Seadrill: Riding The Long-Term Wave

| About: Seadrill Limited (SDRL)
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Jack-up market fears overblown.

Consistent dividend increases provide for stable income.

Seadrill investors should sit back and enjoy the large dividend while waiting on capital gains.

For a market driven by assets that last over 30 years, the offshore drilling segment of the stock market is sometimes extremely focused on the short-term. Instead of focusing on the day-to-day operations and day rate cycle, investors should focus on the age of the fleet and the ability of management to adapt.

In that scenario, investors need to look no further than Seadrill (NYSE:SDRL). The aggressive deepwater driller is always one step ahead of the competition evidenced by theme enhanced deals with PEMEX in Mexico and Rosneft in Russia. Not to mention, investors get to collect a 11% dividend while waiting for the market fundamentals to improve.

Several other articles have already covered the recently released Q214 earnings report, so this article will focus on a few charts that highlight the long-term benefits of staying invested in Seadrill and not sweating daily market gyrations.

Jack-Up Scare Overblown

After a year of weakness (SDRL peaked back last Sept. over $44) in the offshore drilling stocks do to an oversupply in new ultra-deepwater rigs, the fears are now shifting towards the jack-up market. While the jack-up market only accounts for $5.5 billion of the $18.2 billion backlog of the company, the eight jack-ups under construction will nonetheless impact the stock.

Similar to the UDW market, the market for jack-up rigs is quickly moving towards one with a preference for modern, high-specification rigs and creating a bifurcation in demand. Th new rigs remain in high demand while a host of rigs over 30 years face scrapping or the acceptance of significantly lower day rates to find work. The good news for Seadrill with mostly premium rigs is that the market of roughly 500 rigs has an inventory of over 40% older than 30 years. Most of these rigs face significant costs to upgrade making it difficult to justify the expense to keep them in working condition. The problem is that at the same time the jack-up market will be flooded with over 100 new rigs in 2015 and 2016.

Source: SDRL Q214

Consistent Dividends

Another key point with Seadrill is that while most investors fear the aggressive firm won't maintain the $1 quarterly dividend, the company has faced these fears for years now while constantly raising the dividend level.

As the slide below highlights, higher EBITDA from consistently high economic utilization of ultra-deepwater floaters has led to years of dividend increases.

Source: SDRL Q214


The bifurcated market continues to favor Seadrill with a mostly modern fleet. The road might remain bumpy for the next 6-12 months, but at the end of the day the modern fleets will find attractive employment day rates and the old rigs will exit the market. Investors should accept the very attractive dividends and wait for the capital gains to appear whether this year or next.

Disclosure: The author is long SDRL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.