Seeking Alpha
Profile| Send Message|
( followers)  

One of the biggest challenges when owning an oil drilling company is stability. This is from price fluctuations, changes in regulations and the challenges of working at greater depths. Despite these issues,

it is expected that crude oil will remain in a tight range going between $80 and $120 per barrel for 2012. This has raised hopes that the drillers will be able to maximize their profit margins at these levels. To determine which companies are the strongest requires examining Transocean (NYSE:RIG), Diamond Offshore Drilling (NYSE:DO), Petroleo Brasilerio (NYSE:PBR) Vantage Drilling (NYSEMKT:VTG) and Ensco PLC (NYSE:ESV). Therefore, this information should be used as a starting point for all future research.

Transocean

Transocean trades at a forward price earnings ratio of 13.49. The balance sheet includes revenues of $8.96 billion, cash of $3.29 billion and debt of $11.12 billion. The earnings for the firm has been decreasing from $.68 to $.07 (see below).

Transocean Earnings per Share

December 2010

February 2011

June 2011

September 2011

Estimate

$.89

$.76

$.78

$.79

Actual

$.68

$.59

$.64

$.07

This has caused the price of stock to decline (entering a bearish pattern). This is when shares fell to new yearly lows ($38.21) and beneath the 200 day moving average ($56.73). These figures are illustrating how Transocean is not a good buy. This is based on the lack of consistent earnings, the revenues are considerably smaller than the debt and there is no valuation. The combination of these elements and the weak momentum are a sign that the stock is overvalued. As a result, investors should be cautious about purchasing the company going forward.

Diamond Offshore

Diamond Offshore trades at a forward price earnings ratio of 12.74. The balance sheet includes revenues of $3.42 billion, $1.58 billion in cash and $.150 billion in debt. The earnings over the last year have been unstable ranging from $1.73 to $1.92 (see below)

Diamond Offshore Earnings per Share

December 2010

February 2011

June 2011

September 2011

Estimate

$1.47

$.1.43

$1.92

$1.48

Actual

$1.73

$1.80

$1.92

$1.85

This has caused the stock to fall to a 52 week low of $51.16. Since this happened shares have attempted to retest these levels by declining to $54.00. However, the volume was heavy (indicating a large number of buyers) and the price is moving towards the 200 day moving average ($64.00). These factors are illustrating how Diamond Offshore could be attempting to reverse negative momentum. The problem is that the earnings have not been consistent enough to ensure large upward movements. Until this happens, the company will continue to experience bear rallies that will retest the previous lows. As a result, investors should monitor the earnings per share. If the next several quarters show a pattern of improvements the market will recognize the low valuation and strong balance sheet.

Petroleo Brasileiro

Petroleo Brasileiro trades at a forward price earnings ratio of 11.50. The balance sheet includes revenues of $130.90 billion, cash of $30.58 billion and debt of $81.82 billion. The earnings for the firm have been volatile going from $3.02 (for 2010) to $2.62 (in 2011). This has caused the price of the stock to decline to $20.76 in November. After this is when shares stabilized and began to increase to find support at $23.00. Currently, the stock is trading below the 200 day moving average. This is indicating that the firm could be turning around by crossing from a bearish to a bullish pattern. As a result, investors need to watch the next earnings report to determine if the company is increasing the earnings per share. If this happens, the stock could see large upward price movements based on low valuation and a good balance sheet.

Vantage Drilling

There is no forward price earnings ratio for Vantage Drilling. The balance sheet includes revenues of $448.94 million, $37.19 million in cash and $1.25 billion in debt. Over the last year the negative earnings have remained flat (with slight variations of $.01 per share from quarter to quarter) (see below).

Vantage Drilling Earnings per Share

December 2010

February 2011

June 2011

September 2011

Estimate

-$.01

-$.05

-$.03

-$.05

Actual

-$.05

-$.06

-$.05

-$.04

This has caused the price of the stock to fall to a 52 week low of $.97. This is below the 200 day moving average of $1.48 (which is bearish). Shares have been trying to rebound and then reach stiff resistance at $1.50. However, the volume has been fairly low (indicating a lack of conviction from buyers). These factors are illustrating how investors should avoid the stock. This is based on the lack of consistent positive earnings. Moreover, the company has weak revenues in comparison with debt and there is no valuation. This has forced the momentum of the stock negative with shares testing new lows.

Ensco PLC

Ensco PLC trades at a forward price earnings ratio of 8.45. The balance sheet includes $2.25 billion in revenues, $479.00 million in cash and $5.12 billion of debt. The earnings over the last 52 weeks have been volatile going from $.90 to $.45 (see below).

Ensco PLC Earnings per Share

December 2010

February 2011

June 2011

September 2011

Estimate

$.74

$.47

$.68

$.82

Actual

$.90

$.45

$.71

$.87

This has caused the price of the stock to enter a bearish pattern and decline to $37.39 (a new 52 week low set in October). Since that time shares have been increasing by testing the 200 day moving average of ($50.30). This is highlighting how Ensco PLC may appear to be cheap from the forward price earnings ratio. However, the company has larger amounts of debt in comparison with the revenues and cash. This is in conjunction with the inconsistency in the earnings (which has been affecting the price of the stock). As a result, investors should avoid the company based on weak fundamentals and momentum. The ideal time to purchase this firm is when there is a consistent track record of improving earnings and the debt levels have been reduced. Until this happens, look for shares to trade in a negative trend.

Source: 2 Oil Drillers To Buy, 3 To Avoid