Keith Kohl has been mostly teasing his Bakken shale oil picks in recent months as he sniffs around for new subscribers to Energy Investor, but lately we’ve seen a new ad campaign that teases a stock he calls the “Lord of the Rigs.”
Which rolls off the tongue nicely, no? This is the “entry level” energy newsletter over at Angel Publishing, “on sale” for $49, so I suppose we could all go out and subscribe and find out the secret name — but it’s more fun, of course, to figure it out for ourselves. That way we can think it over, be open minded, and later, if we decide we love Mr. Kohl’s thoughts, we can subscribe if we feel like it without the pressure of a “secret” weighing us down.
(Why do we do what we do here at Stock Gumshoe? I’ve gotten that question a lot lately. Well, partly because we like to solve mysteries … and because we really, really, don’t like secrets … and partly because we think that if you sign up for a newsletter just to get a “secret” recommendation you’ll probably be buying newsletters you might not like otherwise. And if you’re like most people, paying for a “secret” stock idea will predispose you to loving the idea and buying the stock even if you wouldn’t have looked at it twice yesterday. So we sift through the clues, reveal the stock for you, get you started on thinking about it for yourself … we don’t tell people not to subscribe to newsletters, we just tell ’em not to subscribe simply to get a “secret” tip. So if you feel like subscribing to Energy Investor later on, well, you go right ahead. (Normally I’d tell you to check out the subscriber reviews here at Stock Gumshoe, but there aren’t many recent ones at the moment.))
Anyway, we’ve got a secret “Lord of the Rigs” to find for you today — here’s how Kohl teases it:
“Why Big Oil MUST pay ONE small company “rent” to the tune of $580,000 per day…
“And how that means an extra $17,300 in your pocket for the next 9 years….
“It’s hands down the best retirement income opportunity you’ve NEVER heard of.
“And it’s backed by the mother of all moneymakers, Big Oil.
“In short, the world’s largest, most profitable oil companies ARE FORCED to pay one small company “rent” to the tune of $580,000 PER DAY.
“What is Big Oil renting from this small company exactly? Offshore drilling rigs.
“And then this small company pays out the majority of its rental income to its “partners” every single quarter.
“These Big Oil firms include Chevron, British Petroleum, and ExxonMobil, the most valuable company in the entire world.”
Sounds compelling, right? There are a half-dozen reasonably sized deepwater rig owners, and most of them don’t have anything really proprietary about them — the most recently built rigs with the best safety equipment and highest capabilities (drilling depth, water depth, harsh environment capability) get the highest rates, and all the companies dance around about how much to invest in building new rigs before they’re under lease, and how long to book contracts out into the future versus how many rigs to hold for availability over the next year if demand spikes higher, etc. etc. And several of them pay substantial dividends.
So which one does Kohl like?
Well, we get a few more clues:
“… this deep-sea landlord has increased the size of its payouts to partners a stunning NINE TIMES in just the past three years….
“The “Lord of the Rigs” owns a massive fleet of deepwater oil drilling rigs.
“These rigs are huge, complex structures that take several years to build — at a cost of nearly $1 BILLION each.
“The “Lord of the Rigs” leases out these drilling rigs to Big Oil exploration juggernauts including Chevron, British Petroleum, Exxon Mobil and more. These Big Oil companies then use the rigs to extract oil from deep below the sea floor.
“And these long-term leases lock in high daily rental rates of half a million dollars or more.
“So even if oil prices crash, the “Lord of the rigs” collects its rent money and you get paid!
“The oil company renting the rig must pay the “Lord of the Rigs” the same amount each day — whether oil is $100 per barrel, $80 per barrel, or $50 per barrel….
“… oil companies the world over are clamoring for these deepwater drilling rigs.
“And right now, there is a massive shortage of them.”
