Seeking Alpha

Seadrill gets an upgrade at Societe Generale but still disliked

  • Societe Generale raises its rating on Seadrill (SDRL -1.7%) to Hold from Sell but the firm still isn't a fan of the offshore driller, and sees better investment opportunities in Noble Corp. (NE -1.2%), Rowan (RDC -1.5%) and Ensco (ESV -0.9%).
  • The firm believes 2014, 2015 and 2016 consensus might now be a bit too low and that the current $3.92 annual dividend (11% yield) might be secure, but in the event of an unexpected harsher scenario of declining oil prices and/or higher interest rates, it finds little reassurance in SDRL, whose net debt could rise to $17.5B by the end of 2015.
  • NE, RDC and ESV are the firm's preferred options because they offer only slightly less expected financial rewards for a much lower degree of financial risk.
Comments (29)
  • JD in NJ
    , contributor
    Comments (1419) | Send Message
     
    Believes / might / might / unexpected / could

     

    Now that's some analysis that I feel I can trust.
    9 Apr 2014, 12:13 PM Reply Like
  • mbn
    , contributor
    Comments (616) | Send Message
     
    That was the first thought that went through my mind when I read this. Talk about an analysis that is non-committal!!
    9 Apr 2014, 12:16 PM Reply Like
  • saratogahawk
    , contributor
    Comments (2427) | Send Message
     
    Why does someone put out such non-analysis drivel unless they want to push a certain trading direction. When I offer an opinion I try to do so with some conviction. It seems that these analysts are the ones that should be convicted.
    In my opinion real analysis would discuss
    1) the aggressive bidding in recent offshore auctions and when those blocks might start exploration
    2) the pending drilling programs for the NOCs that are clearly on different schedules than the IOCs
    3) something about the actual planned spending cutbacks directly affecting offshore drilling rather than these vague statements about cut backs in E&P budgets (those types of statements are lazy and manipulative and border on malpractice)
    4) the need for IOCs and NOCs to constantly be restoring reserves. That alone forces exploration even when prices are down.
    5) Pricing expectations for oil and gas. Nothing I have seen in the EIA or other projections suggests that either demand or pricing will drop precipitously and for sustained periods.
    6) no one other than me seems to look at the fantastic market analysis done by LSU. They examined equipment trends, pricing, etc and with sophisticated statistical analysis demonstrated that deepwater offshore drilling is only reactive to 2 year or longer rolling price averages. So short term spikes in pricing essentially mean bupkus.
    7) Where is the real analysis about equipment demand forecasts and why some of these rigs on speculation will never be built. Most of the major drillers are already very careful about a multi-hundred million newbuild without a user contract in place or expected. This is not the container ship market. Time to deliver and costs to build new rigs are wide-moat issues and prevent excessive building.

     

    I could go on all day but the brokerages and banks fronting this stuff are losing all credibility in my mind. Follow them at your own risk as most have been pile-ons and not legitimate analysts.

     

    This is not to say that some companies in this industry have issues. Due diligence is essential here as anywhere else. But when they do such cursory crap and issue it one after the other its clear that it is intended merely to influence weak hands. Thats not me.
    9 Apr 2014, 12:32 PM Reply Like
  • sts66
    , contributor
    Comments (1797) | Send Message
     
    S-hawk, you put 10 times as much effort and work into your comment than the dumb analyst you're responding to, LOL.
    9 Apr 2014, 02:02 PM Reply Like
  • Stocks-Options
    , contributor
    Comments (771) | Send Message
     
    They might be hedging. Maybe. I'm just not sure. If only I could be certain.
    Oh, well.
    9 Apr 2014, 04:08 PM Reply Like
  • Ethansdaddy
    , contributor
    Comments (21) | Send Message
     
    Stock-Options, I am positive that this comment had me laughing!

     

    Great comment Sarotagahawk.
    9 Apr 2014, 09:07 PM Reply Like
  • financeminister
    , contributor
    Comments (939) | Send Message
     
    One of those dilemmas... I would love to add more SDRL average down if I was certain the dividend was stable for the next 3 years irrespective of volatility. You wonder if they can service all that debt in time without uncontrollable macro events affecting rates.

     

    Adding more would give my portfolio a higher weighting in SDRL... currently SDRL is at around 3.5% of my portoflio and already down by 11% (averaging at around 38/shr) but that's not a problem as the dividend makes up for the volatility.
    9 Apr 2014, 12:21 PM Reply Like
  • Budavar
    , contributor
    Comments (1387) | Send Message
     
    "Upgraded but still disliked"!
    The classic case of damning with praise ?

     

    How many times I communicated with JF who "endorsed" me several times but who turned deaf ears to my numerous plaintive pleas !
    Become a HIGH TECH GROWTH stock, by keeping the pay out ratio around 50 to 60% + using the balance to buy back shares + set up Reserves for Contingencies = both hall marks of American blue chip high tech growth stocks.

