Sunday, February 9, 2014

Stocks - BUY - Seadrill

I have been following stock articles on Seadrill for quite some time and as the stock price dipped in the past weeks, I decided to add some exposure to the industry in the context of recent portfolio rebalancing activities. I am aware that Seadrill is a high-yield investment with considerable risk similar to TICC and Ekosem, but to me the dividend yield of around 10% represents an adequate risk premium.  

Seadrill provides offshore drilling services to the oil and gas industry on a global scale. The company owns and operates one of the youngest fleets by age within the industry, comprising 64 offshore drilling units and 23 more units under construction. Its business model is very capital intensive and as a result the company incurred significant amounts of debt in the last years. While Seadrill showed substantial growth and rising dividends in recent years, it still finds itself within a ramp up phase therefore regularly funding distributions from a mix of operating cashflow and debt financing.

Whereas the industry, just like the oil price, is very cyclical in nature and therefore adding more volatility to my portfolio, Seadrill’s order backlog amounts to ca. USD 20bn which is quite impressive given the ca. USD 3.8bn of revenues within 9M 2013. This strong order backlog provides investors with some mitigation to potential external shocks.


    • 2nd biggest provider of offshore drilling services (after Transocean) with global footprint
    • 4 consecutive annual dividend increases
    • Market capitalization of ca. USD 17.3bn
    • No rating issue by S&P/Moody’s/Fitch
    • Acceptable equity ratio of ca. 28%, but aggressive Total Net Debt / EBITDA of 4.8x
    • Added 32 stocks at price of EUR 28.68 generating a yield of 9.7% 


    Dividend history of the company is not very long due to its very recent inception in 2005 and there are definitely some doubts about distribution sustainability, but even if the currently very high dividend yield of > 10% got cut, I believe that it would remain within an acceptable range for a non-investment grade investment. I am aware that this stock is not the best fit to a dividend growth strategy, but nonetheless I consider it to be a great addition, also when considering its impact on total dividend return of my portfolio.



    5 comments:

    1. I think that Seadrill can have a place in a dividend portfolio, too.

      I m only sceptical because there is not only a backlog in revenue; but alot in new debt too. Economical downturns can always come to a dangerous collaboreation between oversupply, low day rates and falling capex of the big energy companies.

      But if everything goes on "normal" (Oil around 100$) there is a bright future for the coming years.

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    2. Hi Ulrich,

      Welcome and thanks for commenting! You actually released one of the first comments on my side! Thanks for that :-) I appreciate very much that you share your personal assessment on Seadrill. This is also helping me with better understanding my own portfolio holdings.

      Seadrill is definitely a high risk investment and it is not straight forward to understand the business model and financial engineering applied within its complex MLP structure.

      As indicated in my article, I also have concerns about Seadrill's high leverage and dividend sustainability. On the other side, my rationale for buying the stock some time ago was that it had shown remarkable (dividend) growth in past years. To me, the fundamentals of the industry remain promising despite a current weakening of short term demand. As to high leverage, yes the leverage is higher compared to its peers, but on the other side Seadrill's fleet is more diversified and of younger age, which is also reflected in Seadrill's higher utilization rates. Based on recent articles on seeking alpha, I understand that Seadrill Ltd. seems to be able to reduce the amount of debt on its balance sheet by selling own shipping vessels to Seadrill Partners. I did not fully understand how that works in detail, but it seems to be that Seadrill is saving 20% of the sale prices for a so-called dividend capacity fund. This together with the fact that they plan to raise dividends at lower levels provides me with some comfort in regard to dividend sustainability.

      All in all, I think Seadrill is a nice addition to a regular dividend portfolio. Due to the inherent risks I think it makes sense to limit the overall share of such high-yield investments to 10-20% of the overall portfolio size.

      Im Übrigen kannst du auch gerne auf Deutsch kommentieren. Ich schreibe die Artikel zwar auf Englisch, aber dies soll nicht bedeuten, dass die Kommentare nicht auch auf Deutsch erfolgen können! :-)

      Thanks again for your comment und bis bald!
      M-d

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    3. As Seadrill suspended its dividend end of 2014 I am considering to sell the stock. As Oil drillers - in my opinion are heavily biased I am not sure if this is the right move right now. On a valuation basis Seadrill is historically cheap and could be a turnaround story on the back of a stabilizing oil price. However, as the Saudis do not intend to cut production and the Americans continue to produce oil from oil sands using fracking, I see oil oversupply for at least mid-term. Any idea what to do with seadrill now?

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      Replies
      1. At the moment I think there is no right or wrong regarding Seadrill. I pretty much suffered from the price drop, but I still believe in some sort of turn-around. I don't believe that oil prices remain at this level for a longer period of time. So my motto is keep calm and carry on...

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      2. By the way: Nice page of yours. Welcome to the dividend world! ;-)

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