As one of the largest offshore drillers in the world, Seadrill operates in the shallow, mid- and deepwater markets. But the ultra-deepwater market is the fastest growing, and that’s where Seadrill is looking to capitalize.
Seadrill will also continue to capitalize on rising day rates as it renegotiates existing contracts and enters new ones. On July 11, Seadrill announced it had secured a 30-month $214 million contract for its West Freedom jack-up rig. That equates to a day rate of $234,000, which is a huge premium to its current day rate of $155,000, a great example of the cyclical nature of the drilling industry and the impact that a bullish trend can have on earnings.
Seadrill also boasts a dividend yield of 8.4%, more than three times the current return on the 10-year Treasury. That has led to speculation about the sustainability of Seadrill’s dividend. For the time being, higher day rates are driving the company’s cash flow to support a high dividend yield. But Seadrill is a leveraged play, with $8.8 billion in long-term debt and $816 million in cash and equivalents, increasing its vulnerability to economic cycles.
With Seadrill investing in future growth and capitalizing on rising day rates, analysts are bullish, projecting earnings growth of 29% in 2013 and 30% in 2014. Seadrill’s earnings are expected to grow 22% a year over the next five years, a huge premium to the industry average of 12%.
Risks to Consider: The energy industry is particularly sensitive to global economic growth. Seadrill is also a leveraged play in the offshore drilling industry, making the company more vulnerable to economic cycles.
Action to Take –> Energy stocks have been out of favor for the past two years, with many leading names trading near record-low valuations. But with natural gas trading well above its multi-year low and crude breaking above $100 for the first time in two years, this could be a long-term turn in the market. Seadrill is a great way to play that trend. In spite of the company’s bullish outlook, Seadrill’s forward price-to-earnings ratio of 15 is in line with its peer average of 14 and just a small premium to its 10-year average of 12. When you add its impressive 8.4% dividend yield, Seadrill makes for a compelling combination of growth and income.
P.S. — Last year, Seadrill Partners LLC (NYSE:SDLP) went public after splitting from its parent company, Seadrill. Since then, the stock has risen more than 20% and offers a generous yield of 5%. These “Rich Parent” stocks are one of our favorite ways to profit in the market right now. One is a low-risk play that has already returned 333% since going public in 2008, while another yields nearly 10%. To find out how to get the names of 20 of our favorite “Rich Parent” MLPs, go here.
This article Why $100 Crude Could Send This 8.4% Yielder Soaring originally appeared on StreetAuthority and is written by Michael Vodicka.
Michael Vodicka does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of SDRL in one or more of its “real money” portfolios.
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