     

    Argued those Contingencies are inevitable, only their timing is unpredictable. All we know they tend to arrive at the most inconvenient times. The contingency did arrive in 2014,
    It gives me no pleasure to say: I TOLD YOU SO.

     

    With admiration for JF's admirable genius for financial engineering =
    pun intended indeed =
    I invested a bundle of SDRL in the Endowment Fund I manage, only to experience a huge loss it can ill afford. All because of JF's almost manic obsession for a 100% pay out of earnings in cash dividends. Some 20% of those cash dividends go directly in JF's pockets on account of his dominant holdings in SDRL.

     

    Cash dividends are wonderful provided stakeholders also do NOT have to put up with capital losses many times the amount of cash dividends. That is precisely what happened to many SDRL stakeholders in the last two or three years due to the sharp decline in SDRL stock.

     

    A sad personal experience I trust I'll never have to repeat!
    9 Apr 2014, 12:31 PM Reply Like
  • Dividend Newb
    , contributor
    Comments (5) | Send Message
     
    That is precisely what happened to many SDRL stakeholders in the last two or three years due to the sharp decline in SDRL stock.

     

    ?? SDRL is higher than it was two or three years ago. In fact it is roughly the same as it was last year. You are only down big if you loaded up last fall when it ran up over $45.
    9 Apr 2014, 02:26 PM Reply Like
  • The Rebel
    , contributor
    Comments (1275) | Send Message
     
    Div Newb- Exactly!
    9 Apr 2014, 02:38 PM Reply Like
  • Ptstanford
    , contributor
    Comments (504) | Send Message
     
    Budavar

     

    Two things

     

    First, did you buy SDRL at or near the top? How can you have a huge percentage loss in this stock when the top is about $12 higher than now?

     

    Secondly, unless someone held a gun to your head and forced you to buy SDRL near the highs, JF is not responsible for your Endowment Fund loss -- you are.
    9 Apr 2014, 02:55 PM Reply Like
  • AlbionWood
    , contributor
    Comments (847) | Send Message
     
    And a third thing: Did you sell the stock when the price fell?

     

    Stocks are a means to an end. If the goal is income, SDRL is meeting that goal, regardless of price action.
    9 Apr 2014, 03:11 PM Reply Like
  • sts66
    , contributor
    Comments (1797) | Send Message
     
    Well stated - some dude tries to catch a rising star, buys near/at the top expecting it to keep going up, then whines because the stock went down, as did the entire drilling sector. And I note that of all the big players in this sector, SDRL has by far held up the best. See:

     

    http://bit.ly/1g7SCbo

     

    and move the slider to the left to start at 2011 - chart includes reinvested divs too. Play around with the slider and you'll find very few times when you could have bought SDRL in the last three years and be in the red right now - Oct 2012 and May 2013, for instance, with Sept 2013 being the obvious peak.
    9 Apr 2014, 03:14 PM Reply Like
  • Stocks-Options
    , contributor
    Comments (771) | Send Message
     
    You only lost if you sold, which implies you felt it was a mistake to continue with the company.

     

    I think the future is promising. Don't you? If you don't like the business model, you must have had some other reason for investing in the company.
    9 Apr 2014, 04:22 PM Reply Like
  • Debutant
    , contributor
    Comments (2485) | Send Message
     
    JF might send flowers and chocolate to mend a broken heart.
    10 Apr 2014, 08:49 AM Reply Like
  • Bulldog67
    , contributor
    Comments (804) | Send Message
     
    Budavar,

     

    Just a few questions:
    1) When you bought SDRL for your endowment fund, what was its' payout ratio?
    2) When you bought SDRL for your endowment fund, what was its' debt to total capital ratio?
    3) When you bought SDRL for your endowment fund, was the NB Capex plus the dividend greater than the cash flow being generated by SDRL?

     

    When I first bought SDRL in early 2011, its' dividend was greater than its' earnings, it was highly leveraged, and the company was borrowing to fund their NB program while paying out most / all earnings in the form of dividends. My educated guess is that all of that was true when you bought SDRL for your endowment fund!

     

    So how can you blame poor ole JF for your problems? It sounds like YOU didn't do YOUR homework before buying the stock! Did the endowment fund's trustees give you a hard time when you decided to sell at a loss?

     

    When you bought SDRL for your endowment fund, did you write down your reasons for purchase? Did you also write down the risks involved? I have always found that to be a great discipline, when I can go back and ask myself if anything has changed for the good or bad. Are the reasons I purchased the stock still valid? Sounds like you didn't do any of those, so I am wondering why you bought SDRL in the first place, given your current attitude towards the company!

