Why I’m Not Buying Seadrill Ltd (SDRL)… Yet

A few months ago I wrote that I’d decided to finally buy shares of Seadrill Ltd (NYSE:SDRL). Unfortunately, for me at least, I actually didn’t buy shares at that time. Instead, I chose to write puts on the company to buy shares cheaper, and those puts expire this week. In looking over my options this time around, I’m not happy with what I see.

Seadrill West Epsilon Drilling Rig. Photo credit: Flickr/L.C.Nøttaasen

One of the major risks of writing puts is missing the upside when a stock moves higher. This is exactly what happened to me as shares of Seadrill Ltd (NYSE:SDRL) are up over 18% since I wrote that article. While I did earn about 3% in options premiums, this is definitely a case where I’d have been better off buying the stock. In fact, you could certainly make the case that Seadrill Ltd (NYSE:SDRL) is still a buy right now because the thesis for buying has only strengthened.

So, I’ve decided to hold off; I just have the feeling that the waves of volatility will knock this stock down a bit at some point. Right now Seadrill’s stock is riding high as one of its jointly owned subsidiary’s recently won a massive $2.7 billion contract from Brazil’s Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The eight-year contract adds to Seadrill Ltd (NYSE:SDRL)’s contracted backlog while also increasing its presence in Brazil’s massive offshore oil market.

That market is expected to really grow in the future as Brazil is looking to auction areas containing two-thirds of its proven reserves this coming October to bring in fresh foreign investment capital. What’s interesting about this auction is that Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) will still be the operator and own at least 30% of the field according to new Brazilian auction rules. Because Seadrill Ltd (NYSE:SDRL) already has a relationship with Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), it puts the company in the driver’s seat as offshore development continues.

In addition to Brazil, Seadrill Ltd (NYSE:SDRL) is building the drillships required to meet the needs of the world’s toughest offshore energy markets. For example, the company just announced that it has contracted to have four new ultra-deepwater drillships built. These will have water depth capacity of up to 12,000 feet so it can target areas such as the Gulf of Mexico as well as both East and West Africa.