“Let the Last Viking Make You Rich”

Starting the New Year with the favorite pick of the Energy Strategist

By Travis Johnson, Stock Gumshoe, January 2, 2013

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“DEEPSEA DRILLER ALERT: Rates are rising fast for ultra-deepwater drillers. One company commands the sweet spot. It owns a fleet of rigs and drillships—some capable of drilling 35,000 feet under the sea. It just signed a five-year deal paying $635,000 per ship per day. It passes along most of that cash straight to shareholders. If you like growing stocks paying extremely generous dividends, I urge you to read the story about the modern-day Norse adventurer below…”

That’s the intro to the latest tease from the Investing Daily folks, pitching a subscription to their Energy Strategist newsletter — that letter was helmed by Elliott Gue for many years, but he has now moved on and put out his own shingle (he recently started the Energy & Income Advisor service … as soon as he starts teasing picks, we’ll start trying to unravel ’em), so it’s now edited by Robert Rapier. We haven’t written about this letter since the editor change, I don’t think, so I thought we should try to ID Rapier’s new teaser pick and see if he’s looking for the same sorts of things Gue was.

And yes, I confess that after seeing that headline I had a pretty fair idea of what the stock was, even without starting up the ol’ Thinkolator, so I’m starting off 2013 with what’s likely to be an easy one. Which is a good idea, I think … after a few days off I don’t want to sprain something by jumping right in with both arms flailing.

Here’s a bit more of the teaser ad:

“Ten centuries ago, he’d have led an expedition of longships to Greenland. Today, this salty Norwegian makes discoveries tens of thousands of feet below the seafloor, along the coasts of all five continents. Sources whisper he’s about to embark on a new venture guaranteeing rising profits for years to come…

“This swashbuckling, billionaire descendent of Leif Ericson needs only a horned helmet and a broadsword to truly make him the Last Viking….

“In 2005, his tanker business thriving, he started the company that is, hands down, my favorite deepwater driller in the entire oil industry.

“His reasoning: The world was running out of ‘easy oil.’

“To fill the supply gap, he could see that producers would have to explore in more remote and technically difficult-to-produce oilfields.

“In other words, oil producers had to ‘go deep.’

“The Last Viking was dead on target. So much so that if I could own only ONE oil-service stock in the entire sector, this company would be it.”

Rapier also indicates that he thinks we’re still likely to be in a “supercycle” of sorts for oil for many years, largely because the alternatives remain more expensive and the emerging markets are driving increased global oil demand … even when weak economic times or greater efficiency might cut demand or slow demand growth in the US and other developed nations. Here’s how he puts it:

“… do NOT be fooled about the direction of oil markets on the basis of Western consumption trends. Future oil prices will be dictated by developing countries—and so will the pace of oil exploration and production.

“That’s why, in the long run, production will have a hard time staying ahead of demand—the classic recipe for higher prices.”

And the real “supercycle” is in this oil service sector … a sector in which he has one favorite pick:

“When it comes to deepwater projects, nobody does it better than the Last Viking and my top stock pick

“This impeccably managed outfit owns the most advanced fleet of deepwater and ultra-deepwater rigs in the business.

“At a time when there’s a shortage of such rigs and ships needed to drill and produce oil from these new finds, my top pick owns a modern fleet of 24 deepwater rigs, including 16 operating vessels and another 8 units slated for delivery.

“In total, it operates 67 units encompassing drillships, jack-up rigs, semi-submersible rigs and tender rigs for work in harsh environments.

“These are not just rigs—they’re the best rigs in the business. My top pick is renowned for its powerful rigs, ideally suited for drilling ultra-deep wells reaching as far as 35,000 feet. That’s almost seven miles straight down….

“… one of its deepwater units signed a five-year deal with a major oil company for a reported $635,000 per day….

“My sources tell me it’s close to signing a contract with a major producer covering three of its units still under construction. This deal is worth almost $4 billion, equivalent to a day rate of $575,000.”

So, yes, Robert Rapier and the folks at the Energy Strategist are again teasing and recommending Seadrill (SDRL). Just as Elliott Gue did before them. And I don’t blame them, it’s also been my favorite deepwater driller and has been a large personal holding for six or seven years. Seadrill has gotten substantially more complicated during that time — when I first bought them, and a few years later when I profiled them for the Irregulars, they were mostly a rig orderer — they were aggressively buying up shipyard capacity to order extremely expensive deepwater drilling units (drillships and semisubmersible rigs that can drill the ocean floor over 2+ miles of water). They were ordering these rigs “on spec” because John Fredriksen and his team believed demand would go through the roof over the years to come and drive dayrates higher … a big change in the industry, where most of the established drillers like Transocean were unwilling to order expensive new rigs until they had customers lined up and under contract. So that did nothing but help Fredriksen’s image as a modern day Viking, a comparison that’s been made many, many times as he has built several fortunes on the seas … and he apparently has done nothing to slow down, continuing to push his companies into new deals, new acquisitions, new spinoffs and whatever else can build the next fortune, preferably by buying up assets on the cheap.

