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Don't Sell Seadrill

NEW YORK (TheStreet) - Analysts hate the deepwater driller Seadrill (SDRL - Get Report), which is evident in the four downgrades this month. But I believe that is no reason to sell this stock.

In February, Seadrill released its quarterly results that showed double-digit top and bottom-line growth, but the company set a gloomy picture for the next two years due to the tough business environment. Moreover, Credit Suisse and Bank of America's recent downgrade made things even more difficult for Seadrill's investors. Meanwhile, Societe Generale has said that an unexpected decline in oil prices, as well as an increase in interest rates, can exacerbate Seadrill's problems.

As a result, the company's shares have fallen by 12.4% since the earnings release and 18% for the year to date. They currently around $34.

Despite this decline, Seadrill may look attractive to dividend hunters thanks to its juicy yield of 11.8%. Furthermore, more than 60% of its jack-up rigs are already booked through 2015 and the company is getting new contracts that go into 2016. With a backlog of more than $20 billion, the company can navigate through these testing times.

Seadrill is highly leveraged, with nearly twice as much debt as its equity. The company, however, is shoring up its balance sheet by increasing its order backlog to record levels and through asset sales as well as drop downs.

In its previous quarterly results, Seadrill's revenue and operating income climbed 21% and 28.8%, respectively, from the same quarter last year to $1.4 billion and $568 million.

This was clearly an impressive performance but the company spooked investors when it said that "2014 and 2015 may show slower growth in activity levels than earlier anticipated." Later, Seadrill's CFO said the company is  expecting an uptake in oil and gas expenditure by 2016, which could lead towards a better business environment. Therefore, Seadrill will now focus on utilizing its existing fleet, until 2016, when it could restart its expansion program.

Seadrill operates under a massive pile of debt, with a debt-to-equity ratio of nearly 200, more than twice as large as the ratio of its peers such as Transocean (RIG), Ensco (ESV), and Diamond Offshore (DO). Analysts believe that Seadrill will increase its net-debt by around 26% from the current levels to $17.5 billion by the end of 2015. Therefore, higher interest rates can become problematic for Seadrill. 

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