The ultra-deepwater drilling market is still sizzling hot, and that’s great news to the companies with exposure to the market. After the market closed yesterday, Seadrill Ltd (NYSE:SDRL) announced that it secured a three-year, $662 million contract for the newbuild West Neptune, which isn’t due to be delivered until June 2014. The operator leasing the rig plans to use it in the Gulf of Mexico and has an option for an extra year if necessary.
This contract comes with a dayrate of just over $600,000 for Seadrill Ltd (NYSE:SDRL), keeping the momentum rig owners have in deep water. The company has 10 ultra-deepwater semi-submersibles and 10 drillships in operation when you include the holdings of Seadrill Partners. Five more drillships will be completed by the end of 2014, which will drive earnings higher if these high dayrates continue. Management expects that these new rigs will help drive 50% or greater EBITDA growth by 2015.
High tide lifts all boats
In my opinion, Seadrill Ltd (NYSE:SDRL) is the best company in offshore drilling, but it isn’t the only one with major exposure to ultra-deepwater.
Transocean LTD (NYSE:RIG) is selling off shallow-water rigs and building ultra-deepwater rigs to leverage the market. Forty-eight of Transocean LTD (NYSE:RIG)’s 82 rigs are high-specification floaters, built for ultra-deepwater, deepwater, and harsh environment drilling. It also has six additional ultra-deepwater drillships under construction, which should command similar rates as Seadrill Ltd (NYSE:SDRL) has. Transocean LTD (NYSE:RIG) has more upside potential, but operational issues will keep me out of Transocean LTD (NYSE:RIG) right now.
Noble Corporation (NYSE:NE) also has 14 ultra-deepwater rigs, including five under construction. The challenge for Noble Corporation (NYSE:NE) is that it still has 49 jackup rigs, which drag on earnings as shallow-water drilling slows. This market has been less of a drag recently, and the new drillship construction will help help drive earnings, but the company isn’t as leveraged to ultra-deepwater as Seadrill Ltd (NYSE:SDRL) and Transocean LTD (NYSE:RIG).
A growing opportunity
Ultra-deepwater has become more and more attractive for oil explorers as they run out of cheaper oil and discover large fields deep beneath the ocean’s surface. Anadarko Petroleum recently announced another find in the Gulf of Mexico that is a “potentially giant project” and twice as big as they expected. This is a trend and has grown the demand for rigs at very high rates, which shows no signs of stopping any time soon.
I think Seadrill Ltd (NYSE:SDRL) is the cream of the crop in deepwater drilling and investors can get in with a 9.6 forward P/E ratio and a 9.3% dividend right now. Not bad for a profitable and growing market.
The article Seadrill Still King of Offshore Drilling originally appeared on Fool.com and is written by Travis Hoium.
Fool contributor Travis Hoium manages an account that owns shares of Seadrill. The Motley Fool recommends Seadrill and owns shares of Seadrill and Transocean.
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