Transocean LTD (RIG), Seadrill Ltd (SDRL): Why This Driller Looks Attractive Despite Its Recent Rally

Page 1 of 2

Crude prices have been hovering around the $100 mark for most of the year, which has made oil exploration a profitable affair (again). But hydrocarbon land reserves are depleting while inflationary pressures are adding up. This has made exploration of high margin oil fields almost a necessity.

This is one of the reasons why Seadrill Ltd (NYSE:SDRL) has been growing rapidly, despite having a debt ridden balance sheet.

Seadrill Ltd (NYSE:SDRL)

Hefty dividends

Seadrill has a relatively higher debt/equity ratio of 220%, as compared to Transocean LTD (NYSE:RIG)’s 70% and ENSCO PLC (NYSE:ESV)’s 40% . On top of it, Seadrill Ltd (NYSE:SDRL) sports a huge dividend payout ratio of 102% as compared to Ensco’ 30.4% and Transocean’s 85% (proposed).

On a quarterly basis, Seadrill Ltd (NYSE:SDRL) paid out $0.85 per share, which aggregated to a quarterly payout of $398 million ($0.85 per share * 469.18 million shares). But its quarterly operating cash flows stood at just $241 million. To meet the shortfall, the company had to raise cash from various sources.

Although its trailing 12 months (TTM) operating cash flow of $1.59 billion are enough to cover its TTM dividend payout of $1.57 billion, the bottom line remains that Seadrill Ltd (NYSE:SDRL) is over extending itself. The company also recently hiked its quarterly dividends to $0.88 per share (payable on June 20), but there is ample evidence that its cash flow situation could improve in the coming quarters.

Fattening cash flows?

From the chart attached below, it’s evident that Transocean LTD (NYSE:RIG) has been repaying its debt, while its peers have been accumulating liabilities. This is because Transocean LTD (NYSE:RIG) isn’t fully utilizing its resources, and is sitting on massive cash and cash equivalents of $3.68 billion. This has not only lowered its ROE, but also hampered its overall growth. Carl Icahn owns a 5.4% stake in the company, and he has been trying hard to shake-up things to revive growth. But he has been unsuccessful so far.



Meanwhile ENSCO PLC (NYSE:ESV)’s long-term debt has inflated faster than its peers. This is because of Ensco’s acquisition of Pride International for $7.3 billion, carried out in 2011. This may have inflated its long-term debt to $4.83 billion, but has also allowed the driller to enter Brazilian and West African markets. The financial benefits of the acquisition began showing up late last year, which is why its fiscal year 2012 EPS grew by an impressive 70%.

Similarly, Seadrill Ltd (NYSE:SDRL)’s high debt levels can be attributed to its recent acquisitions. The driller had acquired a 33.75% stake in Asia Offshore drilling for around $54 million, in November last year. This move would not only boost Seadrill’ operating cash flows, but allow the company to enter new Asian territories. Meanwhile Asia Offshore would use cash from the proceeds to order a new rig.

Recently, Seadrill also acquired an ultra-deep water semi-submersible rig for $590 million. Its overall utilization rate (quarterly) rose from 86% to 92% on a sequential basis, and a new addition to its fleet will be helpful in sharing the rising workload of its operating rigs.

Besides that, the company has also ordered four new jack-up rigs for around $920 million, which are expected to be delivered by 2015. It is estimated that each jack-up rig has the potential to generate $100 million in annual revenues, which will eventually add to Seadrill Ltd (NYSE:SDRL)’s operating cash flows.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Best States To Practice Medicine

The 10 Best States to Have a Business

The 12 Most Expensive Apple (AAPL) Apps in the Market

The 10 Richest Billionaires in the World

10 Biggest Kickstarter Failures

The 10 Best Places to Work At

The Top 10 of Google Inc (GOOGL)’s Most Expensive Acquisitions

13 Best Cities to Visit in South America

10 Most Expensive Works of Art of All Time

The 10 Richest Banks in the World

The 10 Best-Paying Jobs in America (2014)

7 Most Expensive Foods in the World

The World’s Top 10 Earning Authors

Five Wicked and Very Expensive Items (and Other “Stuff”) Sold on eBay

10 Biggest Celebrity Bankruptcies

The Top 10 Highest Paid CEOs in 2014

The 10 Most Expensive Real Estate Cities in America

10 Most Expensive States To Live In America

The 10 Best Airlines in the World

The 10 Best-Selling Cars in 2014

The 10 Best Industries to Invest In

The 10 Most Expensive States to Own a Car In

Top 10 Business Schools in US: 2014 Rankings

Top 20 Female Billionaires in 2014

6 Movies That You Should Watch to Better Understand The Cold War

Top 15 Best Paying Jobs for Women in 2014

Top 6 Things Rich People Do Differently Every Day

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top 6 Tax Scams and How to Protect Yourself

Top Businesses to Invest In

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!