Why The Future is Bright For These Offshore Drillers

Why The Future is Bright For These Offshore Drillers

Global energy demand is on the way up, led primarily by emerging markets. Therefore, opportunities abound in the energy sector. In particular, investors would be wise to consider offshore drillers, who are seeing strong upticks in business activity.

Of the publicly traded stocks that provide rigs, as well as other products and services to the offshore drilling industry, there are four that are firing on all cylinders right now and are poised to deliver strong returns going forward. Moreover, they're handsomely rewarding their investors with compelling dividends, and should be given strong consideration by investors interested in the energy sector.

Strong growth lies ahead
Transocean holds the largest worldwide rig fleet, with 80 rigs in operation. In addition, Transocean has an impressive $27.3 billion in backlog, meaning business conditions should remain strong in the future.

Of course, the major risk surrounding Transocean that its investors need to pay attention to is the ongoing legal trouble pertaining to the 2010 Gulf of Mexico oil spill. Some progress on this front has already been made, as Transocean pleaded guilty to violating the Clean Water Act and was forced to pay $400 million earlier this year. In total, the company reached a settlement with the Department of Justice in the amount of $1.4 billion, paid over five years.

That being said, Transocean has more than enough financial flexibility to withstand the financial damages stemming from the spill. Revenue is up 3.5%, and the company booked more than $1 billion in operating profit over the first six months alone.

Seadrill lags behind Transocean in terms of rigs currently in operation, but it has 25 rigs currently under construction, so investors shouldn't worry that the company is at risk of missing out on the surge in offshore drilling activity.

Furthermore, investors should be enthusiastic because of the company's high efficiency. Seadrill has shed assets that it considers to be non-critical, including selling its tender rig division for $2.9 billion, on which it realized a gain of $1.25 billion.

At the same time, Seadrill generated its best operating results and net income ever in its recently concluded second quarter. In all, net income totaled $1.75 billion. The fact that Seadrill is booking record results while simultaneously streamlining its operations is a huge credit to management, and investors should be excited as a result.

Not to be outdone, Noble has grown this year right alongside its competitors. In addition, Noble offers a unique proposition for investors, in that its operations are highly diversified geographically. The company has very effectively spread its bets across the globe. No single geographic area represents more than 31% (the Gulf of Mexico) of the company's revenue. In addition, Noble generated 20% of its revenue from Brazil, 19% from the Middle and Far East, 14% from Europe, and 10% from Mexico.

This strategy has clearly worked to Noble's advantage. The company realized quarter-over-quarter increases in most metrics, including revenue and diluted earnings per share. In all, Noble produced 5% growth in revenue and 17% growth in diluted EPS in its second quarter, as compared to its first-quarter results.

Another high-performing driller is Ensco , an interesting play because of the remarkable progress made since 2008. Quite simply, Ensco has drastically restructured itself over the past five years. In 2008, Ensco was exclusively involved in jackups, which accounted for 96% of its revenue. Today, the company is much more diversified, and jackups represent a much more reasonable 35% of revenue. Floaters now comprise the majority of the company's revenue mix.

It's abundantly clear that Ensco's efforts have paid off. Since 2008, revenues have doubled, to $4.6 billion today. The company's market capitalization has growth from $5 billion in 2008 to $17 billion today, and its annual dividend per share has skyrocketed from $0.10 per share five years ago to its current level of $2.00 per share.

Drill deep for growth and income
Not only are Transocean, Seadrill, Noble, and Ensco poised to profit handsomely from the global surge in offshore drilling, but their management teams are seriously committed to sharing their success with shareholders. This is accomplished primarily in the form of hefty dividends.

While the S&P 500 Index yields approximately 2%, each of these stocks provides a much greater yield. Ensco and Noble yield 3.6% and 2.6% at recent prices, respectively, which are solid yields that compare very favorably to the broader market. Meanwhile, Transocean yields 4.7%, and Seadrill does even better, with a nearly 6% yield according to Yahoo Finance.

As a result, both growth and income investors will find a lot to like from this group. Transocean, Seadrill, Noble, and Ensco have strong growth ahead, and their investors will likely prosper right along with them.

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The article Why The Future is Bright For These Offshore Drillers originally appeared on Fool.com.

Robert 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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