“Takeover Target Poised to Explode!” (Friday File Rerun)

By Travis Johnson, Stock Gumshoe, October 6, 2010

A confession: I just made a huge rookie mistake — I was finishing up a different article for you and kicked the computer’s plug out of the wall … plenty of cussing going on here at Gumshoe HQ today. And worse, I screwed up my backup system and wasn’t logged in right, so I lost today’s article. I can re-create it, perhaps even better and stronger than before, but it will take a bit of time, so in the meanwhile I’m sharing this older Friday File article with the crowd. The teaser is still actively being circulated by Elliott Gue, there hasn’t been any big news on the company but the stock is up a few dollars from when I first wrote this piece about a month ago. The copy that follows has not been updated or edited since it first appeared in the Friday File on September 13.

Today I thought we’d take a look at an Elliott Gue teaser for a stock that he thinks will be taken over by, of all people, the Rockefellers. Or maybe it’s The Rockefellers. He’s selling his Energy Strategist newsletter … and you’ll see why this teaser specifically appealed to me in a minute.

Here’s a bit from the ad to give you a taste of his pitch:

“Follow the Money from a Top-Secret Meeting Inside Room 5600 of Rockefeller Center and You Stand to Make Life-Changing Money on One Blockbuster Trade….

“Male heirs of the wealthiest family in America traveled in stealth to midtown Manhattan from the far corners of the earth to attend their annual meeting deep inside this cavernous limestone structure. As stipulated by the oil titan himself over a century ago, women are barred from Rockefeller business and excluded from all meetings….

“The financial affairs of the Rockefeller family—numbering around 150 blood relatives of John D. Rockefeller—are run from the family office in Rockefeller Center, Room 5600, known officially as Rockefeller Family and Associates.

“This Rockefeller family gathering wasn’t just any business meeting. Something big went down. An initiative to take a controlling interest in the deepwater drilling business was unanimously approved.

“As a result of this under-the-radar meeting in New York City, the Rockefeller family will move rapidly to gain control of the one remaining segment of the global oil business they do not already dominate.”

Drawing the connections in the ad seems like a bit of a stretch — Gue goes on to explain that the Rockefellers built their fortune in oil and still have huge influence in the global oil business, both directly and indirectly, and that he believes the family investment funds (particularly Rockefeller Family & Associates, though they have dozens) or their affiliated oil companies (the family still holds shares in ExxonMobil, which evolved from John D. Rockefeller’s Standard Oil).

And I have no idea what source he has about the Rockefellers and their investment policies, so perhaps the family did indeed unanimously decide to invest in deepwater oil drilling — I certainly can’t confirm anything about that, and if he can he’s not citing his sources in the ad.

But the point, we must remember, is that he thinks the Rockefellers will be buying a deepwater driller, directly or indirectly …

“After drilling down for 40 night and 40 days, I’ve deciphered the answer! There is absolutely no doubt in my mind that this drilling company will be acquired in the next year or two by an oil firm that Rockefellers either directly or indirectly control.

“This Under-the-Radar Millionaire-Maker is Paying a 10% Yield Right Now. And the Stock is Poised to Gap Higher in the Next 6 Months and Triple Upon Being Acquired!

“This deepwater driller that I believe the Rockefellers will move to seize control of is an offshore deepwater driller. The company operates a fleet of over 40 units comprised of drill ships, jack-up rigs, semi-submersible rigs and tender rigs. They have 7,000 employees across 15 countries on five continents.

“Consolidation in the offshore drilling rig industry is rapidly approaching. This narrowing of the field of play would only improve the pricing and earnings visibility for this millionaire-maker’s services.

“Such consolidation activities may be in the form of transactions for specific offshore drilling units or entire companies. I believe the Rockefellers will acquire this under-the-radar winner and then turn around and use the firm as a powerful M&A vehicle. This millionaire-maker will definitely take part in the future consolidation of deepwater oil extraction services.

“Future M&A activity aside, the company is on an amazing organic growth track. With a backlog of projects worth nearly $30 billion and rapid-fire expansion plans, current quarterly earnings targets are going to be hit and exceeded for years to come.”

Well, what do you know: This is our old favorite Seadrill (SDRL), a stock I own and the first stock I profiled for the Irregulars back in 2008 (when it was at all-time highs, I’m afraid — with dividends, that pick has tracked just about even with the S&P, but that’s not saying much). And the numbers are a little bit stale in that tease, they’re now up to 9,300 employees.

For what it’s worth, I continue to own shares in Seadrill personally, and I noted for the Irregulars that the shares, which finally got listed in NY this year to make trading easier, started getting interesting again when they dipped to around $20 a few months ago. I’d have to say that I personally have strong doubts that they’ll be acquired by an oil company anytime soon (though of course, anything is possible, and there is lots of chatter about M&A activity in the offshore drilling space, a space in which Seadrill is the second biggest publicly traded company, depending on how you measure, after Transocean).

