Seadrill (SDRL) is a near perfect stock — a high-yielding dividend stock in a sizzling, hot-growth sector with profits set to explode.
Seadrill is currently the largest offshore drilling company in the world by market cap. The company has been growing extremely rapidly since 2005, from just five rigs to 60 rigs at the end of 2011. Today, Seadrill has the world’s second-largest fleet of ultra-deepwater rigs. It’s also the only major offshore drilling company that has tender rigs in its fleet, putting it in an almost monopoly position. Seadrill has one of the most modern fleets in the world, a factor which has proven to be a huge competitive advantage for the company. After the Gulf of Mexico disaster, customers want new, high-specification rigs outfitted with all of the latest safety features.
Seadrill makes its money by renting out its rigs on a daily rate basis. Thanks to a combination of strong demand and a rising oil price, these daily rates have been skyrocketing. The average day rate of a currently contracted-out semi-tender drilling rig is $167,000. Meanwhile, the current market day rate for one of these rigs is just over $200,000. That means that once current rigs come off contract, Seadrill’s revenues will soar. The potential for ultra-deepwater rigs is even more lucrative. Day rates for these high tech rigs in huge demand can hit $575,000.
However you look at it, the recent increase in daily rates for drilling rigs is set to generate massive amounts of excess cash that Seadrill’s management will use for both organic growth and a strong long-term dividend distribution.
Seadrill has been a money maker from Day One, consistently growing its revenue, earnings and dividends over the years. Revenue has increased from $1.1 billion in 2006 to $4 billion in 2010. Net income has increased from $245 million in 2006 to $1.172 billion in 2010. On Feb. 29, the company reported a loss of $82 million for Q4, or $0.23 per share. This loss was due to a $463 million mark-to-market impairment of its investment in Archer Limited. This was a non-cash charge, so it did not negatively impact the company’s ability to earn money for investors, nor did it have any effect on cash flows. The market understood this situation and the stock actually rose on the news.
Dividends
Even after its recent run up, Seadrill is still yielding 7.4%. Equally importantly, Seadrill’s management also has hinted it will likely increase this already substantial dividend going forward as higher day rates push up revenues and cash flows. Historically, the company tends to do just that. I expect the stock’s ex-dividend date to be on or around March 8.
Price Target
On Feb. 29, Morgan Stanley upped its price target on Seadrill to $51.00. That price target is 21.2% higher from the close on Feb. 29. Morgan Stanley also expects the company to increase its quarterly dividend to $1.00, up from the current $.80.
Options
Seadrill’s stock has been on a tear of late. So, if you want to play the options for potentially even bigger gains from the appreciation of its stock price, I recommend the July $43 call options (SDRL120721C000430). They are currently going for $.95.
Stop Price
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The stop price for this play is $31.50.
