Seadrill continues to get punished by the collapsing oil price and the faltering global economy, though so far this morning it has fallen less than oil, and less than some indexes I follow. But it’s certainly not pretty.
Seadrill has now dropped from being my largest holding, just because of the falling share price (I haven’t sold my shares) — that position is now held by Berkshire Hathaway, which certainly is a much more stable port in this particular storm. Seadrill remains highly leveraged, and the evidence recently was that they were able to get continued financing, even if it was at terms that a year ago would have seemed usurious.
The big question is fundamentals for Seadrill — they took delivery of one rig recently, and will take several more in the coming months, all of which are primed to go into action at very high dayrates, bringing very rapid earnings growth in the next year.
In this environment, however, that may matter not at all. As I said, I have not sold, but I can’t tell anyone else to have the stomach I do for this kind of fall — everyone should make their own decisions about their risk tolerance when deciding whether or not to sell during a stomach-churning market cataclysm like this. And I may have to sell some of these shares at some point (you’ll be the first to know if I do).
Concern in the near term is as follows: Seadrill’s contracts with the oil majors may be broken — they lease their rigs to folks like ExxonMobil and Petrobras, who have lots of money to spend, still, but those companies may pull back their exploration and production budgets. They still make plenty of money with oil at $80, but if they begin to fear that we’ll return to an era of cheap oil they might try to break contracts.
Personally, I don’t believe that we’re returning to the stone age, though this will be the worst recession at least since the 1970s. I expect that the massive and unprecedented actions of governments around the globe will eventually have an impact, though in the short-term focused markets the promise of something happening someday isn’t enough to prevent selling. The question is, who are you selling to? Who is still buying? The traders are gone, the hedge funds are gone, the mutual funds ...