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John Fredriksen: The Iron Man of Offshore Drilling

In a previous article I introduced income investors to John Fredriksen, self-made billionaire and a modern day Poseidon. I outlined how this humble son of a Norwegian welder worked his way up the ship-brokering ranks and eventually built one of the largest seaborne empires in the world -- with $14 billion, he's the 78th-richest person on Earth).  

Fredricksen's citizenship in Cyprus, where dividends aren't taxed, is why all the companies that he has founded or taken major stakes in have sky-high dividends. This article will highlight three of my favorite Fredriksen companies: Seadrill (NYSE: SDRL  ) , North Atlantic Drilling (NYSE: NADL  ) , and Seadrill Partners (NYSE: SDLP  ) . These three are among the highest-yielding offshore drillers, and they show Fredriksen's genius at creative financial deals that enable his companies to have both generous yields and solid, sustainable dividend growth.

John Fredriksen and offshore drilling: match made in heaven
The investment theses for all three companies are composed of three parts. 

The first two are major global economic megatrends; the world's growing demand for oil and the subsequent boom in offshore oil drilling. The third involves Fredriksen's influence on the boards of these companies (for example, he owns 21% of Seadrill).

Consider these facts:

  • According to a recent study by Morgan Stanley and Rystad Energy, by 2035 the world's demand for oil will increase by 13%-26%.
  • Oil prices are expected to average $125-$150 per barrel.
  • Global exploration and production budgets (from oil companies) in 2013 were about $650 billion and expected to grow over the long term. (Note the 15% compound annual growth rate over the last 11 years.) 
  • Ultra-deepwater, or UDW, drilling is projected to see 19% CAGR through 2030, compared to just 1% for conventional land-based drilling. 
Despite recent analysts concerns about a short-term glut of UDW rigs and falling dayrates, the fact is that by 2020 165 more UDW rigs will be needed than exist now or are scheduled to be built, meaning long-term dayrates will rise. This places Seadrill, Seadrill Partners, and North Atlantic Drilling into position to maximize long-term growth from these megatrends. Fredriksen's involvement adds an extra kicker to long-term market outperformance. 
This is because Fredriksen is essentially the Tony Stark (Iron Man) of offshore drilling. He loves fast growth, high dividends, and state-of-the-art equipment, and possesses a genius for creative financial deals that enables him to reach all three goals simultaneously. Where other drillers try to build new rigs using cash flow, Fredriksen's company's aren't afraid to use lots of cheap debt.
The company has no difficulty servicing its debts, with an EBITDA-to-interest ratio of 9.2 and EBITDA expected to grow at 20% CAGR through 2016. Fredriksen also has two other sources of funding that his competitors are just now starting to emulate. 
I am referring to Seadrill's nearly $1.2 billion investment in three other companies: SapuraKencana (8.18% stake), Sevan Drilling (50.11% stake), and global oil services company Archer (39.9% stake).
Fredriksen's most ingenious method of alternative financing includes Seadrill spinoff North Atlantic Drilling and master limited partnership Seadrill Partners. Seadrill owns 70% of North Atlantic and 53.2% of Seadrill Partners.
Seadrill acts as the parent company to North Atlantic and the general partner of Seadrill Partners. It uses its massive access to cheap debt to build state-of-the-art, six-generation UDW and harsh environment rigs for which it often arranges long-term, highly lucrative contracts ahead of completion. It then sells these to its subsidiaries. In the process it recoups the cost of the extra debt, but now North Atlantic and Seadrill Partners have additional, highly profitable rigs to generate income.
North Atlantic can then raise its dividend, 70% of which goes to Seadrill. Seadrill Partners has bought five rigs from Seadrill for nearly $4 billion, but at terms that are still accretive to unitholders (distributions have been raised 31% since the IPO and another 6%-7% raise is planned after the completion of the last dropdown). Seadrill not only benefits from these higher distributions, but also receives incentive distribution fees from its MLP (50% of marginal distributable cash flow above a distribution of $0.4456 per unit per quarter).
In this way Fredrikson's offshore drillers create mutually beneficial financing arrangements that allow them to grow quickly while maintaining high, safe, and growing yields. 
Foolish takeaway
John Fredriksen is a modern day Iron Man of offshore drilling and an income investor's best friend. His three offshore drillers offer long-term investors an opportunity for high income, sustainable yet quick dividend growth, and capital gains to boot. All three are massively undervalued due to short-term concerns about the industry, but two major megatrends mean long-term market crushing total returns are likely for many years to come.

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Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 11, 2014, at 6:15 PM, JohnFredriksen wrote:

    John Fredriksen is a cyborg and a ninja. He is also America's last best hope.

  • Report this Comment On June 11, 2014, at 7:55 PM, JohnFredriksen wrote:

    All I'm saying is that he's a really nice guy, smart, handsome, and hung like a horse.

  • Report this Comment On June 11, 2014, at 10:33 PM, srockaz wrote:

    And apparently humble too...:-)

    BTW, the article refers to SDLP as an MLP. Is that right? It's got LLC i nthe title and I thought a company could not be both at the same time.

  • Report this Comment On June 12, 2014, at 2:54 PM, AdamGalas wrote:

    Thank you Mr. Fredriksen for honoring us with your presence.

    I want to make one thing very clear. My title wasn't a joke. In the course of my research for my article I discovered that Iron Man is real and John Fredriksen is Iron Man.

    He is "responsible for this country's longest run of uninterrupted peace in 35 years!... from the ashes of captivity, never has a Phoenix metaphor been more personified!"

    Thanks to Mr. Fredriksen " Uncle Sam can kick back on a lawn chair, sipping on an iced tea, because I haven't come across anyone man enough to go toe to toe with him on his best day!" ;)

    In all seriousness, Yes, SDLP is an MLP.

    On page 12, you can see that SDLP is referred to as an MLP.

    On page 7 you can see that SDLP has public unit holders and pays distributions.

  • Report this Comment On June 12, 2014, at 2:56 PM, AdamGalas wrote:

    But seriously, I'd like to thank Mr. Fredriksen, (who ever you are) for your wit and humor. The Motley Fool is known for its jovial nature and your comments represent the incarnation of what makes this company such a joy to work for.

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Adam Galas

Adam Galas is an energy writer for The Motley Fool and a retired Army Medical Services Officer. After serving his country in the global war on terror, he has come home to serve investors by teaching them how to invest better in order to achieve their financial dreams.

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