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Seadrill could be headed for a dividend cut, Wells Fargo says

  • Seadrill (SDRL -3.3%) may fail to secure the sales prices and external financing required to sustain its current dividend as equity and asset values are slipping, Wells Fargo worries as it downgrades shares to Underperform from Market Perform.
  • The firm says SDRL's aggressive dividend policy has never been funded solely by the operations of its high-quality fleet, but instead through the sale of equity and convertible debt, equity in sponsored entities such as North Atlantic Drilling (NADL -1.3%) and Seadrill Partners (SDLP -1.5%), and the outright sale of rigs.
  • The dividends of other drillers, including Ensco (ESV -0.9%), Noble (NE -0.2%), Transocean (RIG -0.2%) and Diamond Offshore (DO -0.2%), look safer for now, the firm says.
Comments (43)
  • nuahw
    , contributor
    Comments (82) | Send Message
     
    how about not raising the dividend.....
    12 Feb, 12:26 PM Reply Like
  • u01bsb0
    , contributor
    Comments (616) | Send Message
     
    even keeping the dividend constant has a long term bad effect for SDRL as its not out of profits from operations but rather profits from selling parts of its business.

     

    RIG seems like the best choice i think as the dividend comes from profits from operations and is sustainable (even due an increase).
    Further, being the largest deepwater rig fleet they have the best exposure to profits in the future in drilling oil and gas due to the maturing fields of shallower waters. Governments are even offering incentives for exploring and drilling in deeper waters. (introduction of the frontier licences in the UKCS in 2003.
    12 Feb, 12:46 PM Reply Like
  • JD in NJ
    , contributor
    Comments (807) | Send Message
     
    Given that we had three dividend increases last year, I'm not at all certain that SDRL management concurs with this assessment.
    12 Feb, 12:33 PM Reply Like
  • wigit5
    , contributor
    Comments (3964) | Send Message
     
    Just an opinion here...

     

    medium term problem due to the oil bananza in NA shale... won't last for ever probably not past 2015. depending how much the divi is cut it may be a great opportunity to add. Management is shareholder oriented and will increase the divi again when possible.
    12 Feb, 12:34 PM Reply Like
  • Rappenco
    , contributor
    Comments (540) | Send Message
     
    If the dividend is actually cut then the shares will be lowered as investors are now used to the 9+% dividend.
    The dividend will stay at 9% no matter how much they cut it as the shares will lower to that level.
    12 Feb, 01:11 PM Reply Like
  • wigit5
    , contributor
    Comments (3964) | Send Message
     
    seems reasonable Rappenco
    12 Feb, 01:15 PM Reply Like
  • Bulldog67
    , contributor
    Comments (350) | Send Message
     
    I would be willing to bet the WF analyst $5 that SDRL INCREASES it's dividend at least once in 2014. He obviously doesn't understand JF's mind set.
    12 Feb, 12:38 PM Reply Like
  • wigit5
    , contributor
    Comments (3964) | Send Message
     
    The deciding factor will be if $SDRL's day rates hold up strong since they have the newest fleet out there... if their day rates erode just like most others it could be tough to justify a raise in 2014.
    12 Feb, 12:41 PM Reply Like
  • JD in NJ
    , contributor
    Comments (807) | Send Message
     
    wigit5,

     

    One of SDRL's strengths is that most of its fleet is very, very young. Their rigs are equipped with all the modern safety features and their customers enjoy the reliability of new equipment. The "most others" of which you speak tend to be those with older equipment, for which day rates have indeed been bid down a bit in recent months.

     

    I'm not going to claim that SDRL is immune to problems, that would be absurd. It is, however, more resistant to problems than much of its competition.

     

    I'm also a shareholder in a couple of customers of SDRL, and I want my oil companies to use the latest and greatest technology in the interest of environmental protection, efficient operations, and the safety of the crews operating in harsh environments.
    12 Feb, 12:56 PM Reply Like
  • James Sands
    , contributor
    Comments (1921) | Send Message
     
    It will be also be based on finalizing contracts with the three drillships coming online this year. Depending on where these get deployed they should fetch 570k - 650k / day. Plus we'll get more transparency with PEMEX's add from Q3.

