When baseball legend Wee Willie Keeler was asked the secret to his hitting prowess, the diminutive right fielder replied, “Keep a clear eye, and hit ’em where they ain’t.” Sage advice, considering Weeler retired with a .341 batting average, the 14th all-time highest, in 1910.
Keeler’s words ring as true today as they did 100 years ago. What’s more, they ring true not only for baseball. An exceptional investment return, like an exceptional batting average, is frequently the by-product of hitting ’em where they ain’t.
In energy, there is one place where investors notably “ain’t” hitting ’em, and that’s offshore oil-and-gas drilling. The sector is as popular with investors as the chronically complaining employee is with co-workers. Investor aversion is evinced by some of the highest yields among energy investments.
How to Profit From Offshore Drilling
One offshore driller, Diamond Offshore Drilling (NYSE: DO), offers a particularly expansive, unpopulated field for investors. Five years ago, Diamond shares were trading over a $100; today, they trade under $50. The low price has pushed the yield to over 7%, a five-year high.
A slew of analysts downgrades have weighed on Diamond’s share price. For the past year, these Doubting Thomases have forecast nothing but gloom-and-doom. Fracking (where everyone is hitting ’em these days) is the future, they reason. Therefore, offshore drilling will forever be plagued by weak demand and overcapacity.
But a funny thing happened on the road to obsolescence. In April, Diamond reported first-quarter results, which handily beat expectations: Adjusted earnings posted at $0.93 per share versus analyst expectations of $0.65 per share. Revenue was $709.4 million versus expectations for $686.3 million.
Better yet, the dividend – which was of pressing concern – remained intact. Diamond declared its usual special $0.75 per share quarterly dividend on top of its normal $0.125.
The share price rallied, if only briefly.
Earlier this month, Norwegian oil giant Statoil (NYSE: STO) terminated a contract with Diamond for the mid-water semisubmersible Ocean Vanguard. The rig was contracted for a dayrate of roughly $454,000 and was supposed to run through Feb. 2015.
Statoil cited technical issues for early termination. Diamond maintains an opposing view and has challenged Statoil’s claim. Regardless of who is right, Diamond shareholders again find themselves dwelling on spartan turf.
But with a clear eye, it’s easy to look past the Statoil clouds to see the bright future.
Ocean Vanguard is only one of Diamond’s 45 rigs – 33 semisubmersibles (of which two are under construction), seven jackups, and five drillships (of which three are under construction). These rigs are dispersed around the world – in the Gulf of Mexico, the North Sea, South America, Africa, Australia, and Southeast Asia.
I’m familiar with the oft-repeated concerns – an aging fleet; pricing pressure; high rig turnover; a struggling lead client, Petrobras (NYSE: PBR). But these concerns have been so frequently repeated (Motley Fool alone publishes an anti-Diamond screed seemingly every day) that these concerns are well-baked into Diamond’s share price.
It’s also worth remembering that oil is still a very big deal with strong long-term demand fundamentals – $100/barrel is the new and future norm. Supply will need to arise from all sources, including offshore fields. Given the limited slack in the global deepwater drilling fleet, dayrates should hold firm.
Indeed, Diamond management is upbeat that it can maintain dayrates. It also believes it can pick up additional rigs on the cheap from struggling offshore drilling operations – an opportunity it has exploited in the past. These initiatives should increase annual operating cash flow by up to $500 million annually starting in 2015.
If you want to capture superior returns, hit ’em where they ain’t. For now, there ain’t many investors hitting ’em in Diamond Offshore’s direction.
Eureka! Huge, new oil reserve discovered under the Atlantic
Geologists estimate it’s the biggest reserve in the Western Hemisphere. We call it, the “Saudi Arabia of Offshore Drilling.” And only one company has the high-tech rigs to reach these billions of barrels of crude. It’s there right now… reaping massive profits with an entire fleet of drilling rigs. The best part is, the bulk of these profits are paid out to shareholders in the form of dividends. And this driller is making so much money… it regularly pays out special dividends (it’s paid out 20 consecutive special dividends in a row). That means investors earn up to 8 dividends a year — all from this one company. Click here for all the details – before the next ex-dividend date!