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Don't Sell Seadrill

Stocks in this article: SDRL RIG ESV DO SDLP

Although the next two years can be difficult for the company, the markets seem to me to have overreacted and this could be an opportunity for long-term investors.

The company recently announced new contracts, valued at $319 million, for its four jack-up rigs and the extension of a contract for a single rig at higher day-rates that would fetch an additional $24 million in revenues. Of the four rigs, one has received a long term contract for 2 years, valued at $168 million, while another rig would work for 12 months for $89 million, with an option to extend the contract for another 12 months.

In other words, with these new contracts, the company has shown that despite the tough business environment, Seadrill's units can still get booked well into 2016. With the new deals, nearly 92% of the company's jack-up capacity is contracted out for 2014 and 64% is contracted for 2015.

At the end of 2013, Seadrill's backlog stood at $20.2 billion. The company expects to maintain its backlog at this level in the future. Based on this stability, Seadrill has said that it will continue giving dividends at the current rate. A slowdown in backlog growth can have an adverse impact on dividend growth, but the company is not looking at any dividend cut in the future.

Earlier this month, Seadrill sold 230 million shares it had of the Malaysian oil services company SapuraKencana for $300 million, realizing a total economic gain of $165 million. Seadrill currently owns 490 million, or 8% of the company. 

Moreover, the company is also dropping down its assets to its master limited partnership, Seadrill Partners (SDLP). Last year, in December, the company dropped down two assets to Seadrill Partners for $356 million cash. Seadrill has also said that it will report further drop-downs in the future. 

The sale and the drop-downs come at a good time for Seadrill as the cash infusion from these activities will  enable the company to better manage its debt. The company has already said that it would use 80% of the net proceeds from the drop downs on debt reduction and future growth programs. The company's net debt stands at $13.9 billion, an increase from $12.6 billion in the end of 2012. 

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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