The offshore rig industry might have bottomed out in 2015, but the process of recovery is likely to be long. This article discusses Seadrill (SDRL, Financial) with a focus on the company’s first quarter results and the outlook for the industry that makes me believe that the stock will remain subdued in the coming quarters.
For the first quarter of 2015, Seadrill reported revenue of $1,244 million as compared to $1,221 million in the first quarter of 2014. While the revenue was largely flat on a year-over-year basis, I believe that the top-line performance is good considering the industry scenario. Seadrill reported an EBITDA of $711 million as compared to first quarter 2014 EBITDA of $624 million. Therefore, the operating results can also be considered decent. However, Seadrill stock reacted negatively on result announcement and the primary factor for this negative move is the industry outlook provided by Seadrill.
According to the company, the offshore industry is likely to remain weak in 2015 and 2016. Therefore, a recovery might only be likely in 2017. In other words, the company’s revenue and EBITDA will remain subdued in the coming quarters. It is also important to mention that as old contracts are renewed, the day rates are likely to be lower and this will have an impact on revenue as well as the EBITDA margin. Therefore, if industry conditions do remain challenging in 2015 and 2016, Seadrill’s EBITDA, EBITDA margin and cash flow will take a meaningful hit.
Another point of worry for Seadrill is that 15 new rigs are likely to be delivered over the next few years with a bulk of the delivery scheduled in 2015 and 2016. While the deliveries are likely to be postponed in the near-term, I am worried about the contract for scheduled deliveries in 2016 if market conditions remain weak. The critical point here is that if day rate for new contracts are lower, the EBITDA interest coverage is likely to decline in the coming quarters.
Amidst these concerns, it is good to see oil price trend higher in the recent past. However, offshore drilling has a higher break-even (in general) and oil prices therefore need to trend higher before there can be a case for strong recovery in the offshore drilling industry. At this point, only geo-political tensions can take oil higher with potential supply of oil from Iran being the likely offsetting factor.
Coming back to Seadrill, the company had a revenue backlog of $8.9 billion as of May 27. While the backlog provides revenue visibility, I would be more interested in analyzing the fleet utilization change in the coming quarters. I expect few more cold-stacking in order to reduce cost.
In conclusion, Seadrill has a good credit position and the financials look good at this point of time from a debt servicing and sustaining perspective. However, with industry recovery likely to be “u-shaped” than “v-shaped”, investors can remain on the sidelines.
