Off the deep end
Understandably lost in the excitement over America’s onshore oil production was a banner 2012 in offshore and deepwater drilling. Discoveries outside of the so-called “Golden Triangle” of the Gulf of Mexico, Brazil and West Africa have created opportunities for drilling companies like Seadrill Ltd (NYSE:SDRL).
In fact, Seadrill Ltd (SDRL) currently has $21.5 billion in revenue backlog from such companies as British Petroleum, Total and Exxon Mobil Corporation (NYSE:XOM). With the youngest drilling fleet in the world, Seadrill Ltd (SDRL) claims a 5% increase in uptime, leading to $225 million in additional revenue compared to other companies.
Seadrill Ltd (SDRL) plans to continue modernizing its fleet. The big attraction for investors is the 9.4% dividend, which has steadily grown since 2009. With future oil consumption and non-OPEC production growing through 2014 as projected by the US EIA, demand for Seadrill Ltd (SDRL)’s rigs should stay high.
Against all this promise, what downside does Seadrill offer? First, debt, which Seadrill uses to finance new rig construction. It frequently doesn’t order new rigs until it’s lined up sufficient leasing. Furthermore, Seadrill claims the cost of building new rigs is at historic lows, while the dayrate paid for rigs is at historic highs. So while the debt load may appear daunting, much of that debt may be already paid for in admittedly future business.
Second, the price of oil. If oil prices drop, secondary to the European economy slowing down or the dollar strengthening, this will make drilling for deepwater oil less profitable, and likely curtail activity. If oil prices fall in the short term, Seadrill may sink with them.
Final Foolish Thoughts
Risk is proportionate to reward, and dividends from energy companies are no different. Overall, Linn Energy LLC (NASDAQ:LINE) offers the best balance between a high and growing yield, and the future safety of that income.
Calumet Specialty Products Partners, L.P (NASDAQ:CLMT) offers a lower yield, but also the prospect of capital gains, as it expands its operations and benefits from inexpensive domestic oil and natural gas.
For those willing to take a calculated risk, Seadrill clearly pays the highest dividend at 9.4%. The risk is the debt. I think world oil consumption will continue rising which, in turn, will drive continued demand for Seadrill’s rigs. To me, Seadrill’s debt is actually an investment in modernizing its drilling fleet — one that will pay off as offshore exploration expands.
The article To Drill or Refine? Good Ways to Collect Big Dividends originally appeared on Fool.com.
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