by Travis Johnson, Stock Gumshoe | March 26, 2012 10:34 am
Sometimes our teaserriffic temptations come in waves — lately I’ve been getting lots of questions about teasers from Elliott Gue over at Investing Daily, particularly in ads for his Energy Strategist newsletter, so we’re batting in the same park again today.
This time, it’s an ad that sounds a little bit familiar …
… it’s all about the Rockefellers and their plans to take over another segment of the global oil business. Here’s how Gue pitches it:
“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….
“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….
“The only major dynamic of the oil industry that the Rockefellers until now have not attempted to control is the oil extraction through deepwater drilling rigs market segment.
“The only question in my mind was which deepwater driller the Rockefeller clan might be pursuing. I mean, heck, there are legions of publicly held drilling interests in the global universe of stocks. That would be like finding a needle in a haystack.
“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 an 8.7% Yield Right Now. And the Stock is Poised to Gap Higher in the Next 6 Months and Triple Upon Being Acquired!”Are you getting our free Daily Update
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Once that 8.7% yield gets mentioned I start to have a pretty good idea of which pick they’re touting here — and it is indeed one that was teased similarly a year or two ago. But let’s get some more clues to make sure — after all, there’s more than one high-yielding stock in the offshore drilling sector.
“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.”
Sounds compelling, no? Then we get to the confirmation that this is exactly the company I’m thinking of (and you might be thinking of, too — it’s one I’ve written about many times and own personally):
“The Founder and CEO is a Buccaneer Billionaire Who Has Been Compared to Oil Titan John D. Rockefeller!
“The founder of this under-the-radar deepwater driller comes from humble beginnings. The son of a welder, this modern-day Rockefeller used hardball tactics to build his company into a powerful deepwater driller.
“This entrepreneural genius made an early bet many thought was insane. Years ago, his company broke one of the cardinal rules of the rig business. It ordered two “ultra-deepwater” rigs, capable of drilling in waters at a depth of at least 7,500 feet, for nearly $900 million—on spec. It didn’t have a single contract from an oil company to guarantee them. Demand exploded and the company charges a whopping $600,000 a day for its services!
“The CEO sees years of strong demand ahead. And I’m inclined to believe that he’s right. After all, the amount of oil pumped from deepwater fields will double between 2010 and 2015, according to the U.S. Energy Information Administration. Douglas-Westwood, a consulting firm, says capital spending on deepwater oil will rise to $25 billion annually by 2012.”
So yes, we can leave the Thinkolator in the garage and give it a rest — this is Seadrill (SDRL)
Seadrill is now, by some measures, the largest deepwater drilling company in the world, though the company is still a hair smaller than Transocean (RIG), $27 billion enterprise value for Seadrill and $29 billion for Transocean, with RIG having higher revenues and less debt. I’d describe the choice between RIG or one of the other US competitors and Seadrill as the choice between value and growth — Seadrill is (by far, I would say) the most aggressive investor in the deepwater space among the larger companies, and inherited its swashbuckling personae from its founder, John Fredriksen, who used his cash and a giant pile of debt to order hugely expensive ultra-deepwater rigs and drillships a year or two before everyone else got interested in them, then levered those contracts and his capital into acquiring several small drillers and one decent-sized one to quickly build up both his fleet and, importantly, his order book in the few overworked shipyards that were capable of building these massive, high-tech marvels (including the company that Gue’s partner Yiannis Mostrous has teased over and over again in part because of their rig-building prowess, Keppel Corp of Singapore).
So yes, Seadrill has a huge fleet of ultra-deepwater rigs (the kind that can drill in water that’s two miles deep), and they’re booking plenty of $600,000 dayrate deals (meaning, they get paid $600,000 per day for use of the rig, which typically gives them a breakeven on these assets somewhere between three and five years), and though the rig market got a lot more attention in recent years and newbuilds have been added to the global fleet pretty aggressively, offshore exploration has kept up — explorers and producers offshore are desperate enough to get their hands on the best, most modern rigs that they’re inking deals at these high dayrates for many years into the future, even on rigs that aren’t even built yet.
So the business is booming — will the Rockefellers buy it? Well, Gue teased as much about 18 months ago regarding this same stock, and at the time I was quite skeptical about what seemed like a pie-in-the-sky prediction for Seadrill — not that I was skeptical of the company, which I wasn’t and am not (despite some qualms about the rising valuation), just that I’m skeptical that they’d be taken over by the Rockefeller family. Or, in fact, that they’d be taken over by anyone — this is now a huge company, with a $17 billion market cap and another $10 billion in debt, there aren’t many folks (OK, absent the Rockefellers and the company they founded but don’t control, ExxonMobil) who could propose to buy them out with a straight face. Gue can bet it will happen, but I prefer to look at Seadrill as an aggressive dividend payer and dividend grower that is focused on rewarding shareholders — and that takes some risks to get there, largely by borrowing lots of money.
