Markets

2 deepwater drilling stocks for income investors seeking dividends

By Chris Lau for Kapitall.

After trading sharply lower for the last few months, deepwater drillers are starting to come back. Transocean Ltd. ( RIG ) kicked off a renaissance in the sector when the company reported respectable quarterly results. Given stocks in this sector pay a healthy dividend yield, it is worthwhile for income investors to look at Transocean again.

Transocean beats expectations

Transocean lowered its costs during the first quarter. Fleet utilization was much higher than the market expected. Revenue efficiency soared to 95.7 percent, which is the highest Transocean achieved since early 2008. In the Ultra deep water segment, revenue efficiency rose to 96.4 percent, up from 90 percent. Investors familiar with the sector might also look at SeaDrill ( SDRL ) . SeaDrill aims to increase production in the ultra deep water. This is one of many reasons why SeaDrill may pay a double-digit dividend yield.

Improving balance sheet

Transocean aims to lower its long-term debt to below $9 billion. While debt maturities are minimal in 2014, the firm plans to also retire $1 billion in debt ahead of schedule.

Risks

Transocean spooked investors at its quarterly conference call after suggesting day rates in the deepwater market would be between $365,000 and $400,000. Despite the low rate, Transocean investors will vote for approval of the proposed $3 per share dividend. This gives shares a dividend yielding 7.2 percent. Conversely, SeaDrill's shares yield around 11 percent.

Firms in this sector require stable natural gas and oil prices to meet 2015 expectations.

Accumulate shares

Investors are likely to approve the higher dividend for Transocean. This should set a floor on its shares. Liabilities from the Macondo spill in the Gulf of Mexico could create uncertainties in the short term. This could create an entry point for income investors. SeaDrill's volatility is also expected to continue. Like shares of Transocean, drops in SeaDrill's shares are attractive for investors who want to build a position on dividend-paying stocks.

Disclosure : Author has a long position in SeaDrill.

Click on the interactive chart to view data over time.

1. Transocean Ltd. ( RIG , Earnings , Analysts , Financials ): Provides offshore contract drilling services for oil and gas wells worldwide. Market cap at $15.81B, most recent closing price at $43.92.

2. SeaDrill Limited ( SDRL , Earnings , Analysts , Financials ): Provides offshore drilling services to the oil and gas industries worldwide. Market cap at $17.67B, most recent closing price at $37.68.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks