Growth in Offshore Drilling Presents Opportunity for Rig Owners

Growth in Offshore Drilling Presents Opportunity for Rig Owners

The offshore drilling business continues to be strong, particularly in ultra-deepwater. After selling most of its shallow water assets, Transocean is getting higher returns from its fleet and improved financial results for investors driven by ultra-deepwater.

Second-quarter revenue was up 9% sequentially to $2.4 billion due to 93.1% revenue efficiency versus 88% a quarter ago. That helped the company generate $602 million in operating income and net income of $307 million, or $0.84 per share.

Ultra-deepwater floaters were the stars of the fleet, generating average daily revenue of $507,600 on operating efficiency of 96%. This is also Transocean's growth strategy -- two more of these rigs are expected to be delivered next year and another four will follow in 2015 that already have 10-year contracts.

The tide that lifts all offshore drilling rigs
There doesn't appear to be anything slowing down ultra-deepwater drilling, especially now that oil is hovering around $106 per barrel. Transocean has six ultra-deepwater rigs coming in the next two years. Seadrill has 10 such rigs under construction, and Noblejust received two rigs and has three more under construction. The common thread among these companies is that the momentum of high day rates and high utilization in the ultra-deepwater market doesn't appear to be stopping.

The massive increase in ultra-deepwater-rig supply might normally signal an imbalance of supply and demand, but demand for these rigs is growing just as fast, if not faster, than supply. An example of that demand is exemplified by a Chevron discovery in the Gulf of Mexico. The well, completed earlier this year, was in 6,127 feet of water and extended 31,866 feet into the ground, a process that can take months and in some cases years to complete. The length of these contracts means high utilization for rig owners but the payoff can be huge for explorers as well.

Other Gulf of Mexico wells from BP, Anadarko Petroleum, Cobalt International Energy, and others have resulted in billions of barrels of oil reserves, and that's just one small sample. Brazil, Africa, the Middle East, and even the Arctic provide great opportunities for explorers and increased demand for rig owners. As more wells are drilled more oil is found, which requires more wells to be drilled... the cycle continues.

For the foreseeable future the offshore drilling boom taking place in ultra-deepwater looks to continue. That means day rates and profits for rig owners will remain high, whether they strike oil or not. That's why this is a great way to play the oil market; it's profitable and far less volatile than putting a stake in the explorers.

With the economy picking up steam and oil now well over $100 there are a lot of opportunities for investors in the energy business. But rather than betting on the boom and bust nature of oil explorers investors should look for service providers -- like oil drillers -- who profit no matter where oil is found. Our top analysts prepared a free report that reveals three stocks that are bound to soar as oil prices climb higher and become harder to produce. To discover the identities of these stocks instantly, access your free report by clicking here now.

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Fool contributor Travis Hoium manages an account that owns shares of Seadrill. The Motley Fool recommends Chevron and Seadrill. The Motley Fool owns shares of RIG and Seadrill. 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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