Offshore Driller Earnings a Strike

 | May 06, 2013 | 12:30 PM EDT
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I spent most of the weekend perusing most of the earnings reports from last week, hoping to find sectors that are delivering better results than analysts were expecting. Offshore drilling/services companies seem to be having a good quarter.

Almost all the firms in the industry are beating on the top and on the bottom lines. Hornbeck Offshore Services (HOS) was a particular star last week with earnings that beat on the bottom line by 28 cents a share above estimates. Revenues also came in about 7% above consensus. The stock rocketed more than 10% the day after earnings based on the results. Oil States International (OIS) is up more than 20% over last few weeks on the back of a solid quarter and the disclosure of a 9% stake by activist Jana Partners. I profiled the appeal of these undervalued shares late in 2012 when they were trading 30% lower. Higher day rates and strong demand seem to be buoying prospects for the sector overall.

I like the following two offshore firms whose stocks have cheap valuations with good growth prospects.

Rowan Companies (RDC) -- The company focuses on high-specification and premium jack-up rigs for exploratory and development drilling and well work-over operations. Revenue is expected to accelerate over the coming year as new rigs come online. RDC has over 70% contract coverage for the rest of the year with eight rigs up for renewal.

Given the strength of demand in the areas Rowan operates, I would expect renewals on these at higher prices. Rowan should increase sales in the low double digits in FY2013 but is projected to see a ramp up to over 25% revenue gains in FY2014. RDC sports a five-year projected price/earnings-to-growth ratio substantially below 1 (.63). The equity is cheap at 94% of book value and 9x 2014's projected earnings. The stock just crossed its 200-day moving average and was just upgraded to a "Buy" over at Jefferies last week.

Ensco (ESV) -- I profiled this large offshore fleet operator back in October. The stock has moved up just under 15% since then but still has upside at $60 a share. Ensco reported a solid quarter last week, beating the consensus on the top and the bottom line. The company is expected to grow revenues at over a 15% compound annual growth rate during the next two fiscal years and  the stock sports a minuscule five-year projected price/earnings-to-growth-ratio (.30). The stock is cheap at below 8x 2014's projected earnings and 7x current operating cash flow. In addition, the company hiked its dividend payout over 30% earlier in the year and ESV now yields 3.3%. Ensco provides good value, growth and income at these levels -- a rare combination.

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