Some Companies are Built to Survive Rough, Economic Waters in 2014

Before you go, we thought you'd like these...
Before you go close icon

Among the global oil drillers, there doesn't seem to be much that separates Ensco PLC , Transocean , and Seadrill in terms of underlying business conditions. Each company reported strong operating results throughout the year, and all three are poised to capitalize on the boom in oil drilling across the globe.

At the same time, there are a few subtle differences between the strategic directions of each company that investors should carefully consider, as well as their financial conditions. For the best mix of strong performance, product mix and strategic focus, and optimized shareholder policies, Ensco wins out.

Deep-water drilling in focus
Oil is getting harder to come by, with many discoveries occurring in harsh environments. Furthermore, industry data suggests an increasing proportion of global oil discoveries are located in deep-water, as opposed to onshore or offshore plays. According to Transocean, of all new field resources discovered in 2012, 12 billion barrels of oil equivalent were discovered at depths of 5,000 feet or greater. This compares to slightly more than 6 billion barrels of oil equivalent discovered at depths between 1,300 and 5,000 feet, and just over 3 billion discovered at depths of less than 1,300 feet.


This is why Transocean has focused itself on deep-water drilling, and to be sure, it's likely the company's efforts will pay off. In the future, Transocean's core asset portfolio will be centered on harsh environments, high-specification jackups, and ultra-deepwater rigs. Ensco shares this philosophy, which makes it an equal winner from the boom in deep-water drilling.

Going forward, Ensco will focus on its ultra-deepwater drillship and an ultra-premium harsh environment jackup. Ensco accepted delivery of the two rigs in question, the ENSCO DS-7 and ENSCO 120, during the third quarter, and both involve multi-year contracts.

This is where Seadrill is at risk of falling behind. It currently operates just 16 combined ultra-deepwater and deep-water floaters. It's got 23 rigs currently under construction, but it will take time for those to pay off.

Shareholder rewards aplenty
Transocean and Ensco share strategic directions, but Ensco investors are at a distinct advantage because of shareholder policies. Transocean investors no doubt enjoy the company's hefty dividend, which stands at nearly 5%. Ensco, however, does its investors even better. The company recently jacked up its dividend by 50% and as a result yields almost 5.5% at recent prices.

Furthermore, Ensco's payout isn't affected by foreign withholding taxes, since Ensco is headquartered in the United Kingdom. Transocean, meanwhile, is headquartered in Switzerland, which means residents of the United States will see their dividends get a 35% cut due to taxes.

Seadrill's dividend towers above the competition, at nearly 10% according to Yahoo! Finance. However, Seadrill maintains a variable dividend policy, meaning the level of future payouts are far from a certainty.

In addition, this uncertainty is more pronounced due to Seadrill's significantly leveraged balance sheet. Seadrill carries a long-term debt to equity ratio of 130%, due to the fact that it's got more than $10 billion in interest-bearing long term debt on its books. This stands in stark contrast to Ensco's much more reasonable 37% long-term debt to equity ratio. Should Seadrill's business see any significant bumps in the road, not even including the potential impacts of rising interest rates, its dividend could be at risk.

For the 'Goldilocks' oil driller, choose Ensco
To be sure, Transocean and Seadrill are highly profitable companies that will share in the boom in global oil drilling. They each maintain strong contract backlogs and reward their shareholders with compelling dividends. However, Ensco's strategic focus on deep-water drilling is likely to pay off more than Seadrill's. In addition, Ensco's dividend provides a higher yield than Transocean's, and even more so when you include the impacts of foreign withholding taxes. As a result, for the best mix of product focus, balance sheet strength, and dividend yield, choose Ensco among the global oil drillers.

A Warren Buffett darling is heavily tied to the offshore industry as well
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

The article Some Companies are Built to Survive Rough, Economic Waters in 2014 originally appeared on Fool.com.

Bob 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.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners

If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic If You Find One Of These In Your Yard, Don't Touch It - And Try Not To Panic
Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts Don't Get Too Close To a Newborn Giraffe Unless You Want to Get Kicked in the Nuts
Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside Cops Catch Up To A Suspicious Speeding Vehicle - And Make An Appalling Discovery Inside