Offshore drilling companies have significantly underperformed the market year to date and last year, mainly due to over capacity. However, around 30 percent of the 85 million barrels per day of oil consumed around the world now comes from offshore oil wells, according to the International Energy Agency. Moreover, most of the new oil discoveries are found offshore, and the current high price of oil should promote an increase in the demand for new explorations.
In my previous posts, I recommended the following offshore drilling companies: SeaDrill Limited (NYSE:SDRL), Transocean Ltd. (NYSE:RIG), Noble Corp. (NYSE:NE) and Ensco plc (NYSE:ESV). In this article, I will compare these companies' stocks to two other companies: Diamond Offshore Drilling, Inc. (NYSE:DO) and Rowan Companies plc (NYSE:RDC). Furthermore, I will show that all the six stocks are excellent long-term investment due to compelling valuation metrics and strong earnings growth prospects. All the data for this article were taken from Yahoo Finance, finviz.com and Schwab.com.
Oil and natural gas prices have been rising from the beginning of the year. WTI crude price has risen 15.3% from its low of $90.02 per barrel on January 09, 2014, to $103.77 per barrel on July 06 while Henry Hub natural gas price has risen 10.5% from its low of $3.951 per Million Btu on January 09, 2014, to $4.367 per Million Btu on July 06. Furthermore, the turmoil in these days in Iraq can put in the danger Iraq's 2.5 million barrels a day of exports and to cause another rise in the price of oil.
WTI crude August 2014 leading contract
Henry Hub natural gas August 2014 leading contract
Charts: TradeStation Group, Inc.
The table below demonstrates the six companies' stock return over the last month, year to date and one year, taking into account also dividend payment. The price difference from the 52 weeks high and low is also shown in the table.
SDRL is the only stock in this group that has given a positive return year to date due to its rich dividend; in fact, its stock price dropped 2.1% from the start of the year. DO stock has shown the one year highest loss of 22.47%. However, in the last month all the six stocks have performed well with an average gain of 4.42%.
SDRL data by YCharts
The table below presents the valuation metrics of the six companies.
All the six stocks have remarkably good valuation metrics. The enterprise value-to-EBITDA ratio, a very important parameter, is very low for all these stocks except SDRL which has a bit higher ratio of 12.38 which is also fairly low. The PEG Ratio of all the stocks except DO is exceptionally low; the PEG Ratio of DO of 1.45 is also pretty low. The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued. Among the six stocks, only SDRL has a high debt to equity ratio of 1.38, while the others have moderate debt to equity ratio.
The table below shows the compound average annual sales and EPS growth over the last five years, and the average annual EPS growth estimates for the next year and the next five years.
Only SDRL among the six stocks has shown strong sales and EPS growth over the past five years, and it has strong earnings growth prospects for the next year and the next five years. RDC stock has the highest EPS growth estimates for the next year and the next five years among the stocks in the group; at 85.11% and 36.45% respectively. All the six stocks have strong earnings growth prospects for the next five years.
The table below presents the trailing twelve months gross margin, operating margin and profit margin for the six stocks, as well as the return on assets, the return on equity and the return on investment.
SDRL has the highest gross and operating margin among the stocks in the group, and the highest return on assets and equity and RDC has the lowest return on assets, equity and investment.
The table below shows the dividend yield, the payout ratio and the annual rate of dividend growth over the past three and five years for the six companies.
Four companies: SDRL, RIG, ESV and NE pay a very rich dividend, and their payout ratio is not high, which means that they can sustain the high dividend payments. RDC and DO which have a low dividend yield of 1.26% and 1.01% have a very low payout ratio of about 20%, and they can raise their dividend payment. SDRL, ESV and NE have shown very strong dividend growth over the past three and five years.
Many analysts are covering these companies, but their opinion is extremely divided, as shown in the table below.
TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. The table below shows only recommendations from analysts who have the four or five star rating according to TipRanks.
Offshore drilling companies will benefit from the rising prices of oil and natural gas. All these six drilling companies have compelling valuation metrics and strong earnings growth prospects. In my opinion, all the six companies are excellent long-term investments. Four companies: SDRL, RIG, ESV and NE pay a very rich dividend yielding 9.95%, 6.77%, 5.49% and 4.58% respectively, and three of them: SDRL, ESV and NE have a strong record of raising their dividend payment. SDRL which has the highest yield and which has shown the strongest sales and EPS growth also has the highest debt to equity ratio at 1.38. RDC stock that has a dividend yield of only 1.26% has the strongest earnings growth prospects among the stocks in the group. In my opinion, investors who decide to invest in these stocks should divide their investment among at least two stocks of the group in order to decrease the risk.
Disclosure: The author is long ESV, SDRL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.