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Seadrill's muted outlook prompts Nomura downgrade, but Barclays sees dividend as "rock solid"

  • Seadrill (SDRL +1.8%), more than other offshore drillers, depends largely on its big dividend for investor support, which has sparked consternation over speculation of a dividend cut, but the safety of the dividend isn't the reason Nomura is downgrading SDRL shares to Neutral from Buy.
  • Despite SDRL's solid Q4 results and strong utilization, the firm is troubled by SDRL's relatively muted outlook for the deepwater drilling market in 2014 and highlighting for the first time a limited scope to increase the quarterly dividend.
  • However, Barclays calls SDRL's dividend "rock solid," encouraged by the $0.03/share raise to $0.98 as it reflects the company's operational improvements, solid order backlog and support received from financing markets.
Comments (10)
  • long_on_oil
    , contributor
    Comments (1223) | Send Message
     
    The dividend yield is 11.2% and rock solid for the next 2 years. What more can you want? If I had my money with Nomura I would be pulling it immediately.
    First SDRL gets chastised for paying to big a dividend and now it is getting downgraded because the growth of the dividend, which is sky high, is being reduced. SDRL can not win because of apparent manipulation.
    I say that because I can't figure out why anyone would want to sell a stock that will be paying a 98c dividend within the week yet 14 million shares traded hands yesterday. Must be a day traders dream.
    26 Feb 2014, 12:58 PM Reply Like
  • hallereugene@gmail.com
    , contributor
    Comments (353) | Send Message
     
    Cant agree with you more. Its a buying opportunity if your horizons are more than short term > 1 year and with the added benefit, less risk of loosing capital. After all its not a penny stock company is it? Will buy low on market manipulation and or hysteria. Going through the same thing with KMI/KMR.
    26 Feb 2014, 01:16 PM Reply Like
  • William M. Wright
    , contributor
    Comments (242) | Send Message
     
    I'm with you. Today's additional down grade and $34.65 price was an excellent re-entry point for me after selling out of RIG at $55 on the Carl Icahn bounce. While I did buy back RIG shares recently at $42. I'll be more likely to sell it on a bounce while holding today's purchase of SDRL. If you're going to be in this sector SDRL is an excellent choice given managements reaffirmation of its commitment to paying the sectors highest dividend with the most modern fleet.

     

    Once you've observed Wall Street Analyst for decades you come to the realization that their professional expertise is that of a 'Financial Reporter' not a 'Financial Forecaster'. Had they had skills in forecasting future stock prices they would have told investors to 'Sell' all offshore deep-water drillers like SDRL last September through November when the stock was 30% higher. Instead most analyst were upgrading this sector as they watched the stock prices increase even though everyone connected within the oil drilling industry knew the real boom was in American on shore fracking drilling.
    26 Feb 2014, 02:27 PM Reply Like
  • James Sands
    , contributor
    Comments (2429) | Send Message
     
    Seadrill is moving sideways on assuming the West Jupiter and West Saturn drillships based on contract negotiations. The $20.5 billion backlog does not include these newbuilds.

     

    I use the term sideways because they have not yet included them in the backlog, but they reiterated expectations of 98% contract coverage for 2014 multiple times in their call comments and written statements. To me, they expect to have these agreements in place this year, near-term.

     

    This is why management reiterated their ability and confidence to successfully continue along their path through 2014's conditions versus peers. And is what will place them in a strong and flexible position for when demand picks up - hence the allusion to demand outpacing supply as time goes by, and the price of oil increasing to drive further deep sea drilling demand; similar to the previous decade or so.

     

    This is a win-win situation. If no significant economic catastrophe ensues for the year, the stock will probably not end lower than today's levels; which means you'll earn 11%. If the stock finishes near $40 (a conservative positive tid-bit), then you get 25% with appreciation and dividend.
    26 Feb 2014, 05:50 PM Reply Like
  • captain jim
    , contributor
    Comments (11) | Send Message
     
    Concerning questions about future rig contract prices. Pacific Drilling(PACD) just announced in it's webcast a contract renewal in west Africa to chevron at $615.000. Chevron had two one year options coming up, and the ONLY reason for them to extend for two years now instead of one year now and the second next year is Chevron thinks the rate will be even higher next year. Options were exercisabe at current market rates. Very positive for people with state of the art rigs, not a lot of antiques. (I'm long both SDRL and PACD and still buying.). Captain Jim.
    26 Feb 2014, 01:34 PM Reply Like
  • Debutant
    , contributor
    Comments (2485) | Send Message
     
    Tell the analyst that you're ordering new rigs with the expectation of a hot market two years down the road? Oh, no, the analyst finds it too aggressive a strategy and downgrades you.

