Another Set of Analysts Turns Negative on Seadrill Ltd's Dividend

Seadrill (NYSE: SDRL  ) and Transocean (NYSE: RIG  ) have been two of the market's worst-performing stocks year to date, as almost every set of analysts on Wall Street has turned negative on the offshore drilling sector.

Indeed, it is widely believed that the offshore drilling industry is about to enter a cyclical slowdown, putting pressure on earnings across the industry. Unfortunately, this implies that dividend payouts of companies within the sector could also come under pressure.

New research
Now, Seadrill's dividend is and has always been the subject of much speculation and analysis (I have looked at the sustainability of the payment many times myself), and many conclusions have been drawn.

However, research notes from analysts at Wells Fargo published by Barron's recently caught my attention. The note raises some interesting points and brings into question the sustainability of Seadrill's dividend payout with the upcoming slowdown looming. The note states:

It has long been our analysis that [Seadrill's] aggressive dividend policy has never been funded solely by the operations of its high-quality fleet, but instead has been funded through the sale of i) equity and convertible debt ii) equity in sponsored "child" entities ([North Atlantic Drilling (NADL), Seadrill Partners (SDLP)]), and iii) the outright sale of rigs ... As long as [Seadrill] could sell these assets and equity for premium prices, it could sustain a high dividend ... asset values are slipping, we think [Seadrill] may fail to secure the sales prices and external financing required to sustain its current dividend.

This raises a valid point. In particular, looking at Seadrill's cash flow figures supplied by the company within SEC filings, during the past four years, cumulative free cash flow has amounted to just under -$3 billion and dividends paid out during the period have amounted to $5.6 billion, which leaves an $8.6 billion shortfall.

For the most part, this shortfall has been met with debt issuance, $7.5 billion to be exact and last year, $1.3 billion was raised through the sale of assets. So, it would seem that Wells Fargo's analysts have a valid point.

Hiking the payout
Meanwhile, Seadrill's industry peer, Transocean, is planning to hike its dividend to $3 per share this year and is moving to reassure investors that the higher payout is sustainable.

Transocean's management has stated that the company is looking to stabilize the balance sheet through the sale of non-core assets, mainly old floaters. Additionally, the company is planning to spin off or convert a portion of its business into an MLP-like vehicle, including some of the company's best and newest rigs-- similar to the strategy Seadrill is using.

What's more, Transocean plans to boost margins in order to free up an additional $500 million by the end of 2015.

But overall, with 361 million shares in issue, a dividend payout of $3 per share will likely cost Transocean slightly under $1.1 billion per annum. The company's cash flow from operations has averaged $2.6 billion during the past four years, which gives plenty of cover.

Foolish summary
All in all, while no analysts can predict the future, the guys at Wells Fargo have a point about Seadrill's dividend sustainability. With a drilling sector slowdown on the horizon, it's better to be safe than sorry, and on this basis, Transocean's well-covered dividend payout and the company's plans to increase profits indicate that the company's dividend is more secure than that of Seadrill.

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Read/Post Comments (11) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On April 30, 2014, at 12:12 PM, anisqoyo wrote:

    I wish MF would decide whether SDRL is the best thing since sliced bread, and the dividend is justified and safe, or if it's a company that is using smoke and mirrors to prop up its dividend and should be looked at with a jaundiced eye. Which side of the record is playing?

    The cheerleading here for SDRL has been consistent until now. The hosannas appear to have ended based on information that has been readily available for a long time. Your credibility should be in question just like the viability of the SDRL dividend.

  • Report this Comment On April 30, 2014, at 2:36 PM, astronut666 wrote:

    Somebody wants to keep SDRL down - it finally left the $33 support level, then this bozo drags out the seriously flawed "analysis" from WF again, which has been widely disproved, then adds to the pile by comparing SDRL FCF to RIG's OPERATING cash flow to claim SDRL cannot support their div but RIG can, LOL.

  • Report this Comment On April 30, 2014, at 5:19 PM, GreatPricePearl wrote:

    This math seems a bit fuzzy:

    "during the past four years, cumulative free cash flow has amounted to just under -$3 billion and dividends paid out during the period have amounted to $5.6 billion, which leaves an $8.6 billion shortfall."

    Do you mean $2.6B shortfall?

