Separating the Offshore Wheat From the Chaff


This past year wasn't too kind to the onshore businesses of oil-field service companies. Falling rig counts and oversupplied markets affected North American earnings. Offshore, however, was a different story, with these same companies reporting robust results. Unfortunately, the same can't be said for investors in Diamond Offshore .

The company underperformed compared to 2011, with revenue dropping to $2.9 billion from $3.3 billion and its earnings sliding to $5.18 a share from the prior year's $6.92. The company noted cost inflation pressure in its industry as being one of the culprits. The only problem is that pretty much every other company operating offshore had great things to say about 2012 with an even brighter future outlook.

Take the comments from National Oilwell Varco Chief Operating Officer Clay Williams:

Offshore drilling contractors steadily committed capital through 2012 to expand our deepwater fleets and we believe that this will continue through 2013. Our outlook for continued strong deepwater orders is a view that appears to be out of step with Wall Street's conventional wisdom, which seems likely to have convinced itself that deepwater rig ordering will slow. Candidly, we do not understand why.

These sentiments were echoed by Halliburton CEO David Lesar in the company's fourth-quarter conference call:

In the deepwater area, we are seeing the payoff of our recent infrastructure investments with key contract wins and market share gains ... Our value proposition for deep water remains focused at improving reliability and integrity in well construction and completion activities and helping our customers reduce uncertainty. We believe our deep water technology portfolio, expanding market position and service quality reputation will benefit us as new build deepwater rigs live in the market.

Even Schlumberger had great things to say, especially in the Gulf of Mexico. Specifically the company noted that "continued weakening of North America land margins was more than offset by strong activity and excellent performance in the Gulf of Mexico, where deepwater drilling activity reached pre-Macondo levels, as expected." Of course, the strength experienced by oil-field services and equipment makers could have played a factor in weaker margins for Diamond's contract drilling business.

Investors really do need to know where and how a company makes its money because it can underperform both peers and suppliers if it's not as well-positioned. That's one reason why investors should take note of Diamond's new deal with Royal Dutch Shell for its Ocean Patriot rig. That rig will be repositioned into the North Sea from its current location in Southeast Asia.

The rig still needs to undergo upgrades after it comes off of its current contract in Southeast Asia. The company will be spending $120 million to upgrade and modernize the rig before it begins operations in the North Sea in the second quarter of 2014. The company was able to secure a three-year contract worth nearly $439 million. Signing a long-term contract at an attractive rate with a world-class operator is something for Diamond Offshore investors to cheer.

The turbulent seas can be both friend and foe to deepwater operations. While this past year wasn't exactly kind to Diamond Offshore, it wasn't a total washout for the company. Its future looks solid as it's beginning to see some more visibility into 2014 and beyond. This is good news for investors, even if 2012 wasn't a year for the record books.

Halliburton, however, is living it up in the deepwater market
The oil and gas service industry has certainly faced its share of challenges as business overall has taken a hit due to a slowdown in the natural gas drilling boom of the last couple of years. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.

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Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Halliburton and National Oilwell Varco. 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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Originally published