In the short term the answer is clearly yes. However, as an investor I am concerned about the longer term. It appears that the income of SDRL is solely a function of its rigs and the leases. Unlike a manufacturing company there appears to be little know-how, patents, competitive advantages. Unlike REITS the are no long-term location advantage which can cause those assets to appreciate at a greater rate than inflation.
SDRL has a short term advantage based on the current supply of competitive rigs and based on leases it has for the rigs. But this advantage appears to be lost when the leases expire.
Therefore, over time shouldn't the price of SDRL stock decline toward the book value of its assets?
I agree. I have been invested in the deep water drilling sector for more than ten years and this guy knows squat. Sure offshore drilling is a capital intensive business and its fortunes vary with the demand for rigs,fluctuating day rates, the price of oil and the ability to attract majors who will ante up for long term leases. As to aging rigs, it is obvious that older rigs will command lower lease rates than newer ones but you can upgrade and update an older rig and make it more competitive. RIG has been doing that for years. Any comparison between the market value of SDRL and some less capital intensive sector is stupid.
Please take an accounting 101 class. Book value has almost nothing to do with the mkt value of a stock. there are many intellectual stocks with little book value, but have huge mkt caps. Take a look at some of the shipping stocks where mkt cap is 1/2 or 1/4 of book value, The shares are depressed beacuse no cares about book value, liqudation value maybe, thats because the shippers lose money. SDRL will rise and fall on market conditions, not book value. Also about $6 dollars of equity went to shareholders in divs since 2008. SDRL does a great job and makes a lot of money, thats why the shares are priced over "book", as it should be.
No.... Economic theory suggests SDRL's earnings would settle at a competitive rate of return on their premium assets, which include not only newer rigs but also their reputation, expertise, and barriers to entry. The book value of the assets is also over-depreciated as a way of returning shareholder value. For the duller knives that think this a bad thing, it means the assets are actually worth more than what's reported on the books. Conceivably this could turn negative if there's a glut of rigs for sale.
What the equity markets value the above considerations varies, as we're experiencing lately.
You mention the barriers to entry. Beyond the current lease terms are there any?
I noted the last 12 years or so history in Valueline on RIG. They have a history of frequently moving below book value. It should be noted, however, that their book value per share is growing fairly consistently. Their shares outstanding has been fairly constant, so they are financing asset purchases by expanding debt and cash flow (they do not pay dividends and apparently do not have any significant share buy- backs).