These Offshore Drillers Are a Bargain

 | Jan 24, 2013 | 12:00 PM EST
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A couple of things in the energy sector came on my radar Wednesday while I was flat on my back for a third straight day recovering from this nasty flu that has been hitting the country hard (and chastising myself for not getting a flu shot).

Jefferies says it sees capital expenditures in the oil and gas space rising 3% to 5% in 2013 based on recent additional capital spending announcements from oil and gas companies. Bernstein Research says North American activity will continue to climb out of its trough in 2013, and oil-services company Baker Hughes (BHI) predicts North American rig count will increase by 125 to 1880, even as aspects of its business remain under pressure.

This could mean brighter days in 2013 for the oil-services industry, which has underperformed the broader market by approximately 10% over the past year.

I particularly like the offshore drillers, where spending should be stronger. Morgan Stanley believes 2013 will be another big year for offshore drilling and Exxon Mobil plans to spend $14 billion to develop just one huge field off the coast of Newfoundland.

Here are two offshore drillers that look attractive at current price levels.

Rowan Cos. (RDC) provides offshore oil and gas contract drilling services in the U.S. and internationally. It primarily focuses on high-specification and premium jack-up rigs and has a fleet of 31 self-elevating mobile offshore jack-up rigs.

Four reasons RDC provides value at $34 a share:

  • Revenues are increasing at a rapid pace. Sales grew by almost 50% in 2012 as new builds came online. Analysts expect at least 10% revenue growth in 2013. The stock sports a low five -year projected price-earnings-growth ratio of 0.47.
  • The stock is cheap at just 96% of book value, considering Standard & Poor's expects the company to earn a 25% return on capital on its new builds.
  • Although earnings estimates have come down recently, the company is still experiencing a solidly upward earnings curve. Rowan earned $1.14 per share in 2011 but is on track to post around $1.85 in 2012. Analysts project better than $2.40 in 2013.
  • Credit Suisse believes the company will print better than $3.70 in earnings in 2014. It also has a $45 price target and an Outperform rating on the shares. S&P believes Rowan could be a takeover target, given its low valuation and premium assets.

Atwood Oceanics (ATW) is an offshore drilling contractor that engages in the drilling and completion of exploratory and developmental oil and gas wells. The company owns a fleet of approximately 11 mobile offshore drilling units.

Four reasons ATW is a good growth play at $51 a share:

  • Atwood is showing up on some takeover lists, recently as one of two energy concerns on Morgan Stanley's list of 40 companies that have a higher probability of being acquired in 2013.
  • The company is growing earnings rapidly. It made just over $4 a share in 2011 but is tracking to around $4.85 for 2012. Analysts project almost $6.50 a share for 2013.
  • Revenue came with a better than 25% increase in 2012, and analysts expect similar performance in 2013. The stock has a small five-year projected PEG of 0.54.
  • The stock is cheap at just 8x forward earnings given its revenue and earnings growth.

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