04-12-2014, 12:23 AM
(This post was last modified: 04-12-2014, 12:30 AM by 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.
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.