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.
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
Balance sheet
Profit margin and management
Discussion and verdict
Management pay
The worst offender is WFT. When the managementβs 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.
| Company | Current price | 52 week low | 52 week high | % up |
| Transocean (RIG) | 46.49 | 43.15 | 85.98 | 8% |
| Noble (NE) | 29.56 | 27.33 | 46.72 | 10% |
| Halliburton (HAL) | 33.32 | 27.21 | 57.77 | 20% |
| Ensco (ESV) | 41.17 | 37.39 | 60.31 | 10% |
| Diamond (DO) | 55.92 | 51.16 | 81.19 | 8% |
| Weatherford (WFT) | 13.11 | 10.85 | 28.11 | 20% |
| Seadrill (SDRL) | 28.92 | 24.68 | 38.49 | 20% |
| Schlumberger (SLB) | 61.2 | 54.79 | 95.64 | 12% |
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
| Company | P/S | P/E | Fwd P/E | P/CF | PEG | Dividend | Insider Holding/Inst Holding |
| Transocean (RIG) | 1.8 | - | 8.7 | 7.3 | 0.4 | 3.1% | 0.04%/70% |
| Noble (NE) | 3.2 | 26.9 | 8.1 | 8.9 | 0.6 | 0.4% | 1%/90% |
| Halliburton (HAL) | 1.4 | 12.3 | 7 | 10.4 | 0.4 | 1.1% | 0.34%/84% |
| Ensco (ESV) | 3.6 | 14.9 | - | 10.4 | - | 3.3% | 0%/84% |
| Diamond (DO) | 2.4 | 8.4 | 11.4 | 6.1 | 0.6 | 0.9% | 0%/98% |
| Weatherford (WFT) | 0.9 | 54.6 | 7.4 | 12 | 0.4 | - | 1.7%/79% |
| Seadrill (SDRL) | 3.3 | 7 | - | 9.3 | - | 7.6% | 0%/33% |
| Schlumberger (SLB) | 2.3 | 17 | 11.2 | 15.5 | 0.8 | 1.6% | 0.3%/80% |
Balance sheet
| Company | Debt/Equity | Debt/Cap | Debt/Equity | Cash/LT Liab | Share-count |
| Transocean (RIG) | 78% | 42% | 175%(β07) | 3.4b/11.6b | 320m(2%β08) |
| Noble (NE) | 72% | 36% | 25%(β09) | 338m/3.3b | 251m(β06) |
| Halliburton (HAL) | 72% | 43% | 127%(β07) | 2b/5b | 908m(4%β08) |
| Ensco (ESV) | 17.8% | 15% | 62%(β01) | 1b/743m | 141m(4%β09) |
| Diamond (DO) | 73.4% | 43% | 48%(β08) | 1b/2.23b | 139m(β07) |
| Weatherford (WFT) | 100% | 50% | 51%(β05) | 416m/7.1b | 747m(10%β07) |
| Seadrill (SDRL) | 233% | 70% | 376%(β08) | 1.35b/9.6b | 432m(8%β07) |
| Schlumberger (SLB) | 66% | 40% | 200%(β02) | 5b/9.7b | 1.25b(β07) |
Profit margin and management
| Company | Gross Margin | Net Margin | Profit | Total Exec Pay 2009-2010 % of profit | ROIC β10 |
| Transocean (RIG) | 46% | 10% | 3.2b/961m | 34.67m-43.66m (1%-5%) | 3% |
| Noble (NE) | 55% | 27% | 1.7b-773m | 19.17m-13.37m (1%-2%) | 8% |
| Halliburton (HAL) | 18% | 10% | 1.1b-1.8b | 28.57m-29.9m (2%-2.5%) | 13% |
| Ensco (ESV) | 54% | 34% | 779m-580m | 23.25m-20.37m (3%-4%) | 9.7% |
| Diamond (DO) | 25% | 29% | 1.37b/955m | 7.06m-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-4.2b | 47m-42m (1.5%-1%) | 15% |
Discussion and verdict
Management pay
The worst offender is WFT. When the managementβs 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.
