Seadrill earnings beat, stock dips

Seadrill released earnings yesterday morning and held their quarterly conference call, as expected. The earnings were, according to most, better than the average analyst estimates, but the shares have dipped somewhat following earnings and are now trading in the $33 range (they were at $36 when I released my “best idea of the month” writeup on Seadrill and suggested it would be a good buy up to $38).

There was some good news in the release, aside from the fact that the earnings were better than expected. Seadrill is still just in its first stages of earnings growth, since their best newbuild rigs are only now starting to be delivered and earn cash on the water, so operating earnings are still quite small relative to market cap — about half of the earnings this quarter were from investment profits, chiefly on the sale of their position in Apexindo (the Indonesian driller that they toyed with buying last year) and their opportunistic sale of a Jack-up rig.

The good news:

Dividend of 60 cents this quarter, off of 66 cents in earnings (that’s a boost over the last quarter’s dividend of 25 cents). That seems crazy, but it’s part of Fredriksen’s general policy of dividending out free cash flow, and earnings aren’t the key metric for this company right now. Leverage is increasing, and cash is beginning to be returned to shareholders. The company clearly noted, again, that they expect steady and significant growth in both dividends and earnings. I did not see them make an outright promise that 60 cents will be the new base dividend, but they did specifically say that they foresee additional dividend growth.

They’ve got another newbuild deepwater rig on order now, for delivery December 2011. Staying with their policy of using reliable and experienced shipyards and ordering copies of proven designs, this will be the fourth vessel based on their basic deepwater semisubmersible rig design. The first one has already been delivered.

The bad news:

Two of their new rigs are in transit, and are taking slightly longer to arrive at their destinations than expected. This will delay their income producing by a couple months.

And the CEO has resigned. Everyone seems to be confirming that this is for private and personal reasons, but he will remain on the board. His job is being filled internally by the COO. I’m sorry to see him go ...

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