Ordinarily, a sudden change in management during a highly valued growth/momentum story would be expected to shake up the stock. But then Seadrill (NYSE:SDRL) has never been an ordinary story and it looks like the markets aren't too troubled by news of a new CEO and a possible corporate relocation. While I'd be inclined to agree that Wednesday's news really doesn't change a lot for the company, valuation is still pretty robust on this name.

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A Shake up in the Big Office
As part of its two-part news announcement Wednesday, Seadrill announced that the company and CEO Alf Thorkildsen "mutually agreed" to part ways. Thorkildsen has not only seen the company through some very difficult times for the deepwater drilling industry, but saw the company increase its revenue substantially and become one of the most dynamic names in offshore drilling. Although Seadrill has not surpassed Transocean (NYSE:RIG) in size, RIG is no longer necessarily the go-to name anymore for investors who want exposure to deepwater drilling.

Thorkildsen will be replaced by Fredrik Halvorsen, who had served as the CEO of Archer Limited since early 2012. Although a quick look at Archer's stock performance might not instill much confidence in investors, Archer had issues before Havlorsen's appointment as CEO and those issues haven't been helped by a challenging services market (a market that has made conditions more difficult for companies such as Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL) as well).

What Will Change on a Day-to-Day Basis?
I would think that the structure of Seadrill's operations would also help mitigate the disruptions from this switch. While I don't mean to suggest that Thorkildsen's leadership was unimportant to the company, Seadrill is a company with a deep management team, a very active board, and a lot of decision-making power given to regional operating managers. What's more, Archer is part of the John Fredriksen business empire (which includes Seadrill, Marine Harvest, Golden Ocean, Frontline (NYSE:FRO) and Golar LNG (Nasdaq:GLNG)), so it is not as though Mr. Halvorsen's capabilities are unknown to the company.

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A Change in Geography Likely to Be a Net Positive
Investors in Seadrill are likely already aware of the company's complicated structure, what with an MLP on the way for part of the operations, the spin-off of North Atlantic Drilling Limited and so on. What's more, the company is legally domiciled in Hamilton, Bermuda anyway. Nevertheless, management is looking to relocate the operating base for Seadrill Management AS (essentially the "home" of the management team).

Apparently, London, Dubai, Singapore and Houston are all under consideration and all have their advantages. Stavanger, Norway (the current location of Seadrill Management AS) is not exactly a hot area for relocation, and management claims that relocation could improve their ability to attract and retain talent. While that may be true, it's hard to overlook the fact that Dubai and Singapore would both offer certain tax advantages. That's particularly worth noting given a long-running battle with the Norwegian government on a tax issue worth over $250 million.

Whatever the reason(s) for the move, relocating to any of these four cities would not harm the company, and could in fact help with management recruitment/retention and tax efficiency.

The Bottom Line
Generally speaking, it's uncommon for a change to an already well-run company to be a net positive. Nevertheless, the nature of Seadrill's management structure should mitigate some of the disruption that goes with the CEO transition. What's more, nothing about these moves changes the larger issues for the company and the stock. This remains a highly leveraged company in a very cyclical industry and though offshore drilling and energy service demand has been looking a lot better than onshore lately (particularly in North America), Seadrill's valuation already assumes pretty bold expectations for the coming years.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.



Tickers in this Article: SDRL, RIG, HAL, SLB, FRO, GLNG

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