Exactly 1 month ago, I posted about Seadrill, in context with the fact that I am not at all bullish on the prospects of the US stock market as a whole. Seadrill is a company that builds and leases deepwater drillship rigs. The lessors are large integrated oil companies who operate these rigs to extract crude oil that can't otherwise be gotten at because it is deep below the ocean floor.
Since my last update, Seadrill has reported earnings, reiterated management's confidence, leased a new rig at an astronomical (605k/d) rate, settled a financial kerfuffle with the Norway government, paid a dividend of $1, and - if you bought when I told you to and sold today - yielded a 13% net return. Not bad for one month's investment.
Currently SDRL continues on an uptick, probably related to strife in Iraq - any time there are Middle East concerns, the price of oil jumps, and that has knock-on, or trickle-down, or whatever you want to call those effects.
In this space in the past I've pointed out dividend yield as a valuation metric. Right now SDRL's yield is $1 a quarter, which is $4 a year, which is just about 10% of the stock price. Of course, yield is also a risk metric - if everyone thought the 10% yield was AAA safe with no risk of share price loss or dividend cuts, they'd pile in by buying shares and drive the price of that yield down.
But right now, really high quality dividend stocks - S+P bluechips - are paying about 4%. If you believe SDRL's dividends are safe, as their management have stated, the stock should be going for at least double its current price, maybe 2.5x, which would be $100! And that's ignoring the fact that by building new rigs SDRL is trying to organically grow the size of its business.
I have been reading a lot about Seadrill this past month and I keep trying to get my head around the bear case. Something no one is talking about actually seems the most calamitous: a Deepwater Horizon-style disaster. It could happen with one of SDRL's rigs at any moment - I mean, I understand there are highly trained personnel working like dogs to ensure it doesn't, but obviously, calamity can strike - and this would be ruinous for SDRL's finances if it were to occur.
What else? People stop using oil? Yeah, I keep hearing about this terrible possibility, that is likely to occur right up around the bend. Hasn't happened yet. I'm not too worried about it.
For the interested reader, I suggest Seadrill's annual report, available on its website. The discussion of risks is so well written, topical and up-to-date that I found it almost entertaining. It's not boilerplate; whoever wrote it was well knowledgable about all aspects of Seadrill's financial and operational doings, and did their very best to think of every black swan that might fly down the pike.
For the rest of you who have an appetite for return and a little risk at this peculiar juncture in stock history, consider buying a few shares. I think it has more to go.