A Closer Look at Seadrill Ltd.’s Strong First-Quarter Results

Seadrill just joined Transocean and Ensco by surprising investors with its strong first-quarter results. However, Seadrill topped them both with an even more surprising dividend boost.

May 29, 2014 at 9:50AM

Seadrill West Prospero Web

Photo credit: Seadrill

Seadrill (NYSE:SDRL) recently reported stronger than expected first-quarter results. The contract driller beat analysts' expectations and even gave its investors a surprising dividend boost. Let's take a closer look at what happened in the first-quarter and what investors can expect from the company going forward.

Drilling down into the numbers
In my earnings preview of Seadrill I pointed to three areas investors should watch closely when it reported first quarter earnings. Topping that list was to look to see if Seadrill could join Transocean (NYSE:RIG) and Ensco (NYSE:ESV) and beat analysts' estimates. Going into the quarter analysts were expecting earnings of $0.68 per share and revenue of $1.41 billion. Seadrill, however, deconsolidated Seadrill Partners (NYSE:SDLP) from its financial results, which made it tough to get an apples-to-apples comparison.

Because of the deconsolidation of Seadrill Partners, Seadrill reported earnings of $6.54 per share and revenue of $1.221 billion. However, by drilling down a little bit further we are able to get a better comparison of Seadrill's results to what analysts were expecting. On a consolidated basis Seadrill was able to beat revenue estimates as it reported $1.436 billion in revenue in the first quarter. Meanwhile, the company reported operating profit of $890 million, which was well above the $534 million that analysts were expecting. While operating profit was affected by a drop down sale to Seadrill Partners, the company still saw strong growth from new rigs entering service. Add it all up and Seadrill joined both Transocean and Ensco in beating analysts' estimates in the first quarter.

That being said, it wasn't all good news for Seadrill investors. The second area I thought investors should pay close attention to was the company's utilization rate, which for its floaters fell from 94% in the fourth quarter to 91% this quarter. The company noted in its press release that it was disappointed with these results. Overall, the company noted utilization issues with three rigs in the quarter, however, on a more positive note the company's remaining rigs ran with an economic utilization of 95%. Meanwhile, its jack-up fleet's utilization rate held steady at 97%.

The final area investors needed to watch heading into the quarter was the contract backlog. This number was also a bit of a disappointment as it fell from $20.2 billion to $18.8 billion. One of the reasons for this is the fact that the ultra-deepwater market experienced its most challenging quarter since the financial crisis. Seadrill noted that just seven ultra-deepwater rig years were contracted in the quarter, which was the lowest quarter of activity since 2009.

 West

Photo credit: Seadrill

Decent outlook
That being said, Seadrill isn't worried that the market is collapsing. The company noted that it expects second quarter EBITDA to "show meaningful improvement" from this past quarter. The addition of new rigs entering service when combined with higher utilization rates should provide a meaningful boost to the company's bottom line. Overall, the company expects to have a solid year.

That's one reason why the company decided to boost its dividend by two pennies a share and bring it up to a dollar per quarter. It's a surprising move for the company, which just last quarter had said that it saw "limited value" in paying out more to its investors each quarter. The company, however, now appears to be at its dividend limit until it sees a meaningful improvement in the offshore rig market.

Investor takeaway
Seadrill reported really solid results amid a struggling offshore rig market. It expects its results to continue to be solid through the end of the year. While it hasn't navigated past the challenging rig market just yet, those challenges aren't likely to sink the company, nor its hefty dividend, which is great news for long-term investors.

Another bullish bet on offshore drilling
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That’s almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company’s can’t-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we’re calling OPEC’s Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock… and join Buffett in his quest for a veritable landslide of profits!

Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill and Transocean. 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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