     

    It will be good to also get some more info regarding extensions or updates for West Navigator and West Tellus, which could fetch additional 570k - 650k /day rates.
    12 Feb, 01:02 PM Reply Like
  • long_on_oil
    , contributor
    Comments (1071) | Send Message
     
    The only post I have read lately that uses common sense. Good post, my thoughts exactly. Let's see what the newly negotiated day rates for the rigs coming off contract become. good post James
    Anyone can go to the Sea Drill home page and look at the fleet report. The availability dates on most rigs are out from 2015 thru 2020. Great backlog.
    Transoceans rigs are older and less likely to get contracts due to the macondo accident and the risk. Why would you, as a manager, want to lease an old rig when you can get a new one from Sea Drill.
    12 Feb, 06:29 PM Reply Like
  • Not_Quite_Pheidippides
    , contributor
    Comments (150) | Send Message
     
    Aw shucks, long_on_oil, you could save millions on an exploration project by going with an older rig... especially these days if you can score a cheap one... millions! What's that compared to a $40+ billion settlement for an oil spill? Oh wait. Nevermind.
    12 Feb, 07:08 PM Reply Like
  • The Rebel
    , contributor
    Comments (430) | Send Message
     
    This Barron's blog piece fits the pattern of their hit last year on LINE and LNCO, all for the shorts that they seem to coddle at that rag. They were wrong about LINE, and they will be wrong about SDRL. With oil near $100/barrel and rising, day rates and demand won't be abating any time soon.
    12 Feb, 12:57 PM Reply Like
  • JD in NJ
    , contributor
    Comments (807) | Send Message
     
    They were wrong about LINE in terms of its business, but not so wrong about its share price. I try not to get the two confused for each other, especially as the differential between the prospects for the two are where great profit can be made.
    12 Feb, 01:03 PM Reply Like
  • The Rebel
    , contributor
    Comments (430) | Send Message
     
    Excuse me, but the share price resulted from their hit job.
    12 Feb, 01:15 PM Reply Like
  • JD in NJ
    , contributor
    Comments (807) | Send Message
     
    Yes, I'm sure it did. That doesn't change anything, though, does it?
    12 Feb, 01:19 PM Reply Like
  • Cincinnatus
    , contributor
    Comments (3354) | Send Message
     
    Rebel,
    These are the same folks that ran FRO. Leverage is their MO. They run a great party while it lasts, but there is often a day of reckoning. Despite the dividend I never was tempted to join in.

     

    I'm not saying the party is going to end soon, but these guys seem incapable of playing defense. The way I see it any sustained downturn and these guys get sucked under just like they did with FRO.

     

    I own LINE. The guys that run SDRL are not the guys that run LINE. No comparison there.
    13 Feb, 11:31 AM Reply Like
  • Derrick Lilly
    , contributor
    Comments (213) | Send Message
     
    FRO was a disaster, and while I agree mostly with your thoughts, the drilling industry is quite different than the shipping industry. I'm really torn on this one, my gut says they report good earnings and hold the dividend and report new contract agreements. Two weeks is a long time to wait to see what happens when there is so much negativity right now, but analysts seem to trail the trends. With them all being bearish now, that's a contrarian indicator.
    13 Feb, 11:36 AM Reply Like
  • IgnisFatuus
    , contributor
    Comments (2115) | Send Message
     
    <With them all being bearish now, that's a contrarian indicator. >
    Nowhere for analyst opinions to go but up from here.
    13 Feb, 12:01 PM Reply Like
  • 2839298249
    , contributor
    Comments (219) | Send Message
     
    What is the big urgency to buy SDRL here? Unless the earnings report is a blockbuster, what catalyst is there that will move it significantly higher? Why not be patient and wait? Let the dust settle. Let all the analysts finish their downgrades and the noise to quiet down.

     

    If you want to start a position by easing in, thats fine, but I don't think it's time to load the proverbial boat.

     

    Just my 2 centavos.
    12 Feb, 01:01 PM Reply Like
  • The Rebel
    , contributor
    Comments (430) | Send Message
     
    And it's not the time to bail from the proverbial boat, either, as much as the shorts would like us to.
    12 Feb, 01:13 PM Reply Like
  • Mike Nadel
    , contributor
    Comments (7800) | Send Message
     
    283:

     

    That's exactly where I'm at on this.

     

    Not long SDRL but interested ... and not particularly fazed by this latest report.

     

    They report earnings in 2 weeks. I'm leaning toward seeing where things stand then.

