For investors who want to go full throttle into offshore energy exploration, Seadrill (NYSE:SDRL) is hard to beat. This company has quite a lot of debt and sizable spending commitments to shipyards (for new rigs), as well as a fairly complicated corporate structure. But Seadrill also has one of the best, newest fleets on the water and commitments from major oil and gas companies that should lock in favorable profits for years to come.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Solid Results for Q2
With Seadrill's contract commitments for 2012, the biggest questions for Seadrill's performance revolve around its cost structure and cost management. To that end, then, 13% year on year revenue growth (and 7% sequential) was not especially surprising. EBIT growth of 13% and EBITDA growth of 10% was slightly disappointing, but not nearly enough to really lead to any fundamental reevaluation of the company's near-term prospects.

Locking up Even More Growth
Investors may be a little cagey about the energy markets today, but Big Oil is showing little trepidation. The company's backlog grew 47% from the first quarter (and 65% from last year) and the company has little excess capacity in 2013 or 2014. In fact, the company's management is apparently considering its options for potential ultra-deepwater new builds, as there is so little likely uncommitted capacity in 2014.

SEE: A Guide To Investing In Oil Markets

As available rigs get locked up, prices are on the way up. Seadrill recently signed deals with BP (NYSE:BP) that will keep its rigs busy at attractive rates; the West Gemini will get a $640,000 dayrate, up 43% from the current deal. Similarly, the company extended its agreement with Exxon Mobil (NYSE:XOM) for the West Polaris in Nigeria that will see the dayrate climb to over $640,000.

Certainly this is not just a Seadrill phenomenon. Transocean (NYSE:RIG), Diamond Offshore (NYSE:DO) and Noble (NYSE:NE) all stand to benefit from an increasingly tight market for deepwater rigs, drill ships and jackups. While Seadrill is better positioned to wring out premium prices due to its fleet age and capabilities, this is one of those cases where a rising tide lifts all the ships.

SEE: Oil And Gas Industry Primer

Better in the Best of Times
It's also well worth noting that local competition is incrementally less of a threat to these offshore drilling companies. Countries like Brazil are pushing oil and gas companies to direct more business to local service companies, but that's not nearly as much of an option for offshore drilling. Consequently, Seadrill doesn't have to worry as much as Halliburton (NYSE:HAL) or even General Electric (NYSE:GE) about lower-priced local substitution.

Investors less familiar with energy service companies need to realize that this comes at a cost, though. For starters, offshore rigs are expensive to build and Seadrill is going to face some significant refinancing needs in the not-so-distant future. Likewise, while rates soar in the tight times, they crash in the down times as rigs are idled and stacked. In other words, don't get lulled into thinking that 2012-2014 is a "new normal."

The Bottom Line
The problem with Seadrill is as it has long been - investors are keen to play this latest, greatest and leveraged offshore play. Consequently, it is pretty pricey (premium-priced, in fact) at a time when companies like Cameron (NYSE:CAM), National Oilwell Varco (NYSE:NOV) and Weatherford (NYSE:WFT) still seem to trade at discounts. On the other hand, companies like Cameron don't have the same pricing leverage or contract positions that Seadrill has, so that premium is not entirely unfair.

At this point, I don't like Seadrill apart from its potential as a straight up offshore energy services momentum play, even though the company's dividend yield is quite impressive. That said, investors may want to keep an eye out for the MLP that the company is establishing for some Gulf of Mexico assets - MLPs are not for every investor, but this could be an interesting income-centric alternative in the energy services space.

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

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center