NEW YORK (TheStreet) -- Seadrill (SDRL) , one of the leading providers of drilling rigs to oil and gas producers for offshore projects, offers a juicy yield of more than 17%. But this might not be sustainable.
In an email interview with TheStreet, Longdley Zephirin, principal and analyst at the research company Zephirin Group said that for Seadrill, the chances of a dividend cut in the near future are "high; however, the chance of the company skipping a quarterly dividend payment is even higher."
Lately, Seadrill's stock has come under pressure due to the weakness in commodity prices, Zephirin wrote. Seadrill's shares have dropped by 40% over the last two months amid a 13% drop in WTI oil futures to nearly $80 a barrel. Overall, the shares have fallen by 44% for the year to date, closing Friday at $23.
The weakness in crude prices is already prompting oil and gas companies to reduce their capital expenditure budgets for the next year, Zephirin explained. This could endanger growth in drilling activity, impacting the performance of offshore drillers like Seadrill, Transocean (RIG) , Ensco (ESV) and Diamond Offshore (DO) .
However, the lower prices will still support the existing levels of offshore drilling activity, said Deutsche Bank's analyst Mike Urban in Oct. 14 research report emailed to TheStreet.
The oil prices pose a new challenge to Seadrill, already struggling with overcapacity in the offshore drilling industry, Zephirin said. According to one estimate, the day rates for deepwater rigs were already down by between 23% and 42% this year from their peak levels in 2013, partly due to excess supply of rigs.
Further, Zephirin predicted the incoming newly built ultra-deep-water floaters could impact day rates, making things even more difficult for Seadrill.
Floaters are offshore rigs that are anchored to the sea floor and "float" on the surface of the water while drilling at depths of usually less than 7,000 feet, though some floaters, such as Transocean's drillship, have worked at depths of more than 10,000 feet.
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