Seadrill Update — Drillers keep getting cheaper

By Travis Johnson, Stock Gumshoe, August 5, 2008

My confidence in the long-term potential for Seadrill remains unshaken, but the price has certainly taken a hit in the last week (and the last two months). I think all the major offshore drillers are unbelievable bargains at this point, since they have fabulous earnings visibility out several years regardless of the oil price (these contracts for rigs are very unlikely to be broken, in my opinion, even if oil falls further — though if oil collapses dramatically, to well below $100, then all bets are off and there will be anarchy in the sector). The big daddy, Transocean, is laughably inexpensive in my book, as are most of the others due to sector weakness as oil falls. Transocean is up about 10% year to date, Atwood and Diamond Offshore are dead even over the last six months, and Seadrill is up about 40% during that timeframe. The worst performer recently was also the one that had the biggest spike up — Atwood, which was touted by Hsu and also featured in IBD and has fallen 40% in a month, but all have fallen off their highs — Seadrill at $25 is dramatically lower than when I wrote about it at $35, which turned out to be just about the all-time-high price so far.

I still think anyone who bought at $35 will be pleased in a year, and more so in three years, but I wouldn’t blame you for being unhappy or for selling, everyone has to do what’s comfortable for their portfolios and personality.

Ship Finance, which is the company that has done sale/leaseback transactions with Seadrill, has raised more money for future transactions by selling some tankers. I would not be surprised if they make at least one more deal with Seadrill in the near future, freeing up more cash for Seadrill’s new rigs and for dividends. This remains the key year for Seadrill, they have many more rigs coming online in the next nine months or so, and a few have recently gotten to work or been delivered. There has been one significant delivery delay so far, and if there are more the price will probably slip a bit again, but those delays only push out earnings by a few months, they don’t erase them.

The challenges for Seadrill will remain as they were when I first wrote about them: They have to commission ...

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