SeaDrill Focuses on Expanding Moat and Its Actions Will Benefit Stockholders

One of SeaDrill’s (SDRL) strongest competitive advantages is its large fleet of very modern offshore rigs. The company currently owns and operates the newest fleet in the industry and management seems to be very determined to keep it that way. SeaDrill has executed a few actions in the past few weeks that show how committed this company is to retaining its moat over its competitors and this commitment could benefit the company and stockholders.

On June 9, 2011, SeaDrill announced that it has ordered a new semi-tender rig from Keppel FELS (KPELF.PK) in Singapore. This $200 million rig is expected to be available for deployment in the second quarter of 2013. SeaDrill currently does not have a contract with any customer for the use of this rig but I have confidence that the company will be able to immediately put it under contract once construction is complete.

SeaDrill announced on June 21, 2011 that it has entered into a $73 million deal to sell the jack-up West Janus rig to Harrington LLC in Dubai. SeaDrill will report a gain of more than $50 million on this deal. This is, quite simply, an excellent deal for SeaDrill. West Janus is currently contracted out to PCPPOC until August 2011 at a dayrate of $149,500. The sale of the rig will proceed once that contract ends. SeaDrill will thus continue to earn money off of the rig for the next two months. In addition to this, SeaDrill will report a gain of more than two-thirds of the selling price. This is a very impressive gain for such an old and heavily depreciated rig. The West Janus rig was constructed in 1985 and is one of the oldest rigs in SeaDrill’s fleet. The sale of this rig reduces the average age of the company’s twenty remaining jack-up rigs to 2.6 years. After West Janus is sold off, the 1993-built West Epsilon will be the only jack-up rig built prior to 2006 in SeaDrill’s fleet.

SeaDrill continues to show commitment toward maintaining its competitive advantage in the form of its modern fleet. The company also shows the ability to dispose of old rigs in the ways that best benefit shareholders. SeaDrill is selling off the 2010-built West Juno jack-up rig for $248.5 million, a price that gives the company a gain of approximately $18 million. The sale of West Janus gives the company a gain of $50 million.

This money is newly available to be put to other uses. It also slightly increases the company’s liquidity as it transfers capital out of illiquid assets and into other investments, which may or may not be more liquid. The company could also use the money to pay down some of its debt or continue the stock buybacks that it was conducting up until the middle of May to reduce the dilution effect of its convertible bond conversion. The company could also use this money to continue expanding its fleet with new rigs. SeaDrill may also return this money to shareholders in the form of dividends. All of these uses ultimately benefit both the company and the shareholders.

Disclosure: I am long SDRL.