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Wednesday July 11, 2012
Seadrill & Suncor: 2 promising buys
by Lou Gagliardi, editor Cabot Global Energy Investor  In selecting energy stocks, I am looking for companies that are trading off their 52-week highs, with low short-selling interest, good dividend yields, strong growth profiles and strong balance sheets.Both Seadrill Limited (SDRL) and Suncor (SU) show promise in this environment. Bearish sentiment is priced into both stocks, so if crude prices continue to move higher over the long-term, they should respond positively. Both Seadrill and Suncor are trading off their 52-week highs, SDRL 13% and SU 27%. SDRL has a high dividend yield at 6.90% and SU has a more modest yield at 1.70%. Short interest measured as a percent of float is very low: 2.2% for SDRL and less than 1% for SU. Debt interest coverage for SDRL is at a 5.8 multiple, with SU at a slugging 16.7 multiple. Both companies have very strong growth prospects, with SU targeting 8% to 10% crude production over the next several years, while SDRL has increased its backlog consistently since 2009 by nearly a third. To meet its growing backlog, SDRL has expanded its fleet from 23 rigs at the end of 2008 to 48 today, with 18 more rigs under construction, funding capital expansion and modernization at reported low interest rates averaging 2.56%. Growth in the number of rigs has allowed the company to roughly double revenues from 2008 to 2011. Valuation parameters for SU are at a 2012 $75 WTI price in my discounted cash flow models (DCF). SU has a net asset value (NAV) of roughly 19.55 per share, or 13% below its 52-week low. At a 2012 WTI price of 92 based on an average of 98.18 for the first half of 2012, and an average of 85.00 for the second half of the year. SU has an NAV per share of 38.20 or an undervaluation to the market price of about 20%, or 9% below its 52-week high of 42.88. These are valuation parameters—not price targets. Expect to invest for the longer-term (six months to a year). While you wait, you can earn a hefty dividend yield on SDRL and a more modest dividend on SU. Over the next six months, my price target is $42 for SDRL and $38 for SU. Start with small purchases now and look to buy more on pullbacks, especially if crude prices soften. Buy for the longer-term and be patient. Learn more about this financial newsletter at Lou Gagliardi's Cabot Global Energy Investor. Related articles: 
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