We maintain our bullish stance on Seadrill (NYSE:SDRL) based upon its quality of asset base, high dividend yield, attractive contract backlog, and continuous focus on growing fleets. It is highly attractive to dividend growth investors, with a dividend yield of 8.2 percent, in comparison to the industry average of 1.8 percent. The company's recent initiative to relocate its business operations from Norway would bring logistic efficiencies and enable the company to attain more potential customers.
The company's modern fleet is enjoying high demand in the market, after oil exploration companies increased their production with increasing oil prices. As the total rig counts in the Middle East and Africa have increased by 31% and 38% over the course of the last one year, we believe the company has the potential to capitalize on growing energy demand in the coming years.
Seadrill, based in Bermuda, is an offshore drilling services provider. The company provides wells maintenance, drilling and project completion services. According to market capitalization, the company is the largest drilling company in the world. The company has 67 fleet units. 19 of its rigs are under construction, and going forward, it aims to enhance its business, with the expected increase in oil and gas demand.
The company has decided to replace its CEO and relocate its business outside Norway to capitalize on its growth plans. Its board believes that the initiative of bringing the company either to Dubai, Houston, London or Singapore, will bring more customers into its network. In our opinion, the replacement of its CEO Thorkildsen with Fredriksen is a positive development to sustain its competitive position. The new CEO has already served at various capacities in top companies including Archer, Seadrill, Tandberg ASA (TAA.OL), CISCO (NASDAQ:CSCO) and McKinsey & Corporation.
The stock has shown a considerable upside of 21% in the last one year. SDRL's 50-days and 200-days moving averages are $40 and $37, respectively. As we have already mentioned in our previous article, the stock has a considerable potential to show a further upside. We believe its shares will rally because: 1) the company has been continuously increasing its fleet to cater to the upcoming increasing demand - It has recently purchased $600 million of Ultra-deepwater drill ship to enhance its fleet drilling capacity, 2) its business relocation will further improve its profitability position and help generate high profit margins.
Source: Google Finance
The stock is trading at a forward P/E of 11.3x, at a premium when compared to its peers Transocean's (NYSE:RIG) and Ensco's (NYSE:ESV) forward P/E multiples of 10.3x and 8.1x, respectively. It is trading at EV/EBITDA of 12.3x, P/S of 4.6x and P/B of 3.05x. The valuations are on the higher side vs. its competitors. However, the company is well positioned to outshine its competitors in terms of growth. The company's five-year expected PEG ratio of 0.44 depicts that investors can buy growth cheaply. Therefore, we recommend investors to take a long position in the stock.
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Source: Yahoo Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.