Thinking of Investing in Rising Dayrates? Stocks to Watch

By Markets Fool.com

The steep drop in the price of oil over the past year continues to reverberate through the entire oil industry. Not only are oil producers feeling the pinch, but that pinch is being passed down to those that provide services to the industry. One area that has been particularly hit hard is the offshore drilling sector as oil companies aren't leasing as many drilling rigs. Further, the ones that are being leased have no choice but to take a much lower dayrate, which in some cases has been 50% below the previous level.

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All that being said, eventually oil prices are expected to rise to the point where it would support an increase in offshore activity. As a result, dayrates for offshore drilling rigs should begin to rise too. I've already provided a list of the three companies that are, in my opinion, the three best stocks to invest in to profit from rising day rates. However, there are three other drillers that would benefit from this trend, but at the moment are best put on a watch list because most of their rigs are currently under contract.

1. Seadrill (NYSE: SDRL)
One of Seadrill's strengths is its contract backlog, which can be seen on the slide below.

Source: Seadrill Ltd. Investor Presentation

As a result of that strong contract backlog, Seadrill doesn't have as much near-term upside to rising dayrates as the bulk of its fleet is already under contract for the next few years. That's not to say it doesn't have any upside as the company does have several newbuilds that are not under contract as well as some rigs coming off contract later this year. However, the company's overall near-term upside isn't robust, which is why Seadrill belongs on an investors' watchlist at the moment.

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2. Atwood Oceanics (NYSE: ATW)
Like Seadrill, most of Atwood Oceanics rigs are under contract for the next couple of years, which is evident by the slide below.

Sources: Atwood Oceanics Investor Presentation

Because of that strong backlog Atwood Oceanics doesn't have a lot of near-term upside should dayrates surge later this year as most of its rigs are under contract until mid-2016 and beyond. Further, the rigs that it does have near-term availability are jack-ups, which don't fetch the same robust dayrates as ultra-deepwater rigs. This is why I think it is better to watch this stock if the goal is to invest in a stock with a lot of near-term upside in rising dayrates.

3. Ocean Rig UDW (NASDAQ: ORIG)
Sticking with the theme of offshore drillers with strong contract backlogs, Ocean Rig's average rig contract runsmore than two years as the following slide notes.

Source: Ocean Rig UDW Investor Presentation

It's also worth noting that with options the company's' rigs could be under contract for the next four years, which really limits its upside to rising dayrates as those options would be more likely to be executed in a rising dayrate environment. That being said, the reason this stock is worth watching is because of its potential to capture day rates in the future as it has much more availability in 2017 and beyond. Because of that Ocean Rig is a company that could really benefit if rates don't begin to head meaningfully higher as soon as the sector hopes to see.

Investor takeaway
All three of these offshore drillers currently have pretty strong contract backlogs. This limits their near-term upside should dayrates for drilling rigs begin to rise in the back half of 2015. However, that doesn't diminish their future upside to rising dayrates, which is why all three are great stocks to watch for investors looking to profit from rising dayrates.

The article Thinking of Investing in Rising Dayrates? Stocks to Watch originally appeared on Fool.com.

Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Atwood Oceanics and Seadrill. The Motley Fool owns shares of Atwood Oceanics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.