- Seadrill has significantly outperformed its peers over the past 5 years due primarily to its high dividend yield.
- Seadrill is the largest company on the NYSE to have both a trailing 12 month and forward 12 month dividend yield over 10%.
- The annual dividend of $4.00 per share should be sustainable through 2016.
Seadrill's (NYSE:SDRL) investment story begins and ends with its dividend. There is no stock on the New York Stock Exchange as large as Seadrill that holds a trailing and forward dividend yield above 10%. With 73% of the S&P 500 returns over the last 40 coming in the form of dividends, it's no wonder Seadrill has such a massive fan base. Seadrill has made investors a lot of money over the past 5 years through its aggressive dividend program. What's even more impressive is the company's backlog gives investors a view into future revenues that are capable of sustaining this massive dividend for at least another 2 years. This gives investors a great opportunity to lock in a 10% yield and buy additional positions on any weakness.
Source: Seadrill 1Q14 Presentation
With a current quarterly dividend at $1.00/share, Seadrill pays approximately $469 million in dividends every quarter. On an annual basis, this comes out to $1,876 million. As significant as this seems, a strong combination of contract coverage, financial flexibility and EBITDA growth will allow Seadrill to cover this dividend going forward. Seadrill projects annual EBITDA to increase significantly over the next few years to over $4 billion by 2015 and nearing $5 billion by 2016. Granted these are optimistic company projections; strong contract renewals and high dayrates for newbuilds coming online are setting up Seadrill to come close to these projections. Strong dayrates are in place for the majority of Seadrill rigs well into the future. No offshore driller the size of Seadrill has this kind of contract coverage.
Source: Seadrill 1Q14 Presentation
Contract End Date
Contract End Date
Contract End Date
Seadrill has received good news recently on its newbuild program with the West Saturn receiving a 2 year contract with a dayrate of around $680,000, including mobilization fees. At first glance, a note of concern is the vast number of newbuilds without a contract in place. While the West Mira, West Saturn and West Jupiter have received attractive dayrates, there are 15 rigs under construction without contracts. Once again, Seadrill management has shown flexible maneuvering by stating on the last conference call that several rigs slated for delivering in the second half of 2015 will be delayed up to 6 months, due to "bottlenecks with equipment suppliers and subcontractors." This "delay" gives Seadrill added time to secure contracts for their newbuilds and avoid a glut of rigs coming online without contracts and scaring investors. Seadrill has demonstrated that its rigs command a premium on the market and once the industry starts to stabilize, these rigs will be situated nicely for delivery in 2016.
Contract End Date
Management has stated they don't plan on any significant upward changes in the dividend over the next few years based on their high yield and total dividend payment. Even an annual $4.00 dividend per share should continue to give Seadrill a dividend yield significantly higher than their offshore drilling peers. Over the past 5 years, Seadrill's dividend yield has been head and shoulders above the rest and this trend is likely to continue through 2016.
Seadrill's complex structure provides the company with a high level of financial flexibility. I'll briefly explain how this structure benefits Seadrill, but for a more in depth analysis I'd recommend reading "Here's Why You Should Ignore Short-Term Fears About Seadrill" by fellow Seeking Alpha contributor IAEResearch.
% Ownership stake
Seadrill Partners (NYSE:SDLP)
North Atlantic Drilling (NYSE:NADL)
These assets give Seadrill the flexibility to drop down/sell assets while maintaining control of the asset and raising cash at the same time. The creation of Seadrill Partners, a master limited partnership, allows the company a variety of options to raise capital without having to depend on lenders approving new debt. Seadrill Partners and North Atlantic Drilling also give Seadrill added income. Both companies pay healthy dividends and as majority stakeholders, Seadrill can collect roughly $160 million a year from North Atlantic Drilling and $96 million a year from Seadrill Partners as income from dividends. In addition, these holdings can be sold at anytime to collect additional capital to pay off debt or support dividend payouts. During the second quarter, Seadrill sold 230 million shares of SapuraKencana, which raised roughly $300 million in proceeds. While it's unlikely Seadrill would completely dissolve any of these holdings anytime soon, it's always nice to have that kind of financial flexibility in your back pocket.
Any article or mention of Seadrill will always result in the discussion of debt. Seadrill is highly leveraged and has the highest debt burden in the offshore drilling industry with over $10 billion in long-term debt. The company also has the worst current ratio and debt/equity ratio in the industry. Understandably, this high debt load turns many investors off. However, if you really dig into the debt maturity timeline, it further validates the point that Seadrill can sustain their dividend into 2016. No one is questioning the fact that Seadrill has a high debt load, but the question that needs to be asked is how manageable the debt load is.
First and foremost, Seadrill management has shown they have the financial flexibility to manage debt, as they have done for the past several years. The debt maturities are also fairly modest through 2016, which again supports the dividend argument. Investors should never ignore a company's debt load. In the case of Seadrill, investors should keep an eye on contract backlog and revenue generation and revisit this issue on a quarterly to semi-annual basis to determine how sustainable dividend payments and debt load are going forward. With the information that's currently available, I believe investors can confidently rely on Seadrill maintaining their $4.00 per share dividend well into 2016. As long as Seadrill's newbuilds get decent contracts upon delivery in 2016, the $3 billion debt maturity in 2017 shouldn't pose a significant threat to dividend cuts.
Seadrill vs. Peers
When comparing Seadrill's total return over the past 5 years with other top dividend paying offshore drillers, Seadrill stands head and shoulders above the pack. The comparison isn't even close. Seadrill is one of the only major offshore drillers to actually have capital appreciation over the past 5 years, but the majority of the outperformance comes from their high sustain dividends. This high dividend yield is also what gives the stock its downward protection. With a 10% yield, investors are already drooling over Seadrill income generation. Any drop in Seadrill's stock price results in a corresponding dividend yield increase. If Seadrill's stock price dropped 5% to $35.50, the dividend yield would increase from 10.7% to 11.3%. A 10% drop in price to $33.60 would result in a yield approaching 12%. At an 11%-12% dividend yield, investors are waiting in line to lock in these high dividend rates, which in turn stabilizes the stock prices and avoids any sharp decline. Aside from a massive market sell-off or a catastrophic event, Seadrill has surprising downside protection.
My opinion of Seadrill has admittedly changed over the past several months. As I've developed a deeper understanding of the company, I see one of the best dividend paying stocks in the entire market. Based on current contract backlog, revenue and EBITDA growth, financial flexibility, and manageable debt maturities, I think Seadrill will continue to outperform the offshore drilling industry for the next 18-24 months. Investors must understand the risks of owning such a highly leveraged company, but I believe the reward far outweighs the risks. It's difficult to find many companies that continually reward shareholders through aggressive dividend payouts. This makes for loyal investors that are willing to buy more shares on weakness and therefore create a solid baseline in the stock price.
Due to the high debt and aggressive newbuild program, investors shouldn't get too complacent with this holding. Seadrill is best suited for active investors who can continually check up on the fundamentals and determine which way the company is headed. Investors who want to buy a stock and forget about it for the next 10-15 years while they collect dividend income should look at AT&T (NYSE:T) or Procter & Gamble (NYSE:PG), not Seadrill.