Despite some recent hiccups in the world, oil prices aren’t exactly surging through the roof. Low oil prices have been particularly painful for energy stocks that provide specialized equipment to the E&P industry. The problem is that energy producers need a certain price for the oil they extract in order to justify the heavy expenses needed to tackle certain kinds of wells.
And right now, the deepest offshore wells just aren’t cutting the mustard for E&P firms.
The underperformance of offshore wells has hurt the bottom lines and profits at the deepwater and offshore drilling stocks. Share prices have fallen hard over the last few months, and now analyst downgrades have begun pouring into the sector, causing even more pain for these energy stocks.
But as they say, “be greedy when others are fearful.”
For investors, the deepwater drillers over one of the best bargains in the high-yielding energy sector today.
A Energy Stocks Bargain In The Making
Unfortunately for deepwater drilling stocks, several short- and medium-term issues are having their way with the companies’ share prices. Over the last month, shares have plunged by an average of 10%. One of the biggest culprits of that downturn has been falling oil prices.
Despite the negativity, though, investors may want to be buying the drillers with both fists.
A lot of the negativity surrounding falling day rates may be misplaced. Not every sector in the offshore drilling world has seen falling prices or demand. Advanced jack-up styled drilling rigs and rigs that can handle harsh environments — such as the Arctic and North Sea — haven’t seen an deterioration in day rates nor utilization.
At the same time, day rates for the ultra-deepwater semisubmersible market have actually risen from the earlier part of this year, while utilization rates for ultra-deepwater drillships have not declined since hitting 100% back in late 2011. And despite the decline in day rates for these vessels, they are still well above previous records set back 2011 and have been holding steady since the end of last year.
So for the firms with the most advanced rigs, earnings have suffered a bit … but it’s no cause for the outright sector selloff. Today, the energy stocks in the drilling sector are selling for low metrics not seen in years. Dividends in the sector are hitting highs, and shares of deepwater drillers are now bargains.
The bargains are especially enticing when you consider the long-term story that E&P firms will need to continue prospecting offshore in order to fuel the world’s hunger for oil. And fallen day rates for rigs have actually lowered the breakeven cost of drilling offshore to the point where it’s compatible to fracking shale.
With all of that upside in mind, let’s take a look at three of the hottest deepwater energy stocks to buy.
North Atlantic Drilling Limited (NADL)
North Atlantic Drilling Limited (NADL) basically does one thing: operate drilling rigs designed to work in harsh environments. And with that sector of the offshore drilling market booming, NADL has been booming as well.
The firm has been able to secure higher day rates for its harsh-environment rigs when the time comes to renew contracts. And despite being small and owning on a few rigs, North Atlantic has been able to score some pretty big contracts — like a $4.2 billion deal for six rigs with Russia’s Rosneft to drill in the Arctic. Those kinds of deals will help the firm keep up its cash flows and with its hefty 9% dividend. Meanwhile, shares of NADL are cheap at P/E of just 11. For investors looking for a specialized player with pricing power, North Atlantic is it.
Fresh from its spinoff of Paragon Offshore (PGN), Noble (NE) is back as a pure deepwater player, with plenty of high-specification muscle. NE commands some of the most advanced drillships, semisubmersibles and jack-ups in the sector. That technology has allowed to it charge some pretty hefty day rates for renting its ships.
Earnings for the NE were up and actually saw higher day rates across all categories of vessels despite Wall Street’s call for lower ones. Noble managed to beat analyst expectations by a whopping 30 cents per share. If you add in NE stock’s 5% divined and P/E of 8, investors are drilling into a bargain.
Like NE and NADL, Ensco (ESV) operates highly specific and advanced drilling rigs. And like the rest of the sector, ESV has been hurt issues facing the sector. Shares of ESV stock have fallen about 9% over the course of the August. Yet, ESV has proved Wall Street analysts wrong on the earnings front.
ESV reported second-quarter 2014 earnings of $1.58 per share. That was a 7% increase from last year’s comparable quarter — when day rates were supposedly better. That amount also crushed analyst estimates by more than 20 cents per share. Meanwhile, utilization rates continue to be high. That’s great news for ESV’s hefty cash flows and its juicy 5.4% dividend. ESV stock currently trades for a P/E of 8.5.
The Bottom Line: When it comes to energy stocks, the drillers have been unfairly treated by Wall Street. They offer one heck of bargain at today’s prices.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities, but he intends to open a long position in both NE and ESV within 72 hours