by Tim Melvin | June 2, 2014 9:53 am
While renewable energy sources like solar and wind garner all the attention these days, the simple truth is that oil and gas will continue to provide much of the world’s energy needs for the foreseeable future.
With a surging population, demand for energy will grow over the next few decades, and oil and gas companies will continue to profit. While low natural gas prices in the U.S. have hurt some of these companies in the short term, the-long term outlook is much better. The low price is fuel an industrial resurgence in the U.S., which will naturally increase demand and improve pricing over time.
As world energy demand continues to increase, long-term ownership of energy stocks should prove to be very profitable for patient investors. As a bonus, many of the leading energy stocks pay generous dividends, so you get paid to wait for stock prices to drive higher over time.
Transocean (RIG) is the largest offshore drilling company in the world. While the near-term outlook is constrained by overcapacity and a reduction in spending, the long-term outlook for this company is pretty bright. RIG is well positioned in the ultra-deepwater drilling market, which is expected to see a strong increase in activity in the next decade.
Shareholders just approved an increase in the dividend to $3 per share, so the yield on Transocean shares will be more than 7% based on the current share price. Management is also planning to spin off part of its fleet as an MLP in the second half of 2014 and has plans to cut debt by about $2 billion by the end of next year.
RIG stock is priced at bargain levels right now. Transocean trades at just 88% of book value and has a P/E ratio of less than 10. Investors should buy the stock at this level and collect dividends over the years. As demand for oil and gas picks up and ultra-deep water drilling usage expands, RIG stock should be a lot higher 10 years from now.
Ensco PLC (ESV) is in pretty much the same position as Transocean. Short-term concerns are weighing in the stock, but the long-term demand for offshore drilling will benefit the company immensely in the years ahead.
ESV is the second-largest offshore company and also has good exposure to ultra-deepwater market. ESV stock is trading at just 90% of book value and just 8 times earnings, so the stock is also cheap. Even better: ESV stock is yielding 5.8% at the current price and management has a strong track record of raising the payout.
The need for oil and gas is not going away anytime soon. These two offshore drillers will benefit — and in the interim, shareholders can enjoy the benefits of juicy dividend yields.
As of this writing, Tim Melvin was long RIG and ESV.
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