I’m big on oil. I love oil. Forget all this nonsense about “peak oil” and all the green energy freaks. While solar stocks crater and the federal government blows taxpayer money guaranteeing loans to loser companies like Solyndra, oil marches on.
The only stocks almost as good as a direct oil play are oil service companies. I’ve come across a Bermuda-based operation known as SeaDrill (NYSE:SDRL) that is in sound financial shape and also pays a mammoth 8.5% dividend.
SeaDrill’s operations are diversified, owning about 20 of each of the primary types of rigs: ultra-deepwater, semisubmersible, jack-ups and tenders. No matter what depth you want to drill at, SeaDrill can do it. Beyond rig diversification, the company also has spread its operations across the globe, with rigs at work in the Gulf of Mexico, Brazil, West Africa, the Middle East, the Asia Pacific region, the North Sea and the Norwegian Continental Shelf.
The other factor driving SeaDrill’s position is that rig demand is outstripping supply, which allows rig operators to jack up prices in addition to oil. Indeed, daily rates are at all-time highs on all types of rigs except for jack-ups. With demand at the pace it’s going, SeaDrill is waiting on delivery for 14 new rigs, giving it even more opportunity in the space, and it should add as much as $1.3 billion of additional cash flow by 2015.
This additional supply is critical for SeaDrill to take advantage of market conditions. Its present fleet has kept revenue growth from being all it can be by only relying on rises in daily rates. The company’s most recent earnings report showed a 4% increase in revenues, and a 9% increase in diluted EPS.
An examination of financials might initially give investors heartburn, when they see that free cash flow was negative to the tune of $727 million. But that’s because of all the money they’re spending on those new rigs. That’s a very acceptable use of capex, if you ask me.
Despite this, the company still paid out more than $3 per share in dividends in 2011, and will probably do close to that this year. But investors should at least take note that SeaDrill’s dividend, while large, tends to fluctuate.
With day rates on the rise — and some speculation that they’ll continue moving up from here — the worldwide demand for oil being a relative constant, and a sizable fleet at its disposal, SeaDrill would make an excellent addition to either regular or retirement portfolios. I expect to see capital gains as well, possibly significant ones, as the new rigs come online.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.