Digging Up Black Gold with Seadrill

By Ryan Guenette - September 6, 2012 | Tickers: ATW, ESV, RDC, SDRL, RIG | 0 Comments

• Email
• Print

Finding oil and natural gas is becoming harder and harder. Companies are being driven to all-time distances to strike a black gold mine. After all, natural gas and oil are not like trees, as after they take the oil away the companies cannot simply resupply the area. Several companies have been driven offshore in search of oil, with one being Seadrill Limited (NYSE: SDRL). Seadrill is an offshore drilling contractor supplying worldwide offshore drilling services to the gas and oil industry. Its core business includes the operations of jack-up rigs, tender rigs, semi-submersible rigs, and drill ships functioning in all depths of water. The company owns and operates a vast fleet of 59 offshore drilling units: 13 semi-submersible rigs, 9 drill ships, 21 jack-up rigs, and 16 tender rigs, and a fleet of 16 additional units under construction. The company employs 8,000, and is valued at $19.16 billion on the New York Stock Exchange. Trading significantly closer to its 52 week high than low, Seadrill has rallied 32.09% over the past year, in which the S&P 500 has only rallied 18.92%. So is time to go digging up black gold with Seadril?

Industrial Strength Fundamentals

In 2009, Seadrill reported earnings per share of $3.00 and sales of $3.25 billion. In 2014, the average analyst consensus believes the company will derive $4.12 per share and $5.89 billion in sales from its business operations. On the bottom line, Seadrill is projected to grow its earnings per share 37.33%, while on the top line; the company is expected to grow its sales 81.04%. This represents an apparent belief that over the course of this half decade Seadrill’s margins will be compressed. Based on these statistics, Seadrill’s bottom line compound annual growth rate (CAGR) is 6.55%, a sustainable yet moderately fast-paced rate.

 Additionally, Seadrill currently pays out a substantially large dividend. In the first quarter of 2012 Seadrill doled out a quarterly dividend of $0.80; in the second quarter a quarterly dividend of $0.15; and in the third quarter a quarterly dividend of $0.84. Assuming that the quarterly payouts of $0.84 continue, the company’s 2012 dividends would total $2.63, which at the current price, would put the dividend as yielding 6.43%. This is up from 2011’s annual dividend of $2.30, and is further expected to expand into the future. By 2014, the street anticipates the company’s dividend to reach $3.65, which at the current price, would put the dividend as yielding 8.92%. While Seadrill’s payouts are a little inconsistent, their cumulative value is massive. From this we can see the company financial strength on the bottom and top lines, sustainable growth rate, and colossal dividend.

The chart below displays Seadrill’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Diverse Portfolio & Rising Oil Price

Seadrill is the largest offshore driller based on enterprise value, and possesses the 2^nd largest ultra-deepwater fleet. Its fleet is stretched across the entire world, as the chart below displays.

The company is heavily investing in its business to further grow it into the future. Seadrill possesses the most modern jack-up and tender rig fleet, and has state of the art equipment on all of its other units. The company is expecting to expand its fleet by 27.12% by adding 16 new units in the coming years. Seadrill leases its units out to companies such as British Petroleum, and collects a daily payment for the utilization of the unit. Many of these rates are locked in for years to come, so its adds a level of extreme stability to the company. This constant stream of income is why the stock pays out a massive dividend. The more units the company owns, the more it can lease, and the bigger the dividend will become. In a way, Seadrill is a real estate investment trust, except instead of investing in real estate; the company invests in drilling rigs. The chart below displays Seadrill’s daily collection rates and lease terms.

The higher oil prices are placing more pressure on large oil companies such as British Petroleum in order to find more of it. After weathering a downtrend in 2008, oil is rising again, quickly approaching all-time highs, which will drive up Seadrill’s utilization rates.

In conclusion, Seadrill has a vast portfolio of drilling units, should experience significant growth in the future due to its expansion plans. Furthermore, it possesses a stable business model, and greater demand for its services should sprout out of higher oil prices.

Who Has Struck Gold?

Compared to some of Seadrill’s most prominent competitors, such as: ENSCO PLC (NYSE: ESV), Rowan Companies PLC (NYSE: RDC), Transocean Limited (NYSE: RIG), and Atwood Oceanics Incorporated (NYSE: ATW), Seadrill relates moderately favorably.

In terms of growth, Transocean is the industry laggard, while Atwood is the industry leader. Seadrill and ENSCO are the only companies in the industry that pay out dividends, with Seadrill possessing the largest dividend, and with ENSCO possessing the fastest growing dividend. In the fundamental ratio comparison, Atwood is the industry bargain, while Rowan trades at a premium to its peers. All companies are extremely cheap when growth is taken into account. In the net profit margin comparison, Transocean stands out to the downside, while Atwood stands out to the upside.

The Foolish Bottom Line

With oil prices so high, oil companies are racing to obtain large volumes of the black gold in any way they can. Seadrill’s vast portfolio of units is essential to these companies, which allows Seadrill to charge large daily utilization rates. While there are risks associated to Seadrill’s business, the company’s diversified portfolio should allow the company to weather any disasters. The company financial strength is exceptional, and the company pays out a dividend that eclipses the 5% mark. The company is truly a REIT, and has a stable and highly predictable future. The foolish bottom line is that although another BP oil disaster could happen on one of Seadrill’s units, Seadrill is too good of a company to not go digging for black gold with.                

• Email
• Print
• Feedback