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TheStreet Open House

Drilling Deeper to Find an Oil Play

Stock quotes in this article: SDRL

One such stock is headquartered in Bermuda -- Seadrill (SDRL), $21 billion large-cap stock that currently sports a dividend yield of 7.7%. But I am not chasing a dividend here -- that is never a good idea -- and I require more from a stock than that it is simply from an area of the market that should do well given the current conditions in the world. SDRL has the other three characteristics that I like.

Data from Best Stocks Now App

Performance: The first characteristic I look for in a stock is performance, and what a performance SDRL has had over the years!

Data from Best Stocks Now App

Over the last five years while the market has averaged 5% per year, SDRL has averaged over 17%; it has more than tripled the returns of the market.

Over the last three years, while the market has averaged about 15% per year, SDRL has averaged a total return about 34% per year; it has more than doubled the returns of the market.

Also, over the last 12 months, the stock has really been exploding higher. SDRL is up 22.8% while the market is up about 16%. SDRL passes my performance test.

Valuation: The second characteristic I look for in a stock is its valuation. Valuation is critical in my book.

SDRL has been a very good grower over the years. In fact, it has been growing its earnings at a rate of about 15% per year, which is very strong for a company that provides offshore contract drilling and well services internationally through a fleet of several offshore drilling units.

SDRL's earnings are expected to increase 17% this year and another 27% next year. They reported earnings this week and beat earnings estimates quite handily. SDRL is currently trading at eight times forward earnings. It is expected to grow by 22% per year over the next five years. It's trading at a huge discount to its growth rate.

Data from Best Stocks Now App

In fact, the PEG ratio comes in at only 0.48. When I extrapolate out earnings over the next five years, and apply an appropriate multiple, I come up with 77% upside potential. Seadrill passes my valuation test.

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