This article originally appeared on Jan 28, 2014 on RealMoney.com. To read more content like this plus see inside Jim Cramer's multimillion-dollar portfolio for FREE... Click Here NOW.
The last few months have been tough for offshore rig lessors, whose profits are tied to Brent Crude prices and day rates for rig leases. The scare in emerging market debt, currencies and economic growth, if anything, makes the situation for the economically-sensitive commodities sector that much more volatile.
Offshore rig lessors, which are generally regarded as a bet on consistently high international oil prices, have been hit particularly hard. One of the most noticeable declines has been in SeaDrill (SDRL), a large-cap rig lessor. SeaDrill is a Bermuda-based company with mostly Norwegian management. The company is highly levered in various forms of debt but is also perhaps the best of all large-cap rig lessors.
SeaDrill generally has the highest rig utilization, the highest margins and often has the highest return on invested capital. Even better, SeaDrill's U.S. shares pay a substantial dividend yield of 10.25%, a number which is high only because the stock has dropped by over 20% from its October high. At this price, SeaDrill is an "accidentally high yielder."
One of the most important things to understand about SeaDrill is its relatively high leverage. The chart above shows that on a debt to earnings before interest, taxes, depreciation and amortization ratio, SeaDrill is just about the most indebted among its peers. Net debt is over $10 billion. But let's look closer. SeaDrill took on debt when it was inexpensive to do so. The company used the proceeds to order a newer, more deepwater-focused fleet that will boost earnings as global deepwater oil activity is forecasted to grow steadily in the future. Most of SeaDrill's debt is fixed and much of what isn't fixed has interest rate swaps -- which reduce exposure to rate volatility.