What Worries Wall Street About Seadrill?

Trying to assess the health of the offshore drilling industry is a tough task. It seems as if some new data or analyst opinion gets published every day, offering advice on how the sector will change going forward. Along these lines, Seadrill's (NYSE: SDRL  ) first quarter conference call offered some interesting views on the market.

Useful information
These Q&A conference call sessions can be really helpful for both investors and analysts alike. Not only do the calls give analysts a chance to ask questions that the company has not answered, but they also give investors information that they otherwise might have not been able to acquire.

Almost straight away, analysts picked up on the lack of business for the West Tellus, one of Seadrill's newest drillships. The unit is scheduled to roll off of contract with Chevron in West Africa during the third quarter of this year. Analysts asked what management's plan was for the unit going forward.

Per Wullf, Chief Executive Officer: "We can expect it [being without contract] will be up to a six months period. Worst case as I see it, she will be sitting ready to into work within four weeks notice, but West Tellus is ready to go either to U.S., to Brazil, or to West Africa. We don't know where she is going as we speak...There is nothing out there right now. And I will stick to that, if we could, help just fix with the short contract or something like that, we would have done it. But right now for a unit like that there is no work right now as we speak that's correct."

However, this rather dismal admission was followed by good news from the company. Management noted that there had been an increase in drilling activity across the exploration and production sector.

Analyst: "...could you just shed a little bit more light about what type of customer that you are seeing signs of returning ... is it smaller independent-type companies in the Gulf of North Sea or nationals?"

Rune Magnus Lundetrae, Chief Financial Officer: "I can say yes to all of it ... We know that you will go on ultra deepwater units to drill these prospects and that is happening as we speak. Then just when is it happening, is it in beginning of '16, is it in the middle of '16, or when is it? But we are now what we see now through our sources."

Cost control
The call also provided some interesting information on how much it costs Seadrill to run its drilling units. Interesting information not just Seadrill's investors, but all investors who have an interest in the offshore drilling sector.

According to Seadrill's management, the average daily running cost for an ultra-deepwater unit is $230,000 per day, excluding depreciation. For a short-term contract, Seadrill is willing to accept anything above $350,000 per day for the unit -- this is a minimum figure. Essentially, this is putting a floor in the market.

To try to combat the market's downturn, Seadrill's management is looking to sign short-term contracts in order to keep units "warm" (as opposed to cold stacking, or idling the rig). Hopefully, this should allow the company to benefit when rates start to rise again, like shortening duration in a bond portfolio.

A different view
Seadrill's peer Transocean (NYSE: RIG  ) has also weighed in on how low it believes rig rates could fall. At the beginning of May, the company hosted a conference call with analysts.

Looking through the transcript, it seems as if Transocean's management is concerned that rates could drop to $400,000. However, the company is concerned that its peers will not allow rates to drop to that level. For example, this statement from the call:

I think that it becomes a real challenge for our competitors when new builds that were built on spec during this particular near term softness...not return the type of economics that they had certainly planned, I think it's going to be a challenge ... I know that one of our competitors recently said that they did not go to $400,000 a day, but I think with the competitions, they're going to have to make those decisions or look at what the alternatives are.

It would seem as if the industry is shielding itself from lower rates. This could help offshore drillers avoid a significant crippling downturn where day rates fall below operating costs.

Foolish summary
Overall, two things have Wall Street concerned about the drilling industry going forward. Analysts are concerned about falling day rates within the sector. As shown above, however, it appears that the industry is not yet willing to allow the day rates to drop below $400,000. 

Analysts are also worried about the lack of work for Seadrill's West Tellus, which is expected to be out of work for some time. Still, it would appear as if the exploration and production sector is starting to wake up again. This is a positive for offshore drillers. 

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