SDRL - thoughts?

[hendi_alex]

There is a fresh downgrade from CS, but recently Societe Generale gave a modest upgrade. Given the mixed signals and recent negative press related to both SDRL and the entire sector, how do you feel about SDRL? Does the stock represent what could be viewed as a long term position, or should the SDRL longs be ready to exit in anticipation of slower activity and continued soft day rates?

I'm long with a small position in my long term income account. My sentiment is to continue patient accumulation in small increments. But soft contract prices coupled with concern over excess leverage and high borrowing needs has caused my conviction to become weaker than it was six months ago.

[Dividend Watcher]

My ignorant vote was too risky for me right now but I only have a cursory understanding of their business model. When you say you hold it, I think you're knowledgeable and nimble enough to handle any risks. Not for me right now.

[EricL]

I voted too risky. The company doesn't have a very long track record, has high debt ($15B debt vs. $15B market cap), and is paying out higher dividends than it has income. Any downturn in oil price and I think you see a big dividend cut. Generally when a company is sporting a 10%+ yield, there is a reason.

I think ESV is a much safer play if you want to be in the sector.

[earthtodan]

I am overweight the sector, including SDRL. The case in a nutshell is earnings visibility. Consider that:

a) Analysts are predicting soft dayrates due to a deepwater supply glut for the next 18-24 months, which basically means 2014-2015
b) Seadrill is more than 90% contracted for 2014 and more than 60% contracted for 2015. Those numbers are rising as they continue to announce new contracts and extensions, with increasing day rates

The sector is not like consumer goods, where all new revenue has to walk through the door each day. If analysts all started saying, avoid tennis ball manufacturers because there's a glut of tennis balls that will put pressure on prices, I'd have no reason to doubt that because tennis balls aren't sold on long term contracts. However if oil prices fall, the contracts will still be in place. Oil price fluctuations are noise compared to the years-long cycle of bidding for offshore blocks, contracting rigs, and drilling wells.

I agree that ESV is a more conservative pick with less leverage, if you had to pick just one. However, while ESV talks about past dividend growth, their most recent earnings call mentions nothing about future dividend growth. I searched the PDF for "dividend" and found nothing about a commitment to future dividend growth. This makes me think they will be reluctant to leverage up in order to grow the dividend if earnings stay flat. SDRL says dividend growth is a priority. I've looked at all the drillers and decided to mix and match a few companies with different characteristics: SDRL, ESV, PACD and AWLCF, with ESV my smallest allocation.

The opposite end of the spectrum from SDRL is Diamond Offshore (DO), which has the strongest cash position, lowest leverage and highest credit rating in the sector. Their yield shows up as 1% but it's actually 7% due to regularly paid special dividends. However they also have the oldest fleet and lowest contracted utilization of the major drillers.

[rnsmth]

I have a half weight position in SDRL. I am comfortable. Debt is an issue, but the just sold some assets that will help them manage that.

If you want to, look up JimisJim on siliconinvestor, he has worked in the industry and has written on SDRL

[earthtodan]

Some good information regarding ESV's intentions and flexibility surrounding the dividend can be found in the 2014 proxy statement, Resolution 10, page 72.

http://www.enscoplc.com/Investors/Financ...fault.aspx