     

    Tell the analyst that you're not ordering new rigs with the expectation of a slowing market for the next few quarters, but you're focusing instead on contracting your existing and soon-to-be-delivered rigs. Oh, no, the analyst finds it too muted and downgrades you.

     

    Increase the dividend? The analyst will tell you that you should not be so generous.

     

    Tell the analyst that you're keeping the dividend flat for the next few quarters, with the latest dividend amount serving "as a floor". The analyst will downgrade you unless you tell him that "it is the 7th floor!"

     

    Analysts! God bless them. How could I buy stocks on the cheap without them?
    26 Feb 2014, 01:42 PM Reply Like
  • tennis44
    , contributor
    Comments (69) | Send Message
     
    Nomura is way off base. This stock is a dream buy. How can you downgrade ,maybe buy cheap.
    26 Feb 2014, 05:28 PM Reply Like
  • Trader909
    , contributor
    Comments (17) | Send Message
     
    Nomura comes out with a downgrade and Barclay's does a 180 for the second time in 6 weeks claiming the dividend is now "rock solid? (funny being that in late January I believe it was Barclay’s claiming SDRL was going to drop 35% - only 4 weeks after putting, if I recall correctly, a $53 price target on it in late December). Did Barclay’s really need to hear the obvious on the call in order to come back from the twilight zone? And now Nomura, concerned about muted outlook and "limited scope to increase the dividend?" Are you kidding me?

     

    Nomura needs to listen to the call again (maybe 3 more times) and key on a couple of key moments. 1) "We can increase the dividend another $0.16 right now, but not going to do that at the depressed stock price. Maybe we buy back shares, maybe we pare down debt, maybe we opportunistically re-invest in the fleet or issue special dividends as appropriate (hint, hint, hint, when the dumb money finally exits and the smart money bids the stock back up to a rational 9% yield, we will reward the shareholders with increased dividends); 2) “We are reserving 20% of all sales proceeds received from dropdowns to Seadrill Partners in a fund that will be distributed to shareholders within the 12 months following the closing of such sale (ergo the first $0.16 that we can distribute right now following the sale of the Leo and Sirius). Oh, hello Mira, Auriga, Vela! What amount of dividends will sdrl distribute after it sells each of these rigs at a $1 billion a copy in 2014?; 3) Operating profit will grow 20% y-o-y. What will they do with this extra cash flow? Pay down debt (not a bad idea to increases the equity ratio and certainly not destructive to value) or increase the dividend?

     

    Nomura downgrades the stock because SDRL will be applying a greater degree of financial prudence in regards to capex spending, dividend distributions and paying down debt in light of a “seasonally” weak market that SDRL is 98% insulated from (and if you don’t think this current lull is seasonal, then I urge you to listen to the “BOD’s 6 points of Light” also discussed in detail on the call).

     

    What was Nomura looking for? An announcement of entry into another multi-billion dollar new build program coupled with a massive dividend hike such that the company’s leverage becomes more constrained and its yield shoots to 15%?? What do these analysts want to see or are they just determined to go to take a contrarian position no matter how inconsistent it is from the facts? These analysts are heavy on criticism and short on solutions. To think that SDRL should be trading anywhere near 11% indicates a complete failure to understand risk-adjusted total return.
    26 Feb 2014, 09:32 PM Reply Like
  • ronster3
    , contributor
    Comments (19) | Send Message
     
    Where else can you get a dividend like this at 10%
    26 Feb 2014, 10:45 PM Reply Like
  • Debutant
    , contributor
    Comments (2485) | Send Message
     
    Here's the Q&A between the Nomura analyst and the SDRL executives (Copied from the Transcript that's been published by Seeking Alpha):

     

    Operator

     

    Thank you. The final question will come from Christyan Malek of Nomura. Please go ahead.

     

    Christyan F. Malek – Nomura International Plc

     

    Hi, good evening gentlemen. just one question regarding supply additions this year and next, in the context of the major and their exploration budgets and their own outlooks in a scenario where they do cut deeper and demand is down. I know we talked about the base case where day rates are softer near-term, presume higher. where do you see day rates in this sixth generation market falling to? Clearly, there’s a low end of the range, what is your worst case scenario analysis, and I say in the context of major cutting spend and also with supply additions this year, just want to know?

