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Seadrill: Outlook Remain Positive After 1Q14 Results

May 31, 2014
Faisal Humayun

Faisal Humayun

2 followers

Seadrill (SDRL) continued to increase its dividend on a quarterly basis with a dividend announcement of $1 per common share for 1Q14. At current stock price of $38, the dividend translates into an annual dividend yield in the range of 10.5%-11.0%. Besides the high dividend yield, this article looks into other factors that make Seadrill an attractive investment for long-term.

Backlog Remains Strong

Seadrill has an order backlog of $18.8 billion for the quarter ended March 2014. This backlog includes a $14.1 billion order for floaters and $4.3 billion for jack-ups.

The positive point to note here is that the floaters are 96% contracted for 2014 and 66% contracted for 2015. This implies that the cash inflow for Seadrill is firm for the next two years and the dividend is sustainable. Even for jack-ups, the contract coverage is at a healthy 97% for 2014 and 73% for 2015.

I therefore expect Seadrill to report healthy EBITDA for the remainder of 2014 and a gradual increase in dividends. Even a dividend yield of 10.5% for the year is healthy and the stock looks attractive from that perspective.

Liquidity Remains Strong

One of the most important factors to consider is the company’s liquidity position. The importance comes from the fact that Seadrill has $12.3 billion of debt outstanding as of March 2014 and this needs relatively high liquidity cushion for debt servicing.

As of March 2014, Seadrill had a cash position of $912 million. In addition, Seadrill also sold 230 million shares of SapuraKencana raising approximately $300 million in proceeds post 1Q14. This has boosted the cash position to $1.2 billion. I must also mention here that Seadrill generated an operating cash flow of $656 million for the first quarter of 2014.

Therefore, liquidity remains strong and financing the capital expenditure or servicing debt is not a concern for Seadrill in the foreseeable future. With a firm contract backlog for the remainder of 2014, investors can expect operating cash flows to be in the range of $2.4-$2.6 billion for the year. Things are therefore expected to remain strongly positive.

Growth Pipeline Remains Strong

The sustainability of cash flow and dividend comes from the current fleet and the backlog associated with the fleet. The future growth in revenue and EBITDA will come largely from new fleet addition. From that perspective, Seadrill is well positioned to continue to grow its revenue and EBITDA. As of March 2014, the company had 19 rigs under construction with total remaining yard installments for new rigs at $5.4 billion.

The risk associated with the new rigs is a potential delay in delivery. This is likely with Seadrill reporting in the first quarter that the that the West Saturn and West Carina will be delayed up to 6 months collectively from original delivery dates. In addition, is also likely that few of the four ultra-deepwater units scheduled for delivery in the second half of 2015 will be delayed by up to 6 months. Seadrill however will be compensated as it has contractual rights in case the delay is caused by the yards.

Risk Factors

While the positives are significant, the key risk factor is a potential decline in day rates. According to Seadrill, when oil majors begin to contract again, the day rates will be lower than that of 2013. This might expose new vessels to relatively lower day rates. On the positive side, Seadrill has long contracts for several of its rigs and the cash flow profile should remain strong from the already long-term contracted rigs.

I must also mention here that the current uncertainty in the market has reduced new building activities and only 7 rigs have now been ordered for 2016 delivery and 5 for 2017. I believe that the rates will pick up again as the supply of new rigs is relatively lower and the demand picks up on relatively robust global economic activity over the next few years.

Conclusion

Seadrill has experienced its share of ups and downs. I strongly believe that the company is best positioned among peers to sustain growth and dividends even in a relatively muted industry outlook.

A strong dividend yield of 10.5% adds to the overall attractiveness related to the stock. Investors can consider Seadrill with a two year time horizon where the contracted days look robust.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 0.0/5 (0 votes)

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