There's no question that Seadrill stock has been pummeled by the recent downturn in oil. Shares have fallen nearly 70% from their 52-week high and management has been forced to cut a dividend that was one of the best reasons to own the stock.
But Seadrill has stable contracts with some of the word's largest oil producers. And they pose fewer risks than shale and Russian producers, who are under pressure because of falling oil prices.
Seadrill's customer base is rock solid
There are two risks Seadrill investors have to worry about in the future. First is that oil will stay low and rigs won't find work as they come off contract in the next few years. The other risk is counterparty risk with the company'scurrent contracts.
With oil falling below $55 per barrel, there's very serious risk that small shale and offshore producers won't have enough cash flow to keep drilling, banks won't fund future exploration, and they'll be forced into bankruptcy. Many people think this is exactly what OPEC, particularly Saudi Arabia, is trying to do to squeeze weaker players out of the market.
If counterparty risk is high, the $24 billion in backlog Seadrill Group has on the books is worthless. The recent fleet status report (which can be seen in full here) shows that most of Seadrill's counterparty exposure is with large multinational oil companies and state-owned companies. This reduces at least one risk for Seadrill's operations.
Source: Seadrill fleet status report.
Insulation from the decline in oil
If you think oil is going to fall to $40 and stay there for five years, Seadrill definitely isn't a good way to play the market and all oil stocks have further to fall. But if oil recovers, even slightly to $70 or $80 per barrel, offshore drilling will play a major role in the market.
As you can see below, since 1980 a growing percentage of new reserves are coming from offshore. Last year, half of the new oil discovered was is in ultra-deepwater and more than three-quarters was at least mid to deepwater offshore. Considering the growing reserves and high replacement ratio, if we look out over the long-term, say, 5-10 years, the future of offshore drilling still looks bright.
Investor takeawayIt's this long-term outlook, Seadrill's industry leading fleet, and its contracts with some of the most stable companies in energy that has me bullish on this stock. It will be a rocky ride for the next few months, but if oil recovers in the least bit, Seadrill's investors should be able to beat the market by a wide margin.
The article 1 Big Reason Seadrill Will Survive the Drop in Oil originally appeared on Fool.com.
Travis Hoiummanages an account that owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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