Seadrill: High quality in deepwater drilling

The world's largest supplier of offshore rigs provides value and an 8.3% yield.

By TheStockAdvisors Aug 14, 2012 10:10AM

By Timothy Lutts, Cabot Stock of the Month

Oil prices are down over the past year because of the slowdown in global economic growth and increased production of natural gas.

As a result, most energy stocks have had a rough time. We think Seadrill (SDRL) presents an excellent opportunity to get on board a top-quality company while it's reasonably priced and before it breaks out to new highs.

It's a simple fact that the world keeps using more energy. Sure, recent global economic difficulties have slowed the rate of growth, but long-term trends are quite clear. Since 2001, global oil demand has grown by 1.4% per year, while supply has grown by only 1%.

The main reason for the disparity is that most of the world's traditional oil basins are plagued by declining flows. A secondary reason is that drilling activity has not kept up. That means more drilling, and that means more work for Seadrill.

The company, which has headquarters in Norway but is legally based in Bermuda, is the largest supplier of offshore drilling rigs in the world, bringing in $4.1 billion in revenues over the past year from its fleet of 66 units.

The company has grown revenue every year since it was founded in 2005, and there's no reason to expect that to change. In fact, the company recently announced a contract with a major oil company for three offshore rigs in the Gulf of Mexico.

Two are brand-new ultra-deepwater drill ships, to be delivered in 2013, while one is an existing rig. The $4 billion contract runs for 19 rig years, which works out to approximately $576,800 per day per rig.

This is one of the largest contracts Seadrill has ever received, and there's no doubt one factor in the deal was the youthfulness of its fleet. It's the youngest in the industry and thus the best equipped to comply with increasingly strict safety regulations (not to mention generally more efficient, too).

In fact, compared with those of its rivals Transocean (RIG), Noble (NBL) and Ocean Rig (ORIG), Seadrill's fleet is not only younger, it's also geared more toward ultra-deep drilling, where rates are higher and potential payoffs for the explorers are bigger, too.

Yet SDRL trades at a lower multiple than its peers as measured by both market cap and enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization). Further, in 2010 and 2011, Seadrill generated higher gross, operating and EBITDA margins than its peers.

Seadrill pays a very generous dividend yield of 8.3% -- 82 cents per share per quarter -- and while debt is high at 151% of equity, that's not unusual for the industry, and it's not a problem as long as rigs stay booked.

Second-quarter earnings will be announced sometime in mid-August, but more important than the numbers will be management's perspective of the future and any tidbits about future business and the dividend.

As for the stock, it's been a "market performer" over the past two years, but the recent action -- big upside volume on the new contract announcement -- tells us buyers are ready and willing to send this stock higher.

The stock's March high was $42, and we think buying now will ensure a nice profit when the breakout to new highs comes.

More from TheStockAdvisors.com

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

120
120 rated 1
268
268 rated 2
439
439 rated 3
709
709 rated 4
641
641 rated 5
609
609 rated 6
640
640 rated 7
516
516 rated 8
272
272 rated 9
152
152 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION10
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.