SeaDrill Ltd. (NYSE: SDRL) Offers High Yield, High Growth

As a high-yield stock with a growing global presence in the oil-and-gas industry, SeaDrill Ltd. (NYSE: SDRL) is just the kind of investment we need in this low interest-rate environment.

Even if investments like U.S. Treasuries and CDs right now offer less risk than stocks, we can't survive on their pathetically low yields. So a company that's reliable, profitable and yielding 10% is quite a find.

Better yet, SeaDrill's share price has dropped significantly due to recent market conditions, making the stock a real bargain. At around $30 it's trading well below its 52-week high of $38.49.

So now's the time to buy SeaDrill Ltd., for a chance to collect cash flow while investing in a growing business model that's already seen substantial global success (**).

SeaDrill Ltd.: A Growing Global Powerhouse

SeaDrill is the world's second-largest ultra-deepwater driller. The company's asset mix is second-to-none, giving investors access to top-of-the-line equipment involved in high yielding contracts.

In addition to its high dividend, SeaDrill Ltd.:

  • Has one of the newest, most diversified drilling equipment fleets in the world.
  • Is headed by famously successful leadership.
  • And has steady cash flow to keep up with debt.

While Bermuda-based SeaDrill was originally founded in 1972, it wasn't until 2005 that the current version was incorporated and launched with an offshore drilling fleet of 11 rigs. In the last six-plus years, that fleet has grown into 60 different units with more on order.

SeaDrill now operates a fleet of state-of-the-art drill ships, jack-up rigs, semi-submersible rigs, and tender rigs for oil services operations in shallow and deepwater areas. Demand for such new, high-quality rigs has increased since the BP PLC (NYSE ADR: BP) Deepwater Horizon oil spill last year.

And those potentially profitable assets are in the right hands.

The chief executive officer and president is none other than John Fredriksen, who is credited with being one of the most successful investors in history. He's been called "the Scandinavian version of Warren Buffet."

Fredriksen's extensive experience and connections in the oil and gas industry give SeaDrill an edge over its competitors. Fredriksen controls the world's largest oil tanker fleet through Frontline Ltd. (NYSE: FRO) and also is president of Golar LNG Ltd. (Nasdaq: GLNG), the owner-operator of liquefied natural gas carriers and storage units.

SeaDrill has grown extremely quickly over the last few years, using access to historically cheap funding to build or purchase capital-intensive assets like drill ships. The company currently has a large pile of debt built up, but its cash flow is capable of servicing its interest and dividend needs at this time.

The company has a market capitalization of $13.9 billion with an enterprise value of $22.6 billion once net cash and net debt are accounted for.

SeaDrill reported second-quarter earnings Aug. 25. Net income reached $645 million and earnings per share were $1.34.

Operating profits hit $430 million, slightly lower than the forecasted $446 million, but the company expects drilling demand to pick up going forward.

SeaDrill's earnings before interest, taxes, depreciation and amortization (EBITDA) for the first half of 2011 were $1.15 billion. The company's goal is to increase that to $3 billion over the next few years.

"We see sound demand for premium drilling units in conventional waters as contracting activity has improved significantly over the course of the year," SeaDrill said in a statement.

The company also has announced it will continue paying its 75 cents per share dividend for another quarter.

Action to Take: Buy SeaDrill Ltd. (NYSE: SDRL).

SeaDrill is a world-class company with a steady dividend payout. Its share price has dropped about 23% from its 52-week high of $38.49 on March 1 and may not get cheaper from here - making it a "Buy."

Let's go ahead and pick up our position at market over the course of a day or two.

We can use its options market to write covered calls on the stock in the future to lower our cost basis even quicker than the dividend will on its own.

(**) Special Note of Disclosure: Jack Barnes has no interest in SeaDrill Ltd. (NYSE: SDRL).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his previous BSH column, Barnes analyzed Potash Corp. of Saskatchewan Inc. (NYSE: POT).

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