This Offshore Oil Drilling Contractor Offers a Sustainable Dividend
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Seadrill (NYSE: SDRL) is one of the biggest companies operating deepwater drilling platforms in the entire world and is, therefore, a top choice for investors seeking to enter this market. Its headquarters are located in Norway, but its main operating facility is in Bermuda. From there, Seadrill rents its oil rigs to companies anywhere in the world.
It is a favorite for investors due to the company's incredible growth in dividend payouts. Right now, the stock is paying a return on investment of approximately 8.4% or higher, which is truly impressive compared to other similar companies. Dividends are expected to increase even more as the company continues to expand its fleet and thus overall income and cash flow.
Seadrill dividend profile
Seadrill has turned out to be the best bet for income seekers. Though, in the past five years, it has been able to enlarge its dividends by 46.7%. At the moment, the company offers a quarterly dividend of $0.88 /share, yielding at 8.4%. Its payout ratio based on dividends stands at 71%.
Are the dividends safe?
The company has a presence in all significant offshore regions. It is the second-largest operator and owner of ultra-deepwater units and the largest operator of modern premium jack-up rigs. After the sale of its tender-rig business, the company presents substantial potential to grow its jack-up and ultra-deepwater segments. Seadrill is seeking to grow both segments either organically or through acquisitions.
Recently, the company reported first-quarter results with a record EBITDA of $713 million and net income of $440 million. Its top-line growth is phenomenal as Seadrill is enhancing economic utilization of both floaters and jack-up fleets. This strong top-line growth is backed by its smart investment strategy.
During the quarter, the company secured a two-year extension for the ultra-deepwater semi-submersible rig, West Leo, with projected revenue of $430 million. It also completed the acquisition of the ultra-deepwater semi-submersible rig, Songa Eclipse.
With the improving underlying operational performance in the jack-up and ultra-deepwater segments, as well as new-builds commencing operation, the company anticipates growing its revenue by 8% this year. To top things off, it expects to increase its revenue by 20% as new rigs come online. Additionally, Seadrill has the potential to generate hefty cash flow. In the recent quarter, its free cash flow was standing at $41 million when dividends accounted for only $16 million. I believe it has strong potential to provide sustainable returns for investors.
Its main industry peers are Transocean (NYSE: RIG) and Ensco (NYSE: ESV). Transocean is an international provider of offshore contract drilling services for oil and gas wells. Its deepwater expertise has made it one of the best drillers to capitalize on several offshore drilling technologies. Transocean offers a quarterly dividend of $0.56 /share.
Its revenue growth has been slow over the past few quarters. At the end of the recent quarter, it had generated revenue of approximately $2.2 billion, which is down from last year’s quarter of $2.3 billion. Revenue declined due to lower revenue efficiency, mainly on ultra-deepwater floaters. Overall, it is in a stable situation to provide sustainable returns for investors
Transocean has operations all around the globe. The major portion of its revenue comes from Brazil, the U.S. Gulf of Mexico and Norway. Many regions, like the Pre-Salt region, Gulf of Mexico and Barents Sea in Norway, are presenting plenty of growth opportunities for deepwater and ultra-deepwater drillers over the next decade. These regions have opportunities to boost oil production. This will create positive circumstances for drilling companies. Transocean is one of the best drilling companies to have positioned its fleet to concentrate on difficult environments and ultra-deepwater drilling.
Ensco provides offshore contract drilling services to the international oil and gas industry. Currently, Ensco offers a quarterly dividend of $0.50/share. The company has shown solid financial performance over the years. Recently, it announced Q1 results with 13% growth in overall revenue. The increase was driven by the average day rate and a 6% increase in floater rig days as new rigs were added to the active fleet.
Furthermore, its low-cost business approach results in industry-leading operating margins. In the trailing-12 months, its operating margin stands at 36.6% when the industry average is only 7%. I think Ensco has considerable cost-cutting opportunities on hand, which can increase substantial amounts of value. With a recent 33% increase in dividend, Ensco looks like an attractive choice for investors.
Seadrill is one of the best among these three companies. It is making massive investments in growth opportunities. The company is poised to increase its profitability and dividends as its new-build assets are adding additional sources of revenue and income. With the recent massive investments, Seadrill is well positioned to show top-line growth. Along with solid top-line growth, Seadrill is in a stable financial situation to maintain dividends. Its dividends are safe as its free cash flow provides full coverage to its dividends.
siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!