February Idea of the Month — Oil Services

By Travis Johnson, Stock Gumshoe, February 28, 2014

Well, after spending last month catching up and revising my thoughts and opinions about the dozens of stocks I’ve covered for the Irregulars in this space, it’s time to again look for something interesting for your consideration.

First, I should let you know that I’ve become less worried about about Seadrill (SDRL) this week after they reported their earnings, and bought some more shares of Third Point Reinsurance (TPRE) before earnings.

I’ve become comfortable with Seadrill’s “bottoming out” now that they have clearly solidified the dividend and the market has stopped panicking about them cutting it. The stock should creep back up to $40 or so (all else being equal — like, no crash in the oil price or rig accident) on the back of that restated commitment to the current yield (dividend at this pace would be $3.92 per year)… even though they’re unlikely to raise it over the next couple quarters. The company noted that they are keeping some cash in reserve for future dividends, but are maintaining flexibility so will not necessarily be increasing the dividend every quarter as they have in the past.

Seadrill is looking into the future rig demand and getting ready, one expects, for the fact that they will very likely have a tepid 2014 in earnings, and probably a weak 2015 in terms of earnings growth, but their aggressive newbuilding-ordering stance means they’re well supplied to benefit from a return to investment by oil majors after they finish licking their wounds and reassessing costs this year. They view the recent downturn in rig demand among the big oil companies as a retrenchment after so many of those firms got caught overspending on big, expensive projects — many offshore projects should be abundantly profitable at $100 oil, but it’s quite possible that they got into many of these projects with starry eyes.

Oil and gas are both climbing now, but oil companies have had disappointing profits, largely on the back of much higher expenses, so we’re either in a period where we reconsider whether big offshore oil fields are worth searching for and producing … or we’re just in a lull. Seadrill expects a lull, and given the rising population and energy demand, I’m inclined to agree.

But that doesn’t mean we’re looking at certain gains — just that I don’t want to sell a 10% ...

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