NEW YORK (TheStreet) -- I was talking to Stephanie Link, the co-portfolio manager of Action Alerts PLUS, about offshore drillers and particularly Ensco (ESV), which she owns for AAP. She wanted my take on the sector and whether there was some nascent value there.
From the recent reports of the two biggest offshore players, Transocean (RIG) and Seadrill (SDRL), I was hard-pressed to give a very optimistic outlook into the deep-water drillers. The conference call for RIG and SDRL was particularly depressing, to say the least.
Most of the oil majors are devoting the great majority of their development capital to the cheaper and less technologically demanding shale plays in the United States and other traditional onshore drilling outside the U.S., and much of the capital for advanced deep-water projects has dried up.
Seadrill reported that seven of its most advanced rigs are uncontracted for 2015 and 2016 -- a startling prospect for a company that hoped its most advanced rigs would be their savior in this drilling downturn.
But Stephanie continues to find value in Ensco and believes it is by far the best run of the deep-water specialists, and many of the numbers confirm that. With a small boost in deep-water day rates recently reported and with Ensco trading at valuation lows, Stephanie is looking for a value trade to emerge in Ensco. The 5.5% dividend will help you wait, she says.
If there is a positive case to be made for the deep-water drillers, it is that the tough competitive market for rigs has forced the largest drillers to consistently increase efficiency and cut costs. Transocean has done precisely that, increasing utilization by 3% and efficiency by 4% while beating estimates on income in its latest reported quarter.
Both Transocean and Ensco intend to spin off or sell less-efficient rigs as well. This "lean-and-mean" bottom-line cutting is the strongest recommendation for owning deep-water drillers in this environment.
I talk more with Stephanie about deep-water drillers in the video above.
At the time of publication Dan Dicker had no position in any of the stocks mentioned. Action Alerts PLUS, of which Stephanie Link is co-manager, has a position in ESV.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.