By Matt Doiron
Offshore driller Seadrill Ltd (SDRL) was up 8% in 2012 and has been about even with the S&P 500 year to date. In the third quarter of 2012, Seadrill experienced a 5% increase in revenue compared to the same period in the previous year. Operating income was down slightly; while the company's earnings were up in percentage terms, this was primarily due to a large loss on derivatives in the third quarter of 2011. In the first nine months of the year, financial items have been more or less a wash and so pretax income has been more or less equal to operating income. Earnings per share in that period have been $2.36, which annualizes to $3.15 and that in turn implies a P/E of 12. That is also the multiple on Wall Street analyst consensus earnings for 2013; with moderate growth expectations for the next several years, the five-year PEG ratio is 0.7.
Seadrill's most recent dividend payment was $1.70 per share, but that was due to the company moving its dividend payment from early 2013 into December 2012 as a courtesy to shareholders experiencing higher tax rates on dividends in the current year. The previous three dividend payments varied between 80 and 97 cents; assuming that Seadrill makes dividend payments of 85 cents per share, the current annual yield is 8.8% (with the note that shareholders will not receive the next scheduled dividend payment). That should certainly be appealing to income investors, even with the higher tax rate, as low interest rates have reduced yields on fixed-income investments.
Renaissance Technologies, whose founder Jim Simons is now a billionaire, owned 1.6 million shares of Seadrill at the end of September; this was a large percentage increase from three months earlier (see more of Renaissance's stock picks). Billionaire George Soros was also buying, initiating a position of about 320,000 shares between July and September (find more stocks Soros was buying).
Other offshore drilling companies include Noble Corporation (NE), Transocean LTD (RIG), and ENSCO PLC (ESV); because Brazilian oil production is dependent on offshore, we can also include Petroleo Brasileiro Petrobras SA (PBR) as a comparable company. Seadrill finds itself at the higher end of the range of 2013 earnings multiples formed by these companies; Transocean, which is often considered the market leader in the industry but has been tarnished by its association with Deepwater Horizon, joins it with a P/E of 12. Activist investor Carl Icahn is reportedly buying into Transocean (check out Icahn's other recent moves), which has been seeing strong revenue growth and has even more praise from the sell-side with a PEG ratio of 0.5.
Noble and Ensco reported double-digit revenue growth rates in their most recent quarter versus a year earlier, though in Noble's case this was actually accompanied by lower earnings. The earnings multiples here are in the 9-10 range in terms of 2013 consensus, so there is a bit of a discount to Seadrill, although neither has a particularly high dividend yield. Petrobras is of course exposed to a single geographic market, though of course if an investor is bullish on Brazil that might be considered a positive feature. Down 37% in the last year, while the decline in net income has been more modest, Petrobras now carries trailing and 2013 earnings multiples of 14 and 8 respectively.
The value case for Seadrill isn't particularly strong, but it's also not grossly overvalued compared to its peers (or in absolute terms). As a result we think that it might be worth considering as an income stock, with our primary objection being that drilling activity, even worldwide, might be too volatile a business for investors depending on stable dividend checks and a stable stock price.