SeaDrill Works Magic with High Capability Rigs

| About: Seadrill Ltd. (SDRLF)

The news earlier this week that a big oil discovery had been made in the Gulf of Mexico was great for the owners of that property: Chevron (NYSE:CVX), Statoil (NYSE:STO) (which I used to own, dangit), and Devon Energy (NYSE:DVN) but it was also good for the owners of deepwater drilling rigs.

And the more that E&P companies focus on deep water projects, the more SeaDrill (OTC:SDRLF) and the other owners of these rigs benefit, but SeaDrill is in a unique position.

There are many types of ocean drilling rigs, but the main ones of significance are jackups and floaters. Jackups sit on pillars resting on the ocean floor and are generally used for depths of up to a few hundred feet, and there are hundreds of these rigs around the world. Semisubmersibles and drillships are floating rigs that can handle the deep water requirements of drilling in water depths of 3,000 meters or so, and there are only a few dozen of these specialized rigs in existence, even fewer if you're looking for floaters that can handle harsh environments like the North Sea.

As high energy prices (and even if they dip to $50, they'll still be high enough to spur exploration) force the oil companies to look for new reserves aggressively, and most of the easy and friendly reserves are already found, the search is moving to the difficult areas of the world. Sakhalin Island off Siberia is the site of one of the most difficult drilling operations in the world right now, and it's giving Shell fits, but they're still pouring $20 billion dollars in because the world needs that oil, and Shell needs to build up reserves.

I've written plenty about SeaDrill before, and it's my largest individual stock holding. See here and here for a sampling of my fuller writeups about the company, their financial engineering, and their focus on returning value to shareholders as they build a world-class fleet of ocean rigs.But some news came out today that made me take a closer look at SeaDrill's fleet and their availability for new deepwater work a la this new Gulf of Mexico field.

Today, SeaDrill announced their first deepwater rig agreement for the Gulf, a prelminary letter of intent (not yet contracted) to put one of their semisubmersible rigs to work for an unnamed company (could even be for this new discovery, but they're not saying) beginning as soon as this newbuild rig hits the water in the second quarter of 2008. The deal will bring in $690 million over four years (with two option years), which equates to a day rate of about $473,000. This is not bad, and is a serious indication that demand for these high-capability rigs is going to continue to be very strong for at least several years.

When I saw that, I re-checked SeaDrill's fleet status (current one for September is available here as a pdf). Of the estimated 20 or so new deepwater rigs that will be coming online in the next two or three years worldwide, SeaDrill controls eight, seven of which are still available for contract at these stupendous dayrates, many more than any other drilling company.

And it's important to remember that SeaDrill and its acquired companies ordered these rigs over the last few years at prices far below what newbuilding orders are getting now from yards like Keppel Fels (OTCPK:KPELY), which I also own. If SeaDrill can work similar magic with these extraordinarily expensive and desirable rigs as they did with the SeaDrill 3 sale/leaseback by selling the rig to a finance company for twice what it cost them, then leasing it back at sweetheart long term rate, then the amount of cash that could flow from this company from 2008 forward will truly be staggering. They're also talking about possibly spinning off their more predictable cash-flow-generating tender rigs (shallower water, longer contracts) into a MLP or similar entity to free up additional cash to return to shareholders, and they continue to pursue new acquisitions, with a particular focus on getting more involved in the Western Hemisphere market.

SeaDrill has focused on the deepwater market with most of their newbuilding investment and corporate acquisitions, with the intent of building a market leader in that segment. I think they're already close to that status, and I'm looking forward to reaping the rewards of a company that is in the sweet spot of a bull market in their business, and that focuses on rewarding shareholders through careful financial management of their assets.