Seadrill Ltd (SDRL), Transocean LTD (RIG), Rowan Companies PLC (RDC): Should You Invest in Off-Shore Drilling Companies?

The off-shore drilling industry has prospered over the past few years as the companies look to replace depleting reserves. As a result of increased focus on off-shore drilling, the prospects for drilling companies like Seadrill Ltd (NYSE:SDRL), Transocean LTD (NYSE:RIG), and Rowan Companies PLC (NYSE:RDC) have become extremely bright.

These companies have been growing at a phenomenal rate, and expected growth in the industry will help these companies maintain high growth. The increase in demand for energy is driving the demand for drilling services, and these companies are going to be primary beneficiaries.

Condition of the industry

The industry has been growing at an exceptional rate, and this is expected to continue in the short-medium term for two reasons. First, strong demand for energy products from emerging markets have resulted in increased drilling activity. At the moment, demand clearly eclipses supply, which has resulted in extremely attractive day rates. Furthermore, there is also some recovery in developed economies, which will surely further augment the demand. As a result, I believe the day rates will be high in the short-medium term.

Second, the biggest challenge for the energy giants is replacing depleting reserves. Conventional oil and gas reserves might not be enough to meet the demand. As a result, oil and gas players are turning focus to deep-sea drilling. More energy giants are entering deep-sea drilling, which will ensure that demand for the services of drilling companies remains high. Another important factor is the location of the remaining conventional oil reserves. Most current conventional reserves are in areas where the political environment is extremely volatile. As a result, companies are also looking at alternatives to move their investments into stable environments.

How these three drillers are operating

Seadrill Ltd (NYSE:SDRL) has invested heavily in acquiring a standardized fleet with 22 construction units comprised of nine drill ships, two harsh environment semi-submersibles, and 11 high specification jack-ups. Seadrill Ltd (NYSE:SDRL) has an order backlog of over $20 billion, which will provide it earnings visibility for the next five years as most of these contracts are long-term. In order to meet the demand, the company is building new drill ships, which will be added to the fleet in 2015. Due to the increased spending by the oil and gas giants, Seadrill Ltd (NYSE:SDRL) has been able to grow revenue at an exceptional rate — revenue growth for the company has been about 12% in the past three years.

Management believes in selective acquisitions, including an agreement worth $590 million with Sogna Eclipse. The rationale behind the investment strategy is not only expansion, but a move toward a younger fleet. Its dual strategy is expected to increase its dividend-paying capacity. At the moment, the company pays an annual dividend of $3.52 per share and boasts one of the highest yields (8.20%) in the sector. Furthermore, the stock is trading at P/E of 18, below the industry average of 21.1. Expected EPS growth over the next five years is about 22%.