4 Reasons To Buy Seadrill

| About: Seadrill Limited (SDRL)


Markets are still skeptical over Seadrill's double digit dividend but should not be.

Bullish calls for Seadrill include a dividend increase, debt reduction, plus a slowdown that's only seasonal.

With a dividend of 10.3% and possible growth beyond 2015, Seadrill is a compelling investment.

Seadrill (NYSE:SDRL) reported quarterly results that tempered future expectations for investors. The offshore drilling giant said it would favor sustaining its generous dividend over more exploration activities. If the cautious outlook keeps shares rangebound for a while, should investors pass on Seadrill?

1) Dividend increased

Seadrill increased dividends by $0.03 per share, signaling to markets the company's confidence in continually improving operational results. The firm also has $20.2 billion in backlog, which Seadrill forecasts will support its dividend for the next few years. Seadrill could anticipate any possible slowdown in its business, in advance. Seadrill plans to slow dividend increases, but not cut it. To further cushion any business slowdown, Seadrill will set aside 20% from any MLP drop downs towards a dividend capacity fund. A drop-down is a transaction whereby a limited partnership buys assets for a price that is immediately accretive to its distributable cash flow.

The firm also could also lower capital expenditure if markets weaken, to improve its balance sheet.

2) Debt reduction

Long-term debt increased to $11.9 billion in the fourth quarter of 2013. $1.75 billion of it was due to the Sevan credit facility. Looking ahead, Seadrill plans to allocate 80% of MLP drop downs will be used to reduce existing debt, along with funding growth.

Total current liabilities dropped to $3.8 billion, thanks to a decline in short-term debt and other current liabilities.

3) Slower Growth misconstrued

Seadrill was cautious on its growth outlook, but said the spending slowdown was due entirely to budget re-allocation. The market interpreted the spending pause was due to oil prices dropping:

We sort some outlook for floaters in influence by the lower utility level cost by reduce growth and cutback in CapEx from the major oil companies. In this regard, 2014 and 2015 show slower growth in activity levels than earlier anticipated. As oil companies budgets are re-allocated, the entire spending complex tends to slow down. In turn, demand for offshore drilling assets is being pushed into 2015-2016.

It is still receiving more inquires on fleet availability for 2015 and 2016. Contract coverage stands at 72% for 2015 and 65% for 2015.

4) Competitor mimicking Seadrill

Charles Caleb Colton said that "imitation is the sincerest form of flattery." When Transocean (NYSE:RIG) said it would build two ultra-deepwater floaters, it recognized that better day rates could be achieved following Seadrill's business model:

We announced that we had signed contracts with Jurong Shipyard, in Singapore for the construction of two ultra-deepwater floaters with options for three more.

The two firm ships are expected to be delivered in the second quarter of 2017 and first quarter of 2018 and continues our fleet renewal process, at a capital cost of approximately $620 -- $620 million dollars each, for each drillship. We expect attractive returns on these investments.

Bottom line

Day rates fluctuate from $450 to $650, but if day rates average $550, Seadrill's EBITDA would be just five times. Combined with a dividend of $3.64 per share, or a yield of 10.3%, Seadrill shares offer exceptional value to income investors. The company is also a growth play: higher demand and exploration activities would boost profits. In the short-term, investors should accumulate Seadrill shares at current prices. It could test the low 30's, offering investors an even more attractive entry point.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SDRL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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