A Safe Value Stock to Consider

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Seadrill Limited’s (NYSE: SDRL) stock has been trending sharply in the last one year, reaching its highest level in a 52 weeks range. The stock is currently trading at $38.88 with an appreciation of an impressive ~24%. SeaDrill operates a modern fleet of Drillships, Jack-up Rigs, Semi-submersible Rigs, and Tender Rigs. It has a solid dividend yield of 8.50% and its revenues have been increasing continuously since it first hit the market. This aggressive company has always impressed the industry with its ability to acquire new contracts. It currently has18 new builds under construction scheduled to be delivered in the next 2-3 years.

New Contracts Situation for Seadrill and its Peers:

Seadrill has entered into a new contract with Calgary-based Husky Oil for five years for its Newbuild Harsh Environment Semi-submersible Rig West Mira for operating in offshore Canada and Greenland. West Mira is presently under construction at the Hyundai Samho Shipyard in South Korea, and has revenue potential of $1.18 billion for five years.  Upon delivery in Q4 2014 from the yard, the rig will commence transit to the east coast of Canada and will probably start operations in Q2 2015. Seadrill had an earlier contract with Husky Energy, and the new extension is a proof of the company’s efficiency and its successful contracts.

Its closest competitor Transocean (NYSE: RIG) is also an eye-catching stock with its strong contract backlog of $1.1 billion. The major contracts it has are The Discoverer Americas from Statoil ASA, which it contracts for $600,000 a day; The GSF Grand Banks from Husky Energy at $410,000 a day; The GSF Monarch to work in the North Sea at $162,000 a day; and Transocean Winner to work in the North Sea at $461,000 a day. Additionally, the company is perfectly managing its assets by selling its lower specification assets to Shelf Drilling, a deal worth $1.05 billion.

Another competitor of SeaDrill, Noble Corp. (NYSE: NE), is the largest owner of worldwide offshore drilling rigs and has achieved quite an extensive geographic diversification thanks to its large fleet. It has been awarded a contract for two rigs in the Middle East, each at a day-rate of $95,500. Additionally, it has gained a three year contract with Anadarko Petroleum worth $677 million.

Acquisitions

Seadrill acquired a 33.75% stake in Asia Offshore Drilling with an investment of $54 million in 2011. Now Seadrill is planning to acquire the whole company. Under this plan it has already made five big share purchases in the last month with a mandatory offer for all the issued and outstanding shares of AOD at a price of $28.71 per AOD share.

The acquisition will benefit Seadrill, with its strong balance sheet of cash, with $5 million and additional restricted cash of $40 million as of June 2012. The three jack-ups rigs currently under construction from Asia Offshore in Keppel FELS, Singapore will bring Seadrill’s jack-up count to 24. The three new builds are also expected to earn the same day rates as the AOR-1 with the improving fundamentals in the jack-up market. Seadrill also won a three year contract for Asia Offshore Drilling’s first jack-up new build, AOR-1, worth $236.50 million, which is going to start in Q2 2013 at $180,000 per day

In another interesting transaction, Seadrill acquired the UDW semi Songa Eclipse from Songa Offshore to build up its exposure in Western Africa in the ultra-deepwater market. The deal, worth $590 million, will increase SeaDrill’s fleet in Angola and also enhance its exposure with Total. The Songa Eclipse rig was completed in the Jurong shipyard in Singapore in 2011 and is presently operated by Total off the Angolan coast on a fixed contract ending in Dec. 2013, with an option to extend the contract for another year. This option can be exercised three times.

Divestiture

Malaysia’s biggest oil and gas company, SapuraKencana Petroleum Berhad, agreed to buy Seadrill’s tender-rig operations in a $2.90 billion deal. In addition to its 6.4% stake, Seadrill will receive $350 million in new shares of SapuraKencana. With this deal both companies will seek to further expand the subsequent success of their operations in Brazil, where they have a joint venture for 3 Pipe Laying Support Vessels (PLSV0 contracts by Petrobras) awarded in 2011. The companies have also decided to enter into another JV for wireline services expansion in the Far East.

The overall market scenario is clearly on an upswing, resulting in high day rates for all types of rigs across the industry. The ever-growing new discoveries in ultra-deepwater drilling reflect a potential of growth in the sector considering the increasing demand for rigs.

Considering the above factors, Seadrill will certainly see solid financial metrics backed up by its new deals. Despite being a very young company Seadrill is financially and fundamentally stable. It has a gross margin of 62.53%, more than its industry peers, and a higher dividend yield. A good future contracts position locks its future revenue streams and limits the risks. Thus, this company provides a good buy point for a long term investment.


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Transocean and Seadrill. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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