May Idea of the Month: Buy Seadrill for dividends, visibility

by Travis Johnson, Stock Gumshoe | May 22, 2008 3:55 pm


I have intimated several times over the past year that I’d like to create some special content that is just for the folks who contribute financially to StockGumshoe.com … well, the good news and the bad news is, I’m almost ready to actually do so. And even though it’s just “almost,” we’re starting today.

Good news because those of you who donate deserve a little something more than the folks who simply read StockGumshoe.com for free … and bad news, because the special private site for the Stock Gumshoe Irregulars is still “under construction.” So I can’t offer you the full functionality of this private site just yet. But I can offer you something today.

So why rush to do this today, after waiting plenty of time to try to squeeze in development efforts for this new site? Well, I actually have a pretty good reason.

Let me first explain what I’ll be providing to you as a “Thank You” for contributors. My intent with this “private” site, which is in the process of being built at http://www.stockgumshoe.com/premium, is to share a few things:

First, I’ll do one in-depth look per month at a stock that seems like a compelling investment idea. It might be a stock that I own or have researched in the past, and it will probably often be a stock that has also been teased or recommended by an investing newsletter. This will be during the last week of the month, so I’m launching today and will the next one will be released in the last week of June.

Second, I’ll provide access to all the stocks in my personal portfolio via a list. I’ll also provide notification when my portfolio changes, though I wouldn’t necessarily assume that what I think is right for my portfolio is what’s right for yours. This particular part is in response to past requests from contributors.

And third, I’ll share some other thoughts and comments that don’t really fit at the main site or make sense as a full article at StockGumshoe.com, usually reacting to news that affects companies of interest to me and some of you, probably once a week or so.

So — the reason for rushing something out to you today?

Over the last week, I’ve gotten more and more convinced that there is one single stock that I think everyone should at least consider owning.

My best idea for May: Buy Seadrill (SDRL in Oslo, SDRLF on the pink sheets)

Current price: ~180 Norwegian Krone, $36

This stock is my largest personal holding, by far (currently it makes up between 15-20% of my portfolio), and is the stock I have the most conviction about over the next year.

And the company is going to report earnings on Tuesday morning next week (probably just before 11am, after the market close in Oslo), so if there’s a good time for me to share some information about the stock … it’s today. That’s because, with the Memorial Day holiday for the US (and almost all of you are located in the US), if you happen to wish to buy shares of this company before the earnings are announced you’ll in all likelihood have to do so by Friday. And Friday morning may be easier than Friday afternoon. I have no idea where the share price will be on Tuesday morning, but you might be able to buy then, too, if it’s important to you to buy before earnings — the Oslo market closes at 10:30am on Tuesday.

Let me be clear: I have no inside information about whether they will announce something that will move the shares on Tuesday, or if the earnings will beat or miss, but they recently made a very big deal that boosted the shares considerably and clarified the future strategy for the company. If they elaborate on that in the conference call and share their specific plans for future deals, and get more attention from investors as a result, it could easily move the shares up … or down, of course, though I think “up” is more likely.

The stock is at an all-time high now, however, and could very likely pull back at some point in the coming months if you’d prefer to be patient. Personally, I have bought additional shares this week, and I’m looking to buy more in the coming months and hold them for several years. I’ve included a note at the bottom of this analysis that gives some ideas about how to buy shares if you’re interested.

Many of you have probably heard me mention Seadrill before whenever an oil drilling teaser comes up, or even last year when Elliott Gue actually teased this stock as part of a group of oil service companies and I wrote briefly about them at the main StockGumshoe.com site. I’ve held shares for a couple years now, and I just bought more shares this week, so I think it’s worth buying now at $36 even though I picked up most of my position in the high teens. Since I’m releasing this report to you today I will not buy or sell the shares for at least three days, but my intention is to buy more in the next few months, and certainly not to sell.

Why is this the most compelling investment idea I can present to you this month?