     

    As to JF not listening to your suggestions on how to run the company he founded, the man has a great track record with SDRL, and I am a very happy investor who has enjoyed riding his financial coat tails. Every quarter I receive over $32,500 in dividends, just like clockwork! :-) Over the past few years I have trimmed the stock in the 40's and bought heavily in the low 30's and high 20's.

     

    As to the contingencies you seem to think have arrived in 2014 (so you can not say, but still say: I TOLD YOU SO!), may I point out that SDRL will once again show strong earnings growth this year, and the shareholder dividends in 2014 will be greater than last year. JF and his management team have done an excellent job growing SDRL's earnings over the past several years. In fact there are many, many growth technology stocks that would love to have had SDRL's record of growth.

     

    My last comment is related to your comment that somehow JF paying himself 20% of the dividends is a bad thing. The man, and his controlled holdings, own a substantial amount of the stock. Thus he is a large shareholder, whose interests are directly correlated with the other shareholders. He gets paid the same dividend every other shareholder gets paid.

     

    Again: If you don't like the way JF is running the company, why did you bother to buy the stock in the first place? And why are you continuing to bad mouth it on SA? May I respectfully suggest you take your endowment money and go play elsewhere! And I sincerely wish you all the best!
    15 Apr 2014, 01:42 PM Reply Like
  • mtpennybags
    , contributor
    Comments (36) | Send Message
     
    No way. SDRL has the youngest (safest) fleet and in a world of environmental disasters that is going to pay out big for them in the long run.
    9 Apr 2014, 01:26 PM Reply Like
  • sts66
    , contributor
    Comments (1797) | Send Message
     
    Hot off the presses - SDRL just sold 230m shares of SapuraKencana, fetching $300M, $165M profit - no clues what they'll do with the cash in the PR - pay down some debt, maybe put some of the cash in the new slush fund?
    9 Apr 2014, 03:22 PM Reply Like
  • AlbionWood
    , contributor
    Comments (847) | Send Message
     
    I just added more shares. Maybe too soon, but the yield is great and if the dividend is safe, I don't really care what the price does from here.
    9 Apr 2014, 03:27 PM Reply Like
  • user 18159032
    , contributor
    Comments (818) | Send Message
     
    sts66, not only has SDRL beat the industry, they have done so for the past 5 years, just for fun look at the 5 year interactive chart with SDRL vs. any of the industry heavy weights. Like Mr. Wood I added shares today at $34.30, like him maybe to soon but with a 10% dividend I had to pull the trigger. S-hawk, have you dealt with the debt in terms of the next two years? I worry that management is paying too much attention to the what is a very speculative issue. I usually catch you but seem to missed that discussion.
    9 Apr 2014, 05:16 PM Reply Like
  • saratogahawk
    , contributor
    Comments (2427) | Send Message
     
    user
    Just trying to keep my partners off my back by making some business today. If only they would do the same. So to your question. The Debt!!! SDRL's big albatross. So if you are Intel or another chip fab and you want the next generation facility you need to invest $4.5 billion to get there. That is debt funded even for Intel and certainly for AMD, MU, etc. So they pick up lots of debt for "growth" purposes. In offshore drilling we all now know that the debt to acquire 6th generation and beyond equipment is very large. However, no E&P firm in its right mind will drill offshore North America, Europe, the Med or most other areas with really old equipment. So for me SDRL is the INTC growth stock right now of this industry. You can't make the omelet without breaking the eggs.

     

    So what does the debt vs. revenue picture look like for our 1918 Maginot Line battlefield in 2014/15. On the revenue side SDRL has its array of contracts and justed inked Total's Africa unit for jackups and the Pemex Heads of Agreement and and and and!!!

     

    On the debt side SDRL has a bundle of 20+ floaters and jackups newbuilds. Some of that debt has now been dispersed to SDRLs baby companies: SDLP, NADL.
    SDRL just took a $300 mil gain on SapuraKencana stock but still holds 8%+.

     

    The economic utilization was 94% for floaters and 98% for jackups. It just doesn't get any better than that.

     

    2014 is nearly sold out and 2015 is 64% sold out.
    A couple more contracts and 2015 is in the bag.

     

    What is the hallmark of a "growth" stock? Delivery of increasing revenues? or market share? or position in the industry as the acknowledged leader?

     

    Seems to me all those work for SDRL.

     

    The E&P slowdown is much more on the onshore side of the investment equation. onshore has been explored pretty thoroughly. I have done a fair amount of that myself. The frontier is offshore. The growth in oil finds has been offshore and the future has to be offshore for large areas of the world.

