Offshore Drilling Is the Way To Go: ENSCO PLC (ESV)

(3 year operating income, 5 year chart unavailable)

Seadrill has an impractical 145.3% payout ratio. This coupled with the high debt/equity ratio, suggests that dividend payouts could to be unsustainable. To corroborate the statement, its CCE* stands at just $518 million, which is minute for a company with a market cap of nearly $18 billion.

*CCE= Cash and Cash Equivalents

Transocean almost appears attractive at the first glance. Over the last 5 years, its CCE* have risen by nearly 30%, while its liabilities have risen by only 9.5%. But that’s only one side of the story. Its liabilities stand at a towering $20 billion, while its CCE* stand at just a little over $6 billion. Moreover, Transocean’s negative profit margin and mediocre operating income growth takes away all its luster.

Foolish Conclusion

The gradually rising crude prices have renewed the interests of oil E&P companies, and companies like BP are restructuring their business operations to align themselves with their long term goals. BP has been selling its non-core assets, under a plan to raise $38 billion. Moreover 11 of its 15 new projects are high margin oil projects and BP is not alone in the race. I believe that, such E&P activities are only going to increase as oil prices rise.

The strained oil supply coupled with recovering macroeconomic conditions, only present a bullish case for oil prices. I believe that Ensco carries most upside potential due to its strong fundamentals, technologically  advanced fleet and huge drilling experience. Ensco gets a Buy rating, but that doesn’t call for shorts on Seadrill and Transocean.

The article Offshore Drilling Is the Way To Go originally appeared on Fool.com and is written by Piyush Arora.

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