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How to Play Big Oil and Get a 9% Dividend

Offshore drilling contractor SeaDrill is an offbeat play

   

High-yield dividend stocks are the focus of many investors right now — and with good reason. As the market makes dramatic moves up and down but fails to make much headway across the longer term, a steady stream of income via reliable dividends is quite attractive.

Big Oil stocks provide a lot of dividend potential — with Exxon Mobil (NYSE:XOM) offering a yield of almost 2.5%, Chevron (NYSE:CVX) with a dividend yield of 3.1% and BP plc (NYSE:BP) yielding almost 3.9% right now. However, all of these stocks are basically flat year-to-date in 2011. Although inflationary trends indeed indicate a rise in oil prices, the soft demand of the global economic downturn means these stocks are pretty much treading water despite throwing off big dividends.

But what if you could play oil prices while tripling your dividend to 9%? Wouldn’t that be a better way to bank on inflation in oil prices? Even if it takes another 12 months for oil stocks to build a significant rally, in this environment, a 9% return on your investment is pretty darn good!

That’s exactly what SeaDrill (NYSE:SDRL) offers. SeaDrill is an offshore drilling contractor serving the oil and gas industries worldwide, specializing in harsh arctic environments and deepwater conditions. The company owns the manpower and ships to tap wells, then turns those wells over to big energy companies. It’s a lucrative business, and SDRL offers a big chunk of its revenue back to shareholders in the form of big dividends.

How big? Last quarter, SDRL shares paid back 75 cents apiece. Annualized to $3 per year (75 times four quarters) and based on current valuations around $33 per share, that’s a whopping 9% dividend yield!

seadrill How to Play Big Oil and Get a 9% DividendOf course, the dividend at SeaDrill can fluctuate big-time. A look at the company’s dividend history shows significant gyrations in the payouts. However, on the whole, I think you’ll agree the paydays always are substantial.

If you think the 9% yield based on 75 cents per share isn’t fair, let’s try some different math. How about the last four dividends — totaling $2.83 per share? A yield on that is 8.5% at current SDRL prices. And if you want to be pessimistic, aside from the first SeaDrill dividend, the company always has paid at least 50 cents per share — averaging 63 cents per share for the past 10 quarters (again, excluding that initial payout). Annualized for four quarters, that’s $2.52 — or “only” a 7.6% yield.

And as you can see form the chart above, there is equal chance the next dividend could be even more than 75 cents per share.

Clearly, the dividend potential of SeaDrill is powerful. But what about the fundamentals of the company?

Well, revenue has increased year-over-year for 13 straight quarters, with SeaDrill going from a $1.47 billion business in fiscal 2007 to a $4.04 billion business in 2010. That’s nearly triple the revenue in three years!

Profits have gone the same way, with EPS going from $1.20 in fiscal 2007 to $2.73 in 2010 — more than doubling. There was some volatility in that stretch, to be sure, including a steep quarterly loss at the end of 2008 because of the crash in oil prices and the financial crisis, but over the long term SeaDrill has proven itself a well-run business and a valuable partner for Big Oil.

And let’s not forget that oil fields are becoming increasingly difficult to access. Exxon just recently forged an agreement with state-owned energy giant Rosneft to hunt for oil in the frozen north of Russia — some of the harshest conditions in the world. The expertise of SeaDrill will become increasingly valuable as the quest for dwindling oil supplies leads more and more energy companies into harsh or deepwater conditions.

After other oil services like Halliburton (NYSE:HAL) and Transocean (NYSE:RIG) had to deal with the fallout of the Deepwater Horizon disaster in the gulf, SeaDrill has become an even more viable option for Big Oil projects, too.

If you want to play the oil surge and get paid big dividends, your typical stocks like Exxon and Chevron aren’t bad. But for a more aggressive play that could deliver two or three times the returns, try SeaDrill.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, http://investorplace.com/2011/11/seadrill-sdrl-play-big-oil-big-dividend/.

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