“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!