SeaDrill: Buy More for More Gains

SeaDrill (SDRL) released its first quarter 2016 results on 26th May. The company continued to do well regarding cost cutting initiatives and strong operating efficiency as is the need of the hour. Excluding the bonuses achieved, the company achieved an economic utilization of 97%. It also realized the benefits of its ongoing efficiency program which amounted to operating cost reduction of $79 million.

Further, the Group has plans to achieve savings of approximately $340 million in the current year which would be $80 million higher than the previous estimates.
Also, 90% of these savings will be sustainable while only 10% are associated with deferred capital spending.

However, it failed to generate enough demand resulting in a 15% decline in its backlog compared to the last quarter of 2015. The backlog of SeaDrill, the company, was $4.3 billion while that of the SeaDrill Group was $9.1 billion, also 15% down from the December quarter.

Energy Outlook:

The price of oil has made a comeback after diving down to 12 year low of $ 27 per barrel in the first quarter. The prices are close to $50 per barrel but still remain 60% below their 2014 highs. And the short term supply disruptions too have had a positive effect on the price of oil.

However, the time has not yet come when oil companies once again start stepping up their production in response to the price rise. In fact their major focus at this time is still on cutting production and spending less. Major oil companies have announced or revised downward their guidance for the current as well as the next year. And since those announcements are the most authentic source of information on the future activity levels in the industry, we can witness more contract renegotiations and terminations through the next two years. Consequently, the new demand will remain severely affected because of the imbalance between supply and demand of oil and gas.

Idle rigs going to increase further:

In the conference call, the company separately mentioned its concerns about the near term future of offshore exploration. It said that the backlog for this segment will decline some more in the future resulting in the number of idle rigs going up. Hence, scrapping off of the offshore rigs will also continue going forward to rebalance the drilling market. The company gave an estimate that close to some 40 floaters will have to be retired in order to rebalance the market.

In fact, the major oil producing companies are so much under pressure of curbing the increase in oil supply to the market that they are willing to pay millions, just so that the offshore drillers would stop drilling. For instance, earlier this month, one of SeaDrill’s customers, the Norwegian oil producer Statoil called on SeaDrill to stop its drilling that was to be done under their contract. In return, Statoil will be paying Seadrill $61 million and will also bear the rig demobilizing charges.

Balance Sheet:

Apart from the obvious revenue and earnings drop, the company’s stock has suffered particularly because of the debt of more than $10.7 billion that it carries, the largest in industry. However, there has been some good progress by the company on that front. The company's debt level decreased 2.2% compared to the end of the December quarter while it was 13% lower compared to that at the end of the first quarter of 2015. At the same time, the cash position has gotten better. The company’s cash reserves increased 4.6% and 20.9% on a Q-o-Q and Y-o-Y basis respectively.

In addition to that, the company is in the middle of putting a debt restructuring and refinancing plan in place by the end of June 2016. In fact, it had already started negotiating with its creditors with the assistance of Houlihan Lokey and Morgan Stanley while the last quarter ended. SeaDrill has also pushed the maturities of its $950 million debt forward by 6 months to now mature in December 2016 and May 2017. Another debt of $2 billion related to SeaDrill's North Atlantic Drilling unit will now mature in April 2017, 2 months later than the original schedule. Therefore, we can expect the debt levels of SeaDrill to be much better than the 6-7 times the market cap situation that exists today.


The only positives for SeaDrill from the last quarter were successful cost reduction and efficient operations. The external factors are not helping though. The market is expected to remain unbalanced for at least a medium term. However, the company is doing well to focus on other important tasks at hand like the debt restructuring and renegotiating for the present. Finally, for an investor there isn’t much in this stock in the short term.
Published on Jun 29, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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