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

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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Read/Post Comments (5) | Recommend This Article (3)

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 June 14, 2014, at 2:18 PM, toomuchgas wrote:

    Nothing about Rosneft taking a significant share of Seadrill and opening up drilling opportunities in Russia? Seems to be the reason for the recent price appreciation.

  • Report this Comment On June 14, 2014, at 5:58 PM, postnasaldrip wrote:

    This week from Ole Storer, M/S analyst:

    We met with SDRL (and affiliate companies) ... who highlighted continued push to quality and keeping up with latest technology. The rig market is starting to turn more positive as contracting activity for the best quality assets is

    starting to pick up.

     SDRL sees clear signs that the market is bifurcating towards the newest rigs, and should lock up remaining 2014/15 exposure relatively soon.

     SDRL sees signs that demand is returning and is looking for expansion opportunities, and is likely to use SDLP dropdowns, although financing for 2015/16 is largely complete.

     SDRL reiterated that it has no intention of cutting its dividend

  • Report this Comment On June 14, 2014, at 6:00 PM, postnasaldrip wrote:

    Rosneft has announced it's intent to take a significant state in NADL. They have never announced they would be taking a stake in SDRL.

  • Report this Comment On June 14, 2014, at 8:13 PM, awallejr wrote:

    Ah Rupert Rupert Rupert. There is an old saying "never argue with success." You have been on the wrong side of this trade now for about 6 articles worth. I want you to make money, I really do. Stop listening to Barclays and listen to me. In fact even Barclays has switched their tune.

    It is still not too late. Just buy a bunch of Jan 2016 $40 or under calls and hold.

    You simply keep ignoring the business model of Parent company/MLP subsidiary. Even Icahn recognizes it and is copying it. SDRL's dividend will ALWAYS have coverage. If operational income falls short then they sell a rig and viola, profit to cover divy.

  • Report this Comment On June 14, 2014, at 8:21 PM, awallejr wrote:

    And as postnasaldrip (lol try fluticasone propionate) stated, the Russians have a chance to buy up to 50% of NADL, not SDRL. I honestly suspect this was confused in the translation.

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Rupert Hargreaves

Rupert has been writing for the Motley Fool since December 2012. He primarily covers tobacco and resource companies with a passion for value-oriented investments. .

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