Seadrill's Management Turns Negative on the Offshore Drilling Industry

Like the rest of the market, Seadrill has finally turned negative on the outlook for the drilling industry.

Jun 19, 2014 at 4:12PM

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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Rupert Hargreaves owns shares of Rowan Companies. 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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