Diving Into a Pair of Deepwater Plays

 | May 11, 2012 | 3:30 PM EDT
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Energy technology has undergone a transformation over the last couple of decades. I have covered the huge expansion of domestic shale oil-and-gas production enabled by new fracking technology in previous articles. The evolution in deepwater drilling technology is just as impressive. A generation ago, drilling in 500 ft.-1,000 ft. of water was considered a major accomplishment. Today, massive drillships and rigs can drill in 12,000 ft. of water and can accommodate 200 personnel as well. As cheap oil gets harder to find and produce, this new technology will allow production to keep up with demand -- albeit at higher price points.

Here are two speculative deepwater drillers that could richly reward shareholders as deepwater demand increases and they execute against their strategic plans.

Vantage Drilling (VTG) provides offshore contract drilling services to oil and natural gas companies in the U.S. and internationally. Its fleet of owned and managed drilling units comprises four jack-up rigs and three drillships.

Four reasons Vantage is a solid speculative play at $1.50 a share: 

  • It has a monstrous contract backlog of $2.8 billion (The company has a market capitalization of just under $450 million.)
  • Revenues are set to ramp up exponentially. Analysts expect the company to produce 13% revenue growth in fiscal-year 2012 and then ramp sales growth up past 33% in fiscal-year 2013 as the ultra-deepwater drillship it is building (Tungsten Explorer) comes on line. The company has a good record of delivering ships/rigs on-time and on budget.
  • Although the company has a lot of leverage ($1.1 billion in net debt), it has no significant debt repayments until 2014. This should give it ample time to deploy its new build and ramp up cash flow to cover maturing debt.
  • The company has one of the newest fleets of any driller, high utilization rates and is selling at just 63% of book value. It also has beat earnings estimates for the last three quarters, consensus estimates for fiscal-year 2013 have risen smartly over the past two months and it is projected to achieve positive net income in FY2013.

Atwood Oceanics (ATW) engages in the drilling and completion of exploratory and developmental oil and gas wells worldwide. The company currently owns 10 mobile offshore drilling units. It is moving strongly into deep-water drilling. It has an ultra-deepwater semisubmersible, two ultra-deepwater drillships, and three high-specification jack-ups under construction to grow its deepwater fleet.

Four reasons Atwood Oceanics is a solid growth play at $41 a share

  • The company has one of the least leveraged balance sheets (23% debt/capitalization) in the industry and has a five-year projected PEG of under 1 (0.71).
  • The stock is trading significantly under analysts' price targets. The median analysts' price target for the 13 analysts who cover the stock is $55 a share. Both Global Hunter Securities and Dahlman Rose upgraded the stock to Buy or Accumulate in February.
  • The new builds in its portfolio should significantly increase growth in the years ahead. Analysts have the company booking around 15% revenue growth in fiscal-year 2012 and then more than 30% sales growth in fiscal-year 2013.
  • Trading around 8x forward earnings and 8x operating cash flow, the stock is undervalued. It also has a $2.2 billion contract backlog.

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