In today’s Daily Alert, Global Investing Editor Vivian Lewis recommends selling a high-yielding Top Pick from 2011. SDRL was recommended by Global Investing as a Top Pick for 2011 at $33.92 in Investment Digest issue 687, dated January 19, 2013.
“We are selling Seadrill Ltd. (SDRL, $40) today, raking in nifty profit from the Norwegian drilling rig firm despite its new orders for cheaper rigs from Dalian Shipbuilding of China. To be delivered in 2015, they cost $230 million each.
“I think the benefits from Asian developments at SDRL have been overstated, not only its China entry but also the sale of its tender rig fleet to Malaysian oil and gas firm SapuraKencana for $2.9 billion. Sapura will take over debt for SDRL’s tender rig division, other debt, a seller’s note, and issue Sapura shares to SDRL. The amount of cash changing hands however is hard to figure out. And SDRL is ambitious about buying out the remaining third of Asia Offshore Drilling (which it won a two-thirds stake in via SA) but we are not sure that there is enough in the kitty. Even more fraught is the SDRL plan to buy Pacific Drilling using Sapura money. The Sapura deal is not that cash- or earnings-accretive.
“There is a back story here. John Fredriksen, who controls SDRL, Norwegian-born but now a Cypriot living in London, has frequently shafted shareholders in the past. Reuters writes that the removal of SDRL’s HQ from Stavanger to London, certainly convenient for Mr. Fredriksen, will add $10-$20 million in new costs all by itself, a cost of 20 cents/share (including other factors like the delay in starting the Statoil contract for SDRL’s West Hercules jack-up).
“Seadrill last month listed a limited partnership to own part of its fleet on the NYSE.
“But the main reason for selling is that in Q4, while probably making money (it lost 23 cents per share in Q4 2011), SDRL will make less than expected, perhaps as little as 60 cents/share. It today warned it would be reporting a sharp drop in fleet utilization (according to Pareto Securities ASA of Norway), with average rig downtime topping 100 days in the quarter. The earlier SDRL downtime estimate was for 41 days, so this is big. The share fell sharply in Oslo and now NY.
“We frankly own SDRL for its high yield. National Traders Association today put out a report which says SDRL will rise to $100 on its payouts to come. If so, we are selling too soon. $39.352/share is my target. The stock fell amidst a swirl of rumors in Oslo today.”
- Vivian Lewis, Global Investing, February 1, 2013