North Atlantic Drilling Is Protected Against the Drilling Downturn

Shares of offshore drilling contractors have sold off in the past few months due to concerns about market weakness. But, not all drillers are created equal, and some are unlikely to be affected by any short-term market weakness. This creates a buying opportunity for savvy investors.

Mar 20, 2014 at 12:27PM

Shares of offshore drilling companies have been getting punished severely by the markets recently due to fears of an industry shutdown. While it is true that the offshore drilling industry is slowing down from its previously red hot levels, not all drilling contractors will be equally affected. In fact, some will not be affected much at all and many of these have been sold off by investors alongside their much more heavily exposed peers. One such company is Norwegian harsh environment drilling specialist North Atlantic Drilling (NYSE:NADL). The fact that this company, along with others like it, has been sold off by the market offers opportunities for investors that are looking for a very high-yielding, undervalued stock.

About North Atlantic drilling
North Atlantic Drilling, a majority-owned subsidiary of Seadrill (NYSE:SDRL), owns and manages the largest fleet of harsh environment-capable offshore drilling rigs in the world. This fleet consists of five semisubmersibles, three jackups, and one drillship. All of these rigs are harsh environment-capable and many are also capable of operating in ultra-deepwater environments. This also gives the company one of the most technically capable fleets of harsh-environment rigs in the world and this provides the company with a competitive advantage.

Long-term contracts provide protection
One of the reasons why North Atlantic Drilling will not be significantly affected by a short- to medium-term downturn in the offshore drilling market is that contracts for harsh-environment rigs are typically for long periods of time. This chart shows the current contracts that each of North Atlantic Drilling's rigs has. As the chart shows, they all have contracts that last for several years.

Screen Shot

Source: North Atlantic Drilling

One thing that investors should note in the table above is that North Atlantic Drilling has no expiring contracts in 2014. This means that the company is contractually guaranteed to receive all of its cash flow for this entire year regardless of what happens in the market for offshore drilling rigs.

However, what if the current downturn lasts beyond 2014? Well, North Atlantic Drilling has a significant amount of protection going forward as well. The company has very little exposure to the market in 2015, with only its drillship being available for the whole year. The company does have two of its semisubmersibles, the West Venture and West Phoenix, coming off contract halfway through 2015, but otherwise it is still contractually guaranteed to keep generating revenues and cash flow straight through to 2016. Thus, North Atlantic Drilling is largely protected unless the market downturn lasts until 2016.

Risks if the downturn lasts longer than expected
There are still certainly some risks here that every investor and potential investor should be aware of. For starters, the company does still have availability on three of its rigs in 2015. Should the company fail to secure new contracts for these rigs at either the same or similar dayrates then it could see its revenue and cash flow drop as these rigs come off contract. This could be enough to jeopardize the company's dividend should the drop in cash flow be large enough.

The market is handing us a cheap stock with a high yield
However, the market's sell-off of North Atlantic Drilling's stock has managed to push the stock price so low that it is now cheap even when the relatively minimal risks are considered. At the time of writing, North Atlantic Drilling trades for $8.38 per share. At this level, the stock has a P/E of 8.10, an EV/EBITDA of 7.86, and a price-to-book ratio of 2.22. However, one of the biggest indicators that the stock may be extraordinarily cheap is that its dividend yield is now into the double-digits.

In a recent article, I stated that the company increased its dividend to $0.92 per year following its fourth quarter earnings announcement. At this level, the stock yields 10.98%. This makes it one of the highest yielding stocks on the NYSE. This dividend also suggests that investors in the company will receive a return that is at least in line with, if not beating, the market's historical average. This is true even if the stock price doesn't move from today's levels. Thus, a good deal of the company's risks are already priced into the stock, and the market appears to be overestimating these risks.

North Atlantic Drilling is not the only drilling company that is well-positioned to ride through the current weakness in the market without any ill effects, nor is it the only one that pays a high dividend. But a high dividend is quite desirable in the current weak market because until the drilling market begins to firm up again, capital gains are likely to be minimal from any of the drilling companies.

Therefore, dividends will likely be the only return that investors are likely to get. One company that is likely to ride through the downturn without any ill effect is North Atlantic Drilling's sister company, Seadrill Partners (NYSE:SDLP), whose long contracts promise to protect it from any short-term market weakness.

The best play on 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!


Daniel Gibbs has a lon position in Seadrill and North Atlantic Drilling. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may hold positions in any of the stocks mentioned. Powerhedge LLC has no position in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information