SeaDrill reports a record backlog of $20.3 billion as deepwater rig market stays fully booked

08/28/2012 5:08 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

SeaDrill (SDRL) reported second quarter earnings on August 27 that showed the company growing both revenue and operating earnings. Revenue for the Norwegian deepwater drilling specialist—a member of my Jubak’s Picks portfolio http://jubakpicks.com/ -- grew to $1.12 billion in the quarter from $1.05 billion in the first quarter. Operating earnings increased to $483 million from $456 million in the prior quarter. At the end of the quarter the company had a record backlog of $20.3 billion.

Year over year earnings fell by 14% on higher operating expenses. Operating margin fell slightly to 43% from 43.2%. Earnings of $1.09 a share, down from $1.29 in the second quarter of 2011, were ahead of Wall Street projections for 78 cents a share. Year over year revenue climbed by 13%.

Just as importantly (or maybe even more importantly) SeaDrill reported continued momentum on day rates and demand for its deepwater drilling rigs. For example, the company announced that it had secured a commitment of 19-rig-years for its ultra-deepwater new builds West Auriga and West Vela and for an ultra-deepwater rig to be announced for a total of $4 billion.

The market for deepwater rigs is so tight and is projected to remain so tight that SeaDrill called rig availability “minimal” through 2014. That means not only that day rates continue to climb but also that the company is having no trouble signing up customers for rigs that haven’t even floated out of the shipyards yet. For instance, Petrobras (PBR) has signed three-fifteen year contracts with SeaDrill and its Brazilian partner SeteBrasil for three new builds to be delivered between 2016 and 2018 at a day rate of $610,000.

This kind of market gives SeaDrill extraordinary long-term visibility into revenues. That’s one reason that the company bumped up its quarterly dividend by 2 cents a share to 84 cents. At the $41.23 price as of 3:40 p.m. today in New York the stock shows a projected annual yield of 8.1%.

As of August 28, I’m raising my target price for SeaDrill to $51 a New York traded ADR by December 2012 from my earlier target of $49.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , 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 March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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