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MLGtrader (31.84)




February 23, 2009 – Comments (12) | RELATED TICKERS: ATW , RIG , DO

Alright, for those of you who read my last blog, there were some questions about specific companies and just on the industry in general.  I will try to flush out these topics in this blog.  You should read the previous blog before this one to get an intro into the industry.

There are so many offshore drillers out there and I was looking for indicators to find winners.  Through research, I came to the conclusion in my previous blog that the most important thing to look for in drillers was future lease contracts.

After further research, I found that there is more demand for deepwater drilling than shallow drilling.  Almost all the drilling companies state this on their 10Qs.  Also looking at the future contracts, the deepwater rigs have contracts farther into the future.  Nearly all of the drilling companies are adding new deepwater rigs to their fleets.  But these projects take several years to complete, so the next few years at least should be strong for deepwater drilling.  Deepwater rigs also have much higher dayrates and margins.

Things for a good driller:

1. Contracts far into the future to protect current earnings until oil prices rise again.

2. Drillers with many deepwater rigs because higher demand and better margins

Now I will delve into some specific companies that were requested.  Do your own research ifyou are considering buying.  It really is not that hard of a business to understand.  Just grade the companies on the above criteria and pick your favorite.

First of all, I would like to thank rd80 for correcting me about RIG.  They do have vey nice clarity about their contracts, I just didn't see them on the 10Q. 

I will now attempt to rate the drillers based on what I found.  Starting from the bottom.

7. PDS.  Their shares have taken a huge haircut.  They are trading extremely discounted relative to other drillers.  However, looking breifly through their quarterly report, they seem to have some financial troubles.  They had a secondary offering and seem to be trying to raise capital which is a very bad sign after coming from record oil prices.  Oil companies should be rich with cash.  They also do not do ocean drilling, they do land drilling which is an oversupplied market and contracts are falling through the roof.  They are a trust.  I don't know what this means for them, but I think they need to make more cash distributions.  I would not recommend buying them unless you discover why they are priced so cheaply.  I did not spend much time researching them, so you may see a completely different story

6. HP.  They have 75% land rigs, which is not where you want to be in this market.  Their contracts are not as strong because they have land rigs.  They aren't even trading at much of a discount relative to deepwater drillers.

5. ESV.  They are priced relatively cheaper than other drillers because they have almost all shallow water rigs, which is not as strong as deepwater contracts.  They state that the deepwater demand is much higher.

4. RIG.  They are the most diversified and largest driller.  If you look at their rigs under construction, they are all deepwater, again proving that the demand there is strongest.  They have relatively strong contracts.

3.  NE.  Also has a good fleet distribution with several deepwater rigs.  Fair valuation.  Contracts are sort of weak for having so many deepwater rigs which may be of concern.  I really like the insider buying and the excellent timing on their buys.

2. DO.  They are rightfully priced higher than all the drillers.  They have the best fleet.  Most of their fleet is in deepwater and their contracts are very strong, 75% of fleet is contracted through 2010.  I would put them at a very close second to ATW.

1.  ATW.  66% of revenues come from deepwater and 2 new deepwater rigs are coming online 2011 and 2012.  This will increase their deepwater fleet from 4 to 6, a big jump.  Currently, 4 out of 9 of their rigs are deepwater.  Strong contracts going forward, with 75% of the fleet contracted out through 2011.

I didn't reread it, so don't mind grammar and spelling mistakes.

I hope this was helpful.  Comments and questions are appeciated.  Check out my first blog on drillers also.

  Be sure to give a rec ;)

12 Comments – Post Your Own

#1) On February 23, 2009 at 2:59 AM, PrestonCheek (31.05) wrote:

Thats excellent research along with your first blog as well. I think that one of the reasons that the deepwater drilling is in demand is that most of the shallow water stuff has been found. Also, in deep water drilling when they build an offshore platform like the Shell Mars they have 28 slots to drill through, so once the rig is there it stays for several years, sometimes the life of the platform. It's not feasible to remove them, and the cost to get it back would be very high. It might not always be drilling but workover (maintenance on existing holes) as well.

