Shares of offshore driller Seadrill (NYSE:SDRL) have crashed and burned by 71% this year.
Troubles in the offshore rig market have only increased as the year progressed, with oil prices getting pummeled after OPEC refused to give any ground in its battle for market share. This dramatic turn of events forced Seadrill to take drastic action, which resulted in the abrupt suspension of the company's previously very generous dividend. These developments have had a profound impact on the value of the company, as well as its standing with investors.
There is now significant churn in Seadrill's investor base. Growth investors abandoned the stock when they saw the offshore rig market slowing. Income investors subsequently followed them out the door when the company's dividend stream dried up. That leaves Seadrill without a core investor base right now. However, I think it won't be long before a new core emerges as value investors start to pick up shares off of the scrap heap.
Despite all of the upheaval in the offshore rig market, Seadrill's rigs are quite valuable. Maybe not as valuable as before, when dayrates were skyrocketing, but that value only mattered when the company was selling rigs for more than it paid for them. From a pure asset value standpoint, the company holds $27 billion in assets. However, as the chart below illustrates, the company's total enterprise value is now just $18.5 billion.
This suggests there's significant hidden value in the stock, which is why some investors might consider it as a possible value stock purchase as they await the turnaround in the offshore rig market.
Drilling down deeper into the numbers
Value investors study a number of metrics to find a compelling stock. However, in the case of an asset-heavy business like Seadrill, one of the best valuation metrics to consider is the price an investor is paying for those assets. Price to book value can be used to find a relative value for the company. In the following chart, we see that Seadrill traditionally has traded at a substantial premium to its book value, as well as the book value of peers Transocean (NYSE:RIG) and Atwood Oceanics (NYSE:ATW).
Over the past five years, contract drillers typically traded for 1.25 to 1.75 times book value. Note that Seadrill has traded at an even greater premium because of its very young and fast-growing fleet.
Due to the recent downdraft in the offshore rig market, and then the oil market, all of these companies are selling for well below 1 times book value. This suggests there is real value here that is underappreciated by investors. A case could be made that Seadrill should, at a minimum, be selling for its book value right now. Furthermore, there is a strong possibility that the company should eventually trade closer to at least the historical average of its peer group once the storm in the oil market passes. So, based on book value alone, the company appears to be quite undervalued.
Seadrill burned both growth and income investors this year when it was hit hard by troubles in the oil market. That said, investors have now sold the stock off so deeply that it is trading well below the book value of its assets -- when the company has traditionally sold for a premium to those assets. This suggests there is value hiding in the stock that value investors should soon start to uncover, making it a compelling stock to at least put on your watchlist as the oil market settles down.
Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Atwood Oceanics and Seadrill. The Motley Fool owns shares of Atwood Oceanics, Seadrill, and Transocean. 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.