1 Thing Hercules Offshore Inc. Said That Should Be Music to the Ears of Seadrill Ltd Investors

 

West Hercules. Photo credit: Seadrill. 

It has been a rough year for investors in Seadrill (NYSE: SDRL  ) . The stock is down nearly 20% so far this year, battered by the waves of volatility and a weakening market for contract drillers. However, there are signs that the storm might be passing, including today's earnings report from Hercules Offshore (NASDAQ: HERO  ) .

Drilling down into Hercules' results
While Hercules Offshore missed first-quarter revenue estimates by about $7 million, it blew past earnings projections by $0.09 per share. The company earned $0.22 per share after adjusting for costs relating to the early retirement of debt and insurance expenses. However, that was only part of the story.

The big highlight, and the one that matters to Seadrill investors, is what Hercules Offshore CEO John Rynd said about the quarter and the contract drilling market in general. In the company's earnings press release, Rynd said:

First quarter results reflect a healthy jackup rig market in the U.S. Gulf of Mexico and fleet growth in our International Offshore segment. Domestic drilling activity remains active, with the possibility of an improvement in demand later this year. Average dayrates in the U.S. Gulf of Mexico continue to rise as various rigs roll into higher paying contracts. Going forward, we expect stable pricing in the U.S. Gulf of Mexico, as all new contracts signed during the latest quarter were executed at current dayrates.

By saying that drilling in the Gulf of Mexico remains active, and could see improvement as 2014 progresses, Hercules Offshore is signaling that the offshore drilling storm appears to be passing in at least one key market. Furthermore, that Hercules Offshore sees stable pricing is also important, because many investors worry about plunging dayrates, which could impact the debt and the dividend of a company such as Seadrill.

Why this matters to Seadrill
Seadrill has a dozen units in the Gulf of Mexico, including five jack-ups. The company also has eight newbuild jack-ups that are uncontracted, while 20% of this year's overall jack-up capacity remains uncontracted, as the following slide shows.

Source: Seadrill Investor Presentation (Link opens a PDF).

An improving market in the Gulf of Mexico could soak up of some of this uncontracted capacity. Dayrate stability, as cited by Hercules, also suggests that future Seadrill contracts will be signed at healthy rates.

Investor takeaway
Hercules Offshore's results should give Seadrill investors another glimmer of hope that the offshore market isn't about to sink into the abyss. Demand appears to be stabilizing in some segments of the market, with the potential for a pickup in drilling looming on the horizon. It's just one more reason why Seadrill's dividend isn't about to sink.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2014, at 10:33 PM, Hohum777 wrote:

    Data in that slide has already aged. SDRL has already secured new deals for 5 jack-ups that did not have coverage for portions of 2014. Coverage now up to 92% for the jack-up fleet.

  • Report this Comment On April 26, 2014, at 12:29 PM, PrincetonAtty44 wrote:

    "Hercules Offshore is signaling that the offshore drilling storm appears to be passing in at least one key market"

    What storm? CEO John Rynd never said there was weakness in shallow well drilling in the GOM, in fact he said it was continuing to improve. HERO has consistently shown improvement on its dayrates quarter over quarter.

    Seadrill has far greater problems with its massive debt load. Four shallow well rigs in the GOM cannot make much of a dent in this outlook.

    I remind all that "Deep Water drilling" is NOT "shallow well drilling". Companies like Seadrill should not be compared to Hercules Offshore, whose entire drilling ops are shallow well. The cost and production dynamics are entirely different, as the current demand.

    Deep and Ultra deep are suffering on day rate decline. Shallow well is not.

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