On May 14, 2012, SeaDrill Ltd. (NYSE:SDRL) announced that it is increasing its regular dividend to $0.82 per share and paying a $0.15 per share special dividend on top of that. SeaDrill had an EPS of $0.89 over the same period. Considering that the regular and special dividend for the quarter total $0.97 per share, the question on every investor's mind should be, "Can the company afford this?" This article will attempt to answer that question.
SeaDrill had 467,966,574 shares issued at the close of the first quarter of 2012. Thus, the company will pay out approximately $383,732,590 in the form of a regular dividend to shareholders. SeaDrill had an operating cash flow of $454 million during the same time period. It does appear that SeaDrill can easily cover its regular dividend out of operating cash flow. The company did have negative free cash flow during the period, as is typical for it. SeaDrill had total capital expenditures of $538 million during the first quarter, defined as the sum of "Additions to new buildings" and "Additions to rigs and equipment" from its Statement of Cash Flows. This gives the company a negative free cash flow of $83 million. The company financed the difference through a small increase in debt and a private placement of new shares in North Atlantic Drilling (OTCQB:NATDF), which allowed that company to repay some of the debt that it owed to SeaDrill. That caused SeaDrill to have some cash coming in, even though it is not reflected in either operating cash flow or free cash flow.
SeaDrill's cash flow thus appears to be sufficient to cover the regular dividend. The company's strategy is to pay out a significant portion of its operating cash flows to shareholders in the form of dividends while financing its capital expenditures (new rigs, mostly) with debt. That is clearly visible here. The company typically runs negative free cash flow due to its rapid fleet growth. It is an aggressive strategy, but one that has been working out quite well so far. It is important to remember that offshore drilling is a cyclical industry, but SeaDrill has historically reduced its dividend whenever cash flow falls. It is likely that the company will reduce it again should operating cash flows decrease at some point in the future.
So, SeaDrill certainly appears to be able to easily pay its regular dividend. But what about being able to pay the special dividend? First, let's have a look at what that special dividend is.
SeaDrill owns 301,132,020 shares of Malaysian oil services provider SapuraCrest Bhd. In June of 2011, Integral Key Sdn Bhd made a successful offer to acquire SapuraCrest for total consideration of RM5.87 billion or RM4.60 per share of SapuraCrest. Integral Key, which has renamed itself to SapuraKencana Petroleum Bhd., will be paying for SapuraCrest through a combination of cash and stock. Eighty percent of the required payment will be in stock and the remaining 20% will be in cash. As a shareholder of SapuraCrest, SeaDrill is naturally entitled to receive a portion of the total payment. After the merger is completed in mid-May, SeaDrill will own approximately 11.8% of the outstanding shares of SapuraKencana Petroleum. SeaDrill will also be receiving 20% of the total payment in cash. This payment will be approximately $70 million depending on exchange rates.
It is this $70 million that SeaDrill is going to use to pay the one-time special dividend of $0.15 per share. As previously mentioned, SeaDrill had 467,966,574 shares outstanding at the end of the first quarter. Therefore, this $70 million works out to approximately $0.15 per share. This is the exact amount that SeaDrill is paying out as its special dividend.
SeaDrill certainly appears to be able to support this new increased dividend solely from the cash that it receives from a merger involving a company in its portfolio. This is an aggressive strategy, since SeaDrill is rapidly growing its business with debt while paying out a significant portion of its operating cash flow through dividends. For now at least, it does appear that the company can afford its latest dividend hike.
Disclosure: I am long (SDRL).