3. Seadrill Ltd. (NYSE:SDRL)
Forward Price-to-Earnings Ratio: 9.98
Average Upside Potential: 47.57%
Number of Hedge Fund Holders: 41
Seadrill Ltd. (NYSE:SDRL) is a global offshore drilling contractor that provides drilling services to the oil and gas industry. It owns and operates a fleet of drilling rigs, including semi-submersibles and drillships, which are used to explore and develop oil and gas fields in deepwater and harsh environments.
It has also been returning value to shareholders through buybacks as part of a $200 million program. Despite industry challenges, Seadrill Ltd. (NYSE:SDRL) has a potential FCF of $900 million, representing one-third of its enterprise value. Day rates have rebounded from lows, and it has restructured its debt and refined its fleet strategy.
The company’s recent acquisition of Aquadrill and successful jack-up sales have strengthened its position. Despite such moves, revenue fell 9.42% in the second quarter of 2024. While the company is not under financial pressure, it is strategically managing its fleet by reactivating idle rigs only when profitable contracts are secured.
On September 12, the company’s CEO expressed interest in acquiring “distressed assets” or companies with “distressed balance sheets.” It’s also interested in adding to its fleet of drilling rigs through acquisitions or partnerships. In a recent transaction, it completed the sale of 3 jack-up rigs to Gulf Drilling International for $338 million.
Later on September 17, Seadrill Ltd. (NYSE:SDRL) and Oil States formed a strategic partnership to enhance offshore Managed Pressure Drilling (MPD) operations. Oil States’ MPD Integrated Riser Joint (IRJ) system will be used on Seadrill Ltd.’s (NYSE:SDRL) West Polaris rig.
It’s a well-positioned offshore drilling contractor with a strong balance sheet and a focus on value creation. It has demonstrated resilience and a strategic approach to its business, making it a top stock to buy.
Patient Capital Management stated the following regarding Seadrill Limited (NYSE:SDRL) in its fourth quarter 2023 investor letter:
“We purchased a new energy name in the quarter, buying shares in Seadrill Limited (NYSE:SDRL). Seadrill is the fourth largest pure play deepwater drilling specialist. The company emerged from bankruptcy in February 2022 with a net cash position. The company is set to benefit from limited supply and increasing demand in the deepwater drilling rig market. Nearly half of all deepwater drilling rigs in the world were scrapped during the last decade. In addition, player consolidation puts the industry in a more rational position than we have seen historically. As land-based oil production growth comes under pressure, offshore production is receiving renewed interest. With a highly specialized rig base, the company is benefiting from increasing prices which are leading to strong FCF yields given the limited need for capital expenditures (CAPEX). The company has committed to returning 50% of FCF to shareholders via dividends and buybacks. Since September 2023, the company has repurchased 8% of shares outstanding. As old contracts roll-over and new contracts are signed at the higher day rates, operating profit and FCF are expected to expand dramatically. Seadrill could either consolidate the space or be acquired.”
