SeaDrill is expecting 10 new rigs in 2013 and another 8 over the next two years--no wonder market are willing to look past today's earnings miss

02/28/2013 2:28 pm EST


Jim Jubak

Founder and Editor,

The rigs are coming. The rigs are coming.

And in yet more of SeaDrill’s (SDRL) aggressive use of its balance sheet, the company will fund its purchase of new higher margin ultra deepwater rigs by selling lower margin tender rigs in a deal that will close in April

It’s that aggressive increase in assets—and its ability to find a low cash cost way to fund it—that has made today’s shortfall on fourth quarter earnings irrelevant to the market. Shares of SeaDrill were up 0.24% as of 1:30 p.m. New York time today. EBITDA (earnings before interest, taxes, depreciation, and amortization) climbed just 5% for the quarter to $604 million. That missed analyst expectations—lowered in recent weeks on increased downtime for the company’s deepwater rigs—of $619 million in EBITDA. Total downtime for the company’s fleet came to 100 days in the fourth quarter. That resulted in a $60 million hit to revenue in the period. (The day rates that oil companies pay to hire SeaDrill’s fleet have stabilized at $580,000 to $620,000, SeaDrill reported.)

And here’s why the market has been willing to look past these quarterly numbers. SeaDrill expects delivery of 10 new rigs in 2013 and 8 more in 2014 to 2015. That will push the annual EBITDA run to $3 billion by the fourth quarter of 2013—up from $2.4 billion in 2012—and then to $4 billion in 2015, the company projects.

The company reported that downtime in the first two months of the new quarter had already totaled 117 days—but a key rig has been restored to service—and the company projects that it will be able to improve utilization rates for its deepwater rigs to 95% by the end of the first quarter. That would continue the improvement that the company has seen from the low 82% utilization rate in the third quarter to 86% in the fourth quarter.

The stock hasn't gone much of anywhere (well, actually, it’s gone down almost 8%) since I added it to my Jubak’s Picks portfolio  on March 2, 2012. That’s not surprising given the difficulties the company has had with downtime in the second half of the year. As of February 28, 2013, I’m lowering my 12-month target price slightly to $49 a share from the prior $51. The stock now trades below my March 2012 purchase price of $40.05 so even with the lower target I’m still looking for a potential gain of 32.8%.

The shares also pay a 9.2% dividend—based on payouts during the last 12 months. That yield is probably somewhat inflated by the special dividend paid at the end of 2012, but I think it’s reasonable to expect a yield of 7% to 8% or better on these shares if you buy them at the current price.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund , I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of SeaDrill as of the end of September. For a full list of the stocks in the fund as of the end, of September see the fund’s portfolio at
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