Seadrill Limited (SDRL) shares had been trending higher for the past few months and recently hit a new 52-week high. However, the sharp drop in the price of oil and a significant decline in the stock market over the past couple of weeks has taken a toll. Investors have been reducing portfolio risks with a potential fiscal cliff debacle looming. Plus, since tax rates on dividends and capital gains are poised to rise in 2013, some investors have been hitting the sell button on almost anything that has appreciated in value or offers a dividend. Seadrill has both a solid dividend and it has appreciated, so this has put it in the crossfires of the current market drop. However, this has created a solid buying opportunity for investors who have a longer-term outlook. Here is a closer look at the company:
Seadrill is a relatively young company and as such, it has one of the most modern fleets of drillships, jack-up rigs, semi-submersible rigs and tender rigs. It is able to charge premium rates because newer equipment is usually more efficient, less prone to mechanical failure and less expensive to maintain. Seadrill has a wide range of equipment that is contracted by many leading oil and gas companies around the world. It plans to increase exposure to ultra-deepwater rigs which command very high rates and it recently acquired a deepwater semi-submersible rig called "Songa Eclipse". Here are 3 reasons to pick up some shares in this pullback:
1) Seadrill has been raising the dividend since 2009, when it was just 50 cents per quarter. It now pays 82 cents per share on a quarterly basis. The average stock in the S&P 500 Index yields just over 2%, and major oil stocks like Exxon (XOM) yield only 2.6%. With a yield of nearly 9%, Seadrill can offer more in terms of dividend payments in a single year than Exxon shareholders are likely to see in the next three years. That kind of difference can really add up over time and it makes Seadrill shares very attractive for income investors.
2) Seadrill shares recently traded for nearly $42, but the stock has declined to just about $37. This looks like a particularly attractive buying opportunity since the stock now trades near a key support level. The 200-day moving average is $37.15, and that means the stock is likely to remain strong at these levels and possibly see a rebound from oversold conditions unless a major market correction ensues. Buying stocks near key support levels can minimize risk, while still offering significant upside.
3) On November 16, analysts at Credit Suisse (CS) upgraded Seadrill shares to outperform and set a $48 price target. The increased bullishness is based on "deleveraging efforts and ultra-deepwater rig build-out." With the stock at about $37, a rise to the $48 price target would give investors about 35% upside in addition to very generous dividend yields.
Key Data Points For Seadrill From Yahoo Finance:
Current Share Price: $37.83
52-Week Range: $31.02 to $42.34
Dividend: about $3.36 per share which yields almost 9%
2012 Earnings Estimate: $3.02 per share
2013 Earnings Estimate: $3.44 per share
P/E Ratio: about 12 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations
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informational purposes only. You should always consult a financial
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.