Seadrill: This 10%-Yielder Is On The Move

May.27.14 | About: Seadrill Limited (SDRL)


The deep offshore drilling space has started to behave better, after apparently bottoming in March.

Seadrill, a high-yield play within the sector, has been doing better and should benefit from a huge deal with Rosneft announced over the weekend.

The deal has several positives in it for Seadrill, and should be the next positive catalyst to push the shares higher still.

A little over a month ago, on Real Money Pro at, I outlined why the deep offshore drillers were my biggest contrarian position so far in 2014. It has been a good and prescient call so far, as it appears the major drillers in my portfolio like Transocean (NYSE:RIG) bottomed in March.

One of the better performers among the offshore drillers is one that is in my income portfolio due to its high yield. It is Seadrill (NYSE:SDRL). This Bermuda-based provider of offshore drilling services to the oil and gas industry worldwide delivered some very good news to shareholders today that should be the next positive catalyst for upward capital appreciation on top of an over-ten percent yield.

North Atlantic Drilling (NYSE:NADL) signed a cooperation deal with Rosneft (OTC:RNFTF) that will make Russia's biggest oil company one of the larger shareholders in North Atlantic. This transaction should trigger a number of long-term contracts to pursue growth opportunities offshore and onshore in the Russian market through at least 2022. It should also mean initial employment of up to nine offshore rigs to Rosneft with a total commitment of 35 rig years.

This deal is important to Seadrill in two ways. First, it owns 70% of North American Drilling and benefits from the over-ten percent appreciation in those shares today. More importantly, this transaction gives the company a foothold in Russia, as well as a cash infusion that should ease concerns that the company can continue to provide such high payouts.

Even though tensions with Russia and the West are at the highest levels since the Cold War, Russia still represents huge untapped energy potential, and could be a critical customer for Seadrill for years and decades to come. Seadrill was exploring a spin-off of North Atlantic Drilling prior to this transaction that will make Rosneft one of North Atlantic's biggest shareholders. The deal could not have come at a better time, and Seadrill will still be the majority owner of North Atlantic even after the deal completes.

Even with the stock's recent bounce, Seadrill is still cheap here. With today's upward action, the shares still sport an over-10.5% yield. Revenue growth should come in the mid-teens for both FY2014 and FY2015, and the stock has a five-year projected PEG significantly below 1 (.54), almost unheard of in an entity yielding over 10%.

In addition, according to the current earnings consensus; earnings should increase at more than 25% year-over-year in FY2014, before adding another ~15% gain in FY2015. Given its growth prospects and high yield, SDRL is too cheap at 11.5x forward earnings, especially in light of this impressive new deal with Rosneft. BUY

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.