And yes, Seadrill pays a big ‘ol dividend — their founder has followed a fairly standard blueprint with the companies he builds, leveraging up assets, holding roughly 30% of the shares and “paying himself back” by pushing for large dividends that distribute a large portion of earnings (or even free cash flow) to shareholders … and if we hold shares along with him, we get those dividends too. The most recent dividend was 61 cents/share for the second quarter, which went “ex dividend” last week, so if you annualize that it’s $2.44 for a yield of a bit under 10% (thanks to a boost in the share price over the past week — it was well over 10% for a while). This is the third quarter in a row with a dividend hike, coinciding with increasing earnings, though the previous hikes were each more substantial.

Seadrill has been a fascinating story ever since the company was launched in the over the counter market in Oslo just a few years ago with a market cap of just a couple hundred million dollars (they now have an enterprise value of over $12 billion) — John Fredriksen is a modern-day Rockefeller of sorts, a first generation gazillionaire who came up as a scrappy shipping broker. He bought up a few oil tankers decades ago in Norway, and later expanded his fortune dramatically on the back of oil tanker company Frontline (FRO) during the first boom in double-hull tankers a few years ago (and he’s faced plenty of controversy, too, including for trading with apartheid-era South Africa, and with Iran during the Iran-Iraq war, both before the Frontline days). Frontline was Fredriksen’s first big publicly traded company, and he used good timing to build a double hulled fleet after a series of spills made double hulls much more valuable, and leverage and financial engineering (including the launch of his own financing firm, Ship Finance Ltd (SFL), to pay out huge dividends. FRO is currently priced at $27 or so and has paid out, by my calculations, about $32 in dividends over the past five years, so for those who could stomach the volatility it has paid off pretty nicely (though it would have been possible, certainly, to buy at $70 and sell at $20 if you had bad timing).

The caution with Seadrill is that they are very much levered to deepwater drilling rigs, so if that business collapses, either due to falling oil prices or regulatory changes, they’d be in trouble eventually (most of the contracts go for several years) … and perhaps more importantly, when I say “levered” I really mean it. Seadrill, like Frontline, is an aggressive company that has been continually growing through acquisition and new orders, and that uses financial engineering to increase cash flow and dividends (including sale/leaseback transactions for their rigs).

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Seadrill was formed initially to buy rigs that they didn’t have customers for yet, something many companies are afraid to do, and they are not afraid to use debt, often far more debt than similar US companies would be comfortable with, to accelerate their growth plans. The strong of stomach (not me) could have picked up shares for less than ten dollars during the economic crisis, since Seadrill’s heavy debt burden and $35 oil had investors fleeing in droves instead of waiting around for their big fleet of new drilling rigs to begin service (they had a large number of rigs come on line in just the last 18 months, which is why the earnings have exploded upward).

And the talk of takeovers almost always involves companies that Seadrill might acquire, not be acquired by — Fredriksen has been a serial dealmaker, and Seadrill has been built largely by acquisitions, most notably when they bought Smedvig out from under Noble (a deal that Fredriksen claimed was made in the back of a taxi in Seoul). They recently acquired Scorpion Offshore, a relatively small owner of high-capability jackup rigs (not the more valuable “floaters” that can handle deeper water), and made a nice opportunistic profit from Petromena bonds as they went through bankruptcy, just to give some recent examples, but the thing that has periodically resurfaced to make investors antsy is the 10% of Pride International (PDE) that Seadrill holds. They seem to have had meetings in Houston about combining the companies or their deepwater assets off and on for years, and there are rumors about a full takeover or merger every six months or so, but Seadrill has been patiently biding its time, it appears, to see whether Pride wants to do a deal — they apparently aren’t interested in going hostile, or buying more of the shares and triggering Pride’s poison pill anti-takeover provisions. The two companies remain a very nice match, with most of Pride’s valuable deepwater assets (floating rigs and drillships) operating in West Africa and Brazil, areas where Seadrill has a big presence, but there does not appear to be any rush.

And as to whether the Rockefellers will take over Seadrill? Well, that rumoring has certainly not been floated very publicly, at least not from any of the sources I follow — John Fredriksen himself hinted at some interest in the big guys recently, saying that Transocean (RIG), with a beaten-down stock price and great rig assets, looked like the kind of company he likes to acquire (Transocean, despite the drop from the BP spill on the rig they own, is still substantially larger than Seadrill, so that would be a stretch).

