Seadrill (SDRL, Financial) had been sailing through troubled waters for quite some time, and there seems to be no relief for the offshore driller that reported its third-quarter numbers. Although revenue was marginally above expectations but was offset by a significant drop in earnings on a year-over-year basis. Moreover the company is sitting on huge a debt, which forced the company to cut its dividend. Led by its tepid performance the stock tanked to its 52-week low and has a gloomy outlook for the future.
Seadrill's prospects
There is a lot of uncertainty looming around the energy industry on account of declining oil prices. As an offshore driller, Seadrill is not exempt from it. If the crude continues to fall, there are fears that the tendering activity would further decline from its current lows . This would consequently increase competition in a market, which is already over supplied with rigs.
But to keep the situation under control Seadrill has cut its dividends that will strengthen its balance sheet. This would improve its financial position by $2 billion a year and the company will use this money to cut its debt and invest in new value creating opportunities. Although this move will hurt many investors in the short term, it seems to be the right thing to do in a challenging environment such as this.
In fact, after such a move by Seadrill, North Atlantic followed its trail stating the same reasons. This reinstates our point that the entire industry is facing a tough time, and the situation may persist in the near term.
New contracts
On the bright side it has bagged new contracts that will pacify its present situation to some extent. It has extended its contract with Petrobras for a period of three years, which has paved the way for revenue addition of around $2.2 billion. In addition, it has also signed various jack-up contracts with companies such as West Vigilant, West Leda and others, amounting to a total backlog addition worth $120 million. These new contracts reflect the strength in its business to provide solutions to customers worldwide, spanning from Mexico to Russia.
Going forward the market picture is still gloomy and even though Seadrill has bagged some wins but it will take more than a handful of orders to bring the company back on growth track. The concern stems from the persistent soft energy industry in countries such as Norway and U.K where giant companies like Statoil ASA has put rigs on standby or canceled contracts.
Conclusion
However, against all odds Goldman Sachs is positive on the stock stating this as the perfect time to upgrade its shares and consequently raced it to a Neutral stance. But it did not benefit the stock and shares continue to plunge. It will be a matter of time to see how things turn out with oil prices and in fact the entire industry. Therefore considering all the above factors it seems prudent for investors to avoid this stock for the moment and watch it from the side lines for a better entry point.
