by Aaron Levitt | March 6, 2014 10:40 am
While hydraulic fracturing and onshore shale production gets all the energy press and investors’ attention, the action offshore could be an even bigger play. One that leads to some huge opportunities for dividend stocks.
Drilling for oil and natural gas offshore — especially in deepwater — is heating up big time. According to analysts at Wood Mackenzie, the number of deepwater wells drilled each year will increase from the roughly 500 drilled in 2012 to a whopping 1,250 by the time 2022 hits.
All in all, that means some pretty big profits for those firms doing the heavy lifting and drilling. It can also be a fertile hunting ground for those investors looking for dividend stocks.
The deepwater drillers have turned into dividend yield powerhouses as day rates to rent their ultra-modern drilling rigs have skyrocketed in recent years. And given the growth projections for industry, the deepwater drillers should continue pumping out those high dividend yields for years to come.
For investors looking to get a dose of energy sector dividend stocks to their portfolio, the deepwater drillers can’t be ignored. Here are five of the best.
ESV Dividend Yield: 5.8%
Ensco PLC (ESV) is quickly taking the dividend stocks crown in the deepwater drilling space.
ESV is the second-largest publicly traded offshore driller by fleet size — owning 46 jack-ups, 9 drillships and a host semisubmersibles. The key for ESV and its fleet has been its aggressive new-build program.
This capex spending program has helped transition Ensco towards the lucrative ultra-deepwater sector. Drilling in this market is quite expensive and ESV stock is a direct beneficiary of rental rates pushing $600,000+ per day.
Those juicy day rates have made ESV stock one of the best energy dividend stocks around.
Cash flows at deepwater driller have continued to increase — with ESV reporting record revenues and earnings in 2013. Those cash flows have also helped ESV stock become a champion among dividend stocks. Since 2010, Ensco has increased its quarterly dividend four times. ESV stock even managed to double its dividend payment last year.
All in all, ESV stock now sports an impressive 5.8% dividend yield.
SDRL Dividend Yield: 8%
Controlled by the “Warren Buffett” of shipping — billionaire John Fredriksen — SeaDrill (SDRL) is the deepwater firm to beat when it comes to dividend stocks. Currently, SDRL stock carries a mammoth 8% dividend yield.
Like ESV, SeaDrill has a super-modern and ultra-deepwater fleet. That fleet has proved to be both a blessing and curse. Given its smaller and specialized fleet, SDRL’s latest guidance numbers showed a potential near-term slowdown in E&P capex spending.
Basically, energy firms are stepping off the accelerator when it comes to drilling this year. That slowdown has caused SDRL stock to plunge by 7.8% during its latest earnings announcement.
However, investors looking for dividend stocks could use the weakness to snag up shares of SDRL stock and its 8% dividend yield.
The key to SDRL has been its relationship with its master limited partnership subsidiary SeaDrill Partners (SDLP). SeaDrill has been quite successful at “dropping down” assets into SDLP to avoid taxes and gain hefty distributions. All of which continues to boost cash flows and dividend yields for SDRL stock.
RIG Dividend Yield: 5.3%
Transocean (RIG) has dealt with the aftermath of BP’s (BP) Deepwater Horizon spill quite eloquently and is now one of the best deepwater dividend stocks out there.
Since the spill, RIG has undergone a major transition to remove or sell many of its shallow water drilling operations and focus on the deepwater space. That shift has also included purchasing new ultra-modern drillships.
And like ESV and SDRL, RIG has benefited from higher day rates for these vessels.
Currently, RIG stock comes with a juicy 5.3% dividend yield. However, management at Transocean recently announced that they are planning on distributing $3 per share in dividends during 2014.
While the measure still needs to be voted on, the odds of it passing are pretty good — especially considering activist investor Carl Icahn still owns a ton of RIG stock and has been pushing for more cash to be returned to shareholders. That will give RIG stock a whopping 7% dividend yield.
Better still is RIG’s potential plans to spin out assets into a MLP. Like SDRL, that move could help make RIG stock into a more powerful dividend payer via the tax-advantaged distributions.
NE Dividend Yield: 4.8%
For investors looking to have it all when it comes to deepwater dividend stocks, Noble (NE) could be the ticket. The firm currently has two ultra-deepwater rigs and four jackup drilling rigs currently under construction. Those rigs will help NE shift its total revenues more towards the more lucrative deepwater market.
Already, NE continues see rising profits from its efforts. For the latest reported quarter, day rates at Noble averaged $212,000. That’s versus just $194,600 in the third quarter of 2013.
However, Noble is taking it a step further.
NE is planning on splitting itself into two companies through a tax-free spinoff and IPO of its standard-specification fleet as a new, stand-alone company. That means that NE stock will be 100% pure play on deepwater space.
In the meantime, NE stock is turning into one heck of dividend payer.
Management recently announced a hefty 50% hike in its quarterly dividend to 37.5 cents per share of NE stock. And with a 4.8% dividend yield, NE stock is now one of the best-paying dividend stocks in the energy sector.
Estimated Dividend Yield: 6.5%
An interesting play in the deepwater dividend stocks universe could be Pacific Drilling (PACD). After going public in 2011, the firm has been working hard to acquire new deepwater rigs and currently has five rigs in operation.
Three more rigs will delivered this year and next. Those rigs in operation are contracted out to energy giants Chevron (CVX), Total (TOT) and Petrobras (PBR). And having three of the largest oil majors sending you checks every day has worked in PACD’s favor.
The firm has announced that it plans on paying its first dividend since going public by the end of the year. Management at PACD estimates that it will be able to return about $152 million back to shareholders via a dividend. Based on the 217 million shares outstanding, that works out to be 71 cents per share of PACD stock — for a hefty dividend yield of 6.5%.
While it has a much smaller fleet size than the other deepwater dividend stocks on this list, PACD future status as a top payer among dividend stocks might be assured given who has contracted its rigs out. As it grows in size, PACD should be able to keep those payments going throughout the future.
For investors, that might make PACD stock the best firm on this list of deepwater dividend stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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