An Income Gusher in the Energy Patch

11/24/2011 7:30 am EST


Amy Calistri

Editor, StreetAuthority's Stock of the Month and The Daily Paycheck

Regardless of energy prices today, once growth begins to take hold again, select energy stocks will be making even more money than they are now, writes Amy Calistri of The Daily Paycheck.

Seadrill (SDRL) is the second-largest offshore driller, with the second-largest ultra-deep-water fleet.

It operates the world over with 46 rigs, and its clients include most of the oil and gas exploration heavyweights, like Exxon Mobil (XOM), ConocoPhillips (COP), the Norwegian company Statoil (STO), and Brazil’s Petrobras (PBR).

One of the advantages that Seadrill has over its competitors is its youth. The Bermuda- and Norway-based company was incorporated in 2005, and has the youngest fleet in the industry. In many cases, this means its rigs are fitted with more advanced technology and safety features.

In the second quarter ended June 30, Seadrill earned $1.29 per share, compared with the 72 cents per share it earned in the same quarter a year earlier.

Seadrill’s current earnings easily support its current dividend of 75 cents per share. At current prices, SDRL has a yield of 8.7%.

Seadrill has a very aggressive growth strategy that has so far served it well. A growing rig count can potentially translate into growing income for Seadrill’s investors.

But these are incredibly expensive pieces of equipment, which requires Seadrill to carry a lot of debt. Keeping the growing fleet engaged will be key to Seadrill’s success. A healthy credit market is also important, as this is fuel for Seadrill’s expansion plans.

With oil prices high and a number of large deep-water discoveries driving demand, Seadrill’s aggressive plans will likely be rewarded. These sector fundamentals will ensure that energy-related companies such as Seadrill will have fewer difficulties securing credit in the foreseeable future, even in tight credit situations.

Oil prices and the projected demand for drilling services appear to be favorable for the foreseeable future. And Seadrill’s dividend looks to be well supported. I am going to start a small position in Seadrill.

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