Shares of Seadrill Ltd. (NYSE:SDRL) took off in September, ending the month 27.3% higher, according to data provided by S&P Global Market Intelligence. Driving the buying spree was the word that the company plans to be active in the mergers and acquisitions market and news that it signed a contract for at least one new offshore well.
A wave of merger activity has swept across the offshore drilling sector in recent years. The latest news came on Monday when Ensco (OTC:VAL) announced that it had agreed to buy Rowan in a $12 billion deal. That transaction occurred on the heels of Transocean's (NYSE:RIG) agreement earlier last month to acquire Ocean Rig for $2.7 billion. Before that, Transocean bought Songa Offshore for $3.4 billion while Ensco acquired Atwood Oceanics.
Now, Seadrill wants to get in on the action, according to comments by CEO Anton Dibowitz in an interview with Reuters last month. He stated that "based on the number of conversations, I believe there will be more deals ... There is still a significant amount of fleet renewal that needs to happen among our competitors." While Dibowitz noted that Seadrill is comfortable with its current fleet, he said, "we have a history of doing transactions, and we are certainly not going to sit on our hands."
In addition to investor enthusiasm on those comments, Seadrill also unveiled that it secured a new contract to drill a well in Canada for ExxonMobil (NYSE:XOM). Exxon will pay the company $24 million to drill at least one well starting next May, though it has multiple options to extend that agreement. This award is good news for Seadrill because it keeps this rig working off Canada's shores after its current contract with BP runs out.
Seadrill emerged from bankruptcy protection this July and is still trying to get back on its feet. However, positive signs abound, as not only has consolidation in the sector accelerated, but the long-awaited recovery also appears to be just around the corner. While that rising tide should lift all boats, including Seadrill's, these three oil stocks look like much better buys right now.