The higher the risk, the greater the reward! That is the basic rule of business. You may not come across another company in the oil sector that has so much potential reward and risk as Seadrill (NYSE:SDRL). There are two possibilities:
1- The company can be simply totaled with debt worth $13 billion plus the billions of other dollars that have been obligated towards new rigs.
2- The company may achieve a new high for the 52-week range, with the share price increasing by 4 times.
However, for the long term, Seadrill (NYSE:SDRL) is a good stock to buy. First of all, the prices of oil remain low in the global market. The rates are falling by the day and only those companies who are well-positioned strategically can survive the wild waters. The demand for offshore rigs has fallen as people are inclined towards rigs that have better capabilities. Modern capabilities can be added to the old rigs as well. However, no smart company would be interested in spending millions updating an old rig when they can buy a new one with the needed capabilities. So the companies buy new rigs in order to win more contracts and reduce the dayrates.
Seadrill (NYSE:SDRL) is among the companies that have bought a new set of rigs. This will ensure that the company’s rigs are active even as the oil prices remain so low. The rigs will still be under use even after profit margins fall because the dayrates are reduced in order to get more contracts. So, if the prices of oil increase in the future, Seadrill (NYSE:SDRL) will be in a position to gain higher dayrates with their new oil rigs.
In the last year, the market capitalization of Seadrill (NYSE:SDRL) fell all the way to $4.8 billion, after falling by 75%. During the same time, the company acquired about $3.4 billion in EBITDA thanks to a program. Over the coming year or maybe two, the earnings will fall as per assumptions of the market. The market cap will become less than twice of the EBITDA.
However, if there is the chance that the oil prices would increase in the next year to $100 for each barrel, then the assumption that the earnings will fall will prove to be incorrect. For each of the coming two years, the company holds a backlog of $5 billion.
Still, with Seadrill (NYSE:SDRL), one must be concerned. The point of concern is the debt worth $13 billion. $3.5 billion have been invested in the yard installments for new builds over the next two years. If the conditions of the oil market do not improve, the debt can pressurize the company heavily. So the big reward might actually turn into a big risk.
Seadrill (NYSE:SDRL) is currently betting on the oil price. However, Seadrill (NYSE:SDRL) will not face dire conditions unlike the oil producers. There is a chance that the oil market will increase again in the near future and at that time, Seadrill (NYSE:SDRL) will be a rewarding stock.
