Seadrill Fear and Loathing – Barron’s

Shares of Seadrill (SDRL) have dropped despite the Europe-listed shares getting an upgrade atSociété Générale today, as the investment bank still sees better opportunities in Noble (NE),Ensco (ESV) and Rowan (RDC).

Bloomberg

Société Générale Guillaume Delaby andEdward Muztafago explain why they raised their rating on Seadrill and why they’re still not fans of the offshore driller:

Our previous Sell rating (report link, 28 October), was partly based on the risk of floaters oversupply post 2013, which has now materialized. Assuming a “normal” and “gentle” scenario, we believe that: 1) 2014, 2015 and 2016 consensus might now be a bit too low and, 2) the current $3.92 annual dividend (11% dividend yield) might also be secure. In that context, and even assuming a slightly more grim 2014 (before a pick-up in 2015), our Sell rating is no longer warranted in our view. But in the event of an unexpected harsher scenario of declining oil prices and/or higher interest rates, we find little reassurance at Seadrill whose net debt, according to our forecasts, could rise to $17.5bn by the end of 2015 (237% gearing), a high level even by Seadrill’s own standards.

Delaby and Muztafago explain why Noble, Rowan and Ensco are better bets:

All in all, and while Seadrill is no longer a “Sell” or our “least preferred stock” (now SBM Offshore), we believe that US competitors like Noble, Rowan and Ensco (covered by SG analyst Edward Muztafago out of the US) are much more attractive given: 1) 6-8% expected dividend yields (2015-2016e), 2) above 15% FCF yields and 3) reasonable 35-50% gearing levels. Put another way, they offer only slightly less expected financial rewards for a much lower degree of financial risk in our opinion.

Still, not everyone’s a fan of even those drillers–yesterday Barclays cut its price targets on Rowan and Ensco, among others.

Shares of Seadrill have fallen 0.7% to $34.74 at 10:20 a.m. today, while Noble has dropped 0.8% to $31.03, Rowan has declined 0.9% to $31.30 and Ensco is off 0.5% at $50.39.

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