They are renting/ leasing rigs. This is same for other rig companies.
Leasing cargo ships such as NMM appears to be another commodity business.
In contrast, the midstream MLP's lease pipelines but enjoy exclusivity on the the line leased. An upstream MLP may have an advantage based on discovered reserves and expertise in finding new sources of oil. Same for coal companies such as ARLP and PVR.
Bottom line, isn't the rig business cyclical and dependent on the price of oil and the number of rigs available for lease?
I welcome any comments or observations regarding the rig business in general and SDRL in particular. Further concerned with SDRL's high debt to equity.
Absolutely not! The company has long term contracts and so the price of crude has NO bearing on the day to day operation. These contracts run for 18 to 36 months. The key with this company is the dividend and the companys plans to increase it to .75 per quarter.
Your call on VOD being worth $10, I am assuming you are not saying it is going down, since Vodafone is currently selling for $25. What exactly are you saying? Is it that the 45% VZ holding alone is worth $10 a share of VOD's current price?
I agree with you completely on getting a nice dividend. This market might go sideways for several years but getting paid while one waits is a no brainer.
How did you learn about SDRL? I learned of it through the Energy Strategist newsletter. Not all recommendations are 100% profitable into the immediate future but in time do work out for a big plus.
SDRL was at 25 when ES first recommended it but then along with the market took a significant drop to about 17. My initial purchase was a nibble at 25 but having faith in ES recommendation, bought SDRL down as low as 18 and all has worked out. ES has a target price of 30.
CIM is another interesting dividend payer. Check it out but i do not think it is a buy and hold since it is interest rate sensitive.
I already made my fair share of money on BP, sold it all in late March for a 45% gain after owning it for 14 months, partly pure luck to get out before the GOM, partly because I tend to sell out positions with such large gains and move on to another stock.
Good luck with your BP, think you're going to waiting a LONG time for it to crack $50 again.
res ipsa loquitur
I cannot begin to discuss the assets that BP has, never mind their cash flow.
You already have made your opinion very clear.
You make money when stock are out of favor.
APl under 10
SDRL under 20
BP under 36.
BP will re-institute the divy, London needs the divy for their retirees.
There is no way the crown jewels on England are going down.
Thye have cash and assets as well as their share of the accident funded.
Good luck to you.
"They are renting/ leasing rigs."
NO!!! Drillers provide contract drilling services. People who refer to the contract drilling business as renting rigs usually don't know anything about the business.
"Leasing cargo ships such as NMM appears to be another commodity business."
The daily operating costs of tankers and bulkers are somewhere around $5 000-20 000; the operating costs of offshore rigs range from $40 000 per day for jackups to $150 000 for drillships. The bulker Genco Shipping(GNK) employed about 800 people in Q2 and the company operated a fleet of 35 ships; during the same period Seadrill employed 6700 individuals(Seawell's employees are not included) and the size of fleet was 48 vessels(includes newbuilds and co-owned vessels). GNK: 20 employees per vessel, SDRL 140 employees per vessel.
GOM shallow water development drilling is the only segment of the offshore drilling industry, that is considered to be a "commodity" business.
"In contrast, the midstream MLP's lease pipelines but enjoy exclusivity on the the line leased."
The pricing of most pipelines is at least partly tied to commodity prices and the throughput volumes do fluctuate with commodity prices.
"An upstream MLP may have an advantage based on discovered reserves and expertise in finding new sources of oil"
Upstream MLPs do very little exploration and primarily buy their reserves.
"Bottom line, isn't the rig business cyclical and dependent on the price of oil and the number of rigs available for lease?"
Most sectors go through more or less regular business cycles. In the past the down cycles in the drilling sector have been very severe. That cyclicality can interrupted by (mega)trends such as the increase of deepwater exploration and production, which is driven by growing demand for oil and the depletion of shallow water(and onshore) reserves.
The success of every single business depends largely on supply and demand. It is important to understand that there are great differences between offshore drilling vessels(a very crude example below):
Here is the Seahawk 800 owned by Seahawk Drilling(http://www.seahawkdrilling.com/rig-fleet/seahawk-0800): a benign environment jackup that can operate in water depth of 85 ft and it has a maximum drilling depth of 15 000 ft. The rig hasn't worked in couple of years and it's unlikely that it'll work ever again.
Seadrill's West Elara(http://www.seadrill.com/stream_file.asp?iEntityId=1141) is a harsh environment rig(it can operate virtually anywhere in the world including the Canadian East cost and the Norwegian North Sea), max operating water depth 450 feet, max drilling depth 40 000 feet. The rig is still under construction, but Statoil contracted rig in March for 5 years with a day rate $345 000. It's unlikely that this rig will ever be "unemployd" during its lifespan(25-30 years).
In the deepwater drilling segment near-term oversupply is a problem as less than half of the newbuilds that will be completed next year(26 vessels) are contracted, but since Seadrill's deepwater fleet is fully contracted through 2011 it won't be immediately impacted by the oversupply.
Your summary is not quite complete as it could be.
What you failed to consider is that older rigs working now will in many cases never be rehired due to their age and lower spec abilities.
The other factor is no new rigs have been ordered for some time. Build time being about three years will result in a delivery lag when business gets busy again.
Are you really recommending that ANYONE with a functioning brain buy BP?! You do know that they have a virtually infinite amount of financial claims facing them for the GOM disaster, I assume? I don't care how big they are, that decade long (or more) series of lawsuits and damage claims is going to hold down BP's stock price for a very, very long time, and IMO they will emerge a much smaller company after having to sell various assets to pay off all of the fines and claims.
I am heavily into the same sectors with
KMR, EPD, EPE, CPNO and LINE. All were bought over a year ago and have substantial appreciation. I intend to hold rather that switch to other stocks in those sectors. Newer position in coal have been taken (ARLP and PVG) and in investment manager AB. I am now looking for new sectors such as NMM and SDRL. My biggest concentration is in BDC's (ACAS, AINV, MCGC, BKCC, PSEC) most with yields all over 10%. I do not intend to hold for the long term.