     

    Mike
    12 Feb, 03:55 PM Reply Like
  • Bulldog67
    , contributor
    Comments (350) | Send Message
     
    Dear Numbers (2839298249),

     

    SeaDrill just announced today that they finalized the agreement with PEMEX for the 5 jack-ups for a total of 30 rig years, and thus added $1.8 billion to their $20+ billion backlog. While this is impressive, I believe the market is waiting to see what happens with the 6 floaters that are available for contracts in 2014. Especially with all the industry negativity regarding the number of surplus floaters due to all the NB's coming out of the shipyards in 2014-15.

     

    This 4th quarter report I believe will be a very important one for SDRL due to this concern about market imbalances between floater supply and demand. SDRL has the drill ships West Tellus coming off contract in July and the West Navigator coming off in December. In addition they have 4 NB's that will come out of the shipyards this year: drill ships West Saturn (May), West Jupiter (Sept), and West Carina (Dec), and the semi Sevan Rig 4 (June) of which they own just over 50%.

     

    During the 3rd quarter conference call, SDRL said they were in serious, late discussions with operators for the Saturn and Jupiter ships. If SDRL has nothing to report this quarter on any of these 6 rigs, then I believe the stock will make another leg down. However, if we get positive news on one or two of these NB's regarding signed contracts, that will relieve much of uncertainty as to how the supply / demand of floaters will affect SDRL's portfolio of modern equipment. Under that scenario, I would expect the stock to react very favorably.

     

    Personally I believe that SDRL's management had a good feeling about their outlook or they would not have bumped the dividend from $0.91 to $0.95 last quarter. Remember, all of the floaters that they will have available in 2014 are state of the art 6th & 7th generation equipment. I am comfortable holding SDRL waiting for the hopefully good news as I collect my 10.7% yield.
    18 Feb, 03:10 PM Reply Like
  • Derrick Lilly
    , contributor
    Comments (213) | Send Message
     
    I guess I don't understand what all of the fuss is about. The vast majority of their fleet is on long-term contracts with the dayrates already set. Look at the fleet report. Their earnings should be very predictable. New builds coming on span several years; they have plenty of time to get contracts finalized for them. I must be missing something.
    12 Feb, 01:07 PM Reply Like
  • Arthur Fisher
    , contributor
    Comments (223) | Send Message
     
    Seadrill has two kinds of holders: those in the game for the growth in the next 2-3 years based on backlog and new deliveries, albeit grateful for the dividend, and those who own it solely for the dividend and would just as happily own anything else if it paid a guaranteed half-point more. A 20% cut in the dividend would be healthy for everyone. To argue that they won't have access to ample more credit flies against history, against the nature and relationships of the key players, and against the current outlook of European bankers.
    12 Feb, 01:08 PM Reply Like
  • tassi13827
    , contributor
    Comments (2) | Send Message
     
    Looks like another buying op coming up IMHO.
    12 Feb, 01:16 PM Reply Like
  • wigit5
    , contributor
    Comments (3964) | Send Message
     
    The important question is how do we play this... buy short term puts in the event of a cut?
    12 Feb, 01:25 PM Reply Like
  • ge12ar
    , contributor
    Comments (104) | Send Message
     
    Short term puts will do you no good IMO. The company just raised the dividend in November from $.91 to $.95. Unless they are stupid(which is definitely not the case) there won't be any reduction in the near future. Frankly, I don't think there will be any reduction in the foreseeable future and WF and the other analysts that have been negative about this stock just don't appreciate the company's game plan. Yes they have borrowed a lot of money but that money has been used to purchase new rigs. As they come on stream they will be significant income generators which can be used to repay the loans. Frankly I would rather trust JF's judgment than some Wall Street analyst. I have owned this stock for about 4 years and added to my position on two occasions since then. All of my purchases are now in the money. My only question is should I make another purchase. There maybe downward pressure in the short term but in the long term the stock will reach another high IMO when these new rigs are covered by multi-year contracts.
    12 Feb, 04:08 PM Reply Like
  • wigit5
    , contributor
    Comments (3964) | Send Message
     
    ge12ar; I agree owned the stock for over a year now, just added to my position and thinking about selling puts to collect a premium and or double up my position at an insane (imo) price point.
    13 Feb, 10:24 AM Reply Like
  • Ilioula
    , contributor
    Comments (29) | Send Message
     