I don’t know if the current state of the market would back up that “massive shortage” term, but rig day rates are pretty high even if they’re a bit off of their all-time highs, and there are plenty of new offshore exploration projects underway and potentially coming in the years to come to spur further demand (and plenty of new rigs being built, though many of them are under contract for their first few years already).
A few more specific clues to help out the Mighty, Mighty Thinkolator? Here you go:
“Its massive fleet of 64 drilling rigs can operate in shallow to very deep water. In fact, nobody else can drill deeper than its rigs can!…
“Plus this deep-sea landlord has 27 additional rigs under construction, most of which will be ready within the next two years…
“It has inked several long-term lease agreements with Big Oil giants like ExxonMobil, British Petroleum, Chevron, Statoil, Total, ConocoPhillips, Petrobras, and others… and many of these leases are for six years or more.
“ExxonMobil is paying the “Lord of the Rigs” $540,000 per day.
“British Petroleum is paying $487,000 per day.
“Total is paying $580,000 per day….
“the “Lord of the Rigs” will bank over $24 BILLION in guaranteed revenue just in the next 480 days….
“They currently have a monster $19 billion backlog of contracts as Big Oil companies have been locking up rigs.”
So … who is it? This is, the Mighty Mighty Thinkolator must confess, yet another teaser for what has been our favorite offshore oil driller, Seadrill (SDRL).
Seadrill is one of the largest deepwater offshore drilling fleet owners, right up there with Transocean (RIG), but has always been far more aggressive than most of their competitors — they were built very quickly, mostly over the last six-seven years or so, with huge leverage used to buy new rigs and fill up capacity at the shipbuilders at a time when most rig owners were afraid to order new rigs if they didn’t have a customer in place (shipyards have full backlogs too, so many of their hugely expensive rigs were ordered “on spec” several years in advance). That served them well with big offshore discoveries in Brazil, the Gulf of Mexico, offshore China and Africa and elsewhere increasing demand. Lately demand has remained strong, and most of their rigs are under contract for several years, but they continue to be a shareholder-focused, cash-focused company: They borrow money to build rigs, pay debt service, then pay out all the extra cash flow from those rigs to shareholders in the form of very high dividends … and they’re still growing through debt, they turn around and borrow more money to build more rigs.
As the fleet has grown they’re not as susceptible to short-term cash flow issues as they were five years ago in the financial crisis, when the crash in the oil price and freeze in borrowing caused them real problems, but they are still very levered and they are still very volatile when interest rates or oil prices ebb and flow. It’s one of my larger positions, but this is what I said about them in my annual review for the Irregulars a few weeks ago:
“I still think SDRL is a good hold, and I continue to reinvest my dividends partly because I think the company will have ample access to financing to support the dividend for many years given their strong backlog and their ability to sell assets to their captive MLP or do other financial engineering, but if we see the market let the shares drop below a 10% yield (based on the last dividend, which would mean annualized dividends of $3.80) and the shares don’t recover quickly, that will be a real sign to me that investors are losing faith in these shares. If the shares fall below $38 and stay that low for more than a cup of coffee, I’ll have to take another look and reconsider — we’re pretty close to that level now, so I’m holding and reinvesting but also watching warily. Beware of a sharp rise in interest rates, or a sharp fall in the price of oil.”
The stock has fallen since then, so it does now have an expected yield of over 10% — if it remains this low, that gets worrisome. The big rig owners like Diamond Offshore (DO), Transocean (RIG) and Ensco (ESV) are all taking a beating recently, and the yield-focused ones like DO and SDRL are taking it worse than the others. Seadrill would still be my top pick in the sector, but it’s clearly not beloved at the moment and I may end up triggering a stop loss on my account — but they have ample capacity to continue generating cash and paying out that dividend, including the ability to sell down more rigs to their captive MLP Seadrill Partners (SDLP), so I am likely to resist selling for a bit longer while we wait to see if this drop in the price holds.
That’s just me, though — it’s your money, so do you want a piece of a highly leveraged, high-yield deepwater rig owner? Let us know with a comment below.