Why Seadrill Ltd Stock Could Double
Seadrill has been put through the ringer this year, and the sell-off has only gotten worse in the past month.
A slowdown in offshore oil drilling, a long-term trend of lower capital spending from oil and gas companies, and falling oil prices have fueled the sell-off. But there's reason to be more bullish on Seadrill than any other offshore drilling stock. Here are the reasons I think this stock could double over the next few years.
Well positioned for long-term success
What's happened over the past year in offshore drilling is a bifurcation of the market between new rigs and old rigs. This really means that new rigs are able to find work at reasonable dayrates, and old rigs are either out of work or having to compete for work on price.
The market is weak overall, but we can see the value of newer rigs in Seadrill's West Saturn contract, announced on August 8. This new rig, which was delivered last month, got a 2-year contract with an ExxonMobil subsidiary for $497 million. That's about $680,000 per day in what's supposed to be a very weak offshore market.
This bifurcation plays into Seadrill's hands. The company has one of the youngest fleets in both floater and jack-up drilling rigs. This will allow it to remain profitable -- and when you consider its $23.3 billion backlog and floater contract coverage of 96% this year, 80% next year, and 62% in 2016, there's not a lot of exposure to the market weakness right now.
Financial options are open to Seadrill
What may be scary about Seadrill is the company's $12.2 billion in long-term debt and nearly $4.5 billion in new rigs being built in 2015 and 2016 that need to be paid for. But Seadrill has financing options available that make these commitments seem a little less daunting.
I recently highlighted that Seadrill Partners -- Seadrill's publicly traded MLP-type subsidiary -- could act like a cookie jar if Seadrill needs money to stay afloat. It can just push assets down to Seadrill Partners, get cash in the process, and still maintain some economic benefit from a rig.
There's also ongoing cash flow from operations, which shouldn't go underappreciated. The company has long-term contracts for most of its rigs, providing cash flow to pay for new rigs and its dividend. As long as the offshore drilling market recovers in the next couple of years Seadrill should be fine.
How Seadrill stock doubles
So, how do investors double their money with Seadrill?
Seadrill stock trades at just 7.6 times forward earnings estimates, which is well below its historical average. If earnings exceed expectations and/or the multiple rises to closer to a 15 forward P/E ratio, the stock could easily double.
We also need to consider that if dayrates remain constant Seadrill's revenue and earnings should improve significantly, as there are seven floater and eight jack-up rigs due to be delivered through 2016.
If the high end of the offshore drilling market doesn't collapse and Seadrill can find work for its existing and newly built rigs there's significant upside for this stock. Of course, there's massive downside risk if the market does continue to deteriorate, which investors should also consider. But I think odds are good that Seadrill performs well in the next two years, which is why I'm keeping my money in the stock.
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The article Why Seadrill Ltd Stock Could Double originally appeared on Fool.com.Travis Hoium manages an account that owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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