Look Offshore for Real Value

 | May 24, 2012 | 1:30 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

sdrl

,

rig

,

esv

,

rdc

I've been watching the late-spring market swoon through the prism of oil prices. Recently, I have written that oil price action, as bad as it's been, has been telling me to slowly start coming out of cash and into energy stocks. But where exactly? One place to look for some real value is with the offshore drilling companies.

From a very wide, macro view, offshore drilling represents a great place to start re-entering the energy trade because offshore profitability is almost entirely based on crude oil pricing (despite yielding plenty of natural gas). I have been convinced that crude oil prices will inevitably find a bottom in 2012 that is well above the prices we saw in 2011 -- well above $100 a barrel in global average price. This will make the most challenging of offshore operations, using the deep and ultra deep water rigs owned and leased by companies like SeaDrill (SDRL), Transocean (RIG), Ensco (ESV) and Rowan (RDC), increasingly profitable moving through 2012 and into 2013.

But not all inside this sector are created equally. SeaDrill has been the steadiest performer this year -- undoubtedly because it delivered a massive dividend of more than 8.5%. I believe that dividend is safe, and if your goal is just to collect that divvy, you need look no further. But SeaDrill is truly firing on all cylinders right now, and has almost nothing to further contribute in efficiency. Other drillers that have notably underperformed Seadrill are ripe for recovery, particularly Transocean and Rowan.

Particularly with Transocean, the slow retooling of blowout preventers on their aging fleet of deep water platforms has made 2012 a challenging year of cash flow. However, RIG is nearing the end of its upgrading at precisely the right time, as day rates on big rigs near $650,000 a day and the crude oil market remains high. Soaring day rates prove the demand for rigs is increasing while the supply of these rigs remains tight. These trends are extending to shallower floaters and jackup rigs and small player Rowan may be the best value in the sector. Technically, the stock has always represented a fantastic value. It is trading around $30 a share, and the price hasn't been this low when so many of its fundamentals have aligned.

Maybe the best play would be to invest in a cocktail of the three stocks, taking some steady dividends in SeaDrill, along with the growth and efficiency premium that can be captured with RIG and Rowan. But no matter how you play it, offshore looks like an interesting spot to try and capture some great value in a relatively strong crude oil market -- and wait out the midsummer swoon.

Columnist Conversations

Right now ICE is still considered to be within a larger downtrend unless the zones discussed in the article (t...
big X up 8%+ after hours. 30 last. nice short squeeze.
Market woke up a bit today to the fact that the tensions emanating out of Ukraine are not going anywhere as th...
In my article this morning, I speculated this could be the bottom for Twitter. I thought investors would shif...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.