Full Steam Ahead

Seadrill (SDRL) is still cooking away — our favorite deepwater drilling company continues to tinker with its portfolio and book new deals for its growing fleet of floaters and jack-ups, and the prices continue to be very high.

Oh … and, as expected, they raised the dividend again. So even though the shares are up to $41 now, the indicated forward dividend is still a solid 8.5%+ — they raised the quarterly payout to 88 cents, and given the continuing performance of their rigs and the excellent cash flow, I’d be surprised if they don’t raise it again later this year. Since starting the dividend three years ago, they’ve never gone three quarters in a row without raising it.

The risk is still there, the leverage is still there, but so is the underlying demand for their assets — the last two deals they made were an extension on one floater for a day rate of about $590,000, and a deal for a newbuild drillship for three years at a reported $570,000 a day (that drillship won’t even be finished until late next year). Those aren’t record-high numbers, but they’re close, and they’re enough to continue spitting huge cash flows out to the company — especially as they’re likely to continue to be able to drop down assets to their captive MLP (Seadrill Partners, SDLP) and to grow through newbuildings and through investments in related companies. Their current rig status report indicates that they have four drillships coming out of the yard over the next 18 months that don’t have contracts yet, these are the sister ships to the one that just got a $570K day rate, so they should get some continuing cash flow growth when those deals are made and the ships hit the water — but otherwise, all of their other high-spec assets are under contract for at least a couple years, with some booked out through 2020.

Being unafraid to order these hugely expensive rigs years in advance has paid off well for Seadrill, and I see no reason why the performance won’t continue for at least another year — we’ll have to watch them, because at some point the leverage will bite them if there’s ever a substantial drop in demand for their rigs (the rigs are extraordinarily expensive, and are bought with debt), but I don’t think that’s coming anytime soon so ...

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