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Drilling Industry: Near 52-Week Lows

Chandan Dubey

Chandan Dubey

91 followers
Most of the companies in the drilling industry seem to be around their 52-week lows. Let's look at the situation the current market sell-off has created.

CompanyCurrent price52 week low52 week high% up
Transocean (RIG)46.4943.1585.988%
Noble (NE)29.5627.3346.7210%
Halliburton (HAL)33.3227.2157.7720%
Ensco (ESV)41.1737.3960.3110%
Diamond (DO)55.9251.1681.198%
Weatherford (WFT)13.1110.8528.1120%
Seadrill (SDRL)28.9224.6838.4920%
Schlumberger (SLB)61.254.7995.6412%


One might ask, which is the best deal at the moment? I decided to look at the matter more closely. I compare here all the companies on valuation, balance sheet and profitability.

Valuation and Shareholding

CompanyP/SP/EFwd P/EP/CFPEGDividendInsider Holding/Inst Holding
Transocean (RIG)1.8-8.77.30.43.1%0.04%/70%
Noble (NE)3.226.98.18.90.60.4%1%/90%
Halliburton (HAL)1.412.3710.40.41.1%0.34%/84%
Ensco (ESV)3.614.9-10.4-3.3%0%/84%
Diamond (DO)2.48.411.46.10.60.9%0%/98%
Weatherford (WFT)0.954.67.4120.4-1.7%/79%
Seadrill (SDRL)3.37-9.3-7.6%0%/33%
Schlumberger (SLB)2.31711.215.50.81.6%0.3%/80%


Balance sheet

CompanyDebt/EquityDebt/CapDebt/EquityCash/LT LiabShare-count
Transocean (RIG)78%42%175%(‘07)3.4b/11.6b320m(2%’08)
Noble (NE)72%36%25%(‘09)338m/3.3b251m(’06)
Halliburton (HAL)72%43%127%(‘07)2b/5b908m(4%’08)
Ensco (ESV)17.8%15%62%(‘01)1b/743m141m(4%’09)
Diamond (DO)73.4%43%48%(‘08)1b/2.23b139m(’07)
Weatherford (WFT)100%50%51%(‘05)416m/7.1b747m(10%’07)
Seadrill (SDRL)233%70%376%(‘08)1.35b/9.6b432m(8%’07)
Schlumberger (SLB)66%40%200%(‘02)5b/9.7b1.25b(’07)


Profit margin and management

CompanyGross MarginNet MarginProfitTotal Exec Pay

2009-2010

% of profit
ROIC

‘10
Transocean (RIG)46%10%3.2b/961m34.67m-43.66m

(1%-5%)
3%
Noble (NE)55%27%1.7b-773m19.17m-13.37m

(1%-2%)
8%
Halliburton (HAL)18%10%1.1b-1.8b28.57m-29.9m

(2%-2.5%)
13%
Ensco (ESV)54%34%779m-580m23.25m-20.37m

(3%-4%)
9.7%
Diamond (DO)25%29%1.37b/955m7.06m-6.53m

(0.5%-0.7%)
18%
Weatherford (WFT)25%(1%)254m-(108m)91.53m-53.16m

(35%-)
-0.7%
Seadrill (SDRL)56%27.6%1.2b-1.1b-8.4%
Schlumberger (SLB)25%14%3.1b-4.2b47m-42m

(1.5%-1%)
15%


Discussion and verdict

Management pay

The worst offender is WFT. When the management’s interest is out of sync from the shareholders, it is not a good sign. To make matters worse, the management has never given an ROIC more than 11% since 2001. The FCF of the company has also been positive only once in 2010. So, it seems WFT has the worse management with best executive pay.

Balance sheet

SDRL is the worst offender. It has 233% of debt-to-equity. It is actively paying down debt. The management seems to be aware of the problems here. I will not feel comfortable with this much debt though. I will keep an eye on SDRL.

Valuation

The worst offenders are NE, SDRL and ESV. The P/S ratios are > 3. This means that the net margins need to be greater than 30% to get a P/E of 10. In this business this is not unreasonable. So, I will call them fairly valued.

Shareholding

All the companies have a large institutional holdings except SDRL. DO, NE, HAL and ESV all have greater than 80% institutional holding. This is not a good sign. When the institutions start to sell, the stock may enter a sell-off phase because of the volume of shares being dumped. For long-terms investors, this is not a big deal though.

Bottom line

Apart from WFT, it seems that investors can sleep well invested in any of the other companies. The winner though is Transocean (RIG), which looks to be the best positioned as it is turning into a great investment.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 4.3/5 (20 votes)

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