Friday File — Casey’s “Important News” flop and some updates on favorites

By Travis Johnson, Stock Gumshoe, August 8, 2014

This week there’s been quite a bit of news in stocks that I follow fairly closely or own or have featured in the past as “Idea of the Month” candidates for the irregulars, so I do have a bit of a teaser campaign to talk to you about (that’s the Casey bit), but I’m going to start by running down some quick updates on my thinking on several of these companies.

Seadrill (SDRL) — I still think this stock should be closer to $40 for a 10% yield, as I consider that a fair valuation for a risky, levered stock in this environment, there’s not a lot of good reason for it to go below $35 or above $40 right now in my mind. There’s no strong reason why the dividend would have to be cut in the near term and abundant possibilities for it to be increased by 2016, even with rates a bit soft still for their ultra-deepwater rigs. There was a rare bit of optimism from a Seadrill analyst reported here, which is encouraging, but the general tendency of Wall Streeters these days is to be pessimistic about expensive offshore drilling in the wake of the huge onshore (shale) discoveries in the US. Brazil and Kenya and Angola and Mexico aren’t going to stop exploring for deepwater oil just because the US is producting more, but when oil prices dip the marginal offshore projects get less funding, which cuts into the demand for the rigs. I still think that Seadrill is right in their long-term optimism, the demand for oil will continue to be strong and onshore fields aren’t big enough or cheap enough to destroy offshore drilling, so demand for deepwater drilling rigs should still be rising over the longer term. That’s despite the fact that oil company headlines say they want to cut back on costs, and in some cases are actually doing so.

Seadrill is well-booked with backlog to cover a substantial chunk of their earnings. I think it will be 2016, likely, before there’s substantial recovery in Seadrill shares to the $40s or above, but absent a recession that crushes oil prices I think there will be a recovery and I’m happy to hold for the 10% dividend (and continue reinvesting that dividend) for now. They just put West Saturn, one of their newbuilding drillships, under contract this week, ...

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