Well, first I need to explain the company a little bit:

Seadrill is the fourth largest ocean drilling rig company in the world (by market cap), and it is arguably the one with the newest and most capable fleet among the large operators. It was close to challenging Transocean to claim the largest number of ultra-deepwater rigs last year, but the merger between Transocean and GlobalSantaFe put the kibosh on that.

This is far from being a small cap company, even though you may not have heard of it — it is not listed in the US, but is one of the largest companies listed on the Oslo stock exchange. And, at least lately, it trades in halfway decent volume on the pink sheets (definitely not good volume, but almost 20,000 shares a day … which is much better than the pink sheets foreign listings that trade a couple hundred shares every third day). I’ll provide some notes at the bottom about how to buy it if you’re interested.

If you are unfamiliar with the ocean drilling rig industry, there are a few things to know. The vast majority of drilling rigs that are used in the water are shallow-water rigs called jack-ups. These are the rigs that sit on the ocean floor and can drill in up to a few hundred feet of water, though some of the best jack-ups can drill in deeper water. That’s what you’ll see all around the coastal areas of the Gulf of Mexico, for example, on the continental shelf.

Discoveries in offshore areas that are much more challenging have necessitated the development of ever more capable rigs — rigs that can drill in much deeper water, and to much deeper depth under the water. There are also demands for particular capabilities — for example, rigs that can handle particularly harsh storm and temperature conditions are needed for the North Sea and for areas offshore Russia.

And those are the rigs that Seadrill really specializes in — floating deepwater and ultra-deepwater drilling rigs, some of which are capable of drilling in harsh conditions. Most of these are “floaters”, since you clearly can’t “jack up ” a drilling rig with feet on the ocean floor if the floor of the ocean is under a mile of water. So these floating rigs and drillships, which are the rarest and most in-demand drilling rigs on earth, really do float and maintain their position over the wellhead on the ocean floor using computerized stabilizers and similar goodies.

If we think about the recent big oil discoveries in the world — the big field in the Gulf of Mexico that was discovered last year, the huge field offshore Brazil — they are almost all offshore, and most of them are in very deep water. The fields that are onshore or immediately off the coast and in 100 feet of water were discovered and plundered years ago, in the main, so the new oil the world needs is harder to find, harder to get to, and often deep, deep beneath the ocean floor.

So Seadrill is a big company, the market cap is well over $10 billion, and they own a lot of drilling rigs. As of now they have a fleet of 37 rigs of various types (though that counts 11 that are still on order, including six deepwater rigs and drillships to be delivered in the next year). They have just recently taken delivery of their first deepwater newbuilds.

And there are a few reasons why I think it’s the best oil service company to own.

1) Timing. This company was created just as deepwater rigs came into favor again with the rising demand for oil and some big deepwater discoveries, and just as demand started to heat up. Shipyards are running full out and need about a three-four year lead time for new rig orders, so Seadrill is the company that has the newest, most capable rigs just as people are realizing that they really need these rigs. This is no accident, though it’s probably working out even better than management expected. Currently, about 75% of the floating deepwater rigs and drillships that are being built by shipyards already have long term contracts in place, often through 2015 or 2016, and current newbuild orders have big impediments that might depress future supply — they will be more expensive, due to significant yard inflation, and they will not be delivered until probably 2012 or 2013.

2) Fleet. Seadrill has the youngest fleet of deepwater rigs, and these can be expected to have long, productive lives — and with the rates that are being paid now, they can pay for themselves in just a few years. Seadrill’s deepwater rigs are on average about five years old, much younger than the major competitors, and, also on average, these newer and more capable rigs get higher rates.

3) Management pedigree. This is probably the most important consideration. I initially bought shares of Seadrill because of the man who founded it, and he has richly rewarded his shareholders in the past. More on him in a moment.

4) Dividends. The declared dividend is $1 a year, which is about 3% at the current price, but that’s small potatoes compared to what I believe we can expect in the future.

