When making an investment decision, investors keep a number of factors in mind: future growth, dividends, cash generation, and earnings prospects. It is often difficult to find a company with earnings you can easily predict beyond two or three years in the future. However, a little deeper research will bring a handful of companies that fulfill the criteria. If you want to invest in a company with a visible earnings growth potential, then Seadrill Ltd (NYSE:SDRL) is the obvious choice.
Offshore Drilling is the Future
The scarcity of conventional reserves has pushed energy companies offshore, prompting a massive boom in offshore drilling. Though this sector shrank to half its previous size after the Deepwater Horizon incident, it is again gathering pace. The main drivers behind the increased activity are crude prices, deepwater’s massive oil and gas reserves, and the increasingly sophisticated technology being used.
Per capita demand for oil will remain high in the U.S. for the foreseeable future, prompting the exploitation of offshore reserves to decrease dependence on the imports. While shale gas has put the U.S. in a position to become an exporter of natural gas; the country still imports 8.49 million barrels of crude everyday. Furthermore, offshore drilling is also adding substantial amount of cash to the coffers of the U.S. government. Annual federal proceeds from leases have been as high as $18 billion in the past. As a result, the government is allowing the companies to drill in the Gulf of Mexico as well as in the Arctic waters.
Recently, ConocoPhillips (NYSE:COP) made a considerable discovery in the Gulf of Mexico. Faced with declining production and reserves, ConocoPhillips’ recent discovery at its Shenandoah well will go a long way in solving its production issues. It’s one of the biggest discoveries made in the area, and ConocoPhillips (NYSE:COP) has a 30% stake in the jointly owned project.
The other outlet for offshore drilling is Arctic waters; however, this area is proving a bit problematic for the drillers. Royal Dutch Shell plc (ADR) (NYSE:RDS.A)-A) faced problems there due to failing equipment and extreme weather conditions. As a result, the company has suspended its operations in the area, and will not be drilling in the Arctic during the current year, since the region’s volatile weather leaves only a small window available for drilling. However, Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s massive operations will offset any hit to its production from this area, and the company will come out of it relatively unscathed.
An increase in drilling activity has increased the number of rigs these companies are building, which might become a problem in the future. Consider a similar example in another sector: Before the recession, the shipping industry was prospering. But when its glut of new ships met dwindling business in the wake of the 2008 financial crisis, the industry nearly sank.
Nonetheless, it looks like we are at the start of the growth phase in deepwater drilling, and it’s unlikely we’ll see the kind of problems that plagued shippers, at least in the short-to-medium term.
Where Does Seadrill Stand?
Seadrill Ltd (NYSE:SDRL) is one of the biggest players in the sector and has an extremely strong position, with strong ties to other big energy names. Deepwater drilling is the most lucrative segment in the offshore drilling at the moment, so Seadrill is making a very wise strategic move by selling most of its shallow-water rigs and replacing these with ultra-deepwater rigs. That allows the company to secure contracts at higher day rates.
One of the most important factors for Seadrill Ltd (NYSE:SDRL) is its order backlog; the company has acquired contracts for almost all of the rigs it’s building. Order backlog for the company currently stands at more than $21 billion, which provides it earnings visibility over the next five years. Recently, Seadrill Ltd (NYSE:SDRL) secured a three-year, $662 million contract for its new drillship, which will add to its already impressive backlog. The deal was closed at the day rate of $600,000; the range in the sector is $550,000-$650,000 for such contracts.
Conclusion
Seadrill is extremely attractive to investors, thanks to its mouth-watering dividend yield. The stock yields over 9%, which is extremely handy in the current low interest rate environment. The biggest concern about a company’s dividend arises when the company is not able to generate enough cash flows to cover its payouts. However, in Seadrill Ltd (NYSE:SDRL)’s case, its lucrative contracts and hefty order backlog should ensure that the company continues to pay its sumptuous dividend.
There are a few companies that can sell their products even before manufacturing them. Having secured contracts for rigs it hasn’t even finished building yet, Seadrill Ltd (NYSE:SDRL) definitely qualifies.
The article Why You Should Invest In Seadrill originally appeared on Fool.com is written by Ishtiaq Ahmed.
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