     

    I just talked myself into buying more tomorrow. Hope that helped or at least didn't hurt your position any.
    9 Apr 2014, 06:35 PM Reply Like
  • sethmcs
    , contributor
    Comments (3421) | Send Message
     
    If you can't short a stock (SDRL dividend would have to be paid by the short) then you talk it down. Bought 1K shares @ avg $33.66. Will buy another 1K shares below $32 although I don't expect to go there. The yield acts like a floor.
    10 Apr 2014, 12:23 AM Reply Like
  • user 18159032
    , contributor
    Comments (818) | Send Message
     
    Thanks for the answer S-hawk. I looked a SDRL's financials for the past five years and don't see that SDRL debt is out of line with BAU. I was in real estate, timber and construction in the 1980s when 18% interest was normal. I guess creative financing just doesn't bother me enough. What are the creditors going to do with a deep sea drilling rig--repo it? The LSU study tells the story. (That is must read.) From the demand side the oils have to keep looking even if they are going to cut back on production to keep the price up.
    10 Apr 2014, 09:00 AM Reply Like
  • saratogahawk
    , contributor
    Comments (2427) | Send Message
     
    Australia opens up 30 offshore blocks for 2014 bidding. Some of these are cash blocks so the bids must be accompanied by the cash offer to win the block.

     

    http://bit.ly/R5Gy53
    10 Apr 2014, 09:30 AM Reply Like
  • user 18159032
    , contributor
    Comments (818) | Send Message
     
    I thought I sent this earlier, but when I checked back it wasn't published. Thanks for reply S.Hawk. I have reviewed the financials of SDRL for the past 5 years and could not see how its debt situation was particularly abnormal. I was in real estate, timber and development in the 1980s when 18% interest was the norm. I am afraid that experience may have desensitized me to the dangers of over-leverage. My view was that if the heavy debt load did not adversely effect SDRL's recovery in relation to the economy in general and the industry in particular, it was a non issue to any future adversity. It still is my view my concern is that management is spending time, money and effort dealing with what is basically a public relations issue.
    10 Apr 2014, 11:26 AM Reply Like
  • saratogahawk
    , contributor
    Comments (2427) | Send Message
     
    I would say its less a "public relations" issue than a brokerage issue. The brokers have been engaged in WWIII to bring down the drillers the last few months. Sure there is some market softness now but the auctions for new offshore blocks have been very good. Also, the NOCs are on totally different gameplans than the IOCs. I expect to see the IOCs rush back into the market now that the auctions are awarding the new blocks. Bidding has been active and that would not happen if E&Ps were not budgeting for lots of future offshore drilling. So my argument is that SDRL has leveraged itself to offer the largest/best fleet (other small fleets are in the same class but lack the size of SDRL). That leverage is what makes the money and will again make this a growth story. The basic difference between this and any other growth stock is that SDRL returns directly to the shareholders thru its dividend policy. How is that any different than T, TOT, STO, VZ or others that use the dividend as an important part of the shareholder returns? Also, SDRL was built in Europe where dividends are an important and often required element. I think that the Norwegian Sovereign Fund still holds a piece of SDRL for dividend purposes.

     

    Management has demonstrated its ability to package novel financings with SDLP, NADL, Sapura, etc. Also, management has shown it can win contracts with good day rates even when market cycle is weak as evidenced by the Total Africa jackups award, the Pemex Heads of Agreement, etc. These agreements all build solid backlog to weather this short term weakness.
    10 Apr 2014, 11:42 AM Reply Like
  • sts66
    , contributor
    Comments (1797) | Send Message
     
    Perhaps the fear over the debt burden is based on the eventual end of the QE funny money program? SDRL has gotten away with rolling over debt into new low interest loans so far, brilliantly in fact - "good debt". But if QE ends in 2015 at some point those interest rate swaps JF uses are going to start becoming more expensive to obtain and/or start hitting the bottom line a lot worse. What, me worry? Nope. JF will find a way to manage it, he always does - long term problem I have is what happens when he's not among the living anymore? Hopefully one of his underlings (or daughters) was also born with the Midas touch and financial genius he is blessed with.
    10 Apr 2014, 11:54 AM Reply Like
  • user 18159032
    , contributor
    Comments (818) | Send Message
     
    Our money today is not nearly as funny as it was during the 1980s we were paying those dollars back with 80 cent dollars during the "golden age".
    10 Apr 2014, 12:11 PM Reply Like
  • sts66
    , contributor
    Comments (1797) | Send Message
     
    "Our money today is not nearly as funny as it was during the 1980s"

     

    Are you joking? How many trillions has the Fed printed out of thin air to support QE1-3?!?! There will be hell to pay when China wants it's billions (trillions?) back. Yup, it's $1.23 trillion - Japan also owns over a trillion:

     

    http://1.usa.gov/pHzoqJ
    10 Apr 2014, 06:00 PM Reply Like
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