Seadrill Ltd (SDRL, Financial) is an offshore, some would consider maverick, drilling contractor focused on unlocking oil and gas in the safest most efficient way. The company has the industry’s youngest and most advanced rig fleet to go along with 9,450 highly skilled employees.
Offshore drilling (despite the dangers) is still very attractive for companies like Exxon (XOM, Financial) and Shell (RDS.A, Financial)(RDS.B, Financial) who have zero access to most of the world’s reserves because of state-owned companies. Plus, with oil prices at cyclical lows right now, buying into this company could make a lot of sense.
Brent Crude over the last 12 months.
In the last decade, Seadrill has grown from 11 rigs to 69 rigs, 32 of which are classed as ultra-deep-water. This allows the company to produce $1.3 billion in profit on $5 billion in revenue with a very healthy return on equity of 13.5%.
If only the debt levels were lower
SDRL has the highest debt of any other driller with $13 billion on the books, which is close to $3 billion more than Transocean (RIG, Financial) and more than Noble (NE, Financial) and Ensco (ESV, Financial) combined. If this leverage can continue to help the company increase earnings with all the new, safe, advanced equipment, then the risk may pay off over the long term.
The bottom for SDRL (share price) is likely already in. Simply based on the price of oil and its current backlog, which totals around $12.4 billion, the next two years could see a huge rebound in the price of the stock. Plus, management has already done the hard work and cut the dividend payments, so when the company brings those back, what do you think happens to the price? It goes up. In the meantime, it can use the extra cash to expand and pay down debt –Â if it will.
So, let’s look at the current price. Over the last year, the price has seen a significant drop from the mid-30s, bouncing around in the teens before settling under $10. And, when we bring it back five years (see above), investors have never seen these levels, which (to me anyway) bodes well for someone who buys in now.
- You have a company that generates a ton of cash.
- It has the newest product/service on the market.
- It has a backlog of orders going out until the end of next year.
Not to be a bore for financials, but in the last ten years, SDRL’s sales are up 332%; net income is up a whopping 1,700%; and the book value has grown by 195%. The stock should be trading at least 100% higher. If only they didn’t have so much debt.
For investors that can handle owning a company with high degree of liabilities and where much of the income is paid out in CapEx, then the upside potential over the next 2 years could be worth the risk.
Therefore, while Carl Icahn (Trades, Portfolio) bets on on Transocean (RIG, Financial), I think it’s actually better to follow James Barrow (Trades, Portfolio) (and his 31 million shares, 6% stake) into Seadrill at this price point.
