SDRL – One of the Best Dividend Stocks Just Got Even Better

by Aaron Levitt | November 25, 2013 12:17 pm

SDRL – One of the Best Dividend Stocks Just Got Even Better

As the largest deepwater driller based on market cap and one of the best dividend stocks out there, a lot was riding on Seadrill’s (SDRL[1]) latest earnings report.

sdrl SDRL   One of the Best Dividend Stocks Just Got Even BetterThat was especially true after good quarterly numbers came from rivals Transocean (RIG[2]) and Noble (NB[3]L). Deepwater drilling has been a cash cow for firms like SDRL, RIG and NBL as day rates for the most state of the art deepwater drilling rigs continue to command $600,000.

But unfortunately for investors in SDRL stock, the mixed bag that Seadrill reported hasn’t been too pleasing on the portfolio. Seadrill was already one of the best dividend stocks (with a yield of 8.8%) and boosted its payout … but the market isn’t too happy with the dividend stock’s outlook.

The result: Shares of SDRL stock are down nearly 6% today.

However, the short-term pain in SDRL stock could be the one of the best buying opportunities for investors looking for high-yielding stocks. Overall, the dour Seadrill earnings should prove to be temporary as deepwater drilling continues in spades.

That means SDRL stock will rise again — and that SeaDrill stock is both a bargain in the deepwater drilling market, and one of the best dividend stocks to buy now.

Near-Term Issues For SDRL Stock

All in all, Seadrill earnings showed[4] a third-quarter operating profit of $471 million — a 14% increase year-over-year. Unfortunately, that missed SDRL stock analyst expectations by a pretty considerable amount: 8 cents per share. The deepwater driller did however, manage to produce higher revenues that beat analyst predictions.

The bulk of the Seadrill earnings miss can be attributed to the energy industry’s recent pullback in capital spending for offshore drilling. While CAPEX spending on deepwater drilling by the E&P industry is still near record highs, many firms have recently begun to tighten their purse strings. As a result, day rates have flat-lined or even fallen for less state of the art rigs. RIG recently reported[5] that it predicts 39 deepwater units will be off-contract across the industry in 2014. That’s an unusually high number for the sector, highlights the near-term slowdown in CAPEX spending and isn’t great news for SDRL stock investors.

In fact, the reduced CAPEX spending weighted heavily on Seadrill earnings, while the bleak near-term outlook crimped enthusiasm for SDRL stock.

SDRL Still Has a Lot to Like

Despite the recent hiccups, there’s still plenty to like about SDRL stock.

First, management at Seadrill predicts that the drop in CAPEX and drilling activity in the deepwater sector will cut supplies and boost oil prices[6] over the longer haul. This will then cause the E&P industry to return to offshore and deepwater drilling as these wells are once again economically viable. That will continue to benefit SDRL and its advanced fleet of rigs.

And more good news for SDRL stock investors? It’s a fleet that continues to grow.

During the quarter, SDRL ordered four high-tech ultra-deepwater drillships and two jack-up rigs to be constructed for delivery in 2015 and 2016. Those rigs will be able to realize higher rates than Seadrill’s competitors and should come on-line at just the right time to take advantage of resumed CAPEX spending[7].

As for its current fleet, SDRL is still seeing plenty of gains in spite of the CAPEX slowdown. For example, French energy giant Total (TOT[8]) recently signed a new deal with SDRL subsidiary Seadrill Partners (SDLP[9]) to extend a key contract. That will boost the contracted rigs day rate from $580,000 to $627,500 per day for the next five years.

All in all, the longer-term picture for the Seadrill fleet should help keep its cash flows up, which increased $114 million during the third quarter, and SDRL stock’s mouth-watering dividend flowing. In fact, Seadrill is so confident about its fundamental outlook that it raised its quarterly dividend by 4 cents.

That makes SDRL one of the best dividend stocks to buy now, with its yield just under 9%.

One of the Best Dividend Stocks to Buy Now

The bottom line: For those investors looking at high-yielding dividend stocks, the recent plunge at SDRL could make it a great long-term buy. Overall, the recent setback in its earnings should be just that — a temporary set-back.

Deepwater drilling continues to grow as the energy industry looks towards new sources of supplies in order to fuel rising worldwide energy demand. And with one of the most advanced fleets, SDRL is quickly becoming the rig supplier to the E&P industry[10]. The prominent position should help keep it the king of the deepwater drilling dividend stocks, and one of the best dividend stocks out there period.

More importantly, the recent sell-off is providing an opportunity to snag shares in one of the best dividend stocks at bargain rate. At a current 8.8% yield and a P/E of just 9, SDRL stock is a buy for dividend hounds and bargain hunters alike.

All in all, SDRL is one of the best dividend stocks there is … and the time to buy is now.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. SDRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDRL
  2. RIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIG
  3. NB: http://studio-5.financialcontent.com/investplace/quote?Symbol=NB
  4. Seadrill earnings showed: http://finance.yahoo.com/news/sdrl-seadrill-announces-third-quarter-080700960.html
  5. recently reported: http://investorplace.com/2013/11/transocean-rig-icahn
  6. boost oil prices: http://investorplace.com/2013/11/oil-exports-clr-eog-iye-pxd-fro
  7. CAPEX spending: http://investorplace.com/2013/11/exxon-mobil-buffett-xom-brkb
  8. TOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TOT
  9. SDLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDLP
  10. E&P industry: http://investorplace.com/2013/11/dvn-devon-eagle-ford-eog

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