SeaDrill: Will It Make a Recovery?
SeaDrill (SDRL) has been beaten down badly this year as the company’s results have taken a massive beating due to the weak environment that has led to contract cancellations.
For the quarter that ended recently, SeaDrill reported earnings of $0.15 per share, missing analysts’ estimates of $0.38 per share for the quarter. Moreover, its earnings were down approximately 83% on a year-over-year basis. At the same time, its revenue for the quarter came in at $891 million, down 28% as compared to revenue of $1.2 billion in the same quarter last year.
This drop in its revenue was due to challenging conditions in the offshore drilling market that forced the oil companies to cut activity levels for 2016 and 2017, leading to contract termination eventually.
The West Hercules was earlier contracted for drilling in Norway with North Atlantic Drilling ltd. However, as per a recent notice, the company will receive a payment of about $61 million as well as reimbursement of costs associated with the demobilization of the rig.
Efficiency programs are lowering its costs structure
Apart from securing new contracts, SeaDrill continues to make progress on the costs structure. For instance, the company managed to decrease its operating costs by $79 million in the first-quarter of 2016 on a sequential basis. Also, its rig operating expenses for the quarter fell by 21% to $290 million as compared to $369 million in the fourth-quarter of 2015. These costs savings are on the top of costs savings realization of $1 billion and $830 million the company achieved in 2014 and 2015 respectively.
These reductions in the operating costs are due to its efficiency programs that helped the company to improve the utilization of its assets significantly. For instance, the company achieved economic utilization of 97% and 96% for its floater’s fleets and jack-ups’ fleets respectively for the first quarter of 2016 as compared to 91% utilization for its assets in the fourth-quarter of 2015.
As a result of these cost reduction moves and improved efficiency level, its EBITDA for the quarter grew 3% to $528 million from EBITDA of $513 million in the fourth-quarter of 2015. This growth in the EBITDA suggests its ability to perform well in a challenging offshore drilling market that should drive its growth on the recovery of the market.
Looking ahead, SeaDrill expects savings of approximately $340 million in 2016 due to various efficiency gains and cost reduction moves. These efficiency savings coupled with improving market conditions should enhance its bottom line results for the year.
Although SeaDrill’s financial performance has been hurt significantly, its efforts of reducing costs and increasing utilization of its assets cannot be avoided. These operational improvements should lead to a better bottom line performance going forward. Moreover, the company continues to add contracts to its backlog as stated above that should drive its growth. So, all-in-all, SeaDrill remains a good bet in the long-run.