The Next Drilling Stock to Look At

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As fellow Fool Rich Smith says, sometimes we really need to "poke fun at Wall Street analysts and their endless cycle of upgrades and downgrades." As Rich pointed out, SeaDrill (NYSE: SDRL  ) -- one of the biggest offshore oil and gas drillers in the world -- has been among the latest "victims" of these analysts. Bank of America downgraded the stock from a "buy" to a "neutral" after its fourth-quarter earnings missed estimates. The latest development in the industry, however, warrants a good laugh at the expense of these analysts.

Solid outlook
The CFO of SeaDrill, Esa Ikaheimonen, has said that the daily rates for rigs will only go up from here. He expects rates for ultra-deepwater rigs to keep rising in the next 12 months because of growing demand in the global offshore drilling industry. Such rigs are capable of drilling below a water depth of 7,500 feet or more. Out of the five ultra-deepwater rigs employed so far, two of them, contracted with ExxonMobil and Royal Dutch Shell, are already earning above $600,000 a day.

The most lucrative ultra-deepwater plays are located offshore Brazil, Norway, and the West African coast -- specifically, Angola and Nigeria. And SeaDrill has a presence in all these locations. Additionally, the company has five more rigs under construction that are capable of drilling below a water depth of 12,000 feet. These rigs are to be delivered by 2014, with a couple of them set to arrive as early as the first half of next year.

Now, investors should also note that these are not the only rigs in SeaDrill's 60-rig fleet that are capable of drilling in deep water and harsh conditions. Keeping all this in mind, and given the demand for ultra-deep water rigs, there's no reason to disagree with Ikaheimonen.

Foolish bottom line
Incidentally, SeaDrill has been one of the latest recommendations of our Motley Fool Stock Advisor service. I believe there's a long way to go for the stock, and patience is key. The company's 8.3% dividend yield looks mighty good as well. We at The Motley Fool will help you stay up to speed on the top news and analysis on SeaDrill. You can start subscribing now by adding the company to our free My Watchlist service, which collects the most important news and analysis on all your favorite companies.

Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of SeaDrill. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 22, 2012, at 3:49 AM, Ostrowsr wrote:

    Don't understand the logic. Missed earnings, new rigs not available for 2 more years. Why is a downgrade to "hold" so funny? The earnings are not there yet. And why buy a stock who's exceptional earnings are 2 years in the future. Use the money for other stocks that are earning NOW.

  • Report this Comment On March 22, 2012, at 8:22 AM, drillerjim101 wrote:

    Good question, Ostrowsr.

    The answer will be obvious to us all 3 to 5 years from now.

    James Fregia, DDS

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