The Fredriksen companies are hard to count now, there have been so many spinoffs, but Seadrill (SDRL) took over from Frontline (FRO — a tanker company) a few years ago as his biggest corporation, and it continues to dwarf the rest of the constellation. Seadrill has spun off some assets and sold others, including the spinoff of Seadrill Partners (SDLP) as a MLP-like outfit that owns a few of the rigs that are under long-term contract, and the spinoff of Archer in Oslo, which is a service company, but SDRL is still the biggie … and, from my perspective, the one that benefits most from all the financial engineering that Fredriksen companies always engage in. Seadrill is a dividend-paying colossus, and for a large cap company it lives close to the edge — borrowing heavily to finance newbuilding programs and acquisitions, pushing almost all the available cash through to shareholders as dividends, and growing that dividend quite aggressively, so it is very rewarding for shareholders but it is not for the faint of heart — if you don’t think the days of huge deepwater day rates will be maintained as more rigs hit the water in shipyards around the world, then you’re not likely to feel comfortable with Seadrill.

But they remain my favorite pick in the space — you get about a 9% yield at this point, and a company that has always been completely committed to increasing the dividend whenever they can (not steadily, but in fits and starts, including frequent special dividends when deals are done), but you also get potential growth in cash flow in the near term because Seadrill Partners (SDLP) can buy rigs from SDRL, and there are likely to continue to be investment deals and spinoffs in the years to come. Seadrill never stopped ordering rigs, so they continue to have a good backlog of eight or nine new rigs that will be delivered over the next two years … and the day rates continue to be very good, one of the semisubmersible rigs that they won’t even receive until the fourth quarter of 2014 is already under contract through 2020 at $590,000 a day, and most new deals for these high-capacity rigs continue to be in the neighborhood of $600,000 a day, which creates incredible cash flow … particularly when you can borrow the money to build these rigs at relatively low interest rates, or sell a portion of the rig to your captive MLP or to other financing consortiums to offset your cost.

There will always be panicked articles about Seadrill because they are heavily levered, they push and they invest aggressively, and they sometimes make scary deals to buy stuff that other people don’t want … and though the company is far more stable now (with operating assets) than it was when the shares crashed in 2008/2009 on debt fears, the shares can absolutely still take a hit when oil prices fall (thus dropping perceived demand for exploration) or when their deals bring skepticism from investors. I continue to be happy with my shares of Seadrill, and though I haven’t placed any new orders for the shares since I last bought in the high $20s about a year and a half ago, I am reinvesting dividends … which for a stock with a growing 9% yield can have a huge impact in just a couple years.

The stock is volatile, particularly when oil prices move, so I wouldn’t ever tell anyone to bet heavily on them at any one price … we may see some weakness in the next few months if oil prices fall at all, perhaps exacerbated by the fact that they prepaid their next quarterly dividend in 2012 to avoid possible “fiscal cliff” tax hikes for shareholders, so there may be an opportunity to build a position, should you so desire, over time as dips seem likely to eventually bring the shares back down to at least the mid-$30s … though every dividend hike does make it harder for the stock to fall. That’s just my feeling about the shares and my experience as an owner for several years, I don’t have any interest in trying to “trade around” the stock to capture any of this — this is a buy, hold, and watch stock for me, I won’t sell it unless I get worried about the broader environment for deepwater rigs or they spin out too much of their fleet to generate growing cash flow in the future.

But that’s me — it’s your money that you’re worried about, so what do you think? Like a 9% yield from the wild viking? Or is he skating too close to the edge and making you worried? Have other favorites in the offshore drilling space? Let us know with a comment below.

Oh, and Happy New Year!


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16 Comments on "“Let the Last Viking Make You Rich”"

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Myron Martin
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January 2, 2013 6:41 pm

Knew it was a Fredriksen company when I sent it in, but with my limited capital I rarely invest in companies over $5. but it would seem Travis made a good buy 8 years ago. What I look for are the under $1. companies that have the potential to become $20. – $30. stocks a few years out.

