Will SeaDrill Benefit From the "Super Spike" in Dayrates?
With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.
Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.
By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.
Based on my outperform rating on fellow energy equipment and services provider CARBO Ceramics, the CAPS supercomputer thought I also might be interested in SeaDrill (NAS: SDRL) , one of five Stocks of the Day it offered up for my consideration this week.
Let's see what this stock has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.
|Industry||Energy Equipment and Services|
|Market Cap||$17.9 billion|
|Revenues, TTM||$4.1 billion|
|Return on Capital, TTM||6.7%|
|Dividend / Yield||$3.20 / 9.6%|
|Long-Term Debt||$8.6 billion|
|Free Cash Flow, TTM|
(operating cash flow minus capital expenditures)
|CAPS Rating (out of 5)||*****|
Source: Motley Fool CAPS; S&P Capital IQ.
Buy what you know
Look no further than the dayrates that deepwater drillers are commanding for their rigs to see that a recovery is well under way in the space. Even bulk carrier DryShips (NAS: DRYS) , with its foray into drilling through Ocean Rig (which it is slowly exiting), is able to wrangle dayrates north of $600,000. Last month, Transocean (NYS: RIG) leased one of its rigs to Saudi Aramco at $650,000 a day for two years with three eight-month options at $695,000 a day.
Although not everyone is recording such monster rates reminiscent of the drilling heyday of a few years ago, Noble is seeing better terms as well for its rigs, with one under contract to Shell for $530,000 a day for work in the Gulf of Mexico, where rates tend to run between $300,000 and $550,000 a day. So securing work at the upper end of that range bodes well for others.
The resurgence of rates is due to there not being enough rigs for all the demand. Driven higher by elevated oil prices and the successful exploitation of new field discoveries, an analyst at Morgan Stanley says the industry is about to witness a "super spike" in dayrates that could exceed $700,000 per day.
Enter SeaDrill, which also recently secured dayrates of almost $600,000, but is fully expecting that "super spike" to hit, believing $750,000 a day will soon be commonplace. It anticipates the Gulf, the coast of Brazil, and the west coast of Africa will be prime areas of activity as its customers explore and develop those oil fields. To meet the demand, SeaDrill is constructing two new drillships at a cost of $600 million each.
Shallow's not so bad
While the ultra-deepwater play is enticing, don't write off the shallow waters yet. Hercules Offshore (NAS: HERO) is emblematic of the difficulties the segment faces, but its utilization rates in the Gulf are improving while revenue per day for its lift boats rose 5% to $8,225. Operating days jumped 12%. Similarly, SeaDrill recorded higher rates for its shallow-water jack-up rig rates, upward of $180,000 a day for one of its rigs, while ENSCO (NYS: ESV) scored a $230,000 contract for duty in the North Sea.
The attractive nature of SeaDrill centers on its exposure to drilling across the spectrum of depth. Exploration and development is coming back strong, and regardless of where the drilling is taking place -- or everywhere! -- investors can benefit from SeaDrill's strengths. So I'm rating it to outperform the market on CAPS, joining with glenncv, who says it will soon be coming into its own:
SDRL owns one of the newest and most advanced fleets in the world. Management continues to use their opportunistic investing style to generate millions of gains for shareholders, while they continue buy more rigs to build their fleet size. 2014 SDRL should have most of their new rigs online and they will be operating at full strength, which means their stock price should start heading north.
Add it to your watchlist and let me know on the SeaDrill CAPS page or in the comments section below if you think this is the beginning of a big opportunity in drilling.
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At the time this article was published Fool contributorRich Dupreyowns shares of SeaDrill, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Ensco, CARBO Ceramics, Transocean, and SeaDrill.Motley Fool newsletter serviceshave recommended buying shares of SeaDrill. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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