By Lou Gagliardi, Cabot Global Energy Report

We continue to seek stocks that can outperform on a relative basis and provide dividend support to protect the downside. Offshore driller SeaDrill Limited (SDRL) combines both positive catalysts.

SeaDrill is in rapid growth mode seeking to capitalize on the explosive worldwide need for safer, better-quality rigs in the post-BP Gulf of Mexico oil spill era while providing capability for drilling in more difficult and deeper waters (and capturing higher crude prices).

SeaDrill has also recently moved into the Brazilian market looking to capitalize on client Petrobras’ explosive rush to develop its sub-salt discoveries.

The speed of the company’s growth has stretched SeaDrill’s balance sheet, and the company is highly leveraged with debt-to-capital of 59% (57% including cash). But we like the long-term outlook for this sub-sector, as exploration continues to move further offshore to meet demand.

In short, SeaDrill is expected to benefit from elevated crude prices; the stock has good upside potential; and it offers a high dividend yield of 8.5% ($3.02 per share).

Competitive advantages 

• SeaDrill has one of the more modern fleets in the industry, the world’s second largest fleet of ultra-deepwater rigs and the largest fleet of jack-up and tender rigs.
  
  
• Rapid growth—from five rigs in 2005 to about 60 rigs currently.
  
  
• The only major offshore drilling company with tender rigs in its fleet—a growing global niche market providing cost-efficient and flexible production drilling (as opposed to exploratory or developmental drilling).
  
  
• SeaDrill is capitalizing on increasing demand for tender rigs and tight supply by re-signing rigs at increasingly higher rates.
  
  
• With 14 rigs under construction (just under one-fourth of the current fleet size), SeaDrill is well positioned to support its growth plans.

Financial metrics 

• Net income has increased at a compound rate of roughly 46% since 2006 and revenues have grown nearly 31% per annum since 2008.

• 24% ROE through 9/30/2011, compared to 21% ROE for full-year 2010.
  
  
• A four-year dividend compound growth rate of 36% since 2008.
  
  
• SeaDrill has an order backlog of over $13 billion, with major multinationals such as ExxonMobil, Chevron, Petrobras, Statoil and Total among its clients.
  
  
• Despite creeping cost pressures throughout the energy industry, SeaDrill has maintained EBITDA margins at 72% year-to-date through 9/30/2011, in the same period in 2010 and in full-year 2010.
  
  
• Trading near its 52-week high, I like SDRL’s growth prospects and its high dividend yield.

And the short-term strain on the balance sheet is justified by the growing need for newer, safer, higher-quality rigs as older rigs are replaced. Increase purchases on any stock pullbacks.

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