NEW YORK (TheStreet) -- Seadrill (SDRL) , the offshore driller, is getting hammered Wednesday after suspending its dividend and thereby wiping out the double-digit yields that have been a big reason, maybe the biggest reason, for owning the shares.
The stock fell by 22% to $16.24, its lowest level in six years. The company's shares have fallen by more than 60% for the year to date.
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While the decision looks bad right now, and investors are justifiably angry, the decision to retain its cash is a good one for the Hamilton, Bermuda-based company because it will allow executives more capital for reducing debt.
Seadrill Chairman John Fredriksen called the dividend suspension a "difficult decision" due to the "significant deterioration" in the offshore drilling market, a result of overcapacity and the roughly 20% drop in crude oil prices over the last three months. But Fredriksen said the company will resume its "distributions in the future."
The suspension was largely unexpected given that CEO Per Wullf said during the company's second-quarter conference call in late August that he was "confident" in Seadrill's ability to pay dividends "well into 2016." Nonetheless, it's not like investors hadn't been warned this could happen. Zephirin Group's principal Longdley Zephirin has been warning investors about Seadrill's unsustainable dividends for many months.
To give respite to investors, the company has said it will buy back 10% of its shares over the next 12 months. A buy back reduces the total number of shares, thereby causing an increase in the earnings per share without any growth in total earnings.
The suspension of dividends, however, is not bad news because it can strengthen Seadrill's capital position by around $1.8 billion, allowing the company to refocus its efforts on reducing its debt of $13.8 billion, wrote Zephirin in a Nov. 26 report.