5) Visibility of earnings. The long and rich deals that are being signed by oil companies now give us tremendous visibility into the future — we’re seeing five year deals signed now that don’t even start until 2011, and in some cases we’re even seeing 30-year-old drillships getting new deals for $400,000 a day. Seadrill’s most capable rigs and drillships are being signed to long term deals between $600,000 and 650,000 dollars a day, per their recently announced deals with Petrobras. Not many businesses can look out five years and tell you with some certainty what their revenue is going to be — but Seadrill has a backlog of about $12 billion, and about half of their fleet is booked through 2013.

Those are the compelling reasons why I think this is the best investing idea to share this month, but those quick summaries don’t do justice to what is taking place with this company. Let me elaborate on the strategy of the company, and on how I think it is going to pay off for investors.

The strategy was summed up in a recent presentation by the company to be as follows:

What is the Frontline/Ship Finance model?

John Fredriksen, the Norwegian tycoon (though he lives in Cyprus if it’s the taxman asking), is the leading shareholder, Chairman, President, and founder of Seadrill. With him on the board is Tor Olav Troim, often referred to as his “right hand man.” Fredriksen built Frontline, which I’ve written about before and used to own, into the biggest owner of supertankers in the world … but he did it in a way that hasn’t been done before, and in a way that enriched shareholders dramatically more than did competitors.

Frontline was built through acquisitions — Fredriksen has been described as a “viking raider” who pulls no punches in efforts to acquire ships and companies. And it had some awful years in the beginning. But when the market for tankers started to explode, thanks in part to the phasing out of single-hull tankers, he was in the catbird’s seat.

But Fredriksen wasn’t content to just reap the rewards of owning a huge fleet of oil tankers at a time when they were getting sky-high dayrates. That was nice, sure, and it brought in massive profits. But still, there was a tendency for investors to value Frontline based just on the value of its steel, as has been typical in shipping circles in the past. And Fredriksen had a large portion of his assets tied up in Frontline.

So, with the hot market for tankers he decided to use some “gearing” — which is just another word for leverage, or loans. Just like the gears on a car or a bicycle, they allow more production to come out of less equity. In his case, he decided that there was no reason to own the ships if you could just lease them, and get those huge depreciating assets off your books.

So he created a separate financing company, called Ship Finance Limited. This was originally a subsidiary of Frontline, but it was gradually spun out to shareholders and to public investors over a year or two. Ship Finance took ownership of the vessels, using money they borrowed on the capital markets, and in exchange Frontline took out long bare-boat charters on those same ships, giving Ship Finance a guaranteed income stream. SFL became an income investment that was fairly steady and growing, with a nice dividend that ranged from 5-9% or so much of the time. But Frontline became a dividend-generating machine, using the cash generated from selling its vessels to SFL to pay out massive special dividends, often several dollars at a time, to all shareholders.

This is how John Fredriksen maintained control of Frontline even as he managed to extract dividends far greater than his initial investment in the company. And any public shareholder could have done the same.

Then came Seadrill. This was the next big effort by Fredriksen — much as he realized that the tanker business was ripe for new investment and consolidation some ten years or so ago, three years ago he realized that the potential for offshore drilling rigs might be dramatic.

Building Seadrill

So Seadrill was formed, initially by rolling up some small drilling rig owners in Norway and placing newbuild orders with yards in Singapore and South Korea in 2005 and 2006, and then, most dramatically, by buying out the big rig owner Smedvig after a heated battle with Noble.

Smedvig gave Seadrill a great CEO with expertise in this specific business (Kjell Jacobsen), access to more capable personnel, and worldwide reach, along with a nice full order book at the very busy shipyards and a fleet of rigs of various sizes and types, so that was what really brought them to everyone’s attention.

Since then, Seadrill has been placing new orders, making small acquisitions (and hinting at larger ones, as they did with flirtations with Pride International a couple years ago and, more recently, again this Spring). During that time they’ve been getting closer to finally being big players … today, when their big newbuild vessels are entering the water in quantity, and the cash is starting to flow in.

