Seadrill: Is It A Golden Opportunity?

| About: Seadrill Limited (SDRL)

Seadrill (NYSE:SDRL), a large offshore driller, has seen its stock decline 14% in 2014, and a total of 23% over the last three months. Needless to say it has been a rough quarter for Seadrill, and other drillers, as lower utilization and rates have weighed on the industry. However, despite the possibility of short-term problems, does the upside now warrant a long-term investment?

What are the problems?

If you want to know what's pushed drillers lower in recent months all you'd have to do is look to the analyst reports, as many of these reports are responsible for widespread selling.

It really began with Noble Corp's (NYSE:NE) earnings, as the company noted fewer contract opportunities after years of oil and natural gas discoveries. Raymond James then cut its 2015 EPS outlook by 18%, noting a drop in utilization, followed by Barclays predicting an average 35% drop in stocks within this sector.

Yet, despite all of the pessimism, and the large stock losses, each and every analyst, and companies to report earnings, maintain that these issues are temporary, or as Noble said, "a pause in the cycle."

Investing for the future

As a result, this brings to question a very important topic when investing, and that is planning for the future, but not necessarily being worried about today. Specifically, Seadrill looks appealing, a company that's grown at a three-year annualized rate of 11.2%. And on Tuesday the company executed a new contract in Mexico that could create an additional $1.8 billion over the next six years; which is something that has become the norm for Seadrill during its growth period.

With that said, growth is not the problem with Seadrill, but rather fears that its dividend will soon be cut, as Seadrill's operations alone do not support its payout. Instead, the company relies on the sale of equity and convertible debt, as noted by Wells Fargo.

Granted, Seadrill now pays a forward dividend of 10.6% and is trading at just 10 times forward earnings. Hence, the question alone is whether such value, and the security provided with the dividend coupled with its recent losses, make the stock attractive despite uncertainty. My answer is yes!

A golden opportunity

First off, Seadrill is the fastest growing offshore driller in the world. It currently has 49 rigs but another 20 under construction, meaning that growth is likely to continue. This theory is supported with the company's own guidance, which calls for 70% EBITDA growth from 2013 till 2016.

With that said, Seadrill does have a 77% payout ratio and does use debt to pay its dividends, but with such growth the company will easily be able to pay its dividend on operating profits in the near future, most likely before 2016. As a result, my conclusion is that fears surrounding Seadrill are overblown significantly.

The company hasn't even reported earnings yet, but has fallen on the earnings of peers and guidance of analysts. In my opinion, it just doesn't make sense. Seadrill is growing by choice, spending money in a low interest rate environment, and setting a dividend that it can afford long-term. The company doesn't have high maintenance expenses due to its rigs being mostly five years old, versus its peers with 20 year old rigs.

The only caution for investors has nothing to do with this upcoming earnings report, but rather the next year. Seadrill does need rig utilization between 90%-95% to operate smoothly, and while one quarter below this point won't hurt the company, a year or two could change the outlook. Still, with a debt-to-assets ratio below 55% Seadrill has the leverage to raise more debt if needed, or if the industry outlook worsens.

As a result, I see no risk of the dividend being slashed. Instead, I foresee Seadrill continuing to construct its 20 new rigs, monetize its existing 49 rigs at a higher level than companies with older rigs, and grow rapidly until soon being able to easily afford annual dividends that investors have grown to love. Bottom line: This is a great growth story, and what most believe to be a short-term cyclical pause has created a perfect opportunity to buy cheap for the long-term.

Disclosure: I am long SDRL. 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.