SeaDrill: Stay Cautious Despite Positives

SeaDrill (SDRL) shares have seen a massive drop this year due to a weak financial performance, which is a result of weak oil pricing. However, the company is taking steps to reduce costs and improve the robustness of its operations in order to counter the weakness in the oil market.

SeaDrill’s moves      

SeaDrill is focused on optimizing its cost structure and minimizing the non-core expenditures, which actually enabled the company to deliver $651 million of EBITDA for the quarter and slightly above $641 million in the second quarter of 2014.
SeaDrill also declared significant cash and cash equivalents of $918 million by the end of second of 2015, up $15 million over the first quarter of 2015.

The ongoing cost reduction efforts of SeaDrill has allowed it to maintain significant cash level on the balance sheet which is believed to support the company with its future growth plans while delivering improved shareholder returns.

Additionally, SeaDrill’s floaters, including semi-submersible rigs and drillships, achieved an economic utilization rate of 92% during the second quarter as compared to 93% in the previous quarter. In addition, average economic utilization was recorded at 97% for Seadrill jack-up rigs during the second quarter as against 98% in the first quarter.

On a consolidated basis, economic utilization for the Seadrill Group floaters was 93% and 95% without the West Tellus and the jack-up fleet recorded 97% of economic utilization. However, there’s a declining year-over-year trend for backlogs in million dollars. Still, Seadrill signed new contracts during the second quarter of 2015 that grew the overall backlog by nearly $300 million.

Moving ahead, SeaDrill is committed towards continuing with its cost savings efforts which has already allowed the company with nearly $250 million of cash savings during 2014. Therefore, SeaDrill is believed to continue with its cost optimization initiatives through minimizing or postponing its non-core expenditures and thus estimated to realize cash savings of about $500 million in 2015.

Deferring rig deliveries is a good idea

SeaDrill is successfully continuing with its newbuild program under which it has 15 rigs under development including, eight Jack-ups, three Semi-submersibles and four Drillships. However, SeaDrill has deferred the deliveries of two units presently under development, the West Dorado and West Draco, have been deferred from the fourth and third quarter of 2015 towards the conclusion of first quarter of 2017. The anticipated 2015 deliveries of eight jack-ups now under development have been modified, deferring one unit towards December 2015 conclusion, five units for 2016 and two units for 2017.

SeaDrill has recently extended its provisional commitment with Pemex for the semi-submersible unit West Pegasus for an additional two years. Further, SeaMex and Seadrill have decided to lower the dayrate on five jack-ups for a period of about 365 days, leading to a net backlog contraction of nearly $20 million. The key agreement includes the units of the West Titania, West Courageous, West Defender, West Intrepid and West Oberon.

The strategic initiatives of SeaDrill to expand its superior quality production through the introduction of newly and strategically placed rigs is believed to be supported by the planned joint operations of the company with other key drilling partners to maximize high quality productions at minimal costs.


But, despite all these positives, investors should adopt a wait and watch approach and see how SeaDrill performs in the coming two quarters before taking a call on the company due to the weakness that it is facing in the end market.
Published on Oct 18, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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