A Seadrill Bear Takes a Look at the Company's First Quarter Results

Seadrill's first quarter results were mixed; here's a bear's take on them.

Jun 13, 2014 at 12:26PM

Seadrill (NYSE:SDRL) is a love it or hate it kind of company. The group is a leading offshore driller, and both its results and industry outlook are usually heavily scrutinized for indications of the state of the offshore drilling industry.

Industry analysts were looking for any figures in Seadrill's reports that might hint at developing trends in the wider market. Unfortunately, the company's results were confusing to say the least. Many Wall Street analysts were unable to decide if the results were good or bad.

The results
On a headline basis, Seadrill missed consensus revenue forecasts. Consensus called for revenue of $1.38 billion vs the reported $1.22 billion. For the most part, this miss was due to the spinoff of Seadrill Partners. On a consolidated basis, revenues for the quarter came in at $1.44 billion, beating consensus. 

Consensus also predicted that Seadrill's dividend payout would remain constant. However, Seadrill surprised analysts by increasing its payout by $0.02 per share; some analysts were predicting a payout cut.

Despite this good news, Seadrill's cash flow is still an issue. The company only collected $656 million in cash during the quarter, and cash outflows for investing activities totaled $968 million. A free cash flow of negative $312 million was reported for the quarter. 

Analyst interpretation
Seadrill's results failed to excite analysts. In fact, much of Wall Street expressed concern after reading through Seadrill's first quarter numbers and outlook.

Seadrill's management believes that fleet utilization and earnings will expand from here on out for the rest of the year. This contrasts with current trends, however, both in regard to the company's fleet and those of its larger peers.

During the first quarter, Seadrill's utilization rate declined from 94% to 91%. Transocean (NYSE:RIG), Seadrill's larger peer, saw its utilization rate tick up from 75% to 78% despite the fact that the company's fleet is older.

Further, the West Tellus, one of Seadrill's newest drillships, is scheduled to roll of its current contract during June. So far, it has no indication of follow-on work; considering the age of the unit, this is worrying.

There are other numbers that worry analysts in Seadrill's results as well. Seadrill announced that some of its new units, which are going through the final stages of construction, will be delayed for up to six months.

Incidentally, all of these new units have no work scheduled as of yet for when their construction is completed. Seadrill has blamed contractors for these delays. Some analysts have speculated that these delays are actually Seadrill buying time while the new units have no work.

I must clearly state that these are only speculations. Since analysts published these comments, Seadrill has contracted out one of its new builds to Total Upstream Nigeria Ltd for five years at a day rate of above $600,000.

Still, it is worrying that several of Seadrill's drilling units have not yet found any work for when they come online. More concerning is the fact that West Tellus has not found work.

In comparison, all of Transocean's deepwater drillships have found work for when they come online. These contract start dates range from the second quarter of 2014 through to the first quarter of 2017. There is clearly work out there.

That being said, Transocean's two new ultra-deepwater drillships have not yet been able to find work. The company's five new high-spec jack-ups also have no contracts as of yet.

There is a clear lack of demand within the industry if these units are struggling to find work.

Foolish summary
In conclusion, Seadrill's first quarter results were ok. They beat consensus, but the next few quarters are going to be essential for both the company and the industry. It all depends on whether or not Seadrill can contract out its new drilling units.

Even this bear dose not want to make a call on Seadrill's future right now.   

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Rupert Hargreaves has no position in any stocks mentioned. 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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