Transocean LTD (RIG), Seadrill Ltd (SDRL): Which Deepwater Play Will Line Your Pockets?

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Deepwater drilling is overshadowed by onshore oil and natural gas plays, but the profits are still very real.

Two major players get the bulk of attention from investors. On one hand, there is the older and more experienced Transocean LTD (NYSE:RIG). On another hand is Seadrill Ltd (NYSE:SDRL) , a new company backed by one of the John Fredriksen, a veteran of the oil container shipping business.

Transocean LTD (NYSE:RIG)

What's the Difference?

A driller is a relative commodity. Asset owners like Royal Dutch Shell plc (ADR) (NYSE:RDS.A) or BP plc (ADR) (NYSE:BP) hire the drilling services and equipment from Transocean LTD (NYSE:RIG) and Seadrill to develop underwater oil wells. The business is simple, even if the execution is not. Transocean and Seadrill Ltd (NYSE:SDRL) invest heavily in rigs, which are then hired out on a day rate in the hundreds of thousands of dollars per day.

Their business is the same. The way these two companies approach the business couldn't be more different, however.

Let's look at the upsides and downsides with each company.

Transocean

The leading player in the space finally shed much of the liability risk from its Macondo disaster in the Gulf of Mexico. The largest offshore oil spill in U.S. history ended with the death of 11 crewman and $1.4 billion in damages and penalties.

The disaster showed weaknesses in Transocean LTD (NYSE:RIG)'s rigs. The company has much older rigs than Seadrill Ltd (NYSE:SDRL). Post-disaster, the company has spent heavily to maintain its existing rigs and work on blowout preventers. Maintenance has lead to horrendous downtime. The company expects that revenue efficiency should rise into 95%+ territory, up from 90% in 2011 and 93% in 2012.

Improving downtime and working on its cost structure should help Transocean LTD (NYSE:RIG) drive net margins. The company announced a $300 million cost-cutting program that would pay rewards by 2014. The announcement was timed with Carl Icahn's move to push the company to pay a dividend and swap out three existing board members for a roster selected by Icahn.

For long-term shareholders, Icahn's participation is little more than a distraction. Icahn pushed for a $4 dividend per share payable in 2013 and three new directors on the board. Transocean LTD (NYSE:RIG)'s board proposed a quarterly dividend that would amount to $2.24 per year, an amount which the company says it can afford.

Seadrill

Seadrill uses aggressive and creative financing to grow quickly. The company seeks to lease its rigs under much longer contracts, later extracting the value from these future cash flows to acquire new rigs or to pay lofty dividends to shareholders.

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