SeaDrill (SDRL, Financial) delivered impressive results in the recently reported quarter. The company came up with solid improvement in its EBITDA. SeaDrill is expecting this growth to continue. The company is focusing on many new strategies to deliver strong growth in the future. However, there are many headwinds that the company needs to be careful about, but there is more good than bad.
Why SeaDrill might improve
SeaDrill is still counting on its innovative financing strategy. The company is worried about the short-term downfalls that it might face due to the volatile market environment. The falling oil prices are also a matter of worry to the company that will also expected to reduce the short-term visibility of the company. The company is now making strategic adjustment by shuffling its areas of focus to create more opportunities that can be worked on for better performance. SeaDrill is also engaged in search of new reserves in the deep waters to meet the growing demand in the future. If this initiative works out well, SeaDrill is expecting better long-term gains in future.
Despite the lower oil prices, SeaDrill can still face competition from its rivals and other players in the league which already are in good position to deliver better results than SeaDrill even in this soft pricing environment. However, SeaDrill is well prepared to fight this situation, and it has already locked a large portion of its fleet by undertaking a pre-emptive dividend cut with an objective of paying its outstanding debts.
However, considering the continuous weakness in the offshore drilling and challenging financial markets, SeaDrill has to take such a brave step.
SeaDrill also has other positive signs for the future. It has many contract extensions lined up with Petrobras in Brazil and others which are expected to have a revenue potential of about 1.1 billion which is a good sign for SeaDrill. This will surely benefit the company in the coming quarters. Moreover, SeaDrill’s strategy of aligning well with the customers is paying off and the company is seeing good growth in Brazil. It is now focusing on extending its strategic partnerships to further be stable by bringing more employment to its fleet.
Conclusion
Moving on the fundamentals, SeaDrill is dirt cheap with a trailing P/E of just 1.30 while the forward P/E of 3.70 shows slow earnings growth in the near term. This might be because of the soft offshore drilling environment. However, in the next five years also the stock is also moving with a disappointing pace with a CAGR of just 1.22% as compared to the industry average of 16.88%. The improvement in the SeaDrill operations is evident by it might be in infancy and will take some more time to gain full pace. So, until it shows some concrete signs of gaining market share, I would like to suggest the investors to stay away from the stock as of now.