So Seadrill now has a decent sized fleet on the water and a substantial number of deepwater rigs and drillships hitting the water this year and next.

And they have been promising for two years, though not quite at the top of their lungs, that they would bring the same kind of large-scale financial wizardry (read: sale/leaseback transactions) to Seadrill that they used to turn Frontline from a commodity owner of tankers that was valued at a discount to book value into a cash-churning machine that enriched shareholders (myself included, though I sold my Frontline shares almost a year and a half ago).

Ship Finance and Seadrill previously tested the waters for this concept with a couple sale/leaseback transactions for smaller jack-up rigs — and the demand for newbuilds made the numbers look great for those deals, too. In one of them, a rig that Seadrill had paid $140 million for was sold to SFL for $210 million before it had even been put to work — with, of course, a leaseback deal that gives Seadrill a good profit. That kind of effective leverage, far greater than 100%, can really magnify returns for shareholders if it is carefully instituted across an entire fleet of desirable assets.

Just to be clear, this isn’t exactly rocket science — nor is it something that is unique to Fredriksen or Ship Finance or Seadrill, though they embrace the concept probably more enthusiastically than anyone else in the business. Diamond Offshore, another great deepwater rig operator, also has done some similar deals and pays a nice dividend, and sale/leaseback transactions are commonplace in real estate and in some other capital-intensive industries.

But analysts didn’t really believe Seadril’s plans would lead so quickly to dividends and big paybacks for shareholders, or they thought perhaps it wouldn’t be that easy. Or that it might take longer.

Why Is Now the Time?

The news last week tells me that this leverating and monetization is definitely going to happen … probably sooner than many people thought. And all indications are that there will be financing available, even in the current environment.

Seadrill earlier this year surprised everyone by instituting a regular annual dividend of $1 a share (.25 per quarter, the first dividend has been paid), probably a year before most analysts thought they would be ready for that, since they’ve only just recently had enough of their newbuilds hit the water to begin making a measurable profit. And the dividend increases or special dividends might come earlier, too.

And the larger news is that Seadrill just sold one of their newbuild drillships, the West Polaris, to Ship Finance Limited for $850 million on May 19. I’m not sure what the original purchase price of that drillship was when they ordered it a few years ago, but it was probably not more than $500 million. Seadrill gets that $850 million from Ship Finance, who raised it from banks and had some of the cash on hand, and they get a 15 year bareboat lease on the ship.

The first 51 months of that lease will be at a bareboat charter rate (meaning, Seadrill has to pay operating costs) of $330,000 a day, dropping to about half that for the next five years. Not bad, since it probably costs something like $100,000 a day to operate the ship, and this ship is already committed to ExxonMobil for four years at an average dayrate of over $550,000. So Seadrill gets a nearly-guaranteed nice profit of something in the neighborhood of $100,000 a day, and they also get what they estimate is about $600,000 of upfront “liquidity” from the transaction that will allow them to pay higher dividends and/or to make acquisitions or new orders to grow the business.

This is in keeping with Seadrill’s strategy — to make sure that they sign deals for their newbuilding vessels and rigs that will allow them to recover the capital invested within five years (sometimes three years). Sounds nice, doesn’t it, for a rig that might profitably work for 20 or more years?

This probably should not have come as much of a surprise, given that these rigs are generally booked out at least five years into the future now at tremendously high day rates, and banks ought to be lined up to support a loan that has a near-guarantee on repayment like this does. But I think one of the things keeping Seadrill from exploding higher has been a fear that, especially in this credit environment, the financing for deals like this might be tough to come by — or that Ship Finance Limited might not be big enough to take on these deals for all of the rigs Seadrill would like to monetize. Now it looks like there isn’t much of a problem getting the money — which is part of the reason that these shares jumped close to 10% on the news.

