Growth Prospects Make Seadrill An Attractive Pick

Mar.12.13 | About: Seadrill Limited (SDRL)

Seadrill (NYSE:SDRL) is a leading offshore deepwater drilling company. The company operates a versatile fleet of 75 units for operations in shallow to ultra-deepwater areas in harsh environments and benign environments. The company owns and operates tender rigs, jack-up rigs and semisubmersible rigs. For operations in deepwater, mid and shallow areas, the company uses drillships. Seadrill has some 7,900 employees, from 50 different nationalities, operating in 15 countries on five continents.

Seadrill's stock has shown considerable volatility over the past three months, and after losing considerable value, the stock price is again on the rise. Currently, the stock is trading at $37.40 per share. However, one of the most important factors for investment in the company is its juicy dividend yield. In this article, I am mainly going to focus on the dividends and future cash flows of the company along with the growth opportunity.

Attractive dividend Yield

Seadrill is a high yielding stock, and the current dividend yield stands at almost 9.10%. The company pays out $0.85 per share in quarterly dividends. Seadrill has been increasing dividends consistently over the past three years. There have also been some extraordinary cash dividends paid over the last four years. The most recent increase in quarterly dividend came in the third quarter of the last year.

Drilling for the Future

Deep-water drilling is extremely lucrative segment at the moment. Energy companies are looking at alternative ways to replace their depleting reserves. As a result, deep-water drilling services provider like Seadrill have become extremely important players in the energy sector. At the moment, Seadrill has a record backlog of $21 billion, which provides it earnings visibility in these unpredictable times. Furthermore, the company is using its balance sheet aggressively to accumulate high-return assets. Seadrill is financing the purchase of high-margin ultra-deep water rigs by selling tender rigs. In the most recent earnings announcement, the company reported the sale of 18 tender rigs to SapuraKencana for $2.9 billion.

In addition, Seadrill has increased the stake in Asia offshore drilling to 66.16%, which has expanded the overall position of the company in the sector. Recently, Seadrill ordered two more jack-up rigs. The company exercised the option of two more jack-up rigs with the Chinese manufacturer, Dalian Shipbuilding Industry Offshore Co. Ltd. The total value of the contract is $230 million, which includes project management, drilling and handling tools, spares, capitalized interest and operations preparations. These two rigs will be delivered in the third and fourth quarter of 2015. With the addition of these two rigs, Seadrill will now have 28 jack-up rigs. As I said above, deep-water drilling is on the rise and demand for these rigs will increase. By ordering these two rigs, the company has positioned itself nicely to exploit the future demand.

Future Outlook

During the fourth quarter, Seadrill added contracts worth $2.3 billion to its backlog. Furthermore, the company entered into new contracts with the revenue potential of $600 million, which took the total order backlog of the company to $21 billion. Oil and gas companies are spending heavily on offshore drilling; as a result, Seadrill is expected to benefit in the future. These companies are actively investing in the Gulf of Mexico, West Africa, US and North Sea. As a result of this heavy spending, demand for high-margin jack-up rigs will be high in the future. Furthermore, contract rates are very strong for ultra-deepwater drillers.

According to Seadrill, currently, day rates are between $550,000 and 650,000, depending on the location. Seadrill will be able to exploit the increase in demand for ultra-deepwater floaters as six uncontracted ultra-deepwater floater will be available to the company by the mid of 2015. However, I believe the company will be able to win contracts for its currently uncontracted rigs by the delivery, as the company is currently in negotiations with a number of companies.

Conclusion

The ultra-deep water drilling boom can be exploited by investing in Seadrill. There is a lot of room for the company to grow. It has one of the biggest order backlogs in the sector. Furthermore, the experience and expertise of the company's management has positioned it very nicely. Income investors can certainly benefit from high dividend yield of the company, and with earnings visible for the future, I believe Seadrill will continue to payout high dividends. At the moment, the stock is trading at forward P/E ratio of 9.3, which I believe is not expensive, keeping in mind the growth opportunities available to the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.