Seadrill (SDRL)

Seadrill (SDRL, NYSE) switched its listing from the Oslo Stock Exchange to the New York Stock Exchange in mid-April, a move that dramatically increases the company’s visibility and its ability to use its stock as currency for acquisitions. The firm has a long history of growth via acquisitions, including its ongoing bid to take full control of Scorpion Offshore, a company that focuses on shallow-water jackup rigs used in international markets. Day rates for jackup rigs appear to be improving after a slowdown in 2008-09; in fact, Seadrill recently leased one of its jackup rigs to Statoil (STO, NYSE) for $650 million. This five-year deal equates to a day rate of around $350,000—a high rate for that class of rig. Seadrill makes no secret that it plans to expand in deepwater markets. CEO Alf Thorkildsen recently noted that the company is interested in acquiring firms with exposure to the deepwater Golden Triangle—Brazil, West Africa and the deepwater Gulf of Mexico. And Seadrill already has an enviable backlog of contracts covering its existing deepwater rigs. … Shareholders will benefit from Seadrill’s backlog because the company pays out most of its cash as a dividend. The quarterly payout currently stands at $0.55, roughly equivalent to a 9% yield at current prices. The acquisition of Scorpion Offshore and the completion of two rigs under construction could spell significant upside for the dividend payout. By my estimates, Seadrill could pay as much as $0.70 per quarter in a year’s time; the stock could easily hit 40 in that event. With a solid dividend yield, upside from new contracts and a young deepwater fleet, Seadrill is a better buy than Transocean—and there’s no need to worry about Horizon-related liability. Buy Seadrill under 29.

Elliott H. Gue, The Energy Strategist

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