These companies have been growing at a phenomenal rate, and expected growth in the industry will help these companies maintain high growth. The increase in demand for energy is driving the demand for drilling services, and these companies are going to be primary beneficiaries.
Condition of the industry
The industry has been growing at an exceptional rate, and this is expected to continue in the short-medium term for two reasons. First, strong demand for energy products from emerging markets have resulted in increased drilling activity. At the moment, demand clearly eclipses supply, which has resulted in extremely attractive day rates. Furthermore, there is also some recovery in developed economies, which will surely further augment the demand. As a result, I believe the day rates will be high in the short-medium term.
Second, the biggest challenge for the energy giants is replacing depleting reserves. Conventional oil and gas reserves might not be enough to meet the demand. As a result, oil and gas players are turning focus to deep-sea drilling. More energy giants are entering deep-sea drilling, which will ensure that demand for the services of drilling companies remains high. Another important factor is the location of the remaining conventional oil reserves. Most current conventional reserves are in areas where the political environment is extremely volatile. As a result, companies are also looking at alternatives to move their investments into stable environments.
How these three drillers are operating
Seadrill Ltd (NYSE:SDRL) has invested heavily in acquiring a standardized fleet with 22 construction units comprised of nine drill ships, two harsh environment semi-submersibles, and 11 high specification jack-ups. Seadrill Ltd (NYSE:SDRL) has an order backlog of over $20 billion, which will provide it earnings visibility for the next five years as most of these contracts are long-term. In order to meet the demand, the company is building new drill ships, which will be added to the fleet in 2015. Due to the increased spending by the oil and gas giants, Seadrill Ltd (NYSE:SDRL) has been able to grow revenue at an exceptional rate — revenue growth for the company has been about 12% in the past three years.
Management believes in selective acquisitions, including an agreement worth $590 million with Sogna Eclipse. The rationale behind the investment strategy is not only expansion, but a move toward a younger fleet. Its dual strategy is expected to increase its dividend-paying capacity. At the moment, the company pays an annual dividend of $3.52 per share and boasts one of the highest yields (8.20%) in the sector. Furthermore, the stock is trading at P/E of 18, below the industry average of 21.1. Expected EPS growth over the next five years is about 22%.
Rowan Companies PLC (NYSE:RDC) focuses both on high-end jack-ups and ultra-deep-water drilling projects. The fleet composition consists of 30 jack-up rigs in strategic locations including Mexico, the U.S., and the North Sea, also known as the Golden Triangle. Rowan Companies PLC (NYSE:RDC) has been operating four high-specification drill ships in the ultra-deep water segment, the most rapidly growing segment of the off-shore drilling sector. As a result, the company has been able to charge higher rates than most of its competitors.
Rowan Companies PLC (NYSE:RDC) was able to grow its revenue to $1.39 billion in 2012 from $939 million a year before. EPS for Rowan Companies PLC (NYSE:RDC) is expected to be around 16% over the next five years, and the current P/E ratio is 19. However, forward P/E is expected to come down to 9.2.
The biggest advantages of Transocean LTD (NYSE:RIG) over its competitors are its 50 years of experience and its leading position in off-shore drilling services. What distinguishes Transocean LTD (NYSE:RIG)’s business strategy from its peers is its well-diversified and extensive fleet size. Transocean’s revenue efficiency improved from 91% to 93% in 2012, and the company expects to increase capacity utilization up to 100% by 2017. Unlike Seadrill, the business structure is more inclined toward acquisition and divestitures.
Revenue growth has been slow for Transocean. However, the massive size of its operations gives it a larger footprint in the market. At the moment, Transocean LTD (NYSE:RIG) is trading at a lower P/E (17.4) compared to its other two competitors. EPS growth estimates for the next five years are around 27%, and current PEG ratio stands at 0.64. Looking at the valuation metrics, Transocean LTD (NYSE:RIG) is the cheapest stock in the bunch.
Conclusion
Seadrill, Rowan Companies PLC (NYSE:RDC), and Transocean emerge at the top of different stock categories. Seadrill Ltd (NYSE:SDRL) can be classified as a high-growth-high-dividend stock. Rowan does not pay dividends, but its recent decision to start a young, ultra-deep-water drilling fleet makes it a superior growth stock. As for Transocean LTD (NYSE:RIG), it can be considered a high-dividend stock for its large market cap and high trading price. In my opinion, off-shore drilling companies present an excellent opportunity to reap healthy gains in the short-medium term.
The article Should You Invest in Off-Shore Drilling Companies? originally appeared on Fool.com and is written by Ishtiaq Ahmed.
Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Ishtiaq 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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