Pat McKeough responds to many requests from members of his Inner Circle for specific advice on specific stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week we had a question from an Inner Circle member about an offshore drilling company that has grown quickly in less than 10 years in business. Pat looks at the advantages Seadrill derives from its modern, high-quality drilling rigs as well as the pressure building new rigs puts on the company’s balance sheet. He also examines a recent deal Seadrill made with Russian oil producer Rosneft and the complications that may arise from European Union economic sanctions against Russia.
Q: Hi Pat: What are your thoughts on Seadrill? Thanks.
A: Seadrill Ltd. (symbol SDRL on New York; www.seadrill.com) is a leading offshore drilling company. The Norway-based firm has a fleet of 53 drilling rigs that can operate in shallow to very deep water. It also has 19 more rigs under construction, most of which will be ready within two years.
Seadrill only started up in 2005, so it owns modern, high-quality drilling rigs that are in strong demand. As a result, the company’s utilization rates are high, in the 93% to 97% range.
In January 2014, Seadrill sold shares of subsidiary North Atlantic Drilling (New York symbol NADL) to the public. This business operates eight rigs that specialize in deepwater drilling in harsh environments, like the North Sea and Arctic Ocean. Seadrill now owns 70% of North Atlantic Drilling.
In the three months ended March 31, 2014, Seadrill’s revenue fell 3.5%, to $1.22 billion from $1.27 billion a year earlier. That’s because major oil exploration companies are spending less on deepwater projects, which has hurt Seadrill’s rental rates.
Earnings jumped to $3.1 billion, or $6.23 a share, from $440 million, or $0.85 a share. However, the latest results include a $2.3-billion accounting gain after the company lost its right to appoint directors to a 48.3%-owned subsidiary. Seadrill now treats this business as an affiliated firm.
The shares moved up recently after Seadrill and North Atlantic Drilling announced a new alliance with Russian oil producer Rosneft.
Energy stocks: Operating near full capacity, Seadrill has $18.8-billion order backlog
Under the terms of the deal, which runs to 2022, Rosneft will lease nine offshore rigs, and North Atlantic Drilling will help Rosneft with its onshore drilling projects. In addition, Rosneft will buy an undisclosed stake in North Atlantic Drilling. However, Seadrill will remain North Atlantic Drilling’s majority shareholder.
The three companies will finalize these agreements later this year. However, economic sanctions by the U.S. and European Union against Russia for its annexation of Crimea could force Seadrill and North Atlantic Drilling to renegotiate some of the terms.
Seadrill’s long-term debt of $10.7 billion is 57% of its market cap. The company recently raised its quarterly dividend by 2.0%, to $1.00 a share from $0.98. The new annual rate of $4.00 yields a high 10.6%.
The company continues to operate near full capacity, thanks to exploration successes in big offshore fields in West Africa, the Gulf of Mexico and off the coast of Brazil. It also has an $18.8-billion order backlog.
In the Inner Circle Q&A, Pat considers Seadrill’s planned expansion of its fleet of drill rigs in light of its large debt. He also looks at the company’s earnings outlook and whether the shares can keep rising and the company can keep its dividend high. He concludes with his clear buy-hold-sell advice on this stock.
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Pat McKeough responds to many requests from members of his Inner Circle for specific advice on specific stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