  • Report this Comment On April 30, 2014, at 5:30 PM, karlditt wrote:

    It is a shame that a great company like Sea Drill is being trashed like this. MF is keeping novice investors away from a fantastic investment that will provide above average returns for many years to come. Notice I say WILL and not MAY. This article is filled with nothing but assumptions and none supported by facts.

    SDRL is best of breed and the dividend is not being threatened nor will it be the next 2 years. I have owned SDRL since 2009 and have collected thousands in dividends and I am not concerned about the doubts created by articles like this one bit. Anyone without knowledge can write articles like this. Eye catching titles produce hits.

  • Report this Comment On April 30, 2014, at 7:15 PM, Nohjnogias wrote:

    I have to agree with the informed dissenters posting here. This article takes one weakness of SDRL and compares it with one strength of RIG. The slowdown in the majors E&P will likely be short lived, and SeaDrill is positioned better than all save significantly smaller VTG to capitalize on the growth after the slowdown is over.

    This article is poorly constructed and skewed on it's few factors.

  • Report this Comment On April 30, 2014, at 9:28 PM, BrianB wrote:

    Rupert,

    regardless of your feeelings about SDRL versus RIG, what I can not tolerate is that you use different criteria for assessing one versus the other.

    For SDRL you reference the WFC analyst as saying that the problem is that FREE CASH FLOW isn't enough to cover the dividend, yet for RIG you mention that everything is fine because OPERATING CASHFLOW is enough to cover the dividend. In this case Operating Cashflow is the more relavent comparison, as SDRL's cap ex is primarily for acquiring new ships (the analogy for a traditional manufacturing company is building a new plant, you would never expect a manufcturing company to build a new plant, not to mention numerous plants/year, out of Operating Cashflow, you would expect them to use additional capital to fund that).

    So you say that RIG is fine because they have a 2x coverage from Operating Cashflow of the dividend, while if you do that same analysis you see that SDRL is spending most of their Operating Cashflow on dividends, however they are paying twice the dividend (as a percnet of share price). If RIG was to match the dividend of SDRL, they would be at the same payout rate, or conversely, if SDRL cut their dividned in halfo, they would be at the same ratio as RIG today.

    Interestingly, you mention how RIG is doing many things to copy SDRL, and that is all goodness, but SDRL is alsready doing them, and that is bad. It's not just the direction they are headed, but where they will arrive if they keep going in that direction.

    You also bemoan that SDRL might not be able to keep increasing the divdend, so what, they already pay 2x the dividend of RIG, so if RIG keeps increasing the dividend for a couple decades, they might get to where SDRL is today, why wait for a good thing, why not have it today.

    If you where a contributor on SA, I might be able to look aside on this, but you are being paid by MF, and peole p[ay money to get this type of information. I'm not so much surprised at what you wrote, as I am theat what passes for review would have let this go through!

  • Report this Comment On May 01, 2014, at 1:11 AM, awallejr wrote:

    I personally would never invest according to this author's views. You will lose money. Ignore him. Barrons has been wrong just too many times. Don't follow them. In fact do the opposite.

    Cramer already stole my argument. Invest in Portugal or Greek bonds yielding 5% or under or invest in a totally transparent company yielding 11%+.

    Please if you want to make money ignore this auther and listen to me. Buy SDRL.

  • Report this Comment On May 01, 2014, at 10:37 AM, LongSdrl wrote:

    Please do more research before posting

    What this author research on tobacco and resource but has no knowledge on offshore drilling. Not only with high dividend but with great

    potential growth company. Best of both world.

    A fool would listen to you.

  • Report this Comment On May 01, 2014, at 12:24 PM, revrurik wrote:

    Barrons likes to go off the rails on certain stocks. They went ape trashing LINE and were basically caught smoking crack on the multiple hatchet job articles. Now they're doing it again on SDRL. At this point, they're making Cramer look like a Mensan....

  • Report this Comment On May 01, 2014, at 6:21 PM, postnasaldrip wrote:

    All great responses and comments. Time will tell who is right. Long SDRL

  • Report this Comment On May 06, 2014, at 5:36 PM, flounderuiuc wrote:

    How much Barrons paying you to trash SDRL?

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10/20/2014 4:01 PM
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