The Best Energy Stocks of 2012: Seadrill

As New Year's Eve quickly approaches, and we all prepare to make our 2013 investing resolutions, now is a good time to reflect on the energy sector in year that was 2012.

In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends.

Today, we'll take a look at Seadrill (NYSE: SDRL  ) and see if this company is a long-term bet. The stock has been up 14.3% since the start of the year as compared to the Dow Jones Industrial Average, moving up by 4.6% in the same period. However, this doesn't really surprise me.

The year that was 2012
Looking back, 2012 has been a great year for the Bermuda-based offshore driller. While it's latest quarterly results were a slight disappointment – thanks to planned downtime and the relocation of a number of rigs – investors with a long-term perspective need not be worried. By the sheer size of its rig fleet and the high day rates charged on some of the rigs, Seadrill still managed to increase revenues year-on-year. Out of the 48 rigs or drillships that are currently operational, 10 are fetching more than $600,000 per day. These rigs and drillships are stationed off the shores of Brazil, Norway, Nigeria, and Angola.

Why the business looks solid
Are these day rates sustainable? Absolutely! State-owned Brazilian integrated oil and gas giant Petrobras (NYSE: PBR  ) , which operates three of these submersible rigs, is aiming to become the world's largest traded oil company by 2020. Given the rich reserves in the Santos and the Campos basins, Petrobras has been going all out to ensure production does not suffer.

Across the Atlantic, the West African coast seems to be the next lucrative market for oil exploration and production. Again, it isn't a surprise that drilling in this region is led by supermajors, ExxonMobil (NYSE: XOM  ) and Total (NYSE: TOT  ) , companies who are struggling to tackle falling production volumes. These companies wouldn't mind digging deep into their cash reserves in order to get the best piece of equipment up in place. Seadrill's ultra-deepwater equipment is in huge demand. And without doubt, this should be the case for the next few years.

However, ultra-deepwater drilling isn't the only attractive solution. Shallow-water drilling, too, has picked up in the last six months. In fact, economic utilization of shallow water (jackup) rigs went up to 83% from last year's 79%. Unlike Hercules Offshore (Nasdaq: HERO  ) , whose jackup rigs are mainly concentrated in the Gulf of Mexico, Seadrill's rigs are spread across Norway, the Middle East, and South Asia. This makes me less worried about any situation that could affect any particular region. The global footprint itself speaks about the company's business model.

A promising 2013 and beyond
Looking into the future, the majority of Seadrill's rigs and drillships are contracted for three to five years from now. It's also worth noting that more than 75% of Seadrill's rigs are less than 10 years old. With 15 more rigs and seven drillships under construction, the overall age of the fleet should come down further.

These factors make me believe that Seadrill is a solid long-term bet. Management is also retuning cash in the form of a 7% dividend yield. Management has also embraced the master limited partnership structure by floating out Seadrill Partners (NYSE: SDLP  ) , which has direct interests in rigs and drillships. This, too, makes good sense in the high growth industry.

The Foolish bottom line
I believe there's a long way to go for the stock, and patience is key. In any case, Foolish investors must learn to ignore any short-term-trading noise.

However, if you want to learn more about the strengths and weaknesses of this company, as well as what to expect from Seadrill going forward, be sure to check out this brand-new premium report put together by one of our top Stock Advisor analysts. Click here to get started.


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