I assume he was just blowing smoke, and he probably delights in getting people excited about potential deals, but you never can tell with him — he has made some very large acquisitions in the past, and proven to have a strong stomach for risky and leveraged deals when the market is in turmoil. That talk, along with some good earnings announcements, was enough to drive prices higher for most of the deepwater drillers in the last couple weeks, including both Pride and Transocean as well as Ensco (ESV), Diamond Offshore (DO) and Atwood Oceanics (ATW). RIG has been the biggest winner over the last week or so, in part due to relief about the official reports from BP about the spill’s causes, and Seadrill has been the best performer of the group during this economic recovery (such as it is), perhaps in large part because of the emerging dividend story, their new NY listing (they had been traded primarily in Oslo where they were one of the largest few companies, and most of the volume is still there), and because of the fact that they largely sidestepped the BP Gulf of Mexico spill (they had only one rig working in US water, so weren’t harmed by the moratorium directly … and in fact their rig was hired on to help in BP’s recovery efforts). Oh, and because they were heavily leveraged and not consistently profitable yet when the crisis hit, and fell harder than most of the drillers in 2008 and 2009.

I still like Seadrill and it’s my favorite oil driller, though I’d personally be cautious about buying shares in the wake of all this good news and M&A chatter — if you like the Investors Business Daily strategies, however, you might appreciate this run-up more, they ran an article on Sept. 1 indicating that a technical buy trigger was likely at $25.23, and the stock closed above that level on Friday and has been moving up further today.

I’d like to see the merger talk die down and watch the shares dip a bit before buying more, and, as I said before, I liked Seadrill more at $20 a few months ago than I do at $26, but it’s undoubtedly the most aggressive and exciting of the big deepwater drillers if that’s your cuppa tea, and the company remains committed to a high dividend. Of course, I’m also the one who was quite enthused about the stock at $35 (when oil was over $100 and climbing), and I do think that buying Seadrill is likely to pay off with high dividends for many years to come … it is, in comparison with its peers, still cheap (in my opinion).

Seadrill announced its second quarter earnings about two weeks ago and beat the estimates nicely, another reason why the shares have climbed (along with the M&A chatter spurred, in part, by Fredriksen’s comments in the press) — they booked 77 cents in earnings, so can easily sustain the dividend at that level (Seadrill has often paid out more than earnings, thanks in part to leverage and in part to depreciation on their pricey rigs).

We now get much more access to coverage by analysts, and a company that’s generally easier to research, thanks to the NY listing — analysts on average (per Yahoo Finance) expect them to earn $2.81 this year and $3.26 next year, and I would be surprised if they don’t continue to raise the dividend, if not every quarter (they raised it only a penny this time), then every year, and there is still plenty of room for extraordinary dividends if they decide to do more large scale financial engineering (as with their sale/leaseback of rigs to Ship Finance or someone else, which they’ve done with just a couple rigs) to a greater degree in the future.

Absent any real crises, their cash flow is extremely secure — all of their deepwater rigs are booked at high fixed rates, most of them through 2014 or 2015 (there’s one available in the fourth quarter of next year, and a couple in 2012, you can see the fleet list here), and they have interest rate swaps in to fix their rates as well, so the cost side shouldn’t balloon. Their jack-ups are on much shorter term contracts, as is typical, but they seem to think the business is going fine and they’re booking new contracts at reasonable rates.

In the wake of the BP spill and the drilling moratorium in the Gulf, Seadrill is, quite rightly, being cautious about the near term — it’s hard to say what will happen if there’s a big regulatory overhaul and all the rigs leave the Gulf of Mexico for other waters, for example (though that’s obviously a huge exaggeration of what’s likely), but they are confident that their experience, size, and new fleet will help them get through any regulatory tightening that would possibly hurt older or less capable fleets or less experienced operators, and they are very optimistic about the long term prospects for deepwater drilling, as you might expect. You can see their most recent comments in their earnings conference call here.

And of course, there may well be deals — and if there are deals of any size in the offshore drilling space, we can be pretty confident that Seadrill will get a look at them. But I must say, if the Rockefellers (or ExxonMobil) tries to take over Seadrill I’ll be very, very surprised — if there’s anyone with the funding and possibly the interest to take over a major deepwater driller, I’d wager it’s Petrobras, but I think Seadrill is much more likely to buy than to sell, and probably the M&A will be among and between the drilling contractors, not with an oil company (that’s all, in case it’s not obvious, a wild guess).

And if the Rockefellers want to buy my little handful of shares, well, I suppose I’ll take their call.

Full disclosure: In case it’s not obvious from the above, I do own shares of Seadrill. I will not trade those shares for at least three days.



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October 6, 2010 1:44 pm

Get a UPS. It will save your bacon, and maybe your computer.
Need I mention: backup frequently?

October 7, 2010 7:45 am