It’s even good news for Ship Finance Limited — they got a bump on the news that they were expanding their business with this transaction, and they even hiked their dividend thanks to the growth in cash flow they expect following this massive deal for West Polaris. So if you like something steadier, with a decent dividend, you might also want to look into SFL. SFL is US-listed, so you probably get the qualified tax rate on dividends (I don’t expect you will with Seadrill, though I don’t know for sure — Seadrill is domiciled in Bermuda, which I don’t think has a relevant tax treaty with the US, and it is not listed on a US exchange.

Seadrill has done sale/leaseback transactions twice before, on a smaller scale, both times with SFL. It seemd at the time that this piecemeal work might be just testing the waters for future deals, and I think some folks were a bit concerned that it might not work out for both sides.

And he is an expert at creating cash-flow machines. He is also fair to his fellow shareholders, so while he controls his companies and clearly can do more or less as he pleases to direct decisionmaking at Seadrill, he owns roughly a third of the shares — and the are the same common shares that you or I can buy on the open market. So he has the same vote as us, proportionally … and more importantly, he has shown that he wants at all times to maintain his ownership level but also that he wants to generate cash for himself. That means he doesn’t want to sell shares of his companies and dilute his ownership, so he puts in place dividend policies that richly reward shareholders.

Seadrill has been built to enrich shareholders. That’s what all companies try to do, of course, but I think Fredriksen’s companies are focused on it more than most. That doesn’t mean it’s a guaranteed success, but it means that if there is an impediment to shareholders’ return on their equity, it will not be management recalcitrance.

Here’s a quote from Fredriksen that came from the press release about this latest sale/leaseback:

“The cash released through such arrangements will make it possible for us to deliver on our promise to return to shareholders a substantial part of Seadrill’s market capitalization without limiting the future growth of our Company.”

John Fredriksen is a multi-billionaire, and there are hundreds (at least) of eager investors who follow his every move who have made massive returns in recent years — particularly from Frontline, but also from Golden Ocean (dry bulk shippers), Ship Finance LImited (the finance company that was a spinoff of Frontline and is also doing this Seadrill deal), Golar LNG, a liquefied natural gas tanker company, and many more public companies that he has been involved with over the past few years, mostly (though not all) in shipping.

And the constant has always been that he thinks like a private owner — he cares not about earnings, but about return on equity … and, more specifically, about return OF equity. He designs his companies so that they can generate free cash flow, usually with increasing amounts of leverage, and use that cash flow to return equity to shareholders — himself included — in the form of dividends.

Other Seadrill Moves

The future success of this company, and their ability to feed steady cash flows to shareholders, will primarily depend on successful sale/leaseback deals, probably with Ship Finance Limited. But Seadrill also has other assets — they own a fleet of tender rigs, and there has been talk in the past that these might be spun off as a separate company, perhaps even a publicly traded partnership, since these smaller vessels have steady lease rates.

And they own 80% of a services company called Seawell — they floated 20% of the company last year, and might float the rest or spin it out to shareholders.

And as with all things Fredriksen, they’re active in “consolidation” — they own pieces of a couple smaller rig owners, and have a tender offer in for the shares of Scorpion Offshore that they don’t already own. I would expect this to continue — the most likely targets are small companies that have newbuild rigs on order, so that they could get new rigs into service before they could otherwise do (if you want to order today, the rig slots for newbuilds probably aren’t available until 2012 or so). But there is always the tease of something big — Seadrill picked up just under 10% of Pride International earlier this year, which scared the pants off PDE management, and has been rumored as a suitor for other midsize firms, though certainly none of the candidates are obviously cheap at the moment.

That’s part of the excitement of a John Fredriksen company — you’re never quite sure what they’ll do next, though you can be that it’s designed to make money and return capital to shareholders.

The risks

There are a good number of risks with this company, as with all companies. These are the ones that I think about.

Some are financial — their operating costs may be more expensive than they predict, since there is serious competition for capable personnel to run these deepwater rigs around the world. Seadrill has commented on their recruitment strategies in the past, and it appears to me that they are making good progress at getting the right people hired in time for their rigs to be delivered and operational. But I can’t be certain.

