May 21, 2008
Unless you're an avid reader of Scandinavian Oil-Gas Magazine, you probably missed the latest deepwater dish: Seadrill has entered into a sale/leaseback transaction with dynamic dividend payer Ship Finance International (NYSE: SFL ) on one of the driller's newly built rigs. Seadrill will receive $850 million up front, and immediately enter a 15-year lease on the same drillship.
Unlike Noble's (NYSE: NE ) Brazilian bonanza, the importance of this deal is not glaringly obvious. But whether or not other deepwater players follow suit, this is a major turning point for Seadrill, the fourth-largest offshore driller by market cap.
In addition to being the man behind Seadrill and Ship Finance, billionaire John Fredriksen is also responsible for turning Frontline (NYSE: FRO ) into the world's leading tanker company. Frontline's past is illustrative of Seadrill's future. After years of aggressively consolidating assets, Frontline began returning capital in a major way via refinancing and dividends. Sale/leasebacks, a fairly common real estate tool, were one key method of freeing up cash. Shareholder returns, with dividends reinvested, have been dazzling.
Granted, Seadrill isn't the first driller to execute one of these transactions -- Pride International (NYSE: PDE ) and Diamond Offshore (NYSE: DO ) have cut similar deals in the past. Based on Seadrill's recent analyst presentations, however, this looks like a much more systematic application.
Unlike Transocean's (NYSE: RIG ) special post-merger dividend, Seadrill's approach has the merit of creating an ongoing cash-distribution vehicle. It doesn't take too much deep thought to see the appeal.