On November 11, 2013, North Atlantic Drilling Ltd. (OTCPK:NATDF) announced that it has filed the necessary paperwork to begin trading on the New York Stock Exchange. This comes as very good news for shareholders as the New York Stock Exchange offers significantly more liquidity than the Norwegian OTC market where the stock currently trades. Additionally, listing on the NYSE could potentially increase the number of possible investors as not everyone can or is willing to purchase a stock trading in the over-the-counter market. This article will take a look at the impact that the company's impending listing could have on the stock price and on current and future shareholders.
As I briefly mentioned in the previous paragraph, one of the biggest advantages that the New York Stock Exchange offers over the OTC market is liquidity. We can see this in the sheer volume of stocks that trade hands every day in the two markets. For example, North Atlantic Drilling has a 90-day average volume of 109,300 shares. This means that roughly 109,000 shares of the company's stock trade hands every day.
Source: Fidelity Investments
North Atlantic Drilling's corporate parent Seadrill (SDRL), which trades on the NYSE, has much higher volume. Approximately 1.8 million shares of Seadrill's stock trade hands every day.
Source: Fidelity Investments
Admittedly, the two companies are not directly comparable as Seadrill is a much larger company than North Atlantic Drilling with many more shares in the hands of the public and available for trading. The float represents the number of outstanding shares currently trading in the public markets. As Seadrill owns 73% of North Atlantic Drilling's total shares, the float in this case is approximately 27% of the total number of shares outstanding in the company. There are currently 57.56 million shares of North Atlantic Drilling floated and trading in the public markets. Seadrill, meanwhile, has approximately 353.28 million shares trading publicly. Thus, approximately 0.19% of North Atlantic Drilling's publicly traded shares trade hands every day. For Seadrill, the figure is considerably higher, with approximately 0.51% of the company's publicly traded shares trading hands every day.
As previously mentioned, Seadrill is significantly larger than North Atlantic Drilling, boasting a market cap of $21.61 billion to the latter's $2.24 billion. So perhaps a comparison to another NYSE-traded offshore driller of a comparable size would more effectively illustrate my point about improved market liquidity on the NYSE compared to the over-the-counter market. Pacific Drilling (PACD) is one company that can meet this criterion, as shown below:
Pacific Drilling has slightly more shares trading publicly than North Atlantic Drilling but significantly higher volume. There are currently 67 million shares of Pacific Drilling trading in the public markets. However, the company's stock has a 90-day average daily volume of 302,088 shares. Thus, approximately 0.45% of the company's total publicly-traded shares change hands every day. This is more than double North Atlantic Drilling's number. Therefore, we can reasonably draw the conclusion that North Atlantic Drilling's stock will enjoy much higher liquidity once it begins trading on the NYSE.
The increased liquidity that North Atlantic Drilling will likely have once it begins trading on the New York Stock Exchange will, at least in theory, improve the stock's price discovery. Therefore, the stock price may better reflect the true value to be found here. But, what will this ultimately do to the stock price? Will it go up, down, or stay the same? North Atlantic Drilling currently has lower growth prospects than many of its similarly sized peers such as Pacific Drilling, Ocean Rig (ORIG), and Atwood Oceanics (ATW). Therefore, it should trade for a lower valuation than those companies. However, with the notable exception of Pacific Drilling, North Atlantic Drilling is not significantly cheaper than these peer companies:
North Atlantic Drilling also appears to be comparably priced to its much larger and slower growing peers:
Therefore, North Atlantic Drilling does not appear to be significantly mispriced relative to its peers. Because of this, the improved liquidity alone is unlikely to have a noticeable impact on the company's stock price although it may reduce the volatility in the stock's price somewhat.
There is another factor that may have a positive impact on the company's share price once the stock is listed on the NYSE though. North Atlantic Drilling will be one of the highest yielding stocks trading on the exchange. North Atlantic Drilling pays an annual dividend of $0.90 per share which gives the stock a 9.17% yield at the current stock price. This yield is likely to attract income seeking investors who were previously unable to purchase the stock on the over-the-counter market. Additionally, dividend-focused mutual funds and other institutional investors may begin purchasing the stock once it begins trading on the NYSE. These investors are, in many cases, restricted from purchasing stocks on the OTC markets. Thus, all of these new investors represent a new source of demand for the stock and this may be sufficient to increase the stock's valuation and price.