Pat McKeough responds to many requests from members of his Inner Circle for specific advice on stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week we had a question from an Inner Circle member about one of the energy stocks that had to recover from the explosion of the Deepwater Horizon drill in the Gulf of Mexico in 2010. Offshore driller SeaDrill has seen its shares rebound and now it operates at near full capacity and has more rigs under construction. Pat looks at the advantages SeaDrill derives from its modern, high-quality drilling rigs but also at the added risk the company runs as it borrows heavily to build its new rigs.
Q: Dear Patrick: It would be appreciated if you could share your thoughts on SeaDrill Ltd. Cheers.
A: SeaDrill Ltd. (symbol SDRL on Nasdaq; www.seadrill.com), is a leading offshore drilling company. The Norway-based firm has a fleet of 64 drilling rigs that can operate in shallow to very deep water. It has 27 more rigs under construction, most of which will be ready within two years.
SeaDrill only started up in 2005, so it owns modern, high-quality drilling rigs that are in great demand. As a result, the company’s utilization rates are high, in the 93% to 97% range.
In the three months ended June 30, 2013, SeaDrill’s revenue rose 13.0%, to $1.26 billion from $1.12 billion a year earlier. Rising oil prices continue to push up demand for the company’s rigs.
Earnings jumped 215.9% in the quarter, to $1.75 billion, or $3.53 a share. (Total earnings of $1.75 billion exceeded revenue of $1.26 billion because the company sold its tender-rig business for a $1.3-billion gain, which is included in earnings.) Tender rigs are barge-like vessels that carry drilling equipment to offshore platforms. A year earlier, SeaDrill earned $554 million, or $1.12 a share. Excluding one-time items, the company earned $0.69 a share in the latest quarter. That beat the consensus estimate of $0.61.
Energy stocks: SeaDrill shares rebound strongly from Deepwater disaster in Gulf of Mexico
SeaDrill’s shares have rebounded strongly from the low of $17.81 they reached in the wake of the April 2010 explosion and sinking of the Deepwater Horizon drilling rig in the Gulf of Mexico, which caused a massive oil spill. They are currently at $46.29.
The company recently raised its quarterly dividend by 3.4%, to $0.91 a share from $0.88. The new annual rate of $3.64 yields a high 7.9%.
SeaDrill’s long-term debt stands at $9.2 billion, and the company is borrowing more funds as it builds new rigs.
SeaDrill continues to operate near full capacity thanks to exploration successes in big offshore fields in West Africa, the Gulf of Mexico and off the coast of Brazil. The company’s contract prices remain high, and it has a $19-billion order backlog.
In the Inner Circle Q&A, Pat evaluates SeaDrill’s added risk with the debt it has assumed to expand its fleet of rigs. He also examines the company’s earnings outlook and whether the shares can keep on rising. He concludes with his clear buy-hold-sell advice on this stock.
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