Others are operational — if there are significant problems with their rigs, either in the field or in the yard, there could always be significant delays. Some of that will be covered by insurance, in all likelihood, but I’m sure there are potential problems that wouldn’t fully ensure their earnings. This doesn’t worry me as much now that they are growing into a large fleet owner, with dozens of rigs, but if any of their nine most expensive and highest rate rigs/ships goes down for a protracted period, they will certainly feel it.

This year and next they are probably stretched to the limit monitoring and supervising their newbuilds in the yards, since that’s probably the biggest operational risk right now — that the huge (relatively) number of rigs and drillships they have scheduled for delivery this year and next will run into delays that slow their commissioning. There was a good article in the Houston Chronicle recently[1] that detailed some of these challenges, as Seadrill builds up a Houston office in conjunction with their first deal in the Gulf of Mexico.

And while it seems clear that they should have no problem financing the rest of their newbuild fleet, they do have six more deepwater newbuilds delivering in the coming year — and these newbuild contracts are backloaded, so they estimate that they’ll need about $2 billion in financing to cover those costs. The company noted in their last earnings report that they expect not to have a problem getting that financing, and that was before this latest SFL sale/leaseback deal. The newbuilds are worth much more than remains to be paid to the yards, so the risk should be quite low.

For the stock price, I expect that the largest risks might be related to the dividend policy and the price of oil. If oil collapses, all oil service stocks are likely to collapse, too, whether or not that makes sense for each specific company. And if it takes them longer than I expect to begin making extra dividend payments or raising their base dividend, they will probably turn off some investors who are focused on the dividend potential — especially the folks who remember, lustily, the dividends they enjoyed from Frontline.

How to buy, should you wish

Analysts didn’t believe Fredriksen for a while, or had doubts about using the Frontline/Ship Finance model, but some of them are starting to believe now … and I do, too. I’d be comfortable buying shares up to $38, though if I were starting a position here I would probably split my money and buy half before and half a few weeks after this next earnings release, hoping for a pullback of 10-20%.

If you would prefer to buy in the US instead of directing your broker to buy for you on the Oslo exchange (or, for those of you with foreign brokerage accounts, buying it yourself in Oslo), you’ll probably pay a small premium for that privilege to get your order filled on the pink sheets — I would suggest bidding no more than 1% more than the current price in Oslo, and placing your bid in the morning so that it can be filled while Oslo is still open (maybe 2% if you’re really determined to buy, but that’s a stretch).

In practice, at today’s Oslo close of $35.88 that would mean placing an order for SDRLF with a limit price of no more than $36.25, though you might also get it a bit cheaper so it’s worth a try. Keep in mind that it could go up or down in Oslo overnight and change the equation entirely.

Do note that it will be much easier to get a fill — and a fair price — if you buy right at the open when the current fair Oslo price is out there for all to see, rather than a few hours after the Oslo close when those prices have gone stale. If Oslo is open, your broker might effectively act as a market maker for you and buy in Oslo, then sell to you on the pink sheets for a few cents more. Prices are really set in Oslo, you’re just following their lead.

Oslo’s market closes at 10:30am EST, so there is one hour when both NY and Oslo are open simultaneously. You can track the Oslo price, live with a brief delay, in Yahoo Finance at SDRL.OL, and the pink sheet ticker is SDRLF. The current exchange rate is about .20 US to 1 Norwegian Krone, so you can divide the Oslo price by 5 to get a ballpark figure (or use an exchange rate calculator like xe.com to get the exact number).

Please do not buy shares now if you’re going to panic if they drop to $30. I think it’s perfectly possible that they’ll let off some steam from these highs, and this stock can be fairly volatile, especially considering its large size. I don’t think they will drop much further than that, absent a real catastrophe (ie, their rigs catch on fire in the yard and are delivered a year late), but thinking is not knowing.

