Established in 2005 as a Bermuda-based company, Seadrill Limited (SDRL) is an offshore deepwater drilling contractor providing worldwide services to the oil and gas industry. The company operates an extensive fleet comprising of drill ships, jack-up rigs, semi-submersible rigs and tender rigs for operations in shallow to ultra-deepwater areas and harsh and benign environments.
In April this year, I bought 72 shares of SDRL at $34.91 per share, so with this buy I'm averaging down to a per share price of $29.15. Yield on Cost (YoC) for this buy is 16%. As I remarked when I bought SDRL in April, the stock is one of my riskier buys, given its relatively short dividend history and erratic earnings history.
SDRL's stock price has tumbled from a 52 week high of $47.28 to around $25.00, a severe drop of nearly 50%. The main reason for the sell-off is a reduction in capital spending by oil producers, compounded by plunging oil prices over the past few months.
Why buy more shares of a riskier stock that is dropping like a fly? Is there still value here? More importantly, how safe is the current dividend? At 16%, the yield seems excessive and unsustainable.
On the other hand, if SDRL finds support and bounces from this level (like it did in 2009) and, somehow, finds a way to continue paying the current dividend, I'll be a very happy dividend growth investor!
Even with the recent drop, SDRL has returned more than 200% since 2005, easily outpacing the S&P 500:
Analysis of SDRL
SDRL ranked fifth in my October's top ten watch list stocks.
My fair value estimate for SDRL is $30.85. SDRL is in oversold territory and I picked up shares at a discount to fair value of about 23%. The following table provides some key statistics for SDRL:
SDRL passes the following of my selection criteria:
- A streak of at least 5 years of dividend increases (5 years)
- Dividend yield exceeds 2.75% (16%)
- Chowder Rule: Dividend yield plus 5-year CAGR exceeds 12% (36%)
- Price to earnings ratio (P/E) is less than 20 (TTM 2.85x and Forward 7.14x)
- P/E to annual earnings per share growth (PEG) ratio is less than 2 (0.21)
- 5-year compound annual growth rate (CAGR) is at least 10% (19.88%)
- Price discount is at least 5% of fair value estimate (23%)
SDRL falls short of these selection criteria:
- Earnings per share (EPS) percentage payout is less than 40% (47%)
- Debt to equity ratio < 50% (130%)
- Reasonable confidence in continued dividend growth (No)
Based on these statistics, SDRL earns 6 stars out of a possible 7: (******-)
Other ratings for SDRL
About the Dividend
The recent price drop has caused SDRL's dividend yield to balloon to 16%.
There is a possibility that SDRL will cut their dividend, although the company suggests in its second quarter earnings release that the current dividend is sustainable through 2015 and possibly into 2016:
The Board has in connection with the disclosure of second quarter results evaluated the current dividend level. Particular emphasis has been put on financial position, order backlog and future prospects. The Board has resolved to maintain the regular quarterly dividend at US$1.00 per share. The Board had communicated earlier that this dividend level is sustainable until at least the end of 2015. With the recent contract announcements and the solid execution on the financing side, the Board is pleased to report that we feel increasingly comfortable that this period can be extended well into 2016 without any significant recovery in the market.
Source: Seadrill Limited
SDRL has set high targets for growth and dividend payments. The company believes "that such high growth can be achieved based on dropdowns from Seadrill's existing fleet and funded by operating cash flow and by accessing the public debt and equity markets."
Seadrill's founder and major shareholder John Fredriksen recently bought 2 million shares in Seadrill, a bullish sign for investors. Recent articles published on Seeking Alpha (here and here) are also bullish on SDRL. On the other hand, there are bearish viewpoints, too.
SDRL continues to be a risky investment for me, but I'm willing to bet more on a turnaround and more great dividends to come...
100 shares of SDRL represent $400 of expected annual dividend income, which increases DivGro's projected annual dividend income to $4,992.38.