SeaDrill: Buy the Stock for Impressive Gains

Shares of SeaDrill (SDRL) have lost nearly 50% of their value since the start of 2016. This drop in its stock price performance is due to continued weakness in the oil and gas prices that has impacted rig count negatively in the United States. As per a report by BHI, the U.S rig count have plunged 30 units to 541 during the week ended February 12, 2016. In reality, the U.S rig count has fallen by 817 units in the past twelve months.

The weaknesses

As a result of this downturn in the U.S rig count, the offshore drilling company is experiencing amplified idle time on its units such as West Venture, West Phoenix, West Vigilant, West Leda and West Talesto.
This could lead to poor financial performance in the fourth-quarter results that the company plans to announce on February 25, 2016. At present, SDRL has approximately 66 idle units older than 30 years out of a total marketed fleet of 476. Also, the company has additional 64 units that are expected to roll off-contracts by the end of 2016.

Hence, there are virtually 130 rigs that will be retiring by the end of 2016. So, this drop in the idle units will hurt its financials in fiscal 2016 as well. The snapshot below illustrates rig fleet utilization and idle rig counts across its operations.

The company had to idle nearly 9 rigs during the third-quarter and decrease day rates. This high level of utilization across its segments allowed SDRL to improve its margin in the face of declining rig count activity and investments.

For example, its gross margin for the third-quarter increased to 55% as compared to 49% in the same quarter last year. This rise in its gross margin was despite the fact that its revenue for the quarter declined by 24% year-on-year basis.

New-builds programs and order backlog to protect its cash flow in the future

SeaDrill is progressing well on the newbuild programs that should drive its growth eventually. The company has currently 14 rigs under construction that consists of four for Drillships, two for Semi-submersibles, and eight for Jack-ups. In fact, the company has begged additional 125 units from small investors with no operating track records. These projects are currently under construction may deliver significant upside potential from these projects upon completion. Although, a number of small investors may exit the projects, but SeaDrill expects the majority of these projects will possibly fall in the hands of more established companies in the long run.

Order backlog remains attractive for SeaDrill. The company has current order backlog of approximately $6.0 billion. This consists of $4.52 billion for the floater fleet and $1.46 billion for the Jack-up fleet. This provides better visibility of its revenue in the future as the average contract duration for floater is 21 months and for jack-ups 15 months. SDRL has total order backlog of $12.0 billion for its entire SeaDrill Group.

Other positives to consider

SeaDrill is making a good progress on its costs saving program from corner to corner including operating expenses, efficiencies, G&A and capital expenditure. It remains on its target of achieving $600 million in cash savings this year. The offshore drilling company expects almost one third of this savings to come from reduction in headcount, insurance savings, supplier discounts, travel costs and compensation adjustments. And, the two third of its costs savings are projected to come from deferrals that comprises of lower amounts allocated to operations preparation, capital expenditures and long term maintenance.

This is undeniably a big saving that will enable the company to mitigate the impact of lower commodity price environment. In fact, the company is able to realize this strong savings on the top of $250 million of cash savings realized in 2014. This is not all; SeaDrill plans to accomplish an additional $200 million in cash savings in 2016.

Lowering its debt burden

SeaDrill has managed to reduce its debt burden even at tough oil market conditions. For instance, the company has lowered its net debt by 4% to $10.17 billion at the end of third-quarter of 2015 as against $10.56 billion in the second-quarter of 2015. In fact, SDRL has curtailed its debt burden by more than 22% year-on-year basis.

Conclusion

SeaDrill’s operational progress worth noticing that should assist the company to partially offset the decline in the total rig counts. Its cash savings realization are expected to increase by next year that will allow the company to remain competitive during this not so impressive commodity set up. Moreover, the company has strong backlog and SDRL continues to progress well with respect to new builds, which are expected to realize at the earliest. Although, its debt remains the highest in the industry but its efforts of lowering through various means cannot be avoided, which will provide the company more financial flexibility in the future.
Published on Mar 3, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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