In the last three months, Seadrill (SDRL, Financial) has crashed by 30%, and this is certain to make investors nervous about the future of the company. This article discusses if Seadrill is a good investment at current levels of $28.26 and a dividend yield of 11.1%.
First, it is important to understand the reason for the decline in Seadrill’s shares. The primary reason is the weakness in the day rates and the company’s management has been concerned about a steep fall in day rates. Seadrill has several rigs going off-contract in 2015 and if these rigs are contracted at lower day rates, the company’s cash flow will be negatively impacted.
The second reason for the company’s stock decline in the recent past has been concerns related to the company’s debt. Seadrill still has significant new rigs for delivery in 2015 and 2016. If day rates remain weak, the company’s leverage will increase further on new rig delivery with lower than anticipated increase in cash flows due to low day rates.
The third reason for the stock decline is the most recent news that Tor Olav Trøim has decided not to stand for re-election to the Board of Directors in order to focus his efforts on developing Golar LNG. This is another setback to the company in challenging times, and Seadrill declined by 6.9% yesterday on this news.
At a dividend yield of 11.1%, Seadrill certainly looks attractive, but I am of the opinion that investors need to wait further before buying into Seadrill. Therefore, I believe that Seadrill will give investors a better opportunity in the foreseeable future to buy the stock.
The reason for this opinion is the upcoming challenges for Seadrill and an expected decline in stock price from these challenges. The biggest hurdle for Seadrill at this point of time is the company’s contract with Rosneft.
I am bullish on the Rosneft deal with North Atlantic Drilling (NADL, Financial) in terms of the potential that the deal has for the long term. However, if sanctions on Russia ultimately impact the deal, Seadrill will decline further as this deal has multi-billion dollar long-term prospects.
Therefore, the worries are not over for Seadrill, and it is best to avoid the stock. It certainly does not mean that Seadrill has no future. Once there is clarity on the Rosneft deal and once the day rates are more stable for the rigs, the stock can move higher. Currently, there will be more clarity on these events over the next 3-6 months and investors can patiently wait for the period before considering buying into Seadrill.
I must also say that Seadrill will not be burdened by its debt over the long term as the company has plenty of liquidity-generating options. The company’s financial investments are a potential source of liquidity, and the company will not find it difficult to fund the new rigs through more debt if the day rates stabilize.
Therefore, the key is that day rates stabilize or move higher over the next 2-3 quarters. I am of the opinion that the ultra deep-water market has bright long-term prospects and therefore I do believe that day rates will stabilize and get healthier in the days to come.
In conclusion, investors need to remain in the sidelines as Seadrill goes through one of the most difficult times for the company in the recent past. It remains to be seen if Seadrill comes out victorious. I personally do believe that Seadrill will emerge victorious in the long-term.
