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The most recent boom and bust cycle in the tanker market provides useful insight into the deteriorating fundamentals in the offshore drilling market.

Consider the similarities between Frontline (NYSE: FRO), a formerly high-flying tanker owner, and SeaDrill (NYSE: SDRL), a leading offshore contract driller.

Both companies levered up aggressively and paid a generous dividend. Like Frontline at its peak, SeaDrill offers a double-digit dividend yield, has posted impressive gains over the past several years and remains a popular stock among income investors. Readers also frequently ask me about the name and its prospects.

Moreover, SeaDrill and Frontline both took advantage of surging demand to expand their fleets dramatically and reaped the rewards of a tight supply-demand balance.

Although we don’t expect the market for offshore rigs to collapse in the same manner as the tanker market, an influx of new drilling units has skewed the supply-demand balance in customers’ favor, putting the day-rates that these vessels earn under pressure.

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