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Drilling Down Into Seadrill's First-Quarter Results

Seadrill (NYSE: SDRL  ) reported earnings last week. The contract driller recorded its best operating quarterly result ever and is primed for more as drilling picks up. Let's drill down into the results and see what made this quarter so good.

Behind the numbers
Coming into the quarter, analysts were expecting revenue of $1.14 billion, Seadrill beat that number and delivered $1.27 billion of revenue. That revenue generated operating profit of $552 million which was up from $441 million last quarter. Finally, net income came in at $440 million, or $0.87 per share, as Seadrill's high-margin business delivered excellent profits. There were a lot of moving parts this past quarter, so let's take a quick look at how it affected the numbers.

Utilization was strong this quarter with floater utilization at 92%, up from 86% in the fourth quarter, while jack-up utilization was 99% in the quarter, up from 94% last quarter. The higher the utilization of Seadrill's fleet, the more money the company can make, so seeing improvements here is great. Overall, utilization was very strong this quarter which helped contribute to the excellent results.

In addition to utilization, the company made several adjustments to its fleet which contributed to the excellent results. In the quarter, Seadrill completed the sale of its West Janus jack-up rig for $73 million. The company recorded a gain on that sale of $61 million in the quarter. This sale is of course a one-time item, but given how Seadrill manages its portfolio, these sales happen a lot. Looking ahead, the company has already announced the completion of two sales after the quarter ended, which will impact next quarter's results. One is a $2.9 billion sale of 18 tender rigs to SapuraKencana Petroleum and a $210 million drop-down transaction with Seadrill Partners (NYSE: SDLP  ) . Seadrill's fleet is always on the move -- assets are sold while new pieces are added to its portfolio all the time.

Speaking of which, the company ordered four jack-ups last quarter at the cost of about $230 million per rig; they will be delivered in 2015. The company also completed the $590 million purchase of Songa Eclipse which is an ultra-deep-water, semi-submersible rig. Finally, Seadrill secured a two-year extension for the West Leo which is also an ultra-deep-water, semi-submersible rig. The company estimates that there is a total revenue potential of about $430 million with that vessel.

It's important to watch how Seadrill manages its fleet. As vessels are added or subtracted it can have a noticeable effect on the company's quarterly results. For example, in this past quarter, the additions of both the West Eclipse and the West Hercules boosted both revenue and fleet utilization while the sale of West Janus helped to boost profits. 

What to expect next
Don't expect these portfolio adjustments to slow down as Seadrill is in the midst of a major growth phase. The company has 19 rigs under construction, which are expected to be delivered between now and the end of 2015. So far, 10 of those newbuilds have already secured long-term contracts. Having a large contract backlog is crucial to Seadrill's business because it enables the company to fund its growth, maintain its balance sheet all while funding a very strong dividend.

As last count the company's backlog stood at $19.1 billion, which is down $1.9 billion from its previous report. However, this decrease is largely related to the sale of its tender fleet to SapuraKencana, which accounted for virtually all of the decrease. Seadrill does have a few vessels not currently under contract; however, it is involved in active discussions and expects to announce new contracts for all these units over the coming months. While this is an area to watch, given the strong offshore market these days there is no reason to be concerned. 

This strong backlog gives Seadrill the clarity of earnings to pay out a very substantial dividend. That backlog, when combined with its excellent results this quarter, enabled Seadrill to raise the payout to $0.88 which implies a current yield of about 8.7%. The payout looks very secure which has been enhanced by the company's ability to drop down assets to Seadrill Partners. The company can pull this important new lever to free up capital to pursue growth opportunities by shedding slower growth assets. 

Foolish bottom line
Seadrill delivered its best quarterly operating results ever. The future looks even brighter as the company continues to build its fleet to take advantage of the major growth opportunities in offshore drilling. Best of all, investors are being paid very well to hold shares and will likely be paid more in the future as the company executes on its plan. 

If you're an energy investor on the lookout for new opportunities, then you should consider one of the more exciting plays in the space: Seadrill. To help you size up this stock, one of The Motley Fool's top Stock Advisor analysts has authored a premium research report on the company, covering everything from its strengths and weaknesses to what to expect going forward. Simply click here now to claim your copy and determine whether Seadrill deserves a place in your portfolio.

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9/28/2016 4:02 PM
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