According to the Energy Information Administration (EIA), global per-barrel oil prices will fall below $100 by the end of 2014. Additionally, the US oil imports will reduce to half of the mid-2000 level. This decline in imports is an indicator to the upsurge in the domestic oil production. The US per-day oil production in 2014, could reach its highest level in the past two-and-a-half decades. This gives a good growth opportunity for the domestic drillers as well as to the income investors who are always on the hunt of good dividend paying stocks. In this article, I have discussed three oil-drillers that will be benefited by this boom in oil production. Let’s find out which of these stocks holds the potential to derive returns for its shareholders in the long run.
Transocean LTD (NYSE:RIG)
No doubt, Carl Icahn’s new position in this stock in the last-quarter has substantially helped the upside of Transocean LTD (NYSE:RIG)’s stock in the year 2013. But this doesn’t necessarily mean that the management of Transocean LTD (NYSE:RIG) has to agree with Icahn every time. The management is strongly opposing Icahn’s proposal of dividend of $4/share with a permanent payout ratio of 85%. This proposal is to be voted in May 2013 against the board’s proposal of dividend of $2.24/share.
Looking at the future prospects of the company, going with the board seems to be a sensible decision. The company already has debt of $1 billion. Out of this, $600 million is scheduled for repayment in 2013 and 2014. Transocean LTD (NYSE:RIG) also has to repay approximately $1 billion of excess debt by the end of 2014. Additionally, the recent settlement by the company with the Department of Justice regarding oil-spills will elevate its cash requirement in the future. I don’t think it would be in the best interests of the company to increase its dividend outflow at this moment.
Apart from this, Transocean LTD (NYSE:RIG)’s future endeavors seem enduring. The sale of two standard jackups brought down the estimated out-of-service time in 2013 by 45 days. The Ultra-deepwater market remains tight with day-rates ranging from $550,000-650,000/day. Transocean LTD (NYSE:RIG) is on the verge of securing a term contract for the available Ultra-deep water new-build in Indonesia. Similarly, another contract is expected for the upgraded Ultra-deep water drill-ship with ONGC in India. And, several other deep water units available in 2013 are also close to securing extensions.
The future contracts of the company complement its fleet, but the dividend decision may have an impact on the liquidity of the company. However, in either of the cases the shareholders are in a win-win situation. With solid sales pipeline and better dividend paying capacity, I would recommend a buy on this stock.
ENSCO PLC (NYSE:ESV)
The company continues to benefit from its new asset deliveries, including the recent startups of ENSCO 8506 and ENSCO DS-6. The delivery of the 8506 marks the final delivery in the 8500 series program. The assets from the series that have been in service for more than six months have achieved around 99% revenue efficiency in the last-quarter of 2012 whereas its competitors have been battling with the downtime issues of their new-build.
In 2012, ENSCO PLC (NYSE:ESV) received roughly 60 inquiries for jack-ups and floaters. However, the company could only bid for a quarter of them because of limited rig availability. However, the company has six rigs under construction to meet the future demand. The first one of the three upcoming drill-ships of the company to be delivered in the third quarter of 2013 is already contracted for three years at an average day rate of $648,000/day. And, one of the three upcoming jack-ups, to be delivered in the second-half of 2013, is contracted for the next two years at $230,000/day. The company’s new assets will be able to provide some meaningful upside for a couple of years in the future.
On a different note, the company has increased its annual dividend by about 33% from $1.50 to $2 per share. This increase has resulted in an increase in the total dividend pushing it to roughly 3.4%. With this increase it has also achieved the target to maintain a dividend yield of around 3%. The cash generation capacity and intention of its distribution makes Ensco a promising stock for the future.