Ultra-Deepwater Drives Drilling Stocks

Drilling for oil and natural gas in deep water isn't slowing down, and results announced in the last 24 hours confirm that this will continue to be a hotspot for investors.

Noble (NYS: NE) reported third quarter results last night, highlighted by a 20% rise in revenue. The company benefited from a utilization rate of 78%, from 76% a year earlier, as well as two new drillships in ultra-deepwater.

Net income of $115 million, or $0.45 per share, was four cents short of estimates, and was due to operational issues on the newbuilds, Hurricane Isaac, and a number of other minor issues. Management said most of these issues have been resolved, and the company expects stronger performance in the fourth quarter.

At Diamond Offshore (NYS: DO) , the bottom line was better than expected, but revenue and profit was lower than last year. Revenue fell 17%, to $738.2 million, and net income fell 24%, to $201.5 million, or $1.45 per share. The company sold five jack-up rigs in the quarter, which helped profitability, but hurt revenue.

Diamond is seeing "continued strength in deep and mid-water markets," according to CEO Larry Dickerson. The challenge short-term is that the company has a smaller deepwater fleet than its competitors, which lowered the company's growth prospects this quarter. Diamond will add four ultra-deepwater drillships to its fleet in hopes of taking share in the growing ultra-deepwater market.

Two takeaways
Noble and Diamond Offshore provided a couple of takeaways for investors at the beginning of the third quarter earnings season.

First, the ultra-deepwater market is still hitting on all cylinders. Noble CEO David Williams said that it has been a record year for announced discoveries, and customers are expanding their geographic reach. Last week, I called this a reinforcing loop for ultra-deepwater rig owners. As more wells are drilled, reserves grow, which leads to more drilling. The supply of rigs to serve this market is nowhere near catching up with demand, so there's still a lot of opportunity for investors.

More surprisingly, shallow water appears to be improving from low levels: 87% of Noble's jackup fleet days are booked for the remainder of the year, and management said that day rates are up 40% from previous jackup contracts. Diamond Offshore also said drilling has picked up in Mexico on shallow water. This is positive for an industry that has an oversupply of shallow water rigs, but doesn't make me bullish on shallow water yet. It's an incremental positive for diverse rig owners, but more pure plays, like Hercules Offshore's (NAS: HERO) , are nowhere near as attractive as ultra-deepwater plays.

Neither of these developments led to blowout numbers from Noble or Diamond Offshore, but the quarter was steady and conditions continue to improve.

Foolish bottom line
In the offshore market, investors should continue to focus their attention on companies with ultra-deepwater capabilities and fleets that are growing in this space. SeaDrill (NYS: SDRL) is still my top pick in ultra-deepwater but Transocean's (NYS: RIG) recent move to sell shallow water rigs and its growing fleet of drillships make it an intriguing pick. Noble will also continue to grow in this space, and should see profitability improve next year as a result.

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The article Ultra-Deepwater Drives Drilling Stocks originally appeared on Fool.com.

Fool contributor Travis Hoium manages an account that owns shares of Seadrill, Ltd. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Transocean and Seadrill, Ltd. Motley Fool newsletter services recommend Seadrill, Ltd.. 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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