Photo source: BP

If you have ever looked at companies like Transocean ( NYSE: RIG ) or Seadrill ( NYSE: SDRL ). your first reaction was probably, Holy schnikes! This company has a huge dividend, I should buy shares. Then, your second reaction is, Wait, I have no idea what rig companies are all about, maybe I should stay away until I know more. Well, here is the nice thing: Rig companies are not the complicated businesses their name might suggest. There are, of course, the basics such as income statements and balance sheets, but there are some other very important factors that you should consider when investing in these types of companies. To help you break down the business of offshore rig companies, here is a primer on what these companies are and what you should look for when analyzing them.

What are we talking about?

Source: Fleet Status Reports (list includes rigs under construction)

The niche players, on the other hand, focus more on one single aspect. While there are more than on this list, these are the most prominent ones:

A semisubmersible rig, these are capable of handling midwater, deepwater, and ultradeepwater. Photo: Seadrill Media Relations

• Hercules Offshore ( NASDAQ: HERO ). A large fleet of jackup rigs and liftboats (support vessels). A very large portion of fleet is dedicated to the Gulf of Mexico.
• North Atlantic Drilling ( NYSE: NADL ). A recently IPO’d subsidiary of Seadrill that only owns rigs designed for harsh environments, such as the North Sea off the coast of Norway and in the Arctic.
• Rowan ( NYSE: RDC ). For years it was mostly a harsh-environment jackup-rig company, but it has recently purchased an ultradeepwater rig and has three more under construction.
• Pacific Drilling ( NYSE: PACD ) and Ocean Rig UDW ( NASDAQ: ORIG ) are two companies that focus exclusively on serving the ultradeepwater market with new, high-specification rigs.

The 5 focal points for your research

For rig companies, there is one document that is just as important as its financial statements: Its fleet status report. Every company produces one, and it gives loads of details such as what each rig is capable of, which ones are on the job, how much they are earning per day, who is paying for the work, and when that contract is set to expire. When looking at this document, there are basically five things that you should look for in no particular order. To help get a jump-start on your research, here is some of the data from the fleet status reports of the companies mentioned.

A drillship, used for midwater, deepwater, and ultradeepwater operations. Photo: Seadrill Media Relations

This table is a breakdown of the age of each companies rig fleet for both floating and stationary rigs, as well as the percentage of the fleet that is less than 10 years old: