SeaDrill: Go Long for Huge Gains

Shares of the offshore deepwater drilling company, SeaDrill (SDRL) climbed roughly 26% as the company provided a clear indication to survive this recession in oil & gas through its fourth-quarterly results. In fact, this was the best quarter the company had ever produced in terms of operating performance since the countdown for oil started in late 2014.

Despite the considerable decline in the oil and gas prices the company for the fourth-quarter reported earnings of $0.58 per share that outpaced analysts’ estimates of $0.46 earnings per share by a large margin.
In effect, its earnings for the quarter were 71% higher than its earnings of $0.34 per share in the fourth-quarter of 2014. More importantly, this strong growth for its bottom line was on the top of a 24% drop in its revenue for the quarter year-on-year basis. Let us find out the reason behind this robust earnings performance.

Enormous costs savings

Surprisingly, SeaDrill generated remarkable costs savings of $832 million for the fiscal year 2015 across the group. This includes reduction in operating costs, G&A expenses, insurance savings, delay the capital expenditure and supplier discounts. For instance, SeaDrill at one hand reduced its G&A expenses by over 19% and lowered its vessel and rig operating expenses by more than 24% at the other. As a result of these cutbacks the company lowered its overall operating expenses by 34% for the quarter year-on-year basis.

Looking ahead, SeaDrill observes a lot of rooms for further costs reductions and therefore has identified approximately $260 million of additional costs savings relative to levels achieved in 2015. This clearly indicates that the company is leaving no stone unturned to survive this slaughter in oil & gas prices, which is restraining its business. These efforts will enable the company to benefit strongly when the offshore drilling market picks up the pace eventually.

Strong operating cash flow and liquidity in 2016

SeaDrill in the past twelve months ended December 31, generated cash of approximately $1.78 billion from its operating activities as compared to $1.57 billion in 2014. This rise in the cash from operating activities was despite the fact that the company had reported net loss of $750 million as against net income of $4.08 billion in 2014.

This robust cash from operating activity is the result of its sustained economic utilization for its assets that reached to the record level at 95% during the fourth-quarter of 2015. In fact, including the bonuses earned SeaDrill achieved a 97% economic utilization. This evidently highlights its cash generation efforts from its assets that include floaters and jack-ups.

More importantly, the company has secured a new contract for its assets that should further improve its economic utilization and enhance its cash flow in 2016. For instance, SeaDrill during the first-quarter 2016 locked a new contract for the West Eclipse, which is expected to begin in the second-quarter of 2016. This contract will add approximately $285 million to its backlog revenue going forward. As of February 24th, the company has total backlog of $5.1 billion for SeaDrill and $10.7 billion for SeaDrill Group.

This ability of gaining new contracts during this dead oil price environment clearly is a positive sign for Seadrill that should bolster its cash flow for the year. In fact, the company expects its cash flow to remain notably higher in 2016 due to majority of its rig working. As a result, the offshore drilling company anticipates its contracted revenue to be at $2.3 billion in 2016.

As of now the company has strong liquidity with cash in hands of $1.14 billion and free cash flow of $550.50 million as well as credit facility of $7.3 billion at the end of fiscal year 2015. This bodes well with its total debt and therefore should enable the company to survive this downturn in oil efficiently.


Although, SeaDrill might experience further weakness in its financials but its operational initiatives to improve its costs and capital structure as well as its efforts of obtaining new contracts will assist the company to survive this recession proficiently. The company has strong liquidity and it is further taking steps to reduce its debt load, which is a good sign that should bolster investors’ confidence going forward.
Published on Mar 23, 2016
By Vinay Singh

Copyrighted 2020. Content published with author's permission.

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