The oil services sector could be one of the cheapest sectors in the market right now. Many oil-service companies are now trading on earnings multiples less than half of the market average and two of the four oil and gas drillers in the S&P 500 are trading below the value of their assets.
This presents an opportunity for investment; a drilling company that is trading for less than the value of its net assets is a potential takeover target and value investment.
That said, a Foolish investor should never invest in a company because it is a takeover target — there should be a solid fundamental reason as well. The company also needs to know what it’s doing and be financially strong.
So, based on that here is the lowdown on three oil drillers, their fleets and financial positions.
The small one: Atwood Oceanics, Inc. (NYSE:ATW)
| Metric | |
|---|---|
| Number of rigs and drill ships | 16 + 3 under construction |
| Day rates | High: $584,000Low: $105,000
Average: $305,000 |
| Current contracts | Longest: May 2017Shortest: July 2013 |
| Operators | 14 |
| Key operators | GlencoreApache
Hess Chevron BHP Noble |
The length of Atwood Oceanics, Inc. (NYSE:ATW)’s leasing contracts is currently mixed, but the majority have a shorter duration as the company has a client based of small oil and gas operators as well as diversified commodity company’s such as Glencore and BHP Billiton plc (ADR) (NYSE:BBL). Chevron Corporation (NYSE:CVX) is Atwood Oceanics, Inc. (NYSE:ATW)’s largest client; apart from that most of Atwood Oceanics, Inc. (NYSE:ATW)’s clients are smaller companies with short-duration contracts. This could be an issue for future revenue clarity as smaller oil and gas firms often run into financial trouble.
Medium sized: Rowan Companies PLC (NYSE:RDC)
| Number of rigs and drill ships | 31 + 4 under construction |
| Day rates | High: $610,000Low: $80,000
Average: $221,000 |
| Current contracts | Longest: June 2017Shortest: June 2013 |
| Operators | 16 |
| Key operators | ConocoPhillipsTotal UK
Hess BP BG Saudi Aramco ExxonMobil |
Rowan Companies PLC (NYSE:RDC) has 31 rigs of various descriptions with four high-spec jack-up drill ships on order, which when completed will be the company’s most expensive product, demanding day rates of $610,000.
Currently, the average day rate for Rowan Companies PLC (NYSE:RDC)’s rigs is $221,000 and the lowest is $80,000. Meanwhile, the longest lease that the company is currently locked into extends into 2017.
Unlike Atwood, the majority of Rowan Companies PLC (NYSE:RDC) clients are oil majors, which gives a certain amount of clarity and less speculation over the company’s future revenue due to the financial strength of these operators.
The big daddy: Seadrill Ltd (NYSE:SDRL)
| Number of rigs and drill ships | 52 |
| Day rates | High: $640,000Low: $65,000
Average: $350,000 |
| Current contracts | Longest: Nov 2020Shortest: June 2013 |
| Operators | 13 |
| Key operators | ConocoPhillipsTotal
Shell Statoil Saudi Aramco ExxonMobil Chevron |
The big daddy of the group is Seadrill Ltd (NYSE:SDRL)with three times as many rigs as Atwood. The average day rate for Seadrill Ltd (NYSE:SDRL)’s rigs is $350,000 and the company has the widest day-rate range of these three drillers, which allows it to appeal to both small and large customers.
Seadrill Ltd (NYSE:SDRL) has a much stronger client base than that of its peers. Seadrill has three time more rigs than Atwood but fewer customers and contracts that extend into the next decade. This gives the company some clarity on its income position for the rest of the decade. Additionally, the company’s customers are the biggest oil companies in the world, removing some of the risk that comes with dealing with smaller operators, which can default on their contractual obligations.
Financials
As of these drillers lease their equipment to operators on multi-year contracts and have a certain amount of clarity when it comes to their revenue forecast for the next couple of years. Having said that, there is still a certain amount of unpredictability especially concerning contract renewals, industrial accidents and third-party defaults.
Due to the high cost of drilling equipment, drillers are usually highly geared, which can cause a problem in the event of a customer default or slowdown in activity in the sector. So based on that, I believe that the gearing and interest coverage of these three companies are the most important metrics.
| Operator | Seadrill | Atwood | Rowan |
|---|---|---|---|
| Debt to equity | 2x | 0.47 | 0.44 |
| Interest costs | 608NOK million | $6.2 million | $18.6 million |
| Q1 interest cost coverage by gross profit | 5.2X | 18.9X | 6X |
Seadrill Ltd (NYSE:SDRL) has the biggest fleet and also the largest amount of debt; interest costs are easily covered just over five times, but in comparison to Atwood, Seadrill’s financial position appears poor. Meanwhile Rowan Companies PLC (NYSE:RDC), which only has a gearing level of 0.4x, can only cover its interest costs 6x and Atwood can cover its interest costs around 19x.
Unlike Atwood, the majority of Rowan Companies PLC (NYSE:RDC)’s clients are oil majors, which gives a certain amount of clarity and less speculation over the company’s future revenue due to the financial strength of these operators.
Conclusion
So, Seadrill has the biggest fleet with the best operators but the worst financial position. Atwood has the smallest fleet but its operators are small and this adds an element of speculation to the company. On the other hand, Rowan has a medium sized fleet but its new jack-up drill ships should really boost the company’s future outlook. In addition, Rowan has a wide basket of oil majors and customers and its financial position is better than that of Seadrill.
Overall, Rowan would have to be my pick of this group.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Atwood Oceanics and Seadrill. The Motley Fool owns shares of Atwood Oceanics and Seadrill.
The article A Rundown of 3 Oil Drillers originally appeared on Fool.com and is written by Rupert Hargreaves.
Rupert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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