Seadrill's Management Turns Negative on the Offshore Drilling Industry

Seadrill (NYSE: SDRL  ) has long been one of the offshore drilling industry's sole optimists.

Indeed, for the first half of this year management has remained positive about the outlook of the drilling industry. Management frequently stated that while peers are likely to suffer, due to the age of Seadrill's fleet, the company was well positioned to ride out the downturn. Seadrill is widely believed to have the best, youngest fleet of high-spec sixth and seventh generation drillships around.

Changing position
However, Seadrill recently changed its position on the industry, even after releasing a set of relatively upbeat first quarter results. In particular, Seadrill reported first quarter net operating income of $890 million, above forecasts of $523 million, and significantly above the $552 million posted for the same period a year ago. 

Nevertheless, Seadrill's management warned after releasing these results that, "It was not expected that activity would come to a virtual halt while oil companies worked through their forward budgeting process."

It seems as this was a thinly veiled admission that the company may have got things wrong. 

Adjusting forecasts
After this revaluation, Seadrill expects that day rates for new, sixth and seventh generation drill ships will fall to an average of $425,000 to $475,000 for the rest of the year -- well below the peak of $650,000 per day reported last year, the peak of the recent drilling boom.

Unfortunately, this downbeat outlook is almost certainly going to have an effect on Seadrill's results. Still, nothing is set in stone, and the company may perform better than management's dismal outlook suggests. Nevertheless, five of Seadrill's existing units and seven new-builds yet to be delivered are still without contracts.

The company is postponing all new rig orders until it note an improvement in the market. Seadrill already has 19 new drilling units on order yet to be delivered.

Reflected across the industry
It's not just Seadrill feeling the effect of an offshore drilling slowdown. Rowan Companies (NYSE: RDC  ) has been trying to find a customer for one of its new drillships for some time now, and it has only just succeeded.

Rowan has three new drillships under construction, set to be delivered over the next few quarters. These are part of a four drillship expansion program, designed to boost the company's presence within the ultra-deepwater drilling market.

Luckily, Rowan had already signed contracts with customers for three of its new drillships before the industry slowdown took hold. The effective day rate for these units was around $600,000, give or take a few thousand.

However, the company's most recent contract, signed with a subsidiary of Freeport-McMoRan Copper & Gold Inc, is for two years, for a total value of $425 million; around $582,000 per day. While higher than the rates Seadrill is predicting, this is still a decline of 3% from the contracts signed earlier this year.

Foolish summary
So it would appear that Seadrill is sailing into stormy waters. The company's own management is now forecasting a decline in day rates over the next few quarters. Additionally, the company is putting any new orders on hold. 

Still, the company's 2014 earnings forecasts remain unadjusted. As of yet, Seadrill has not felt any ill effects of the slowdown. It'll be interesting to see how this pans out over the rest of this year. However, with a yield of around 10% at current levels, Seadrill's investors are being paid to wait. 

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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 21, 2014, at 3:42 PM, awallejr wrote:

    Rupert show me where Seadrill management expects 6th and 7th generation ships to drop to $425,000-475,000. I suppose eventually when there are 9th and 10th generations out there. Otherwise you are giving yourself a bad rep with all these false negative SDRL articles. If I listened to you I would have missed a great buying opportunity. Had you listened to me you would have made a ton.

  • Report this Comment On June 24, 2014, at 7:00 PM, fla10000 wrote:

    Clearly Rupert is having a little trouble backing up his claim. I too am not aware of any change in outlook since the earnings came out and have not been able to independently verify this new claim. This leads me to look at the motivation behind such a claim. I think he should either reveal his source to the rest of us or retract this claim.

  • Report this Comment On June 25, 2014, at 12:40 PM, RupertHargreav wrote:

    There's none so blind as those who will not see.

    http://www.reuters.com/article/2014/05/28/seadrill-results-i...

    http://www.rigzone.com/news/oil_gas/a/133298/Rig_Firm_Seadri...

    http://petroglobalnews.com/2014/05/seadrill-frowns-as-day-ra...

    Three respected sources have this news. Please do your research before flinging accusations around.

  • Report this Comment On June 25, 2014, at 4:51 PM, awallejr wrote:

    Rupert I would say the other way around at you. Please do some serious DD before writing tons of shallow blogs knocking SDRL. The ONE thing all three of your links plus you have in common. Nowhere, let me repeat, nowhere do ANY of you print a direct quote from anyone at Seadrill saying specifically that they are expecting dayrates to fall to $425,000-475,000 for THEIR deepwater rigs. No one of you which would be journalism101 to do. Instead you all basically copied similar language off ecah the other.

    Here I will help you. This from May cc from CEO:

    "As for expected, normalized rates on sixth gen assets over the long term, the industry requires dayrates to be in the 500 to 550 range to achieve an attractive return on investment and justify newbuild programs. Therefore Seadrill believe that two cycle rates average in the low to mid 500, however, Seadrill swings around the average can be expected."

    And this from Feb cc from CEO:

    "Yes, I think we’ve said several times, in this market when it’s been good and when it’s been bad, we say that $450 low day rate, $650 is a high day rate, $550 is probably the level where we have a very good return when you are talking about the assets generating around five times enterprise value of the EBITDA. While you don’t see a lot of ordering if rigs are just about 600, you’ve seen that few times and then it leads to massive order increase pretty quickly, I think the $550 level, you have a limited amounted of ordering, you have a very decent return on the capital investment around 5x EBITDA."

    All four of you took things out of context. But now I have direct quotes from the CEO of SDRL unlike ANY of you.

  • Report this Comment On June 26, 2014, at 12:37 PM, Heidikitty wrote:

    I would never turn negative on a company I was working for and he should not have either.

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