North Atlantic Drilling's Earnings Show Strong Forward Growth Prospects

North Atlantic Drilling announced results last week that, while weaker on a quarter-over-quarter basis, did an excellent job of showing the company's forward growth prospects.

Jun 14, 2014 at 9:26AM

North Atlantic Drilling (NYSE:NADL), an offshore drilling contractor specializing in operations in harsh environments such as the North Sea and the Arctic, announced its first quarter earnings results in late May. Overall, this was a very big quarter for the company as it finally became listed on the New York Stock Exchange. Previously, the company's shares could only be obtained in the over-the-counter market. Other than this listing, however, it was a fairly ordinary to weak quarter for North Atlantic Drilling. The company does have a lot to offer investors, though, so those of you that are interested in the sector may want to take a look.

Highlights from the first quarter 2014 report
In the first quarter, North Atlantic Drilling reported total revenues of $273.7 million. This represents a decrease of 11.8% over the fourth quarter of 2013. The company's lower revenues also caused operating profits to decline from $89.2 million in the fourth quarter to $71.2 million in the first. This is a decrease of 20.2%. Likewise, North Atlantic Drilling's EBITDA fell by 13.3% and its net income fell by 57.9%. However, despite this weakness in earnings, the company increased its dividend by $0.01 per share per quarter.

Reasons for the declines
The quarter-over-quarter declines in many of the company's reported numbers are nothing to be concerned about as they were largely caused by normal business fluctuations.

One of the company's rigs, the West Alpha, had to spend some time in a shipyard so that the company could inspect its components and perform maintenance on it. This is something that the company has been planning to do for a while and which all offshore drilling contractors have to perform on their rigs in order to keep them functioning at optimal capability.

Two of North Atlantic Drilling's rigs also suffered equipment failures due to winter conditions that were much more extreme than normal. These two rigs were the West Alpha and the West Phoenix, the West Alpha being the same rig that spent some time in the shipyard for planned maintenance and upgrades.

As a result of the repairs and other work that was done on these two rigs, neither of them was able to spend as much time performing work for clients as they otherwise would have (or did in the fourth quarter). This resulted in these rigs generating less revenue for the company in the most recent quarter than they did in the fourth because offshore drilling rigs are only paid for the days that they actually spend working. Because these rigs spent less time working, they were naturally paid less.

Second quarter should be better
The company should see much better earnings from these two rigs in the second quarter now that they have been repaired and maintained. We see this just by looking at the company's downtime. In the first quarter, North Atlantic Drilling had a fleetwide downtime of 10%. So far in the second quarter, the company has only had a fleetwide downtime of 2%, which is clearly much better.

New rig should boost cash flow
In addition to this, North Atlantic Drilling should see its second and third quarter revenues positively affected by the addition of a new rig to its fleet. This rig, the West Linus, began operating on May 25, 2014 at a dayrate of $375,000. This is how much revenue the rig will make for every day that it operates. As the company can operate this rig profitably, it should also prove to increase the company's net income.

The rig will only be operating for a little over one month in the second quarter, compared to all three in the third. This is why it will contribute more to the third quarter than to the second: It will be operating for more days! Thus, the addition of this rig to the company's fleet should help the company grow over the next two quarters.

Strong forward growth prospects due to Russian deal
North Atlantic Drilling also has strong forward growth prospects, particularly over a medium- to long-term horizon because of a recent deal between Seadrill, North Atlantic Drilling, and Russia's Rosneft to explore for oil in the Arctic. This is because of the huge amounts of undiscovered oil believed to be located in Russia's Arctic regions and the unique position of North Atlantic Drilling as the only company that represents a pure play on the world's harsh-environment regions. Should the companies' exploration efforts prove successful then there is likely to be a surge in demand for harsh environment rigs; North Atlantic Drilling stands ready to expand its fleet to meet this demand.

Foolish takeaway
In conclusion, North Atlantic Drilling's performance may have been somewhat off in the first quarter, but there does not appear to be anything for investors to worry about at this point. The company's growth prospects continue to remain strong, and its growth story will continue to play out over the next few years.

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Daniel Gibbs has long positions in Seadrill and North Atlantic Drilling. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. 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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