Just did research on the industry. Note industry pe is in the 3.5 to 5 range and they are all trading at book value, which makes them seem cheap. If you dig a little deeper, you will see why. ATW, RIG, NE are the companies I looked at. They all own oil rigs and lease them out to companies (or people) who own ocean oil under the sea.
I really like this sort of business because it makes so much sense. They just rent their assets to companies, perform maintenance, and find people to rent them. Oil demand and prices have been deteriorating away in recent months as the recession worsens. Inventories are piling up and companies are trying to stop pumping because the price is so low. This all sounds like horrible news for the companies who rent to the people who drill and it is.
The catch is that these companies all have lease contracts on their rigs usually spanning a few years. This is great news for the companies that have contracts locked up far into the future because they can just rake in the same profits at when there was peak oil for a few more quarters.
I looked at the lease contract for these oil rig owners on their quarterly reports.
ATW has 80% of its contracts spanning through 2011.
NE has 60% of its contracts going through 2009 and 40% of its contracts through
2010 RIG did not give numbers on this which I don't like at all
The recent quarterly earnings reports reflects these contracts. ATW doubled YOY earnings. NE showed strong double digit earnings growth and RIG's YOY earnings were significantly lower.
The future lease contracts are the most important thing to look at when investing in oil rig companies. As a conservative investor, I don't expect any new oil rig contracts to be signed in 2009 and few in 2010 because of the deteriorating economy and huge current oil inventories. I forecast my future earnings based on currently signed contracts only.
ATW talks most about their contracts and gives the most financial clarity hands down. They claim that their contracts are very safe from cancellations because oil companies are generally in good financial shape and their contracts don't give room for backing out due to weak oil markets.
My conclusion, all rig companies are priced at about the same ratios, so I value ATW above the rest because of their strong lease contracts.
Forward pe for ATW through 2010 using these assumptions is around 5, which I think is very reasonable.