Drilling Deep for High Dividends

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Oil rigIt's been only a year since BP's crews finally capped the company's runaway Macando oil well. For two months we watched as millions of gallons of oil spewed into the Gulf of Mexico. I'm sure many of us thought then that that disaster must spell the end for deepwater drilling. That turns out not to be the case.

The Bureau of Ocean Energy Management lifted the moratorium on deepwater drilling in the Gulf of Mexico last October. Since then, the bureau has approved 115 deepwater drilling permits, with 27 more pending. Offshore drilling companies are obviously not going out of business yet, and I would like to share with you one I particularly like. It's also a company that more than a few Motley Fool CAPS members like, too -- they give it a five-star score and a 100% bullish rating.

That company is SeaDrill (NYS: SDRL) , an offshore drilling contractor based in Bermuda. It provides shallow and deepwater drilling services around the world through its subsidiaries in Europe, Africa, the U.K., Asia, and the United States.

Beneath the surface
Here's what to like about SeaDrill:

  • Operating revenue up every year from 2006 to 2010. That's 40%, 42%, 63%, and 26%, respectively.
  • It has a trailing-12-month P/E of just 8.9, and that's without any disingenuous income tax carry-forward sleight-of-hand to increase earnings.
  • It distributes a dividend at an 8.4% yield, with a payout ratio of 58%.
  • It also has healthy gross, operating, and net profit margins.

There are some items that gave me pause (but I'll also tell you why I think they won't turn out to be problems):

  • Net income declined 2009 to 2010 by 11%. (I think this was inevitable with the BP fallout lingering on.)
  • It has negative free cash flow. (This is from the heavy capital expenditures it has made in building up its large drilling fleet.)
  • Total debt to equity ratio is more than 170%. (This is a larger amount of debt than is usual for its industry peers, but SeaDrill incurred this debt to finance the company's enlarged fleet. It is important to note that SeaDrill's interest coverage ratio is more than adequate at 5.3to cover its interest payments.)

The competition

Company

Market Cap

P/E (TTM)

Yield

SeaDrill$13.59 billion8.98.4%
Transocean (NYS: RIG)$20.59 billion49.95.0%
Diamond Offshore Drilling (NYS: DO)$9.85 billion10.30.7%
Ensco (NYS: ESV)$7.64 billion16.92.7%
Noble (NYS: NE)$9.95 billion33.01.5%

Source: Google Finance.

The deep end
As my Foolish colleague Travis Holum shows us, there's still plenty of finger-pointing going on between BP and Transocean, owner of the Deepwater Horizon drilling rig involved in last year's catastrophe. But if newer, more stringent drilling regulations work as hoped, that kind of drama won't repeat itself, and investing in offshore-drilling stalwart SeaDrill will pay off now, with the dividend, and in the future, with a growing fleet.

Keep an eye on all of these offshore drilling companies with one easy click of the mouse button. Enter them into your Foolish watchlist.

At the time this article was published Fool contributorDan Radovskyowns no shares in the companies mentioned. The Motley Fool owns shares of Diamond Offshore Drilling, Transocean, Ensco, and Noble.Motley Fool newsletter serviceshave recommended buying shares of Atwood Oceanics and Hercules Offshore. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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