     

    Per Wullf

     

    I think we tried to say before that we cannot really comment on day rates, because of the pure speculation based on one rig that have been secured really since December and that was the Ensco rig in the US GOM. so that one I cannot really comment on. What I can say is that when we operate all the units and if you take a good figure as to, if you take all included and you say $230,000 a day, that is our total cost and we operate our unit. And then you can – you look yourself of your gap up to whatever rate you can get. That is what I can tell you, because I know our operating cost and I know we have the five-year cycle now, your running units in Seadrill and we have a very good picture of what our cost is.

     

    So then you can figure out from there on, when it is worth running with these units or they have to be stacked, because we cannot really comment on the day rate as such, because that would just be pure guess work.

     

    Christyan F. Malek – Nomura International Plc

     

    Right, so you have a lower end, but the point you are making is that regardless of the prevailing day rates in CIRR on these rigs, which is key for you, and therefore as long as day rates stay far below, cash flow uptakes which is what $250, $300 you will be fine.

     

    Per Wullf

     

    Yes, I think we’ve said several times, in this market when it’s been good and when it’s been bad, we say that $450 low day rate, $650 is a high day rate, $550 is probably the level where we have a very good return when you are talking about the assets generating around five times enterprise value of the EBITDA. While you don’t see a lot of ordering if rigs are just about 600, you’ve seen that few times and then it leads to massive order increase pretty quickly, I think the $550 level, you have a limited amounted of ordering, you have a very decent return on the capital investment around 5x EBITDA.

     

    And if you then can fill up, those contacts you get there into [their material], 10x to 12x EBITDA, you have a business mobility works over time. I think what’s important also to remind people about is what’s stated in your report when the oil companies smelt their wells and say you want to cut CapEx and they think day rates are too high.

     

    I am almost tempted to say, it’s crap it’s not the day rates who kills oil production today, what kills oil production today yes we have added on 300 more rigs over eight years and we are effectively producing less oil offshore, I think for me that’s the strongest drill sign I’ve ever seen for a stock because it does tells you how much more capacity you need over rigs in order to bring that oil up off the ground, and you can do you like Statoil did kind of few weeks ago decided to cut CapEx I’ve said didn’t have to confess, then you don’t meet the production targets, I think that’s where we are today. and then I would say kind of for us long-term probably the rates around $550 level is to optimum size where you don’t still see a lot of new ordering. you have a very healthy return and with the kind of financial flexibility, they have been [indiscernible] MLP under we have a very, very sustainable and good business model.

     

    Christyan F. Malek – Nomura International Plc

     

    And so just also justifying onto make sure it’s clear to not put words in your mouth, but if day rates are so below the US $450 and again I understand it’s not a one day rates in aggregate but say the prevailing that would be marginal and that would be an incremental negative to return but above US $450 say between the US $500 and US $550 that would be a base case around of returns you are looking for.

     

    Per Wullf

     

    Yes, I mean since we launched the MMP originally I think the average rates on the MMP is going to be – around 520,000. I think we can comment on that during – uptick on the average rates we have on the MMPs.

     

    Rune Magnus Lundetrae

     

    In October 2012, it was in the low 500. We have all re-contracted several of those rigs now and gotten new day rates significantly above that level. I think, also looking back a little bit what we have done historically, look at, we have Gemini which obviously came in at the lower end of day rates level. I think it came in at 440,000. It certainly didn’t kill the company.

     

    I think the important thing for Seadrill right now is, of course, to have most of the rigs exposed to and the market is good and that’s why we spent quite a bit of time to try to set the market and take an independent view on what’s going on. I think that’s where we have been successful. That’s why we have moved first and I think followers, but actually been taking charge in the market.

     

    I think, we have subsidized that because of the other companies following us three times to four, we will be a little bit cautious now before we commit to more new builds. But as soon as we are comfortable with the 50 deliveries and also continue with the operation performance and the financial performance we have done lately then I think you can expect us to add more. But I think it's a little bit [hypothetical] to challenge us on what is one rig fall below 450 because I think we have demonstrated what we did before.

     

    We have significant comfort around the 2014 exposure, and then it’s a little bit early to be specific where is the 2015 delivery is going to end up because it is in the end of 2015 early 2016 where those rigs are really exposed to.

     

    So I think what we are try to get across today is that we are very confident about where we are position in the market. We are comfortable with exposure we have and we are comfortable with the current dividend level at $0.98 a quarter as a floor from this quarter and for the foreseeable couple of years.

     

    Christyan F. Malek – Nomura International Plc

     

    Very good. Thank you very much gentlemen.
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    27 Feb 2014, 01:59 AM Reply Like
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