I don't know if this information helps, I spent a lot of time offshore working years ago.

I guess you have to look at what type of rigs they have, jackup, stationary as on the Mars, or semi-submersible. I worked in Africa as well and the shallow water stuff there has been discovered and it's driving them further offshore to find black gold.

Do you know what they consider deep water? 

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#2) On February 23, 2009 at 3:22 AM, PrestonCheek (31.05) wrote:

"6. HP.  They have 75% land rigs, which is not where you want to be in this market.  Their contracts are not as strong because they have land rigs.  They aren't even trading at much of a discount relative to deepwater drillers."

You sparked my interest in this so I hope you don't mind.

A friend of mind is building these rigs for H&P, do you think that one day it might pay off for them. He is still buiding them and I will find out how many more he has contracts for. You never know it might bankrupt them.

Also, I'm very glad that you found your updated information on RIG, that has been a long for me and I was worried a little.


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#3) On February 23, 2009 at 4:20 AM, drdrab (< 20) wrote:


400' is considered deep for a jackup.

1000' is shallow for a semi.

6-8000' is getting deep for a semi/drillship.

8-12,000' is "ultra-deep"

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#4) On February 23, 2009 at 4:30 AM, PrestonCheek (31.05) wrote:

Thanks dr, I worked on the construction side and that was 10 years ago.

In general after reading this information it seems as though the industry as a whole is still in pretty good shape, when the price of oil goes back up several of these stocks will be great.


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#5) On February 23, 2009 at 7:34 AM, maxhoffa (< 20) wrote:

what's your take on the rig service companies . . . like NOV . . . with a sizable '09 contract loads



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#6) On February 23, 2009 at 7:53 AM, JakilaTheHun (99.92) wrote:

Any thoughts on Herculus Offshore (HERO)?  They appear to be one of the most deeply discounted drillers out there.  I assume their near-term business outlook is poor (otherwise the stock wouldn't be discounted so heavily), but over the long-term, what are your thoughts on the company at the current price?

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#7) On February 23, 2009 at 9:38 AM, BigFatBEAR (28.44) wrote:

Great thoughts MLG! Appreciate the sector comparison very much.

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#8) On February 23, 2009 at 10:21 AM, Bays (29.29) wrote:

Thanks a lot MLG... good work

Ive been hearing the same thing about deep water drillers. Stay away from shallow water and land drillers. 

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#9) On February 23, 2009 at 11:25 AM, TDRH (97.30) wrote:

The contracts may be firm, but yet if their customers cannot pay, the contracts mean very little.     I felt the same way, and longer term I still believe in Deepwater, but change is in the air.   Factor a failrate on the contracts with your evaluations.  Look who the end customers are.  Majors are ok, but some of the smaller players may fade and are fading out.  As units become available from new construction and failed contracts day rates will and are dropping.

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#10) On February 23, 2009 at 12:57 PM, Bays (29.29) wrote:

DO's second biggest customer is Petrobras at 10.4%.... Petrobras is a solid company and will be able to hold up their end of the deal.   Their biggest customer is Anadarko at 10.6% revenues.  Both companies are rated 4 and 5 stars respectively.

Although after a quick look at Anadarko's (APC) balance sheet, I don't like their current ratio of .9

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#11) On February 25, 2009 at 12:13 AM, MLGtrader (31.84) wrote:

Only took a glance at HERO, but they do shallow water witch should see more pain than deepwater and for some reason their current earning are hurting badly.  Perhaps they don't have good contracts on their rigs, but they are priced cheaply.  Should post a bigger rebound than other drillers because of cheap price if they can survive when oil rises again.

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#12) On March 03, 2009 at 9:30 PM, rvanzo (74.03) wrote:

I took a look at PDS and HERO as well but as with ever beaten down stock from 40 to 2....does someone else know something you dont? If the market comes back they will be 10 baggers but until then can they survive?


Great article by the way

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