Looking for Offshore Prospects

 | Mar 04, 2013 | 12:00 PM EST
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Fracking technology and shale plays have received most of the headlines recently as domestic oil production increases impressively. It is the key reason for the massive growth in domestic oil & gas production over the last six years that is moving the U.S. to energy independence. My portfolio holds many names that are seeing robust production increases as a result of this technical development. Pipeline and oil services companies are also benefitting from this production expansion, and they have appeared in my column as well as my portfolio.

As important as fracking is for expanding domestic energy resources, it is not the only technology enabling new energy sources to be developed globally. Technology that allows companies to drill deeper in waters to bring new fields on line is an increasingly important catalyst to supply the world with the oil it needs to meet growing demand in the developing world. The offshore space should continue to see robust activity as long as oil stays near historically high levels.

Here are two offshore drillers that are poised to benefit with strong revenue growth over the next few years. Both sport cheap valuations.

SeaDrill Limited (SDRL) provides offshore drilling services to the oil and gas industry, including drilling, completion and well maintenance.

Four reasons SDRL is a great value play at $37 a share:

  • Over the past 12 months, the company has paid $4.31 a share in dividends, a yield of more than 12%. Normalizing the December payout of $1.70, the stock still yields nearly 9%.
  • Analysts expect more than 10% revenue growth in 2013, accelerating to just below 20% in 2014. The stock has a five-year projected PEG of 0.36.
  • The stock sells for less than 10x forward earnings despite high yield and growing revenues.
  • The 14 analysts that cover the stock have a median price target of $46.

Atwood Oceanics (ATW) is an offshore drilling contractor with 10 mobile offshore units and an ultra-deepwater semi-submersible, two ultra-deepwater drillships, and three high-specification jackups under construction.

Four reasons ATW is a solid growth play at $50 a share:

  • Analysts expect more than 30% revenue growth in 2013 and close to 25% growth in 2014. The stock sports a low five-year projected PEG of 0.51.
  • Despite the stellar growth prospects, the stock sells for less than 8x 2014's projected earnings.
  • The median price target on the stock held by the 19 analysts is $60. Barclays initiated the shares as Outperform in late January. Credit Suisse has an Outperform rating on the company due to its "Market leading Return on Capital and strong built-in growth (3 newbuild drillships)."
  • ATW also sells toward the bottom of its five-year valuation range based on price-sales, price-cash-flow, and price-book ratios. The company has easily beaten earnings estimates for four straight quarters.



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