Seadrill: The Future Is Bright For This Driller

| About: Seadrill Limited (SDRL)

Seadrill (NYSE:SDRL), an offshore deep-water drilling company, has provided an attractive opportunity for the investors to pick up some shares after the recent sell-off. The company's stock had grown by about 50% in the last two years and hit its all-time high at almost $48 per share in the mid of September. However, it has come down recently and currently trades close to $39. As a result, the dividend yield of the stock has gone up, and it has become even more attractive to the income investors.

SDRL Chart

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Increased Order backlog

The company has a significant order backlog of $19.5 billion as of 22 November 2013 - the figure does not include two lucrative deals already in place. One of these deals is with Pemex worth $1.8 billion and the other one is the extension at West Aquarius, which has revenue potential of $337 million. After the addition of these deals, the order backlog would be above $21.5 billion. Seadrill already had a massive order backlog, which has been further enhanced. It is expected to get even better in the coming year as more and more oil exploration companies decide to exploit alternative reserves. The companies are currently focusing on the deep waters of Mexico, Brazil and West Africa.

Future Cash flows Will Grow

The increased order backlog discussed above shows the strength of future cash flows and its capacity to grow its dividend. The revenue backlog of Seadrill is divided into three business units - its jack-up fleet will account for $3 billion while $500 million will come from its tender units, and floater fleet has a backlog of $16 billion. The average contract duration for contracted floaters, which takes up about 82% of the existing order backlog of $19.5 billion, is 28 months, excluding the West Aquarius extension. This figure evenly spread across 28 months gives a figure of $8.3 billion of annual revenue. Moreover, jack-up fleet, with the order backlog of 3 billion, has an average contract duration of 25 months. This figure spread across 25 months gives an additional annual revenue of $1.44 billion. Looking at these figures, it is quite clear that the growth in revenues will be substantial as the company starts on these contracts.

In the fourth quarter, three ultra-deepwater drillships were to begin operations, West Vela, and West Tellus, the West Auriga, transforming a substantial amount of backlog into new revenues. Moreover, during 2014, the company expects to have a follow on contract in West Africa for the West Tellus and clarity around a contract for the West Navigator, which was expected to complete its existing contract in December 2014 and is located where numerous other lucrative opportunities exist.

Impressive Dividend Will Continue

As I mentioned above, the recent dip in price has resulted in pushing the already impressive dividend yield of 9.5%. Dividend stability is always a question for the stock paying such high dividend yield. However, looking at the future revenue and cash flows prospects, it is clear that the company has the capability to pay dividends. Furthermore, the overall cash position of the company has improved as shown by the most recent results in this report. Seadrill has managed to bring up its cash in hand to $551 million this year from $318 of last year. This makes a massive increase in the free cash flows by 73.2%. Also, this cash in hand was left after paying the dividends of $841 million, which is another example of the strong cash position of the company.


Seadrill is operating in the booming segment of the energy sector. While the other energy companies are facing stagnant growth, deep-sea drillers are experiencing impressive growth. The growth in this segment will continue in the next two-three years as the energy companies look to exploit the non-conventional reserves. Over the past three years, we have seen a lot of activity in the off-shore drilling segment and bigger energy companies are entering this arena now. As a result, I believe the cash flows for Seadrill will further improve over the next five years and the company will most likely continue to pay high-dividends. In my opinion, Seadrill is one of the best picks in the energy sector at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.