr EPS Growth Estimate per annum

10.00%

8.30%

10.67%

5.00%

EPS misses in the last 4 quarters

2

0

1

3

Avg. EPS beat % in the last 4 quarters

+18.60%

+6.525%

+2.30%

-11.65%

Stock Price Appreciation % YTD

-23.70%

-3.76%

+13.84%

-13.87%

Price/Book

0.46

2.44

1.81

0.88

Price/Cash Flow

3.58

6.75

9.62

9.73

Beta

3.28

2.09

1.43

0.90

Short Interest as a % of Float

5.16%

1.66%

6.88%

1.86%

Cash per Share

$0.33

$3.41

$2.50

$11.93

Market Cap

$1.54B

$15.33B

$2.71B

$19.11B

Enterprise Value

$4.27B

$24.00B

$3.00B

$26.55B

% Held by Institutions

22.01%

47.51%

84.40%

68.68%

Total Debt/Total Capital (mrq)

40.12%

60.74%

23.27%

34.06%

Quick Ratio (mrq)

--

--

2.35

1.66

Interest Coverage (mrq)

2.9

8.27%

262.52

2.86

Return on Equity (ttm)

5.95%

34.40%

17.99%

1.94%

EPS Growth (mrq)

46.71%

252.45%

5.28%

-80.05%

EPS Growth (ttm)

-15.50%

38.48%

-1.68%

-85.64%

Revenue Growth (mrq)

6.83%

30.14%

0.01%

-16.87%

Revenue Growth (ttm)

6.80%

26.02%

4.80%

-17.24%

Annual Dividend Rate

--

$3.00

--

$3.16

Gross Profit Margin (ttm)

73.41%

58.13%

62.48%

38.23%

Operating Profit Margin (ttm)

39.94%

36.74%

50.14%

14.01%

Net Profit Margin (ttm)

23.96%

41.36%

39.00%

5.12%


The Price/Book ratio on both DRYS and RIG is enticing. In RIG’s case you also get a $3.16 annual dividend (approximately 5%). Of course, this dividend could disappear temporarily if RIG has to pay considerable Gulf oil spill costs. With RIG’s reputation as a leader, it is bound to draw some “window dressing” interest this week. In DRYS’ case you have the prospect of a spin off of the Ocean Rig part of DRYS to shareholders. The breakup value is much higher than the two companies together. Even without a breakup, DRYS is slated to do well. It’s 4 new builds will all have been delivered by the end of 2011. They should all be very profitable once they are put into service. ATW is the only stock of the 4 in the table above whose price appreciated year to date (+13.84%). It is in a consolidation phase. This could be a prelude to a good move up. SDRL has lots of new equipment. Plus it pays a substantial dividend of $3.00. That’s 9.1% with a stock price of $33.04. It is a strong performer. I see no reason to believe that will change.

The 2 year charts of these stocks may provide some technical insight. See below.

The 2 year chart of DRYS (click charts to expand):

  

The 2 year chart of SDRL:

 

The 2 year chart of ATW:

 

The 2 year chart of RIG:

 

SDRL and RIG are oversold. They both could get a little extra lift from this. I would still tend to stay away from RIG longer term with its possibly huge legal liabilities still undetermined. However, it is set up to rally well this week. I might play it for a window dressing bounce. SDRL seems like a good stock to own longer term, especially with its great dividend. DRYS worries many people, but it is more fundamentally sound and a more likely grower than many other stocks. As such it is a good longer term investment. ATW is the only one of the 4 deep sea drillers listed in the above table whose price is up for the year in 2011. That speaks volumes for it. Legging in is a good strategy. Selling “out of the money” puts to obtain a lower price or just to get the puts’ premium is a good strategy.

No one knows when or if Greece will blow up with certainty. No one knows exactly what will happen with the various other parts of the EU credit crisis. However, the EU, IMF, and Greece did come to an agreement on an austerity package late last week. Plus the Greek parliament did reaffirm the Greek prime minister’s government. This should mean that they will succeed in kicking the can down the road on Greece once again. This should help the stock markets to rally. You can only play the current situation.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIG, ATW, DRYS, NOV, SDRL over the next 72 hours.

Source: Deep Sea Drillers Are Set for a Rally