Seadrill’s (SDRL, Financial) stock has taken a hit in the last three months as the market seems to have overestimated the risks faced by the offshore driller. Despite a weak drilling environment, Seadrill seems to be in a good position to sustain long-term growth and is an attractive buy at present valuations. Let’s take a look into Seadrill’s prospects.
A decent quarter
Despite all the negativity, Seadrill reported an upbeat first quarter of fiscal 2014. The company posted earnings per share of $6.23, beating the consensus estimate of 70 cents. The total operating revenues came in at $1,221 million, down 3.5% from the prior year quarter. The net operating income was $784 million, way more than the previous year quarter’s $317 million. The operating expenses were $771 million, representing a minute decrease from the year-ago quarter. We are pleased to report first quarter consolidated EBITDA of $788 million, representing nearly 3% growth rate over the fourth quarter, a 21% growth rate year-over-year.
The Floaters segment reported revenues of $787 million compared to $757 in the year-ago quarter, while the revenues from Jack-up Rigs segment came in at $305 million which was up from $256 million in the prior-year quarter.
Seadrill generated $1.93 billion in operating cash flow in the last year and the company’s quarterly cash dividend was $1.00, a 2% increase from the dividend paid in the previous quarter. For the second quarter, the company expects earnings to be at 76 cents per share, while the analysts expect the company's earnings to grow at an annual rate of 18.7% for the next five years.
Looking ahead
Seadrill Limited along with its partner firm Field Offshore Design Engineering Nigeria Limited, recently announced that it has secured employment for its newbuild West Saturn. The company made a contract with a subsidiary of Exxon Mobil Corp., Esso Exploration and Production Nigeria Limited, for the ultra-deepwater drillship. This contract lasts for two years with a one year extension option and is estimated to bring in about $497 million in revenues.
The company’s three segments, namely, Floaters, Jack-up Rigs and Tender Rigs have reported less earnings in the previous year, but with certain measures and new rigs coming into operation, the company is expected to perform well in the coming future. The company seems to be in a very good position to bring more newbuilds online and sustain them, which will lead to rising levels of debt, but will also help the company strengthen its position in the market. Thus, Seadrill is using North Atlantic Drilling Ltd. and Seadrill Partners LLC, as means to diversify its debt while still possessing a share in the profits. Also, as all three of the companies pay out strong dividends, Seadrill earns a lot from the other two.
Seadrill expects that it will grow rapidly in the next five years, which will help it to sustain its current dividend. The company currently has a dividend yield of 10% although its shares are down 7% this year. But this is not too much of a problem as long as the company posts results similar to this quarter.
In the next quarter, the company expects to take delivery of West Neptune, initiating operations in the Gulf of Mexico. It will be three-year deal that will begin in October this year. Furthermore, Seadrill also expects to take delivery of two ultra-deepwater Samsung drillships -- West Jupiter and West Saturn along with the semi-submersible Sevan developer for the rest of 2014. The company also announced a strategic corporation agreement with Rosneft while NADL is expected to sign up to nine rigs and 35 rig-years worth of contract with Rosneft.
The company’s Mexican joint venture is also playing well along with positive developments in Brunei and Saudi Arabia, in addition to attractive opportunities in Mexico, West Africa, and Australia. The company mainly aims on high-specification new assets, strong uptime, full utilization, and a lean cost structure as these factors have been helping it deliver results and grow the dividend. Seadrill is also focused on building a modern high-specification fleet. The jack-up portfolio of Seadrill has 3% of its fleet available this year and 27% in the next.
Conclusion
All in all, Seadrill appears to be a good buy and it is expected that the company will perform in line with the broader U.S. equity market over the next one to three months. Hence, it’s a good opportunity for the investors.