Shares could also certainly fall if oil prices collapse — and we should expect some fairly significant volatility now that oil is trading at the ridiculous $130. If oil prices fall to $100 or so and the share price of Seadrill falls more than 20%, that will, in my mind, represent another buying opportunity. Oil service stocks always move in some concert with oil prices, but the cash flow Seadrill is locking in for the next five years does not depend on $130 oil … if oil prices fall to $80 a barrel, nearly all oil companies will still be very profitable and they will continue to push to find and exploit new undersea reserves, and, even in the unlikely event that they want to, oil companies rarely if ever back out of these rig deals. If oil prices fall to $50, however … all bets are off and Seadrill will probably be cut in half, at least.

Dividend future?

I think we can conservatively expect to see the dividends, including special dividends, reach 8-10% annually for 2009 and remain at least in the high single digits for several years. If they follow the pattern established with Frontline, they will maintain a relatively low standard dividend — in this case, it’s at $1 a year now, paid quarterly — and issue frequent special dividends after events like the large sale-leaseback deal recently announced, though until we hear official word that is still speculative.

What is not speculative is that the company wants to raise the dividend — here’s the quote from their last earnings report, in February: “The Board plans to increase the dividend stream materially when the deepwater rigs commence their contracts and more financing has been secured.”

To me, that means significant dividend changes probably within the next 6-12 months, and my bet would be that it’s likely to be less than six months before we hear encouraging news on this front.

One analyst, from Kaupthing, recently noted that if Seadrill is able to make similar sale/leaseback deals for its remaining deepwater rigs, they will be capable of paying a dividend of $3.60 a year for at least several years (that’s 10% at the current price), and that same analyst put a price target of 225 Kroner on the shares, which is about $45. To be fair, that’s the highest price target among analysts, as far as I know, and several analysts also have hold or sell recommendations on the shares, with target prices below the current price. I would expect a raft of new analyst estimates and reports to come out sometime after earnings are released next week.

Your due diligence … these are the basics for getting started if you want to research further:

Seadrill’s latest analyst presentation, from April (pdf)[2]

Seadrill’s announcement of the details of the sale/leaseback deal for West Polaris[3]

Seadrill’s latest earnings announcement, from late February (pdf)[4]

And of course, listen to the conference call on Tuesday at 11am if you can, or to the archive that will be available on Seadrill’s website. Listen for any comments about future sale/leaseback deals, future dividend policies, and any commentary on possible consolidation in the industry. The call should be linked from the Investor Relations page at the informative Seadrill website[5], and you might also want to spend some time browsing that site — they provide details on their fleet, including contract status, and other useful information.

If you have questions or want to discuss this investment idea further, please share below. I’ll try to answer what questions I can, and it’s fine with me if you wan to tear apart my argument and put forth the sell case for Seadrill — it’s your money, you should have conviction about what you do with it and not assume that my opinion is the most important one to consider.

By the way, if I had gotten it together to write this piece for you several weeks ago, before Seadrill announced their latest deal, the stock that would have been a competitor to be my featured company might have been Westport Innovations, but the shares of that one have headed up too far, too fast, without as strong a fundamental reason, in my opinion, so I’m reluctant to feature that until it pulls back a bit or until I get more comfortable with their valuation. I do own shares in that one, too, and I’d keep an eye on it if it falls back a bit.

full disclosure: I own shares of both Seadrill and Westport Innovations. I do not own shares of any other company mentioned above.SDRL.OL 2 year chart

Endnotes:
  1. good article in the Houston Chronicle recently: http://www.chron.com/disp/story.mpl/business/5786724.html
  2. Seadrill’s latest analyst presentation, from April (pdf): http://www.seadrill.com/stream_file.asp?iEntityId=767
  3. Seadrill’s announcement of the details of the sale/leaseback deal for West Polaris: http://www.seadrill.com/modules/module_123/proxy.asp?C=42&I=1957&D=2&mid=19
  4. Seadrill’s latest earnings announcement, from late February (pdf): http://www.seadrill.com/stream_file.asp?iEntityId=743
  5. Investor Relations page at the informative Seadrill website: http://www.seadrill.com/investorrelations.asp?mid=20

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