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North Atlantic Drilling: Strong Asset Driven Growth To Continue

May 17, 2014 | About:
Value Investor

Value Investor

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Investment Thesis

  • Leader in Harsh environment drilling industry with young and advanced fleet
  • Growth opportunities in Atlantic and Arctic regions
  • Harsh Environment market conditions would support growth
  • Contract backlog with tier one companies

North Atlantic Drilling (NADL) is an offshore harsh environment drilling company and is a majority owned subsidiary of Seadrill Limited (SDRL). The company has been listed in NYSE only in January 2014 and with strong growth drivers I believe the company would give good returns over a span of two years. I would discuss some of the revenue drivers of the company which would have an upside effect on the company’s growth.

Well Positioned Assets

North Atlantic Drilling operates mostly in the Norwegian region with a part of its operation in United Kingdom as well. Norway is the largest holder of oil and gas reserves in Europe and according to the EIA, the region is the third largest exporter of the natural gas.

Since North Atlantic Drilling is a pure player in the harsh environment, the company is bound to benefit with large unexploited resources in the Atlantic and Arctic regions. I will discuss about it later in the article.

Currently, the company has the largest fleet operating in harsh environment consisting of six harsh environment semisubmersible ships, three harsh environment jack-ups and a harsh environment drillship.

Source: Company Presentation

The company has 100% of its fleet operating in harsh environmental conditions. Considering large resources unexplored under such conditions, North Atlantic Drilling has an added advantage over peers.

Source: Company Presentation

Young and Advanced Fleet

North Atlantic Drilling has a relatively young average fleet with an average age of 11 years when compared to Songa Offshore and Saipem. However, the age of the fleet has been affected because of the presence of two old rigs West Alpha and West Epsilon. Excluding these two, the others rigs are technically advanced fleet with almost all operating as a 6th Generation rig. This eliminates the competition from companies like Ocean Rig and COSL. Moreover, with a young and technologically advanced fleet, the company is in a position to demand for a higher day rate.

Source: Company Presentation

Growth Opportunities in Arctic Region

Arctic Region is estimated to have over 400 billion barrels of oil equivalent unexplored and over 85% of this is available offshore. It is expected that more than 50% of this is available in Russia. The chart below shows that the Russian Arctic region has 214 billion barrels of oil equivalent unexplored. This accounts for 30% of the world’s undiscovered natural gas and 13% of the world’s undiscovered oil.

Russian harsh environment offshore area has 5x more recoverable resources as compared to Norway. To add to this is the big news of the melting of the Antarctica’s ice sheet. According to the report, as the ice recedes it will uncover the unexplored territory which is expected to hold more than 20% of the world’s oil and gas reserves.

Last year over $1billion was spent in offshore exploration and there are huge opportunities for Oil and gas companies in this region to continue to spend to exploration. These opportunities will benefit North Atlantic Drilling as day rates will remain firm.

Take Away

Considering the fact that there are huge resources unexplored under harsh environment conditions and that North Atlantic Drilling has 100% of its fleet operating under such condition, the investors can expect a boost in the company’s growth and cash flow.

What adds to its revenue drivers in near term is the delivery of two of its most advanced rig, which would further have a positive impact on its cash flow. In addition to this, the company has a contract backlog of $2.6 billion with some of the high credit rating companies like Exxon Mobil Corporation (XOM) and Statoil (STO). This would thus reduce the downside risk of the company. The company is young with good growth prospects making it an attractive BUY.

About the author:

Value Investor
A value investor.

Rating: 0.0/5 (0 votes)

Comments

heidikitty
Heidikitty - 1 month ago

If we can stay afloat for the next two years and have another good election I am thinking all will be ok. Holding my SDRL shares. Would like to hear other comments.

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