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.
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.
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