Why These 3 Oil Drillers Will Benefit From the Boom in Deepwater Drilling

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Deepwater drilling is back, and in a big way. The industry was shrouded in controversy after the 2010 Gulf of Mexico oil spill, which resulted from an explosion on a rig owned by Transocean . Three years later and deepwater drilling resumes across the globe, even in the Gulf of Mexico.

The world's seemingly unquenchable thirst for oil, particularly in the emerging markets, is serving as a strong tailwind for deep-water drillers. As a result, investors may want to carefully consider buying Transocean, SeaDrill Limited , or Ensco PLC .

Deepwater drilling is back
Transocean is set to benefit from its focus on high-specification rigs, which are specifically designed to drill in extremely harsh environments. In fact, Transocean prides itself on owning the largest fleet of high-specification rigs of any oil driller. Moreover, much of Transocean's fleet is designed for deepwater drilling, where an increasing percentage of new oil finds are located.

Of all new field resources discovered in 2012, 12 billion barrels of oil equivalent were discovered at depths of 5,000 feet or greater. This compares to slightly more than 6 billion barrels of oil equivalent discovered at depths between 1,300 and 5,000 feet, and just over 3 billion discovered at depths of less than 1,300 feet.

This should be directly beneficial to Transocean, since it owns 29 ultra-deepwater floaters and 14 deepwater floaters. This compares favorably to close competitors SeaDrill and Ensco, whose own fleets are not as heavily geared toward deepwater. SeaDrill owns 16 ultra-deepwater rigs, while Ensco owns 13 ultra-deepwater floaters and 10 deepwater floaters.

Transocean is already reaping the benefits of its focused strategy. Transocean grew revenue by 4% over the first nine months of the year, and operating income has soared 75% in the same period. This was the major contributing factor behind Transocean's decision to increase its dividend earlier this year.

Still, there's an investment case to be made for both SeaDrill and Ensco as well. As the saying goes, a rising tide lifts all boats, and it's clear that SeaDrill and Ensco are by no means struggling. SeaDrill is performing very strongly so far in 2013. The company grew revenue by 17% and operating income by 13% over the first nine months of the year. SeaDrill may have an added advantage since it holds the most rigs currently under construction of any oil driller. SeaDrill has 23 rigs under construction, which is more than Transocean and Ensco have under construction combined.

For its part, Ensco is doing very well. The company grew revenue and EPS by 14% and 10.5%, respectively, over the first nine months of the year. Management was so pleased by its results so far this year that the company increased its dividend by 50% after releasing third-quarter results.

Ensco, meanwhile, points investors to its new ultra-deepwater drillship and an ultra-premium harsh environment jackup, which will drive earnings growth in the years ahead. Ensco accepted delivery of the two rigs in question, the ENSCO DS-7 and ENSCO 120, during the third quarter, and both involve multi-year contracts.

The boom in deepwater drilling fuels hefty dividends
Transocean, SeaDrill, and Ensco are enjoying improving underlying business conditions thanks to the surge in global deepwater drilling. Fortunately for investors, each company is committed to sharing its success with shareholders in the form of compelling dividends. Transocean and Ensco both yield approximately 5%. SeaDrill operates a varying dividend program, but its last four quarterly payments amount to an 8% yield according to Yahoo Finance.

Transocean, SeaDrill, and Ensco provide high current dividend yields that handily beat the yield on the broader market, and the fact that their profits should only grow in the years ahead means those dividends have nowhere to go but up. As a result, growth and income investors alike should get to know Transocean, SeaDrill, and Ensco.

The best way to play deepwater drilling
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The article Why These 3 Oil Drillers Will Benefit From the Boom in Deepwater Drilling originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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