Interestingly, the swashbuckler who founded Seadrill, John Fredriksen, just recently sold about a fifth of his shares in the company — Seadrill has apparently got a bit too boring, so he’s cashing out a billion dollars to invest (probably) in the beaten-down shipping business. That’s where he got his start and built his first couple of fortunes, so that’s probably not a surprise — Fredriksen also created the world’s dominant oil tanker fleet a decade ago when he was building Frontline (FRO) into a colossus, and he started out as a shipbroker and did plenty of wheeling and dealing (and missile-dodging) as he built Frontline and its predecessors, in part by taking the (admittedly ugly and risky) charters that no one else would into Iran during the Iran-Iraq war, or into South Africa during apartheid. Given his predilection for making big bets in the energy and shipping markets at a time when others are fearful, I’d keep a close eye on what he does with that billion bucks — but I don’t think it means anything bad is in the wind for Seadrill, it’s probably just the easiest place for him to free up capital given the shellacking that his other companies, like Frontline and Ship Finance (SFL) have taken in recent years with the glut of tankers bringing rates in that segment way, way down. Fredriksen also controls Golar LNG (GLNG), FYI, another stock I own that’s making some pretty aggressive bets on LNG shipping and gasification facilities.
Seadrill pays a high dividend, it’s true, and I’ve generally been willing to buy more shares when that dividend is in the 10% range — dividends have always been a major way that Fredriksen gets “paid back” from the companies he owns, and thankfully he’s been fair in sharing the wealth (he owns common shares just like us, he gets the same dividends). It’s now not that high, but I’m not against buying Seadrill at these prices as long as folks understand that it’s an aggressive company, highly levered to future dayrates for ultra-deepwater rigs and highly levered in general. That means if we get a crash that’s similar to the last one, where oil prices fall dramatically and financing becomes difficult, Seadrill could easily take another hit (they’re bigger and stronger than they were in the last crash, with more operating assets and cash flow — much of their fleet was still on order at the beginning of the last collapse … but it’s still a risk).
The company will undoubtedly continue to use financial engineering and wheeler-dealer moves to create value, invest in new companies and rigs (they also just ordered a couple new rigs for 2014 delivery), and probably borrow more money to do more deals — I’m sure they’ll continue to be more aggressive than the typically cheaper and more staid US firms like Diamond Offshore (DO) and Noble (NE), so if you think deepwater drilling will continue to grow dramatically for the next decade I think Seadrill is still the play that probably gets you the biggest bang for your buck in that sector … just remember that “bang” isn’t always good. As part of their wheeling and dealing, we’ll see them list their Brazilian subsidiary, Seabras, in Brazil very soon (Seadrill does a lot of the drilling for Petrobras in the presalt way offshore, one of the huge growth areas that has driven drilling rates up — that deal, which will probably take the form of an IPO for part of Seabras on the Bovespa for about a billion dollars, has been delayed but will probably take place in April). They’re also likely to list their North Sea assets as North American Drilling, a yield-focused spinoff expected to take place late this year, and they own 20%+ of several related companies, so you never know what they might do.
And I think Gue is blowing smoke when he says that the 8.7% dividend is somehow “secret” or unknown — that was probably true as recently as a year ago, before their dividend started getting well-reported in the financial aggregator systems, but I’d wager that almost all sites now accurately report SDRL’s high dividend. What may be under-known is the aggressive push for dividend growth that Seadrill shares with other Fredriksen companies — he loves leveraging his companies, and he loves paying out as much of free cash flow as he can with dividends. Seadrill has raised the dividend in most quarters by at least a token amount, and also pays out additional special dividends from time to time — it’s certainly not as “secretive” as Diamond Offshore, which pays out most of its dividends as “special dividends.” Seadrill has been public about their desire to grow that dividend as much as they can, the last quarterly payout was 80 cents, which is why Yahoo Finance and others will list them with an indicated dividend of $3.20 per year, which is indeed a yield close to Gue’s clues (8.5% at the current price). I’d be surprised if the dividend hasn’t grown substantially from that level by this time next year, perhaps including special dividends if they use their North Atlantic Drilling and Seabras IPOs to return more cash to shareholders, as has been typical of Fredriksen companies who’ve done spinoffs in the past.
Take my words with a grain of salt, since I’ve owned Seadrill for many years and it has grown (thanks in part to reinvesting those big dividends in recent years) to be my second-largest holding again (it was my largest holding before the financial crash, when I had to sell some of those shares at a loss to reduce my own risk when they were plummetting on low oil prices and debt fears). I also might be too nervous about their debt levels, since they’ve grown enough now that their long-term debt is more than covered by the value of their assets (the rigs and drillships) — though they do still trade at a substantially higher price/book value than most of their more staid peers, most offshore drillers trade at less than 1.5X book value while Seadrill is closer to 3X book. You do have to “think different” and look at their aggressive stance, which built the firm from almost nothing to the industry leader in just five or six years, and paid up for new high-spec rigs instead of refurbishing old “good enough” ones, to appreciate Seadrill compared to their sector.
Perhaps it’s because of my long relationship with these shares that the recent bouncing around in the high-$30s and the peak to over $40 briefly makes me a little nervous, but I certainly still see good things ahead for them even if the volatility and their leveraged nature could easily lead to dips of 20% or more — and with their continued focus on growth, aim to distribute almost all of their free cash as dividends, and possible big cash infusions from spinoffs this year, those who wait for the pullbacks might, as always, miss out on a fun ride.
But that’s what I think, and what I’ve done with part of my money — for your money, you make the call, if you’ve got an opinion on Seadrill or one of their many competitors in the offshore rig business, let us know with a comment below.
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