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SDRL Put Play

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August 29, 2013 – Comments (4) | RELATED TICKERS: SDRL , BBEP , BWP

I have been backing SDRL for awhile now.  I even made it my DIVIDEND pick in Harry's DIVIDEND CONTEST (which didn't require picking dividend paying stocks ;p).  They just posted a really solid earnings report, one which many were expecting to be weak.  Going forward, however, even greater growth is projected.  They have a $19 Billion (with a B) backlog of new rigs all under contract to lease. They have upped their dividend to .91.

As these new build rigs come online they will be immediately accretive to earnings and hence to increasing distributions.

One thing I love doing is selling puts as a way of making extra cash or buying a stock I like at a discount. I had sold 15 Jan 2015 $38 SDRL puts  awhile ago for an average price of $9.  They currently sell for $3.  I could close them but I don't expect SDRL to be trading at $38, absent a black swan event.

I am now eyeing the Jan 2015 $50 puts.  You can get $10.20 now for each. The stock is currently selling at $46.09, which means you could be forced to net pay $39.80 from now until expiration. Personally I expect the stock to be selling in the 60s by then since more rigs will be online and adding to income.

Of course no guarantee, but something for others to consider.

4 Comments – Post Your Own

#1) On August 30, 2013 at 7:44 PM, HarryCarysGhost (99.68) wrote:

Hey Andy,

Thanks for the shout out.

I have Seadrill on my watchlist of energy stocks. Main concerns-

$11 mil debt.

Debt to Capital ratio- 61.15%

Also the beta, but I think I could live with that.

Do you think the growth will outpace the debt level?

I'm actually waiting to deploy some new money (man, the money saved from not smoking is incredible).

Watching the tapering for good entry points. Already decided whatever stock I buy, it will be in the energy sector.

Cheers.

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#2) On August 31, 2013 at 1:19 PM, awallejr (81.55) wrote:

Hi Harry.  This might be a long reply but I hope it is helpful

There is "good" debt and there is "bad" debt.  An example of "good" debt really is a mortgage despite the crash. As long as you were still employed and able to keep paying your mortgage in 15-30 years the asset you bought will be free and clear. 

Those who bought over their heads because of the easy lending, or had teaser rates they couldn't refinance, or lost their jobs well that didn't make the concept of borrowing for a home bad.  Many just got hit with a black swan event like losing their jobs, or bad timing with teaser rates, or gambled to flip and lost.

Same thing about SDRL.  It is basically a leasing company.  Conceptually no different than car leasing or airplane leasing.  So the debt is high but it is immediately monetized for SDRL.  SDRL recognized where the oil is and pushed a very aggressive deepsea rig building program.  And because these rigs are literally state of the art the Oil drillers want them and are willing to pay a premium.

So as the rig comes online the lessor takes it and starts paying SDRL a daily rate (anywhere between $550,000 to over $600,000 a day).

Over the next two years SDRL has quite a few rigs coming online which will be immediately accretive to earnings and distributions should rise steadily.

Well the one thing with this stock really is its Beta, it does scare people if they are the type that likes to look at their portfolio everyday.  You might want to wait for a pullback before buying the actual stock or if you don't want such a long term put commitment above, you could sell any of the low $40s expiring in January 2014. Always always always use limits especially further out options since the spreads can be great.

The other energy option for you really was and still is BBEP.  Much lower beta and their recent acquisition from Whiting really was a good deal.  Yeah their debt too went up but these guys know what they are doing and down the road they probably will do a secondary to knock the debt down.  It is higher than when I first urged you to buy it but anytime under $18 is a good price in my opinion. 

It is a MLP so you will get a K-1 but turbo tax really does make it easy to handle.  Alternatively you might want to sell the March 2014 17.50 put.  The ones I suggested in another blog was the December 2013 $15 ones for $3, but they now sell for .35.  I suppose you could sell 10 to make $350 but better profits with similar risk on the March ones I think.

I fully expect to close those December ones for .05.  So .05 got me $3 in half a year.  Not too shabby.  I always close them on the Friday of expiration for .05 since I don't want to deal with being put the stock on Saturday even if the stock is in the black.

You will need a margin account to do this.  Although Cramer would tell you never sell on margin I disagree.  However, I never use more than half of my margin (am usually around 1/3 tops) simply because a 15% correction can always occur and I don't want to get a margin call if I levered it too high.  A lesson learned from 2008-2009.

Hoped this helped.  Feel free to ask questions.

Oh one last thing.  When you do sell puts your portfolio valuation will do wacky things.  If you sold a put for say $10 and the bid/ask is 10/15 (which can happen on far dated puts, your broker will use the $15 ask price for purposes of valuations.  It doesn't mean you just lost $5 but be mindful that they do that when considering your margin use.  Usually on weekends they use the last trade. I always "lose" money on Mondays because they switch back to the ask price heheh.

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#3) On September 02, 2013 at 1:14 PM, awallejr (81.55) wrote:

Correction,  I received $2 for the BBEP Dec puts, not $3.  I mixed it with my BX put play in another thread where I got $3.  BBEP 17.50 March ones are at 1.70/1.90 bid/ask with last at $1.72.

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#4) On September 04, 2013 at 11:59 AM, awallejr (81.55) wrote:

Well sold 10 BBEP Mar 17.50 puts for $1.90.

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