Income investors looking for dividends should check out these deepwater drilling stocks.
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.
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.
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.
Written by Chris Lau.
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