Diving Into the Deepwater for Profits


Most people will tell you that 2012 was just a mediocre year for business. Investors had to deal with a constant barrage of news full of worries about the election, continuing concerns about Europe, a slowdown of growth in China, and the fiscal cliff. However, underneath it all, 2012 turned out to be the best year for business if you were looking in the right places.

Under the sea
As it turned out this past year was a record year for deepwater and ultra-deepwater discoveries. Exploration and production companies announced 52 new finds, which blew away the previous record by 40%. What's also important is that more of these discoveries were found in locations not traditionally known for being a hotbed of activity. Here's the kicker: Because of the general malaise among investors, no one is really noticing.

I love the following quote from National Oilwell Varco Chief Operating Officer Clay Williams, from the company's latest earnings call:

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.

Given that apparent disconnection, wouldn't it make sense to be invested into the profits found under the sea before Wall Street begins to notice?

Drilling down
An obvious choice for investors looking to profit are the contract drillers. Take Seadrill for example, the company has a massive revenue backlog which stood at $21.3 billion as of the end of the third quarter. Plus, what's not to like about the company's near 9% dividend? Ok, there is one thing not to like -- the company's debt load is fairly substantial. That risk, though, is somewhat muted by the company's bountiful backlog.

Another risk to consider is another Macondo like blowout similar to the one Transocean experienced a few years back. That being said, Transocean and the entire industry learned valuable lessons, and have put that incident behind them. Investors should note that Transocean is the world's largest contract driller; it has a premier position in the ultra-deepwater market. Like Seadrill, the company has recorded a massive backlog that now stands at $29.4 billion. With its past issues now behind it and a bright outlook ahead, the company remains a top option for investors.

There are of course other options outside of the contract drillers. Topping that list is oil-field services company Schlumberger , which I think certainly deserves a look. The company's recent joint venture with Cameron to form OneSubsea is one to pay particular attention. When you add Schlumberger's industry prowess to Cameron's subsea equipment know-how, the outcome is likely going to be profitable for both customers and investors.

My Foolish take
I personally wouldn't overlook that ability of National Oilwell Varco to continue to make an impact. As one of the top equipment suppliers, the company has what deepwater drillers need to get the job done. Plus, you can't beat the price at less than 12 times earnings, which analysts expect will grow by a mid-teen percentage for the next five years.

Many would even agree that National Oilwell Varco is perhaps the safest investment in the energy sector due to its industry-leading 60% market share. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if NOV is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.

The article Diving Into the Deepwater for Profits originally appeared on Fool.com.

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