Seadrill Ltd. dropped to the lowest level in more than three weeks in Oslo as HSBC Holdings Plc cut the offshore drilling operator to neutral from overweight.
The Bermuda-based company fell as much 1.2 percent to 248 kroner, the lowest intraday level since July 4. It’s the second-biggest decline on the Bloomberg EMEA Oil and Gas Index.
While Seadrill is benefiting from a “strong rig cycle,” has a $19 billion order backlog and consistent dividend support, the “risk/reward is now up with events,” HSBC analysts David Phillips and Phillip Lindsay said in a note today. “The high dividend yield theme should limit downside, but we think current levels price in much of the potential in ultra-deepwater.”
Seadrill, the largest owner of ultra-deepwater drilling rigs after Switzerland’s Transocean Ltd., is expanding its fleet in anticipation of rising demand from energy companies that are extending the search for oil and gas reserves into deeper and harder-to-access regions. The company, controlled by billionaire John Fredriksen, has gained 22 percent in Oslo trading this year and reached a record level of 257.70 kroner on July 22.
It traded at 249 kroner by 10:30 a.m. in the city.
Seadrill is expanding through new builds and acquisitions, and yesterday announced a mandatory offer for Arendal, Norway-based Sevan Drilling ASA at 3.95 kroner a share.
Seadrill, which already has 50.1 percent of Sevan Drilling, is seeking to take control of the company’s two operational deepwater rigs and two more that are under construction.
While Seadrill is benefiting from favorable funding, this is also likely to lead to an increase in industry capacity and “we see little upside for ultra-deep dayrates,” HSBC said. “Our target price moves up 10 percent to 280 kroner but with insufficient potential upside to support a positive rating.”
Seadrill owns 62 units including drill-ships, jack-ups, semi-submersible rigs and tender rigs, with more than 20 being built. An ultra-deepwater rig can drill for oil and gas deposits in water depths of 7,500 feet (2,300 meters) to 12,000 feet.