Buy SeaDrill Limited (SDRL)   25 comments

I am going against my own macro-economic, as well as market-related, views on this one: SeaDrill Limited (SDRL) is a strong buy at current price levels. At a little over $33/share, they are close to their 52 week low.

However, the offshore drillers have been knocked down so low that even in a bearish market, it is hard to see much downside here.

Even if a world recession were to happen, it is hard to imagine an economy so bad that people quit using oil (if it gets that bad, most stocks will be pretty worthless).

Looking at SeaDrill’s numbers, it is the definition of cheap:

Market Cap: $15 billion
Enterprise Value: $29 billion
Trailing P/E: 6.07
Forward P/E: 8.60
PEG Ratio: 0.50
Profit margin: 53%
Operating margin: 40%
Revenue: $5 billion
Operating cash flow: +$1.7 billion
Quarterly Revenue Growth (yoy, from December 2013): 24.5%
Dividend Payout Ratio: 51%
Dividend yield (annual, paid quarterly): 11.8%

Stocks don’t get cheap without a reason. Aside from issues with the entire offshore drilling sector, here are a few problems with SeaDrill’s financials:

Price/book: 2.11
Debt/equity ratio: 1.86
Levered free cash flow: -$1.5 billion

The dividend is what makes SDRL worth taking a chance on right now, even with the headwinds. I will be adding it to my long-term 401(k) portfolio today, and I will add an update when the order goes through.

UPDATE: Including trading fees, I added SDRL at $33.25.


Posted April 16, 2014 by edmcgon in 401(k), Portfolio Moves

25 responses to “Buy SeaDrill Limited (SDRL)

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  1. Excellent buy Ed and you got it at a great price.

  2. ESV

    • Bobb,
      ESV is a good play also. Frankly, it’s hard not to find a good play among the offshore drillers. RIG is also excellent.

      I lean towards SDRL for the dividend yield. But if the debt bothers you, ESV and RIG are safer.

  3. Ed – In the same day you show charts of the Baltic index and the price of copper and make the very strong statement that the world economy is on the brink of global recession, you then buy the most highly levered deep sea oil driller. Why would you do that if you believe your first statement?

    • Marshall,
      As I said in the post, the offshore drilling sector has already taken a beating. Even if they drop some more, SDRL’s dividend makes it more than worthwhile to wait for them to come back.

  4. Ed

    Is this a long term play for you? If it is then I say it’s a good move but if you plan on it as a short term play it is not.

    • Bobb,
      As long as SDRL is willing to pump 11% into my 401k, I’m more than happy to hold it.

      • Looks like SDRL could reach the low to mid 20’s. Wonder how long that dividend will last?

      • Trader,
        Sounds good! I can double it and increase my dividend!

        At a 51% payout ratio, I’m not concerned. The stock price has no impact on whether the company can make payments on their dividend. 😉

      • Ed, if the stock does hit low 20’s I would expect the company is in trouble. The dividend maybe in trouble at well.

  5. Over the last two years I have been slowly moving money into dividend yielding stocks — we are in our early 60’s and both retired so am beginning to look for income. I have bought safe and will I will let you determine which are the less safe dividend yielding stocks:

    BBEP bought at $16.30 and today at $20,19 yielding 9.88% but at my buy yielding 12.20%

    COP bought at $48.61 and today at $73.84 yielding 3.74% but at my buy yielding 5.67%

    GSK bought at $43.96 and today at $52.33 yielding 4.67% but at my buy yielding 5.61%

    SDRL bought at $34.81 and today at $32.80 yielding 11.83% but at my buy yielding 11.26%

    CIM bought at $3.46 and today at $3.11 yielding 11.46% but at my buy yielding 10.40%

    ARR bought at $6.53 and today at $4.16 yielding 14.53% but at my buy yielding 9.19%

    ETP bought at $44.14 and today at $55.88 yielding 6.60% but at my buy yielding 8.34%

    FSC bought at $9.61 and today at $9.40 yielding 10.65% but at my buy yielding 10.40%

    Both CIM and ARR are big time down but since I don’t need the principal money invested in these stock I just keep collecting at roughly 10% a year (before taxes).

    I would like for us to make a minimum of 6% per year in all equity investments so we can withdraw 4-5% per year — this will keep us from using current principal and allow for some down years (to truly protect against a 4% withdrawal rate I need to be making more than 6% to protect against down years but I also am a believer in that you can’t take it with you so we will on occasion dip into the principal.)

