The ink was barely dry on our update on Seadrill in the previous issue of Personal Finance when the company dropped the bombshell that many had feared: It announced on November 26th that it is temporarily suspending its dividend until further notice, something it had also done in late 2008 as “The Great Recession” created a similar squeeze on its operating cash flow.

That time the suspension lasted five quarters, with the company resuming dividend payments in the third quarter of 2009 at an amount 20% below the prior dividend payment made in the second quarter of 2008. So, it’s fair to ask how long might the company hold off on resuming its dividend, and when it does, at what level is it likely to begin paying out? More importantly, how will the price of its stock perform until that happens?

The answer to all of those questions is dependent on a variety of factors, including how soon the price of oil gets back closer to $90/barrel where companies like Seadrill can turn a profit; whether or not Seadrill elects to exercise its contractual right to bail out of the Rosneft deal with Russia by this coming May; and  to what extent Seadrill can offload some of its debt onto its related entities, and/or walk away from that part of it contingent on consummation of the Rosneft deal.

For what it’s worth, when Seadrill did resume paying its dividend in 2009 the stock price quickly recovered, going from a low of less than $10 to a high of more than $40 in less than six years (see chart below). Of course, in 2008 the entire global stock market was imploding, most likely compounding the level of selling in the stock. Also, aggressive Fed intervention since then has rapidly propelled the stock market higher, most likely exaggerating the level of demand for all stocks, including Seadrill.

That being the case, my best guess is that the stock does not sink as low as is did last time, nor will it recover so quickly. That said, it does make for interesting speculation at current prices, as the energy sector is notoriously cyclical so it’s only a matter of time until oil prices are back on the upswing and the deep sea drillers are competitive again.

However, until then the company won’t be able to pay its dividend so we are removing Seadrill from the  Global Income Edge (GIE) Aggressive Portfolio as the stock will no longer deliver income.  It is also being cut from the Personal Finance Maximum Income for Retirees portfolio. 

On October 30, GIE moved to put Seadrill on Hold as a result of a glut in the oil market due to slower global growth. The publication at the time warned investors that short-term earnings pressures could impact the dividend given their high debt levels, and headwinds from projects in Russia due to geopolitical tensions could hamper earnings, which regrettably turned out to be true.

While PF and GIE will no longer cover Sea Drill, our other publication, The Energy Strategist does hold out hope of a recovery for those that lost principal. The publication believes “there’s significantly more value here than today’s share price would indicate, but don’t expect that to be realized next year. Profiting from SeaDrill’s rebound will require the patience of a true bottom-dweller. If that sounds like you, they say, continue to hold Seadrill.

But from the perspective of PF and Global Income Edge – when a company suspends its dividend – it’s the worst possible outcome of any income investment. 

SRDL is a SELL.

 – Richard Stavros and Jim Pearce