Pat McKeough responds to many personal questions on investing in stocks and other investment topics from the members of his Inner Circle. 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 the Inner Circle. This week, one Inner Circle member asked about one of the more recent energy stocks on the scene. This specialist in deep-sea drilling has only been in business for seven years, which gives it the advantage of having modern high-quality rigs that are in demand. Pat assesses the company’s ability to keep adding to its record backlog and maintain its high dividend yield. Q: Pat: Can I have your recommendation on SeaDrill? Thanks. A: SeaDrill Ltd., $39.82, symbol SDRL on Nasdaq (Shares outstanding: 467.1 million; Market cap: $18.6 billion; www.seadrill.com), is a leading offshore drilling company. Norway-based SeaDrill has a fleet of 66 drilling rigs that can operate in shallow to very deep water. SeaDrill only started up in 2005, so it owns modern, high-quality drilling rigs that are in great demand. As a result, the company’s utilization rates are high, in the 93% to 97% range. SeaDrill continues to operate near full capacity thanks to exploration successes in big offshore fields in the Black Sea, the Mediterranean, West Africa, the Gulf of Mexico and off the coast of Brazil. As well, SeaDrill’s contract prices remain high, even with lower oil prices. In the three months ended June 30, 2012, SeaDrill’s revenue rose 12.8%, to $1.1 billion from $995 million a year earlier. That’s mainly because higher oil prices pushed up demand for the company’s rigs. The company has a record order backlog. Even with the revenue increase, earnings fell 8.6%, to $562 million from $615 million. Earnings per share fell at a faster pace of 18.7%, to $1.09 from $1.34, on more shares outstanding. The company had fewer gains on its investments during the quarter; this was the main reason for the earnings drop. Operating earnings, which exclude these items, rose 12.3%, to $483 million from $430 million.
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Shares have rebounded from low point following Deepwater disaster
SeaDrill’s shares have rebounded strongly from the low of $17.81 they reached in the wake of the April 2010 explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico, which caused a massive oil spill. The company recently raised its quarterly dividend by 2.4%, to $0.84 a share from $0.82. The new annual rate of $3.36 yields a high 8.4%. SeaDrill’s long-term debt of $9.2 billion is high at 49.5% of its market cap, and the company is borrowing more funds as it builds new rigs. That adds to its risk. In the most recent Inner Circle Q&A, Pat looks at whether SeaDrill can continue to operate at or near full capacity and whether its forecast cash flow is sufficient to maintain its high dividend yield. He concludes with his clear buy-hold-sell advice on this stock. (Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.) COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members What area do you think will make the biggest contribution to energy supply in the next few years—offshore drilling in deep sea locations, or Canada’s oil sands? Are there stocks in either area that you think offer clear advantages for investors? Let us know what you think.
