In this tumultuous market environment, many energy stocks have taken a beating. However, I’ve found an energy play that has a solid fundamental growth outlook, is well-valued and offers an attractive 6.1% dividend.
Investors scouring the four corners of the earth looking for this “too good to be true” stock need leave no rock unturned. Rather, this company can be found drilling into the deepest, darkest depths of the sea.
Seadrill (NYSE:SDRL) the world’s second-largest offshore driller (as measured by enterprise value, a variation of market cap), operates on four continents and in 50 countries.
The Norwegian-Bermudan firm is known for having the most advanced, high-quality drilling equipment in the world, giving it an edge over tarnished competitor Transocean (NYSE:RIG), whose faulty equipment led to the BP (NYSE:BP) oil spill disaster.
Also helping the company outshine its peers is the fact that Seadrill doesn’t typically operate in the Gulf of Mexico, where drilling was curtailed last year, following one of the largest oil spills ever. Instead, Seadrill primarily operates off the coasts of Brazil, Norway and Asia.
With the U.S. global dependence on oil, Seadrill has seen steadily increasing demand for its advanced rig technology. As a result, the company has a strong fundament outlook.
In late May, the driller reported solid first-quarter results. Revenue for the period increased to $1.1 billion from $853 million in the year-ago quarter. Greater capacity utilization, due to more rigs being leased, contributed to the gain.
For the full 2011 year, analysts’ project revenue will expand by 7.1% to $4.3 billion, from $4 billion last year. With increasing global oil demand, revenue is expected to rise a further 6.4%, to $4.6 billion, by 2012.
The earnings picture is similar.
First-quarter 2011 earnings were $1.70 a share, a sharp increase from earnings of 47 cents in the year-ago period. Strong demand for the company’s advanced drilling technology helped push up earnings.
Expanding into new areas like Vietnam, the company expects earnings growth to continue over the coming years. As such, analysts’ project full-year 2011 earnings will reach $2.99 a share. By 2012, analysts’ expect earnings to increase to $3.28 a share.
In addition a strong growth outlook, the company is well-valued, based on its trailing price-to-earnings ratio of about 8.
Based on this P/E ratio, the company’s PEG ratio (P/E divided by growth rate) is an attractive 0.83. A PEG ratio of 1 or under is seen as desirable.
Although the company has a high debt-equity ratio of around 154.7, Seadrill has managed to, literally, stay afloat and acquire new machinery, showing it has the financial strength to maneuver around its debt load.
Seadrill also offers an attractive dividend, with a current annual yield of about 6.1%. And management has stated its priority is to return cash to shareholders in the form of dividends. As a result, as Seadrill’s earnings rise, its dividend likely will too.
Based on the fact that Seadrill has solid fundamentals, is attractively valued and sports a large, rising dividend, Investors looking for a safe haven energy play may want to consider this drilling company.
