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Seadrill Looks Like a Good Long-Term Investment

August 12, 2014 | About:



Offshore drilling contractor Seadrill (SDRL) recently reported its results for the first quarter, which were slightly better than before. The improvement was on the back of stable operations in West Auriga, West Tellus, West Vela and the two jackups, West Castor and West Telesto. Management of the drilling contractor believes that there are chances for Seadrill to improve in the future. It has many plans and strategies that are lined toward achieving better results in the future.

Solid results and improvements

Seadrill’s consolidated EBITDA came in at $788 million, denoting a 3% improvement from the fourth quarter. On a year-over-year basis, the company delivered an impressive growth rate of 21%. However, Seadrill was hurt on the revenue front, posting revenue of $1,221 million, which was lower than $1,469 million in the fourth quarter of the last fiscal year. Further, the operating profit of the company came in at $574 million on a consolidated basis.

Management of the company believes that its fleets are not operating at full potential, which is hurting its revenue. The Floater fleet reported 88% utilization on a consolidated basis, which management believes is not up to the mark. Seadrill is making moves to improve as management thinks that the company can do better with full utilization. In order to improve, Seadrill is managing challenges and is geared up to reap benefits of uniform fleets. It is also working on rectification of spare part failure to improve its operational efficiency.

Mixed indications

For the second quarter, Seadrill is expecting to lock a three-year contract, which will be mobilized in the Gulf of Mexico. With such news, Seadrill is expecting a better utilization of West Neptune. This will ensure steady growth of the company. Seadrill is also confident for a better 2015 and 2016 with the contracts that it has under its belt.

However, Seadrill's results present a tepid image of the company, while the fact that the company revised its dividend offering is a point of concern. The board has raised the dividend by $0.02 to $1 per share, which gives rise to questions regarding the sustainability of the dividend.

Moving on, though, Seadrill’s EBITDA came in line with analysts’ expectations, the sequential decline in the EBITDA indicates that the company can’t be trusted on the back of mere EBITDA growth. The numbers can be deceptive. Also, as per reports, Seadrill is in a bad shape. It has also announced the delivery delays on several new builds up to six months.

As per the company, these delays in the delivery schedule are due to constrained supply by equipment suppliers. However, the reason for the delay in delivery doesn’t appear so concrete. It can be anticipated that Seadrill wants to secure contracts before delivery, which can be a smart move by it to improve profitability in the future.

Gunning for improvements

Seadrill is looking forward to making progress in its Mexican joint venture. With current running day rates, Seadrill is confident of holding a competitive edge in the Mexican market. In addition, Seadrill is seeing attractive opportunities in Brunei and Saudi Arabia for its two drillships. The company is confident of receiving meaningful returns from these.

Also, with the addition of new contracts with West Tucana, West Telesto, West Ariel and West Prospero, and also an extension for the West Mischief in West Africa, Australia, and Southeast Asia the backlog of the company has increased..


Seadrill's earnings are also not expected to improve much as it has announced a delay in delivery by six months. However, the dividend offering of 4.00% can be a strong point of attraction for investors. But still, the sequential decline in revenue can’t be neglected. However, if everything works on well, it can be a good long-term holding. So, from an investment perspective, short-term investors should stay away from Seadrill, but investors looking for long-term gains can think of investing in the stock.

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