Oil and gas exploration is a long term investments that is capital intensive and may hit many dry holes before finally striking black gold. While the return may be great, the risk is also high. An alternative play is to invest in the gas and oil drillers. While the risk is lower, the demand is great for these companies, giving them predicable returns.
The following companies operate in the oil and gas offshore drilling sector and provides offshore contract drilling services in the United States and internationally. They offer drilling units, related equipment, work crews, and construction supervision services for drilling units.
Seadrill Limited (NYSE:SDRL) has a market cap of $21 billion. The company owns and operates a fleet of 66 offshore drilling units, which consist of 15 semi-submersible rigs, 1 drillship, 24 jack-up rigs, and 16 tender rigs. It serves oil and gas exploration and production companies, including integrated oil companies, independent oil and gas producers, and government-owned oil and gas companies. The company has a strategic partnership with North Atlantic Drilling Limited (NATDF).
Transocean Ltd. (NYSE:RIG) has a market cap of almost $17 billion. As of February 20, 2013, the company owned, had partial ownership interests in and operated 82 mobile offshore drilling units. This included 48 high-specification floaters, 25 midwater floaters, and 9 high-specification jackups, as well as had 6 ultra-deepwater drillships and 3 high-specification jackups under construction or under contract to be constructed.
Ensco PLC (NYSE:ESV) has a market cap of $13 billion. The company operates through three segments: Floaters, Jackups, and Other. The company owns and operates an offshore drilling rig fleet of approximately 74 rigs, including 9 drill ships, 13 dynamically positioned semisubmersible rigs, 6 moored semisubmersible rigs, and 46 jackup rigs.
Noble Corporation (NYSE:NE) has a market cap of almost $10 billion. Its drilling fleet consists of 14 semisubmersibles, 14 drillships, 49 jackups, and 2 submersibles, including 11 units under construction that comprises 5 ultra-deepwater, harsh environment drillships and 6 heavy-duty, harsh environment jackups.
Diamond Offshore Drilling, Inc. (NYSE:DO) has a market cap of almost $9 billion. The company operates a fleet of 44 offshore drilling rigs, consisting of 32 semisubmersibles, 7 jack-ups, and 5 dynamically positioned drillships, of which 4 are under construction.
Atwood Oceanics, Inc. (NYSE:ATW) has a market cap of $3 billion. The company owns a fleet of approximately 11 mobile offshore drilling units primarily located in the United States, Gulf of Mexico, the Mediterranean Sea, offshore West Africa, offshore southeast Asia, and offshore Australia. It also has three ultra-deepwater drill ships, and two high-specification jack ups under construction.
Pacific Drilling S.A. (NYSE:PACD) has a market cap of $2.4 billion. As of February 15, 2013, the company operated four drillships in the deepwater regions of the U.S. Gulf of Mexico, Brazil, and West Africa; and had four drillships under construction.
Ocean Rig UDW Inc. (NASDAQ:ORIG) has a market cap of $2.3 billion. As of March 22, 2013, it owned 10 offshore ultra deepwater drilling units comprising 2 ultra deepwater semisubmersible drilling rigs and 8 ultra deepwater drillships. ORIG is a subsidiary of DryShips Inc (NASDAQ:DRYS).
Hercules Offshore, Inc. (NASDAQ:HERO) has a market cap of $1 billion. As of February 21, 2013, the company owned and operated a fleet of 37 jackup rigs, 13 barge rigs, and 58 liftboat vessels, as well as operated 5 liftboat vessels owned by third party.
Awilco Drilling PLC (OTCPK:AWLCF) has a market cap of $647 million. It owns and operates two semi-submersible drilling rigs, WilPhoenix and WilHunter. The company was incorporated in 2009 and is based in Aberdeen, the United Kingdom.
Vantage Drilling Company (NYSEMKT:VTG) has a market cap of $537 million. As of December 31, 2012, it owned and managed a fleet of seven drilling units, including four ultra-premium jackup rigs and three ultra-deepwater drillships.
Debt & Assets
The process of offshore drilling is expensive, and the ships and platforms that do the drilling and extraction are also expensive. Most of these companies have taken on massive debt in order to finance the building and purchase of these ships and rigs.
The debt to asset ratio helps to measure how much debt the company has compared to their assets. The higher the percentage, the more extended the company is and the more likely they could face default in the event of a down turn in the industry. With that in mind, VTG and SDRL have a high rate of debt and DO, ESV, ATW, and AWLCF are all sitting at more comfortable margins.
The process of offshore drilling is also a lengthy and time consuming process, with those in the industry lining up for the opportunity to have a drill ship come and drill their prospects. The lines can be long with some waiting multiple years. This is good for the drillers, since it gives them a level of predictability for their revenues.
With over $27 billion in back log, RIG has the most customers standing in line, followed by SDRL with close to $20 billion. NE and ESV, each with over $10 billion in back log, also have a steady and predictable flow of customers. This predictability also helps to justify some of the high debt levels the companies maintain.
I frequently like to look at how sell side views the companies in an industry. When short sellers smell blood in the water, it can be pretty easy to see which companies are struggling.
When looking at the companies that belong to the offshore gas and oil drillers, shorts don't seem to feel like any one in particular is struggling. DO has the highest percentage of float with 13%, but even this is not a high enough percentage to indicate the company is in trouble.
Of the eleven companies, only five of them offered a dividend. For investors that are looking for a steady cash flow, they may want to consider SDRL, RID, and DO for their healthy dividend.
For the offshore drillers, analysts have a general consensus of hold. Analysts have a mild recommendation of buy for PACD, and DO has a moderate sell recommendation, but as a whole the industry seems healthy.
As a whole, the industry is healthy. For those looking for predictability in their portfolio, then sticking with the larger companies, SDRL and RIG, are safe bets with boring steady dividends. Additionally, RIG and SDRL both have healthy back logs that will provide a steady stream of revenues for the next few years and help to maintain their dividend. While SDRL does have a high debt to asset ratio, it certainly has the cash flow to meet the requirements. Investors should first define their strategy before choosing which company to invest in. While each company may have its own strengths and weaknesses, the industry as a whole is looking strong.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.