Transocean LTD (RIG), Seadrill Ltd (SDRL): Which Deepwater Play Will Line Your Pockets?

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Seadrill Ltd (NYSE:SDRL)’s rigs are all less than a decade old, which is obvious from the company’s impressive utilization of better than 95%.

Whereas Transocean LTD (NYSE:RIG) faces equipment and efficiency risks, Seadrill’s model faces higher risks from swings in oil prices. The company’s debt gives Seadrill Ltd (NYSE:SDRL) a higher cost structure that would crush profits should lease revenue dry up on sustained lower oil prices. The company had 50 rigs in 2012, a number which it intends to grow to 75 by 2015.

Seadrill’s aggressive model is a concern in a commodity business. There is substantial demand for rigs at the present time due to a shortage and low utilization and rigs are updated for safety improvements. However, a cyclical shift in oil prices could punish the company due to its levered balance sheet. A total of $14.1 billion in total liabilities compared to $5.5 billion in shareholder equity make this a highly-levered bet on rig demand. The company’s rigs are estimated to be worth between $9 and $10 billion. Current assets of $2.3 billion hardly insulate it from a downturn.

Playing the space

Seadrill Ltd (NYSE:SDRL) and Transocean are very different plays on the same industry. First, Seadrill is executing perfectly, maintaining high revenue efficiency and securing long-term leases on its new rigs, some even before they’re built.

Transocean, on the other hand, is only recovering. It’s focused on cost-cutting and efficiency, hoping to divest parts of its business to focus on deepwater contracts – the most rewarding segment of the business.

Given market valuations, Transocean looks to be a better value than Seadrill. Transocean trades at roughly 10 times forward earnings potential. Seadrill trades at 10 times expected forward earnings, but is significantly levered in its expansion with 25 new rigs from 2012-2015 and debt levels that are significantly above the industry average.

Transocean has room for upside should it re-establish a dividend policy by a vote on May 17. Conservative investors should play the turnaround at Transocean before the perfection at Seadrill. Improving on terrible performance at Transocean is a better bet on the continuation of perfection at rival Seadrill.

The article Which Deepwater Play Will Line Your Pockets? originally appeared on Fool.com is written by Jordan Wathen.

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