    The dividend is very nice, however it is not why I own the company. The replacement cost (of oil) will recover and unless water becomes the fuel of choice, oil will rise. The reasons for owning the stock have not changed.
    12 Feb, 01:26 PM Reply Like
  • 2839298249
    , contributor
    Comments (219) | Send Message
     
    The piling on of the negativity from the analyst community is incredible. Every analyst is negative and they reiterate this point on a daily basis. We are entering the fear and loathing phase for this sector. Wait for the earnings, because that will be the last rush of analysts abandoning ship. After they all downgrade the sector (regardless of the report) that should be the contra signal to get busy and get long(er).
    12 Feb, 01:30 PM Reply Like
  • NV_GARY
    , contributor
    Comments (1766) | Send Message
     
    ESV info:
    http://seekingalpha.co...
    12 Feb, 01:39 PM Reply Like
  • manwhoolovesshareholderfrie...
    , contributor
    Comments (3) | Send Message
     
    I feel if dividend is maintained when they announce earnings in 15 days, the stock will pop to over $40.00 again. Any increase will see it to the mid 40's.. Buy at these levels! Ignore most if not all analysts since their track records are seldom scrutinized!!!
    12 Feb, 02:02 PM Reply Like
  • C D
    , contributor
    Comments (123) | Send Message
     
    Long on SDRL- will buy more on this dip
    12 Feb, 02:58 PM Reply Like
  • glf4mny
    , contributor
    Comments (237) | Send Message
     
    Thanks for that article link, NV_Gary. As for WF's downgrade of SDRL, welcome to the sector party of bad news. Must have a bunch of shorts working there and I'm sure they are loving it today. Just fyi, according to data accessible on Fidelity's website, SDRL payout ratio is just under 77% and according to Yahoo Finance, 69% (provided by Morningstar). I'm liking those numbers. Since fossil fuel won't be replaced any time soon, I'm going to hang on to my ~1450 sh. I got @ $30 mid 2011.
    12 Feb, 03:12 PM Reply Like
  • sethmcs
    , contributor
    Comments (3080) | Send Message
     
    Short a stock with a 10% yield? That would be nuts. Shorts have to cover the dividend.
    12 Feb, 11:56 PM Reply Like
  • Eudaimonia
    , contributor
    Comments (530) | Send Message
     
    sethmcs

     

    No opinion on shorting (SDRL) it's an interesting long, I was short (NLY) for along time the dividends were lower than they decay on (TBT).

     

    It's not always crazy to pay the yield.
    13 Feb, 04:42 AM Reply Like
  • Budavar
    , contributor
    Comments (1387) | Send Message
     
    A voice in the wilderness =
    I virtually begged JF about NOT pushing the envelope on cash dividends for a long time + work diligently to become a high tech growth stock = to avoid the humiliating spot the shares are now = at or below where they were two years ago.
    12 Feb, 04:05 PM Reply Like
  • Bulldog67
    , contributor
    Comments (350) | Send Message
     
    Budavar,

     

    Who says SDRL isn't already a "high tech growth stock"?

     

    2012A $2.21
    2013E $2.60 +17.6%
    2014E $3.70 +42.3%

     

    How many tech companies will have that kind of earnings growth from 2012-14?
    12 Feb, 04:28 PM Reply Like
  • tennis44
    , contributor
    Comments (42) | Send Message
     
    The old story, downgrade the stock,short and buy it back. Sdrl is a winner buy more
    13 Feb, 11:27 AM Reply Like
  • goldenretiree
    , contributor
    Comments (892) | Send Message
     
    In a normal year (last year was not normal), SDRL cash flow is almost double the dividend, and qujite sufficient to cover the debt, which has actually dropped from 55% to 51% in the last year. But I always wonder if WF analysts know something I don't.
    13 Feb, 11:59 AM Reply Like
  • jrw_mdus
    , contributor
    Comments (13) | Send Message
     
    I have 100K or more in margin power, seadrill is a buy, I do not have the guts to do it.
    13 Feb, 02:09 PM Reply Like
  • James_B
    , contributor
    Comments (112) | Send Message
     
    I am in the same position. No dry powder left and not sure if SDRL has bottomed out. I placed an order for half my margin balance at $35.50. Haven't gotten it yet.
    13 Feb, 03:26 PM Reply Like
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