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

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.

 

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.

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Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

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 May 29, 2014, at 11:22 AM, Suzi wrote:

    It is a shame that no mention of the new Russian deal was not discussed. Navigated the market? The new deal will utilize up to 9 rigs filling 2015 and 2016 with big dollars, and add significantly to the backlog. Too bad this guy is just looking at the backside and not the future. This is a solid $50 stock with a great dividend.

  • Report this Comment On May 29, 2014, at 12:14 PM, HoerthCM wrote:

    Looks like the market is taking this well.

  • Report this Comment On May 29, 2014, at 1:52 PM, TMFmd19 wrote:

    @suzi - That deal was signed after the quarter closed, which is why I didn't mention it in the article. It's also with North Atlantic Drilling (which SDRL is the largest investor) and not SDRL. It will benefit from the deal because of its ownership position, but it won't add to the backlog of SDRL.

    BTW: I own SDRL, which is why I look at the downsides.

    Matt

  • Report this Comment On May 29, 2014, at 3:03 PM, formeraf wrote:

    Read about this stock on MF. Bought stock. Love this stock. Intend to hold for long time.

  • Report this Comment On May 30, 2014, at 10:36 PM, Heidikitty wrote:

    I thought maybe their was more juice to the story than they could or wanted to disclose now but I have received info that this is a huge deal and should be great for SDRL shareholders. The investment counselor that put me on SDRL before I joined Motley Fool says it is great. So for what it is worth I am long on SDRL. The Motley Fool hung in there for a long time and so did I. Anxiously waiting for any further news as you are also.

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