Markets

Is it Worth Holding SeaDrill (SDRL) Amid Low Oil Prices?

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We initiated a research report on SeaDrill LimitedSDRL on Oct 2, 2015. The company is one of the leading offshore drilling contractors in the world, with one of the youngest and most advanced fleets. However, the ongoing slump in oil and gas prices is likely to hurt SeaDrill's near-term business to a considerable extent.

SeaDrill's current Zacks Rank #3 (Hold) reflects how it is straddling its proactive fleet in an unfavorable business environment. Moreover, the Zacks Rank implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

With less oil being discovered on land and companies having to dig even deeper to get to reserves, SeaDrill is poised to benefit from a market with robust multi-year demand trends, given its technologically advanced and versatile fleet.

In the floater fleet, that generates the maximum revenues for the company, more than 70% of the rigs are under contract through 2016. Most importantly, the company's strong backlog, which now stands at $7.5 billion, not only reflects steady demand from its customers but also offers an unmatched level of earnings and cash flow visibility. This enables SeaDrill to navigate the uncertainties in the industry better than most of its peers.

On top of that, SeaDrill has high economic utilization for its floaters. Economic utilization basically implies the percentage of payable days the floaters of the company operated.

However, SeaDrill derives its revenues from companies in the oil and gas exploration and production industry, a highly volatile and cyclical sector that is directly exposed to commodity prices. As a result, the ongoing slump in oil and gas prices have curtailed deepwater drilling and dampened equipment demand, adversely affecting bookings at SeaDrill.

Moreover, the unfavorable business scenario following plummeting oil prices and oversupplied drilling rigs compelled SeaDrill to suspend dividend payment for or an indefinite period in Nov 2014.

Stocks to Consider

Not all stocks in the energy sector are expected to perform like SeaDrill. Better-ranked players in the energy sector include NuStar Energy LP NS , Alon USA Partners, LP ALDW and Tesoro Corporation TSO . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NUSTAR ENERGY (NS): Free Stock Analysis Report

TESORO CORP (TSO): Free Stock Analysis Report

SEADRILL LTD (SDRL): Free Stock Analysis Report

ALON USA PTNRS (ALDW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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