Why I'm Not Buying Seadrill... Yet

A few months ago I wrote that I'd decided to finally buy shares of Seadrill (NYSE: SDRL  ) . Unfortunately, for me at least, I actually didn't buy shares at that time. Instead, I chose to write puts on the company to buy shares cheaper, and those puts expire this week. In looking over my options this time around, I'm not happy with what I see.

Seadrill West Epsilon Drilling Rig. Photo credit: Flickr/L.C.Nøttaasen

One of the major risks of writing puts is missing the upside when a stock moves higher. This is exactly what happened to me as shares of Seadrill are up over 18% since I wrote that article. While I did earn about 3% in options premiums, this is definitely a case where I'd have been better off buying the stock. In fact, you could certainly make the case that Seadrill is still a buy right now because the thesis for buying has only strengthened.

So, I've decided to hold off; I just have the feeling that the waves of volatility will knock this stock down a bit at some point. Right now Seadrill's stock is riding high as one of its jointly owned subsidiary's recently won a massive $2.7 billion contract from Brazil's Petrobras (NYSE: PBR  ) . The eight-year contract adds to Seadrill's contracted backlog while also increasing its presence in Brazil's massive offshore oil market.

That market is expected to really grow in the future as Brazil is looking to auction areas containing two-thirds of its proven reserves this coming October to bring in fresh foreign investment capital. What's interesting about this auction is that Petrobras will still be the operator and own at least 30% of the field according to new Brazilian auction rules. Because Seadrill already has a relationship with Petrobras, it puts the company in the driver's seat as offshore development continues.

In addition to Brazil, Seadrill is building the drillships required to meet the needs of the world's toughest offshore energy markets. For example, the company just announced that it has contracted to have four new ultra-deepwater drillships built. These will have water depth capacity of up to 12,000 feet so it can target areas such as the Gulf of Mexico as well as both East and West Africa.

The ultra-deepwater Gulf is an important market for Seadrill, as overall oil production in the Gulf is projected to more than double by 2020. Some of the more recent finds have been in water depths of more than a mile. For example, earlier this year ConocoPhillips (NYSE: COP  ) and its partners announced two major finds, both in water depths of more than 5,800 feet, with the wells being drilled to total depths of more than 31,000 feet. Oil producers continue to be forced to drill in deeper water in order to find oil. This trend bodes well for Seadrill which has the ships capable of finding this oil.

While those are all reasons to be bullish, I'm still a cheapskate when it comes to buying stocks. Because Seadrill does move with the price of crude, I think I can get shares cheaper on a dip in the price of oil. Lately, globally benchmarked Brent Crude oil has been rising due to the unrest in Egypt, which has sent it up about 8% over the past three months. If Egypt and the global oil markets calm down, it could put some pressure on Seadrill stock, making for a better entry price. 

In the meantime, I plan to keep watching Seadrill, but I'll be on the lookout for some other currently intriguing energy plays instead. Three that are on my watchlist are the stocks that I found on The Motley Fool's special report "3 Stocks for $100 Oil". If you'd like to see those stocks and gain FREE access to this special report, simply click here now.

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  • Report this Comment On July 18, 2013, at 1:38 PM, Jellywig wrote:

    It sounds like you wrote this article to help yourself feel better and rationalize why you can't buy it now. Why not write somehthing a little more useful for the investment comuity out there in Fooldom?

  • Report this Comment On July 18, 2013, at 2:01 PM, caffeinefree51 wrote:

    Glad I just bought back in SDRL at $35 a share a couple months back. I have bought and sold this stock twice over a 2 year timeframe, and reaped the dividends as well. I am dripping this stock, and will buy more, if another steep drop happens. My gut feeling is we won't see another $35 price anytime soon again.

    Although SDRL's debt is an issue of concern, I am a firm believer in their approach of using debt to grow their fleet. I also love that they think of the shareholder, and return a high dividend. If only the big oil majors would take that approach as well. Those conglomerates have piles of cash, but are stingy in dividends..ex XOM, CVX. COP is on my radar, but I will wait for the inevitable correction with a buy in under $60.

    Looks like you missed the boat on SDRL!

  • Report this Comment On July 25, 2013, at 1:39 PM, gmf001 wrote:

    So, are you going to write more puts in the hope of a drop meanwhile collecting some return - or just hoping for a correction to jump in?

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