Seadrill Looks Attractive With Dividend Yield, Backlog, And New Equipment

| About: Seadrill Limited (SDRL)

Seadrill (NYSE:SDRL) has seen its shares climb over 26% (including dividends) since the start of the year. Today, the company reported third quarter earnings that missed analysts' estimates. Despite the miss, shares still offer a great price to earnings valuation, dividend yield, and future growth with a strong backlog and new equipment.

In the third quarter, Seadrill reported revenue of $1.09 billion. Analysts on Yahoo Finance had expected $1.11 billion for the quarter. Net income was reported at $216 million, representing $0.40 in earnings per share. Analysts were looking for $0.68, a decrease from last year's $0.72.

In the last quarter, Seadrill spun off Seadrill Partners (NYSE:SDLP). The spin-off raised $207 million for Seadrill after pricing at $22.00 per share. Shares of the new company are close to $26, representing a small gain over the quarter for Seadrill, which still owns 75.7% of the company.

Seadrill ended the third quarter with 48 drilling units. Seadrill now has 22 units under construction. The majority of these units will be ready for ownership by the company in 2013 and 2014, representing large revenue and earnings potentials in the following two fiscal years. The 22 units break down as:

· 7 ultra deepwater drillships

· 2 ultra deepwater rigs

· 1 harsh environment jack up rig

· 7 premium environment jack up rigs

· 1 semi tender rig

· 4 tender rigs

Fourteen of the 22 new units have already been signed to long-term contracts. Seadrill continues to have a large occupation rate for all of its drillships and rigs. A total of $7.5 billion is being spent on the 22 new units, of which $1.6 billion has already been paid. Seadrill had a record backlog of $21.3 billion as of November 23rd.

During the third quarter, Seadrill declared a quarterly dividend of $0.85. The new dividend adds on to three previous quarterly payouts of $0.80, $0.97, and $0.84. For the year, Seadrill will pay out $3.46 per share in dividends, representing a yield of 8.8%.

Estimates for the fourth quarter call for $0.77 in earnings per share, from $1.17 billion in revenue. On the fiscal year, analysts see the company posting earnings per share of $3.02, an increase from last year's reported $2.94. In the following fiscal year, analysts see the company posting earnings per share of $3.42. Shares currently trade at 13x this fiscal year's earnings, and 11x next year's targeted earnings.

At the beginning of the year, I selected Seadrill as one of my "Top 10 Stocks for 2012". The top three reasons I selected the company were: dividend yield, newer rigs, and increased deepwater drilling. Shares are now up 26%, including dividends. I set a price target of $40 at the start of the year, and that is pretty close to what shares are currently trading at. I still think Seadrill shares are a buy going into 2013.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SDRL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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