    Currently we are going to wait until we both turn 70 to draw SS — 4 years for the wife and 7 years for me. We have trading accounts (see stocks above) and non-trading accounts with municipal bonds, mutual funds, and bond funds — these are in a regular account and IRA’s.

    Any comments or buy suggestions?

    • Doesn’t look like you need much help. My only thought would be to look at covered calls to generate more income. Maybe on part of your holdings. If they are long term holdings look at out of the money options.

    • Tom – I generally like what you have done and am doing something very similar as I am 54. I only have two minor suggestions. (1) you only have equities in the list I see. While I understand the allure, I am also building in a bond component. I bought NTC, which is a closed end fund of Connecticut municipal bonds. While it yields 5.6%, that is tax free. Depending on your tax bracket, you may find that is pretty competitive with some of the yields you show above after tax. The other item I am into are closed end funds. I have sizable amounts in AOD and CSQ. These are nice for retirement as they pay income monthly. They also give you some spread of risk and trade at a discount to net asset value. Actually a third item – I do not see anything that I would consider international exposure (GSK to some extent). I would probably add something international. I have my wife IRA in DEM ETF, which yields 4.3%.

      • In our non-trading account we have a bond fund and a small municipal bond ladder (2017- 21) of which makes up almost 10% of our total investments. I want to increase the number from 10% to at least 15%. I am going to look for a Texas fund, where we live, that has a return similar to your Connecticut bonds — that is a good return. Also will take a look at AOD and CSQ. I have been hesitant to buy more bonds over the last year because of the fear of a price fall. I have looked a DEM before. I have 20 to 25% investmented in international mutual funds (and I don’t think I have ever invested in a fund with Japanese stocks). They have done well but I think I may sell some of these off (I can offset the gains with my NUGT losses for tax purposes) and buy a position in international bonds. It may be a little early to buy an international bond fund but I have time to wait to recover from any drop.

        I do have several other stocks I bought with dividends (Apple, FCX, VALE, etc.) but the dividends are small and I didn’t buy them for the dividends. In the case of FCX, VALE, etc. it is nice to have even a small dividend while you wait and wait and wait for a rebound to the price you bought at.

        Thanks Trader and Marshall.

  6. Ed, A while back you liked AT. Would you consider it a buy now with its 12.3% dividend?

  7. The debate over the drillers got me looking a bit at them. I did own RIG last year, but thankfully sold around $48 when I read that many of their contracts were coming up for bid and expectations were reduced revenues. I think the macro problem with these deep sea drillers is that the world is finding a lot of oil in places like shale formations that are much cheaper to retrieve. Over the next couple of years, Barron’s thinks oil prices will drop to $75 a barrel. At that sort of price, it will not be economically feasible to get oil from hard to reach places like Siberia or deep waters. So my thesis has me staying out of deep water drilling space and also away from oil and gas plays in general (though I do own BBEP – I am not reinvesting dividends). I think the smarter play are things that will benefit from cheaper gas, such as chemical plants, airlines, trucking. Again, this is a macro view, but I find it helpful to sometimes think macro and then apply to stocks you own or may think about owning. And of course different people may have differing macro views, that is what makes a market.

    • Marshall, what energy articles or authors do you read. I am especially interested in the $75 oil.

    • Marshall,

      I never like to bet fully on direction of oil prices,from peak oil hitting $250 a barrel to the last few years I have been hearing that oil would be as cheap as $65 a barrel. I tend to want to keep something in the oil space for unexpected uptick in world economic growth, political tensions or simply that inflation may heat up and that may be a hedge.
      I like ESV because of its balance sheet, 6.2% dividend and a PEG that is .88 right now, looking at it from a value perspective would the oil drillers not have alot of this factored in at the moment? From cheap shale oil, large oil companies slashing exploration budgets, and every analyst downgrading them is this not a time to look at buying?
      I also am not sure if enviromentalist will halt shale oil at some point, along with us not building pipelines to move it to market.

      • Ojunker – May turn out to be a brilliant move. Many industries in past decade have been beaten down and counted for dead, only to charge back. Look at best buy and HPQ 18 months ago. But I am not comfortable with my money there right now.

  8. Thanks Ed. I guess you mean risky as in unsustainable dividend. So in the end may not be a buy then.

    • George,
      They cut their dividend last year. But I also mean that AT is very much a project-driven company. I’d feel better about them if they had a large backlog of projects, but they don’t.

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