With a 10.5% Yield, Seadrill Ltd. Is a Bargain

Over the past three months, offshore rig lessor SeaDrill has has declined by over 20%. With high demand for the newest deepwater rigs, Seadrill should be able to grow its earnings substantially until 2017. In the meantime, you can also enjoy a 10.5% dividend yield.

Feb 4, 2014 at 3:18PM

Since late January, the S&P 500 index has fallen by about 6%, from 1840 to to about 1740. Although this has thus far been a mild pullback by many standards, in events like these there are often sectors and industries that get beaten up disproportionately, and this pullback has been no exception. One of those industries is offshore rig leasing. Offshore rig lessors' profits depend on dayrates for the rigs, which they lease out to operators. Because offshore operations are very capital intensive, many rightly regard the rig lessors as a leveraged bet on high global oil prices. 

It is, perhaps, for this reason that offshore drilling companies have seen their stocks tumble the most. Seadrill (NYSE:SDRL), a Bermuda-based driller with mostly Norwegian management, has seen its U.S. shares drop a gigantic 20% since just October of last year. And despite that steep decline, Seadrill's operational performance has been great since then. This article will go over three reasons why this offshore rig lessor is worth your consideration at this discounted price. 

A young, deepwater fleet

Sdrl Udw 

Seadrill Investor Relations

The chart above shows that Seadrill has among the youngest and most deepwater-focused fleets, easily beating both Ensco (NYSE:ESV) and Transocean (NYSE:RIG) in both fleet age and deepwater focus. This is a good thing for a few very important reasons. First, a majority of new offshore oil discoveries are now happening at depths exceeding 5,000 feet, so the future of offshore drilling activity will be in deepwater and ultra-deepwater. Second, because supply for deepwater and ultra-deepwater is the most constrained, and because drilling at these depths is very capital intensive, dayrates for these types of rigs are also the highest and carry the greatest profit margins. 

Second, the Macondo disaster in 2010 has ushered in a heightened need for safer, state-of-the-art rigs. As such, operators are putting a premium on newer vessels. It is for these two reasons that I believe Seadrill is better positioned than either Ensco or Transocean. Seadrill spent money during the tougher years of 2009 and 2010, kept a long-term view, and took on debt when it was cheap to do so while many of the company's competitors were too afraid to spend.

Earnings growth 

Sdrl Ebitda Growth What To Expect

SeaDrill Investor Relations

Thanks to the new additions to its fleet, which are expected to come online over the next few years, Seadrill expects to grow EBITDA from around $3 billion in 2013, to well over $4 billion by 2016. Of course, this could be hurt if day rates plunge and stay low, but I believe much of that fear is unwarranted. Much of the world's traditional oil producing nations are finding it difficult to increase production onshore. As long as the shale remains off limits in most of the rest of the world, offshore oil activity will continue to increase.With a young, deepwater-focused fleet, Seadrill will be at the forefont of that.

A high and sustainable dividend
One big concern of retail investors is Seadrill's 10.5% dividend, which seems too good to be true. A cursory look at the company's balance sheet shows that Seadrill cannot pay its dividend from cash flow. The reason for this is primarily Seadrill's capital spending, which in 2012 amounted to over $1.5 billion and is on course to be perhaps over $2 billion this year, compared to only $1.59 billion in operating cash flow in 2012. 

Looking deeper into the company's financials, in 2012 Seadrill paid $1.97 billion in dividends but took in only $1.59 billion in operating cash flow. This, however, was due to a $1.4 billion "other non-cash" charge which masked a year of otherwise great results. That charge was in fact due to a decline in mark-to-market value of an unrealized derivative, and there will be no cash transaction until that derivative runs its course and is realized. When considering that charge as only a one-time event, operating cash flows would have been $3.8 billion, compared to a dividend of just under $2 billion. In my opinion, as long as Seadrill can manage its debt and continue expanding EBITDA earnings, this juicy 10.5% dividend yield will be secure. 

Bottom line
Seadrill has the youngest and most deepwater-oriented fleet, which should afford the company a measure of protection should oil prices come down. As new ships come online between now and 2016, Seadrill's earnings should rise and the need for capital expenditure should decline. At more than 20% off its October highs, Seadrill is a bargain right here. 

An interesting way to play offshore drilling
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

Casey Hoerth has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers