How Seadrill Could Outdo Transocean and Noble

Seadrill (NYSE: SDRL  ) will release its quarterly report on Monday, and investors have watched happily as the offshore drilling company's shares have jumped over the past six months. Yet in a cutthroat competitive environment, can Seadrill fend off Transocean (NYSE: RIG  ) and Noble (NYSE: NE  ) to make the most of the profit opportunities under the sea?

Seadrill has benefited greatly from its emphasis on deepwater drilling, with the company being among the first players to develop and emphasize its deepwater and ultra-deepwater expertise in light of some massive finds around the world. But the threat that it and rivals Transocean and Noble all face is that oil prices could fall far enough to make expensive deepwater drilling uneconomical. Should Seadrill worry about that possibility, or will its customer contracts lock in profits to ride out any short-term price swings? Let's take an early look at what's been happening with Seadrill over the past quarter and what we're likely to see in its report.

Stats on Seadrill

Analyst EPS Estimate

$0.68

Change From Year-Ago EPS

55%

Revenue Estimate

$1.26 billion

Change From Year-Ago Revenue

15.3%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How deep can Seadrill's earnings growth go?
In recent months, analysts have had mixed views on Seadrill earnings, cutting third-quarter estimates by a penny per share but boosting their full-year 2013 and 2014 projections by 6% and 2%, respectively. The stock has kept climbing, with a rise of 7% since late August.

Most of the gains came early in the quarter, as the company's second-quarter earnings results boosted enthusiasm about the stock. Seadrill saw a 5% rise in operating income from 13% higher revenue, with the company having further shifted its emphasis toward ultra-deepwater drilling with the sale of its shallower-water tender fleet during the quarter. Those shifts are consistent with what we've seen from Transocean and Noble, with Transocean having sold off some of its jack-up rigs while Noble has increased construction of deepwater equipment and recently announced it would spin off its older rigs into a separate company.

The challenge, though, is whether Seadrill can maintain the torrid pace of growth. So far, Seadrill has a huge advantage via a fleet that is much newer than Noble, Transocean, and other peers. But Seadrill has taken on substantial debt to gain that competitive position. Right now, the sky-high prices that customers are paying to use Seadrill's equipment justify its aggressive moves, but it'll be important to bring new equipment online as quickly as possible in order to lock in those high prices while such favorable market conditions persist.

Another big question facing Seadrill is whether competitors will follow its lead in spinning off assets into master limited partnership subsidiaries. Seadrill took that approach with its Seadrill Partners (NYSE: SDLP  ) MLP, and Transocean said earlier this month that it would do the same with its own MLP offering in the middle of next year. For investors, MLPs mean more dividends, but they can also give companies like Seadrill ways to apportion assets and take maximum advantage of favorable tax rules.

In the Seadrill earnings report, watch to see how well the company does at rolling out new equipment and refocusing its efforts on the ultra-deepwater. With a substantial lead, Seadrill's aggressive approach could give it a lasting competitive advantage over Transocean and Noble.

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