ConocoPhillips (COP), Seadrill Ltd (SDRL): Why I’m Finally Buying This Stock

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I've had my eye on Seadrill Ltd (NYSE:SDRL) for some time now. The company pays a very tempting dividend, currently at just over 9%. However, as I drilled down deeper into the company and the industry, it became pretty clear to me that it offered a compelling long-term investment opportunity.

ConocoPhillips (NYSE:COP)

The opportunity Last year marked the best year ever for deepwater and ultra-deepwater discoveries. Not only did the energy industry's 52 finds smash the old record by 40%, but those discoveries were spread across the globe off the coasts of 14 nations. As good as last year was, 2013 is shaping up to be a gusher as well.

Just last month ConocoPhillips (NYSE:COP) and its partners announced two discoveries in the Gulf of Mexico. ConocoPhillips (NYSE:COP) is planning to drill five exploration and appraisal wells this year, but that plan could be expanded by three more wells. Given its success, it wouldn't be a surprise if the company devotes more capital to its deepwater projects.

That's what is so compelling about Seadrill Ltd (NYSE:SDRL)'s future. The more oil that's discovered, the more it will incentivize energy companies to drill. That, of course, creates higher day rates for Seadrill Ltd (NYSE:SDRL)'s rigs which equates to more profits. It's a cycle that's showing no signs of slowing down.

Why Seadrill? While I really like Seadrill's outsized dividend, that's not the main reason why I'm choosing the company. The company is in the midst of a major newbuild program which has 22 units expected to be delivered over the next few years. This fleet build-out gives the company the most modern fleet of all the offshore drillers. That's important because it means less downtime, which is something exploration and production companies really like.

Further, Seadrill Ltd (NYSE:SDRL) has a contract backlog of $21 billion which goes a long way to securing its hefty dividend. When you put it all together, the company is poised to grow its EBITDA by 50% by 2015. However, the company is not without its risks.

The risks The biggest risk in my mind is Seadrill Ltd (NYSE:SDRL)'s use of debt to fund its growth. While the contract backlog provides security, it's still a risk as debt has been known to be the weight that's sunk many businesses. However, Seadrill does have a plan to keep its debt it check.

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