Steve
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Steve
January 2, 2013 6:52 pm

So, how many $1 dollar companies do you have to look at to find one that actually makes a profit? Lotto tickets may be a better risk/reward ratio. I’m good with a $40 company that makes a hefty profit and pays a huge 9% dividend.

blufox
Member
12
January 2, 2013 11:46 pm
Steve, It’s not how much one pays for a stock that determines its ultimate value. It’s a combination of fundamental and technical analysis that help one determine what to buy. I have currently have a total of 80 positions and pretty much all of them have done well. AND some of them are cheap stocks while others are multi-billion mkt cap stocks. For example, KDIAF cost .489 166 days ago, DCIX cost 5.66 22 days ago, TAT was bought today for .91/sh, BAR.V cost .98 108 days ago, etc. My point is that people can do well at any price… Read more »
chuck
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0
chuck
January 2, 2013 6:51 pm
Have owned SDRL stock for approximately 2 years and like you am very satisfied with the return — a solid 9+ % per year with reinvestment. Unfortunately, was somewhat late to the party and had to pay in the low $30 for my initial buy. Also own Diamond Office Shore (DO), having bought in approximately the same time. DO did not do well in 2011, but came roaring back in 2012. Look at this pair as “book ends” for this industry — the aggressive SDRL and the rather conservative DO. Of course, two years is a short time to judge… Read more »
rfdesam
Irregular
0
rfdesam
January 2, 2013 7:47 pm

Personal Capital tool looks like MINT and invalidates confidential agreement you signed with all banks in Canada telling you not to divulge your password. Any fraudulent access to your account even through ATM machine would be denied insurance by the bank. Does not seem to be available in Canada

Perry Noblett
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0
Perry Noblett
January 2, 2013 10:22 pm

I have had SDRL for about 18 months and will buy more on the next pullback. Love it.

olivan leach
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0
January 3, 2013 2:32 pm
I have owned SDRL for some time and will buy more on dips. The guy who was talking about under a buck stocks I used to live in that world back in the bad ole days of learning to invest.I was in the state of mind that I would dream of hitting the big one and selling at 10 20 30 even and all the looking and dreaming would pay off and I would be in the big bucks.Buddy don;t do that to your self.It is just a dream that don’ work and will never work. It really is much… Read more »
john hryma
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john hryma
January 3, 2013 3:53 pm

It doesn’t matter if you buy a$25..00 stock or a penny stock. As long as the story is really good and you get into the stock very early. There are only a handful of companies that you may make some money. Be greedy, be careful get in fast and get out fast as the old saying goes pigs get slaughtered. Be very careful and Happy Investing to all in 2013. Gumshoe is where I want to be before I Invest. Any Ideas?

jshib
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jshib
January 3, 2013 5:14 pm

a reported 20 huge oilfinds in U.S. (10 Bil barrel size) may slow or halt completely ultra-expensive deepwater drilling, Cushing is overflowing . More is flooding down from boiling Canadian oil sand and new pipelines. These oil & gas shale fields can be all over the world. Shale is all over, especially where coal has ben found. Newly perfected horizontal drilling has raised the flow, should drop the price of oil and gas for many years. SEAD might be a great short!

olivan leach
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0
January 3, 2013 6:14 pm
John Hryma said it all about it don’t matter about the stock price if the story is right. You see from what I have learned at a very high price is the story on a penny stock is more fiction and bull than any thing else. Now don’t get me wrong there can be some high priced stocks that are a ton of bad dreams and bull,but the cheap one’s have a million to one chance of being a pipe dream.We have a way of thinking that some little stock is one thing when if we went and put our… Read more »
Jerryaster
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Jerryaster
January 4, 2013 3:46 am

In looking at the SDRL chart, it appears to be just nudging the lower trendline drawn from the low in 2009 to date indicating a potential buy area. However, two things to think about…the pending IPO of NADL and the future glut of oil in the US vis-a-via, shale oil! One “industry” sure to profit from shale oil that I have not seen mentioned are E&C companies such as FLR…same goes for LNG infrastructure! Someone has to design and build them!

T. Walker
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T. Walker
January 5, 2013 2:08 pm

I am guessing that oil will stay up for a long time. I hope we in america can go to electric cars and stick it to the middle east.

hill_0662
Irregular
0
hill_0662
January 7, 2013 5:45 pm

Predictions of vast supplies of US shale natural gas are criticised here; production is not economic at present:
http://www.theoildrum.com/node/9753#more
http://www.theoildrum.com/node/9751#more
http://www.theoildrum.com/node/9748#more

Re US shale production of oil, I have not seen as much detail, but I doubt the deep water sources will be supplanted by increased production on land, because many on-land fields are depleting. My concern is when there will be too many deep water rigs, can’t tell when that will be – ?
Thanks for fine article and comments, George

hill_0662
Irregular
0
hill_0662
January 7, 2013 6:34 pm

An apology and correction – The 3rd link above,
http://www.theoildrum.com/node/9748#more
is mainly about oil shale. I should have put it into the second paragraph. It describes depletion and cost issues which will limit Bakken production.
So we can be bullish on SDRL till we have too many rigs – still would like help on that time prediction.
Thanks, George

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