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(B)(N) SDRL SeaDrill Limited

February 3, 2014
Drilling Down

Let’s drill here, boys. This looks good!

Drama. Investors have the instincts of honey bees, sniffing out one good opportunity after the other, and then the hive follows. Of course, not all investors are alike, but after flirting with the “big oil” offshore drilling companies throughout all of last year, they suddenly shot them down by 13% and a loss of $9 billion in less than thirty days.

To us, those are the facts – first “undervalued” and now “overvalued” and we don’t know if the shooting has stopped or what the prognosis is for the industry this year and we are neither inclined nor able to speculate on it. Nor do we need to. Please see Exhibit 1 and the Chart below it.

Exhibit 1: NYSE Deep Sea Drilling – Fundamentals – February 2014

NYSE Deep Sea Drilling - Fundamentals - February 2014

NYSE Deep Sea Drilling – Fundamentals – February 2014

The "Overvalued" Deep Sea Drilling

The “Overvalued” Deep Sea Drilling

The companies returned 62% of their earnings to the shareholders last year, paying out $3.6 billion and an aggregate dividend yield of 5.9% which goes a long way to explaining why the investors were hanging in there for so long.

But some were bitten by the loss of 13% and $9 billion in market value in January which was gone in thirty days and took more than a year prior to earn.

Moreover, investors-at-large are important to these companies because they are unlikely to finance $2 billion to $3 billion offshore drilling rigs with bank debt and we can see that bank and preferred share debt ($97 billion less $47 billion) are matched by the shareholders equity of $47 billion which in itself is pretty generous of the banks who also like to earn higher rates on a competent bet.

Ocean Odyssey Blowout 1988

Ocean Odyssey Blowout 1988

As an abstraction, the industry operates like the airlines by financing their rigs and earning back the money over time by the daily drilling rates and newer, safer and more efficient rigs will have a market advantage over the older equipment. The rigs are churned as much as the ocean-bottom that they hope not to dwell on.

Only three of these companies were included in the Perpetual Bond™ last year and now none and our estimate of the downside risk in the stock prices due to the demonstrated volatility is another minus (11%) absent more surprise. Please see Exhibit 2 below.

Exhibit 2: NYSE Deep Sea Drilling – Prices & Portfolio – February 2014

NYSE Deep Sea Drilling - Prices & Portfolio - February 2014

NYSE Deep Sea Drilling – Prices & Portfolio – February 2014

Exhibit 3: (B)(N) SDRL SeaDrill Limited – Risk Price Chart

(B)(N) SDRL SeaDrill Limited

(B)(N) SDRL SeaDrill Limited

SeaDrill Limited was included in the Perpetual Bond™ since much lower prices of $30 two years ago but is now out on a “line fault” and trades below the price of risk.

As usual, we could afford and were saved by the effective “stop/loss”. Please see Exhibit 3 on the left.

Moreover, for these stocks, the keel is up and even though investors are still holding them at these low prices, they are in the trading zone below the price of risk and there is an excess of supply over demand.

For more information on the chart elements and additional references to the theory, please see our Post, The RiskWerk Company Glossary.

And for more on what risk averse investing has done for us this year, please see our recent Posts on The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class actionLa Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in AmericaBig OilShopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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