For the past couple of years, investors and analysts alike have been fixated on energy production in the midsection of the United States. Technological advances have made oil and gas extraction through fracking cheap and efficient.

#-ad_banner-#Apparently, everyone has forgotten about drilling for oil at the bottom of the ocean.

If you didn’t know any better, you’d think that no one drills in deep water anymore, based on the stock prices of some of the better-known offshore drilling companies.

These are exactly the types of investing opportunities I look for as a contrarian/value investor; the forgotten, unloved, and ignored.

One reason investors have shunned these stocks is the Deepwater Horizon incident of 2010. Billed as the worst marine oil spill in the history of the petroleum industry, the disaster claimed 11 lives, cost BP (NYSE: BP) and other parties involved over $40 billion, and made an environmental impact that will be felt for decades to come…

Like I said, a great contrarian investment opportunity.

One of my favorite offshore drilling stocks is Noble Corp. (NYSE: NE).

Noble’s stock is off nearly 50% since its pre-financial crisis peak. Why? All offshore drilling isn’t in the Gulf of Mexico. Oil prices certainly haven’t plummeted.

Instead of trying figure out what’s wrong with the stock, let’s figure out what’s right about it.

Currently domiciled in the United Kingdom for tax reasons and to be closer to its customer base, Noble is one of the world’s leading offshore oil drilling contractors. At the beginning of this year, the company had a fleet of 77 offshore drilling rigs with five more units under construction.

Noble’s strategy is highly focused. While concentrating on building a deepwater-capable fleet, the company also has a foothold in the shallow-water jack-up rig drilling space, which commands a premium price.

In addition, six years ago, Noble chose to build only rigs that were backed by long-term contracts that would cover the majority of the company’s capital investment in the projects. This kept a lid on costs as well as a firm handle on future revenues. Presently, the company’s contract backlog stands at $16.2 billion.

Despite the widespread pessimism about the offshore drilling sector, Noble’s fundamentals are rock-solid. Average annual revenue growth over the past three years has come in at 19% while earnings per share (EPS) grew at a strong 36%. The company’s average net margins are around 28%. Although Noble’s long-term debt-to-capital ratio is a bit high at 38%, this is manageable, given the long-term, locked-in nature of the firm’s contracts.

Noble’s dividend is also an attractive feature. Recently the company increased its quarterly cash dividend by 50%, to $1.50 annually. This puts NE’s current dividend yield at 4.4%. I’m also comfortable with the dividend payout ratio of 39% (my rule of thumb is that anything over 60% raises a red flag).

The company is also looking to create more value by spinning off some of the older rigs in its portfolio. Noble plans to divest 42 older rigs built in the ’70s and ’80s, trimming its fleet to just 35 rigs. In doing this, the company will generate a pile of cash and emerge as a specialized drilling pure play.

Risks to Consider: Besides the obvious exposure to oil and gas price volatility, Noble is at the whim of its customers: the world’s major oil- and gas-producing companies. If they cut back, the company suffers. Also, the company always faces regulatory risk from the governments whose waters they drill in.

Action to Take –> Shares of Noble trade near $32 (a 22% discount to its 52-week high) with an extremely cheap forward price-to-earnings (P/E) ratio of 9.4. Based on the company’s solid operating history in a difficult environment and focus going forward, the stock is a real bargain. A 12- to 18-month price target of $41 is reasonable; with the dividend factored in, the result would be a total return in excess of 30%.

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