There’s growing evidence that the decades of cheap oil are over. Despite the weak economy, oil prices have remained high and are now around $100 a barrel, up 22% from just a year ago. In addition, demand from emerging markets led by China will likely push oil prices steadily even higher, so oil at $80 a barrel may be a thing of the past. In fact, the International Energy Agency says world oil output will peak by 2020, and then begin to decline, which means it may be only a matter of time before we see $150 oil prices again.

If you are an income investor like me and want to profit from rising oil prices, then you could buy oil stocks like BP (NYSE: BP), Conoco Phillips (NYSE: COP) or Exxon Mobil (NYSE: XOM). All of these companies pay a nice dividend and yield anywhere from 2% to 4%. But there is another investment play on increasing oil prices that offers much richer yields — some as high as 9%.

As oil prices rise, so does drilling activity and the profit opportunities for oilfield-service providers, which own the drilling rigs and related equipment needed to develop new wells. In addition, while oil companies often wait years for enough production to recoup investment on new wells, oilfield-service companies are paid at the time the well is drilled.

Here are two leading oilfield-service companies that can be a great alternative to traditional oil stocks. Both of these companies benefit from a rising backlog of drilling contracts and provide generous dividend yields.

Transocean Ltd. (NYSE: RIG)
Yield: 6%
Based in Vernier, Switzerland, Transocean is the world’s largest offshore-drilling contractor. The company’s fleet of 135 drilling rigs includes the latest generation of ultradeep-water drillships and mobile offshore drilling units. Transocean specializes in the harsh, deep-water environments where big oil companies such as Exxon and Chevron (NYSE: CVX) drill for oil. About 50% of its fleet is deployed in deep water.

Transocean’s share price took a severe pounding recently due to disappointing third-quarter earnings. During this year’s third quarter, Transocean reported a net loss of $71 million, or $0.22 per share, compared with the $368 million profit, or $1.15 per share, in last year’s third quarter. The company’s average daily rig rental rate improved 7% year-over-year to $290,200. Rental fees for the company’s most sophisticated deep-water rigs jumped 24% to $524,800 a day, although expenses from the recent $1.4 billion acquisition of Aker Drilling wiped out the benefit of the higher rental prices.

Higher operating costs also negatively affected company’s third-quarter earnings. Transocean racked up higher-than-expected operating costs — fleet utilization fell to 58% this year from 64% last year, as a result of more downtime for rig maintenance and repair. But higher rig maintenance spending led to a 28% year-over-year surge in third-quarter operating expenses to $1.54 billion compared with last year. Sales that came in 2% below analyst estimates didn’t help either. Unsurprisingly, earnings for the first nine months of 2011 plummeted about 77% to $444 million, or $1.22 per share, compared with $1.78 billion, or $5.47 per share, for the same period last year.

But these weak results will likely end soon. Transocean says the surge in spending on rig maintenance and repair is only temporary. In addition, the company booked $2.6 billion in new contracts during the September quarter, raising total backlog to $25 billion. Transocean also added four deep-water drilling rigs to its fleet through the Aker acquisition, including two deployed in Norway under multi-year contracts. Analysts look for Transocean to deliver 75% earnings growth next year and 12% earnings growth in each of the next five years.

The company’s strong balance sheet provides an additional level of comfort. In the past 12 months, for instance, Transocean has generated more than $2 billion of cash flow — more than enough to cover dividend payments totaling $1 billion this year. Transocean pays a $3.16 annual dividend and yields 6.3%.

As a result of the poor quarterly performance, shares are trading at a 30% discount to book value and a forward earnings multiple of 11, which is well below Transocean’s five-year average P/E of 14.

Seadrill Ltd. (NYSE: SDRL)
Yield: 9%
Seadrill owns 54 offshore drilling rigs and has another 17 rigs under construction. Like Transocean, Seadrill specializes in deep-water drilling and owns the high technology rigs that command the best-day rates.

Seadrill has recorded 13 consecutive quarters of year-over-year sales growth and earnings per share (EPS) that has doubled in the past three years. The company’s strong performance continued during the first six months of 2011. Earnings of $1.47 billion were an improvement of 167% compared with last year, while EPS jumped 150% in the same period.

Investments in new rigs have pushed long-term debt higher to $8.2 billion and 55% of capitalization. The company has a contract backlog exceeding $12.2 billion and bright future prospects. Consensus analyst estimates forecast 14% earnings growth next year and longer-term growth of about 11% a year.

Although Seadrill has only been paying dividends since 2008, coverage has been conservative, with 55% of earnings going toward its dividend. Seadrill has generated $2.3 billion in cash flow to cover $1.4 billion in dividends in the past 12 months, providing ample margin for dividend safety. The company pays a $3.00 annual dividend and yields about 9%. 

Risks to consider: Transocean owned the Deepwater Horizon rig involved in the Gulf of Mexico disaster. The courts have determined BP is mainly at fault, but Transocean may also have some liability. In addition, Transocean and Seadrill are foreign companies, which means risks from currency swings and uncertainty around future dividend increases. Foreign companies tend to link dividends to earnings trends and don’t always deliver a steadily rising dividend stream.

Action to take–> Seadrill is the safer choice for investors right now because of its consistently strong financial performance. Transocean has struggled to produce earnings this year and may still face stiff penalties and fines due to the BP oil spill. That said, I think Transocean is more likely to outperform in the long-term because of its technologically advanced drilling fleet, $25 billion contract backlog and considerable pricing power as the market leader.

P.S — We recently came across an unusual energy stock that has crushed gold, silver, oil and just about anything else you can think of over the past 10 years. What’s amazing is that even after its 2,000% run-up it’s STILL paying an 8.6% dividend yield right now. Click here to get the name of this stock…