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Summary

  • The offshore drilling space has acted better recently after deep sell-offs.
  • Seadrill is one of my favorite plays in the space given its growth prospects, contracts in place and valuation.
  • The shares yield a robust 11%, and should reward long-term value & income investors.

Over two months ago, I did a piece on Seadrill Limited (NYSE:SDRL), an offshore driller. At the time, the shares yielded an attractive 10%. Despite all the gnashing of the teeth in the offshore space, with day rates declining and almost all offshore plays pulling back, Seadrill has held up pretty decently.

The shares have pulled back a bit from the time of the article, and now yield 11%. However, the shares have acted much better recently, and I am glad I added some additional shares at the ~$34 a share level. In addition, the company seems to be picking up some positive catalysts. I continue to believe patient, long-term value & income investors will be rewarded by holding the shares. Seadrill continues to be a core holding in my yield portfolio.

Positive Catalysts:

The company signed new contracts and an extension on rigs today that have potential revenue of over $300mm. More importantly, the company now has 92% of its jack-up capacity contracted for 2014 and 64% for 2015, with a total order backlog for the jack-up fleet at $4.4B.

Given the company's CEO recently stated that offshore pricing should turn around in 2016 and the company could live with another $50K/day drop in rates, this bodes well for Seadrill weathering the current storm in the offshore space. The company has no rigs scheduled for delivery in 2016, but has not had to cancel any current rig deliveries.

The view that offshore drilling stocks have hit or are near bottom is echoed by Citigroup. The investment bank called a bottom in these offshore plays in mid-March. The call has been prescient so far, as almost all offshore plays have bounced over the past few two weeks.

Valuation:

The shares were cheap when I profiled Seadrill in January, they are even cheaper now given their yield. The stock sells for less than 11x forward earnings. Earnings are projected to increase some 25% this fiscal year, and another 10% to 15% gain is the current consensus for FY2015. Revenues are growing in the high teens as new rigs come online. The stock has a minuscule five-year projected PEG (.51).

The shares pay a very robust yield of 11% at current levels. The company recently upped its dividend by 3 cents a share, despite the challenges in the offshore space. This caused Barclays in late February to call the dividend "rock solid", as it noted Seadrill's vote of confidence by raising the payout, even if by an incremental amount. The mean price target by the 13 analysts that cover the shares is $43 a share, ~20% above the current price level. BUY

Source: Seadrill: Now An Attractive 11% Yielder