SeaDrill: a Smart Buy

SeaDrill (SDRL) announced first quarter ended March 31, 2016 total operating revenue of $891 million, down 28 percent year-over-year from $1.24 billion during the same period last year and down 7.1 percent sequentially from $959 million in fourth quarter of 2015.

SeaDrill declared first quarter of 2016 EBITDA of $528 million, down 26 percent year-over-year from $715 million during the same period last year but, up 2.9 percent sequentially from $513 million of EBITDA in fourth quarter of 2015. Going forward, the company has also provided EBITDA guidance for second quarter of 2016 and estimates total EBITDA of approximately $510 million.

The upstream energy company reported continued year-over-year decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with the rising exploration costs, negatively impacting the company’s key margins.

Making the right moves  

SeaDrill successfully achieved dayrate minimizations on the West Mischief, Sevan Brasil, West Tellus, AOD I, II, and III with no changes in volume and improved uptime.
SeaDrill reported complete quarter of free time on the West Telesto and Sevan Driller along with improved operational expenditures on key working units and smaller stacking costs. There was notable West Polaris dayrate lessening coupled with additional sales and reimbursable products.

The upstream operations company delivered $1.09 billion of total cash and cash equivalents by the end of quarter coupled with significant operating cash flows that highlights the operational excellence of the company. Further, SeaDrill has impressively achieved $79 million of quarter-over-quarter rig operational costs minimizations and targets on delivering total yearly cost savings of $305 million with no fresh rig deliveries and newbuild installments estimated during 2016.

The attractive cost reduction initiatives of SeaDrill, by delaying the core capital expenditure programs while consistently optimizing its day-to-day operations to maximize production at minimal costs, is believed to assist the company in successfully overcoming the negative impacts of the global economic slowdown while allowing it to emerge strongly and deliver notable long-term top line growth as well as healthy shareholder returns.

Positives to consider  

SeaDrill has illustrated superior first quarter of 2016 operating results with robust operational uptime and an attractive SeaDrill Group economic utilization of 97%. Importantly, the company has signed a key contract with DSME for deferring the deliveries of the West Aquila well and West Libra well, till the second quarter of 2018 and first quarter of 2019, respectively. In addition, SeaDrill has signed a contract with Dalian for further deferring all the eight key jack-ups under development.

SeaDrill has an attractive fleet position with the least average floater age compared to its older counterparts such as, Diamond and Transocean. Therefore, Transocean is expected to invest significantly in renewing its old fleet to stay in competition whereas, SeaDrill has this key competitive advantage of having new fleets which are much safer in operations and would continue to serve the company over the longer time period. Further, SeaDrill has the highest percentage of Ultra-Deepwater Floaters among its overall Floaters inventory compared to several of its key counterparts and thus, giving it a solid competitive advantage in the near-term as it is difficult to imitate this characteristic so quickly.

The solid economic utilization in addition to minimal current backlog and smallest Floater age compared to its key competitors along with attractive positioning of total Floaters in Ultra-Deepwater is expected to enable SeaDrill in maintaining an industry-leading operating position, delivering sustainable long-term profitability and attractive shareholder returns.

Conclusion

Overall, the investors are advised to “Sell” any equity held in SeaDrill Limited considering the company’s weaker long-term growth prospects coupled with poor financial positions with notable total debt of $11.21 billion against weaker total cash position of $1.38 billion only, restricting the company to continue with its daily operations profitably. The profit margin of -29.02% seems disappointing. Further, the PEG ratio of -0.06 indicates no company growth but decline.
Published on Jun 13, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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