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

A solid quarter and, more importantly, encouraging guidance from Hercules Offshore is good news for Seadrill investors. Here’s why.

Apr 23, 2014 at 2:48PM
 Seadrill West Hercules

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.

Seadrill Jackup

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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Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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