What Seadrill Ltd (NYSE:SDRL) does see for small and midsized companies is that these operators will look to sign short-term contracts for exploration drilling. Larger companies like BP plc (ADR) (NYSE:BP) will counterbalance this with long-term drilling campaigns. Overall, Seadrill expects oil companies to continue to increase their budgets and spending on ultra-deep water by double digits. The company sees a strong trend here which also bodes well for competitors such as Noble Corporation (NYSE:NE) and Transocean LTD (NYSE:RIG). Here, though, Seadrill sees exploration companies looking to replace older drilling rigs with the most modern equipment. Seadrill has a very young fleet with its ultra-deep-water units having been built after 2000. Overall, its fleet is still smaller than Transocean’s, which boasts 29 ultra-deep-water rigs in service while Seadrill currently has 16. However, Seadrill has a much more robust newbuild program than all of its competitors. Meanwhile, Noble sees ultra-deep water becoming a major contribution to its revenue; it’s expected to grow from 24% in 2011 to 40% of Noble’s revenue in 2015. The trend here is clear: Oil companies are increasingly looking to drill in deeper water to find oil, which means lots of future revenue and profits for contract drillers.
Foolish bottom line
Seadrill is in a prime position to take advantage of the massive growth in deep water drilling over the next few years. The company has a young fleet that it’s aggressively growing, yet prudently securing though a large backlog of contracted revenue. When you add in the company’s equally large dividend, there’s a lot to like when looking at Seadrill.
Fool contributor Matt DiLallo owns shares of ConocoPhillips. Matt DiLallo has the following options: Short Jul 2013 $35 Puts on Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean.
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