Why Seadrill? The company reports a revenue backlog of $21.3 billion, which is larger than the backlog for ENSCO PLC (NYSE:ESV) or Transocean LTD (NYSE:RIG). This is driving Seadrill’s expansion of its rig fleet. As of November 2012, most of Seadrill’s rigs are in operation with deep water rigs going for as much as $642,000/d. Most rigs are collecting higher rates than in previous contracts.
Seadrill sells at a PE of around 13, not too expensive. Earnings growth this past year came in at 25%. For income-oriented investors, Seadrill pays a 8.8% dividend. The dividend has grown over the past three years with special dividends being paid every other year.
Why not Seadrill? The debt the company bears hinges on continued demand for oil and drilling rigs. If the price of oil drops and exploration activity goes down with it, Seadrill could face a situation not dissimilar to that faced by Chesapeake Energy not too long ago. Relatedly, if utilization rates or lease rates decline, that debt will prove a significant liability.
A safer play?
Energy Transfer Partners LP (NYSE:ETP) as been an anomaly in the natural gas pipeline business. It pays about a 7.8% dividend, but the dividend hasn’t increased since 2008. Energy Transfer looks like a turnaround story backstopped by a big dividend.
Specifically, Energy Transfer is changing its business model to a fee-based leasing of its pipelines rather than an energy sales model. This should help generate guaranteed revenue, which in turn should help reduce financing costs. Also, Energy Transfer bought a stake in Sunoco, giving them access to Eagle Ford shale oil. Lastly, Energy Transfer spent over $3 billion in the past three years building out the company. These investments and business changes bode well for Energy Transfer. How well the company executes its new business model and oil transportation opportunities remains to be seen.
Final Foolish Thoughts
In this age of historically low interest rates, investors looking for income to replace interest income on CDs or bank accounts seek high dividend stocks. Utility stocks like Exelon are generally thought of as safe investments. While Exelon won’t likely go bankrupt anytime soon, its dividend is about to take a 41% hit. Seadrill has a lot going for it and if investors are willing to watch the price of oil and Seadrill’s utilization rates, this company may prove a satisfactory balance of risk and income. Energy Transfer Partners has been steadily paying a dividend for years. As the company transitions from one business model to another, I suspect Energy Transfer will continue paying at least that same dividend. If management can pull off this transition and the Sunoco acquisition delivers significant additional revenue, investors in Energy Transfer Partners could see a nice dividend go even higher.
The article Not All Dividends Are Desirable originally appeared on Fool.com and is written by Robert Zimmerman.
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