The No. 1 Alternative to Seadrill LTD

With its philosophy of paying nearly all operating cash flow to shareholders, Seadrill is a controversial offshore lessor. Here is the one viable, similar alternative in this space.

Jun 15, 2014 at 10:44AM

Sdrl Esv Picture

An Ensco Rig stationed off the coast of Africa. Source: Wikipedia

Seadrill's (NYSE:SDRL) last quarter has caused a number of differing opinions among contributors here at the Fool and a few other places. Most who have written about this offshore rig lessor appreciate the high dividend and best-in-class operating efficiency.

However, some are understandably concerned by the company's relatively high debt load and by management's tendency to maintain a dividend to operating cash flow ratio of 100%. On the surface of it, Seadrill just doesn't seem to have much room for error. 

My opinion on Seadrill is that the company is a worthwhile investment due to reasons I've written about before. However, it is understandable that an investor would prefer a more conservative choice with regard to debt load and the dividend. 

Those investors should look no further than Ensco (NYSE:ESV). Of the large-cap offshore rig lessors, Ensco and Seadrill are the two 'best of breed' companies. However, both companies have very different philosophies. In fact, looking at both companies' strengths and weaknesses, Ensco and Seadrill, in many respects, seem to be mirror images of one another. 

Debt and dividend
Investors these days want a dividend that is repeatable and well covered. Ensco has the definite advantage here. Ensco's dividend accounts for about half of its earnings. This means that earnings would have to be more than cut in half before Ensco's dividend would be in jeopardy. With this conservatism comes a lower dividend yield of 5.7%, compared with Seadrill's yield of over 10%. However, many risk-averse investors are more than happy to take that 5.7% yield with the assurance that comes with such a low payout ratio. 

When looking at debt, a similar picture emerges. A simple look at debt-to-capital ratios shows Ensco to be the least leveraged among the major lessors at only 27%. Conversely, at 65%, Seadrill's ratio is easily the highest. Digging a little deeper, all of Ensco's debt is in the form of fixed-rate bonds. While Seadrill has fixed-rate bonds as well, it also has debt "vehicles" in which its ships are used as collateral. Basically, some of Seadrill's debt is in the form of "mortgages" on its ships. Seadril's overall debt picture can seem complicated to the layperson. 

Contracts and utilization
Conversely, Ensco's relative weakness lies in its greater cash flow visibility. Of its eight deepwater and ultra-deepwater ships under construction, Ensco has thus far secured only two ships for contracted service, with one more expected to be signed soon. Seadrill currently has fourteen floaters under construction. Of these, five are already contracted out, but an additional four of the fourteen will not be complete until the latter half of 2015. 

Seadrill's fleet utilization last quarter was 88%, well above the industry average of 79.7% (according to Rigzone), but well below the company's standard utilization rate of mid to high 90s. This drop was due to technical issues on three ships. However, Ensco's last reported utilization rate was 78%, still well below that of Seadrill. 

Bottom line
Ensco and Seadrill do have a few things in common. Both have the youngest fleets and the highest net income margins among the larger offshore rig lessors. In a "bifurcated" market where newer state-of-the-art ships are in high demand, Ensco and Seadrill should both be the clear favorites. However, both of these companies have vastly different styles. Those who insist on a consistent dividend and a low debt load should choose Ensco. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Casey Hoerth has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers