Seadrill's Profits Are Strong but Investors Fret Over Outlook

Seadrill may be the best positioned company in offshore drilling, pumping out dividends and profits quarter after quarter, but the announcement that it isn't buying any new rigs in the near future has investors worried the drilling boom is coming to an end.

Aug 27, 2014 at 12:07PM

This article originally appeared as part of ongoing coverage in our premium Motley Fool Stock Advisor service...we hope you enjoy this complimentary peek!

2014 has been a disappointing year for offshore drilling companies, and Seadrill's (NYSE:SDRL) earnings report this morning may have only muddied the waters for investors. In short, the ultra-deepwater drilling market isn't improving as fast as investors hoped, and that's sending shares of Seadrill lower after it reported second quarter results. But long-term the picture might not be as bad as the market thinks.

Screen Shot

Where different rigs are drilling for oil and natural gas. Source: Seadrill. 

The numbers
Seadrill's income statement and balance sheet has been complicated over the past year because of the launch of Seadrill Partners (NYSE:SDLP), which now holds six floaters and three tender rigs that were once on Seadrill's balance sheet. So, financial comparisons to a year ago aren't exactly apple-to-apples.

With that said, total revenue in the second quarter fell 3.6% to $1.22 billion and net income fell 62.7% to $653 million, or $1.24 per share. On the income side, the quarter's earnings were helped by a $131 million gain on the sale of part of Seadrill's stake in SapuraKeneana, and the year ago quarter included a $1.26 billion gain on the sale of Seadrill's tender rig business.  

Seadrill West Jupiter

Seadrill's West Jupiter drillship. Source: Seadrill.

A better look into Seadrill's operations comes from a few operating metrics. The floater segment achieved a 96% economic utilization rate in the second quarter, up from 94% in Q1, and the economic utilization for jack-ups was 93%, down from 97% in Q1.

Both utilization rates are extremely high for the drilling industry and show the value of Seadrill's young, high specification fleet.

Outlook disappoints investors
What had the market spooked today was the announcement that "Seadrill will refrain for the time being from ordering additional rigs until a clearer direction can be seen in the market." To the market, that was a warning sign that rough offshore conditions in 2014 may get worse before they get better.

But before we go and call the offshore drilling boom over, consider that Seadrill already has 18 rigs under construction, including seven drillships, three semi-submersibles, and eight jack-ups. So, taking a breather from a massive expansion plan probably isn't a bad thing.

There are also 73 new ultra-deepwater rigs due to be completed by 2018, which could flood the market if demand for these rigs doesn't improve. But management also noted that 128 of 300 floater currently in operation are over 25 years old, so while new rigs are coming online others will likely be retired. Still, a cautious approach is probably prudent, especially for a company with a $12.2 billion debt load.

Offshore drilling isn't dead yet
The other thing investors in Seadrill and any other offshore drilling company need to consider is the capability of the rigs their company owns. New rigs have capabilities and safety features that explorers covet and are willing to pay for. 

Consider the weak market rig owners have experienced overall in 2014 and then look at the contracts signed by Seadrill for its recent or soon to be delivered rigs. These are strong dayrates despite what is supposed to be a very weak market at the moment.



Contract Period


West Neptune


Dec '14-Dec '17


West Saturn


Jan '15-Jan '17


West Jupiter


Nov '14-Nov '19


Source: Seadrill fleet status report.

What has been noticeable this year is that contract terms are getting shorter and explorers are waiting until the last minute to agree to terms, rather than lock up rigs years in advance.

This dynamic is the result of exploration and production companies big and small cutting back on capital spending because they're seeing return on equity and cash flow fall for their existing projects. As new oil reserves have moved from easily developed locations to shale and ultra-deepwater the risk and cost of projects has increased, something they don't have a lot of appetite for right now.

Seadrill Offshore Defender

Seadrill's jack-up rig West Defender. Source: Seadrill.

Long-term, this dynamic will lift but it may require oil prices to rise, increasing the potential return for these projects. In the meantime, Seadrill will probably grow slowly and may see dayrates fall slightly. But given the young age of its fleet I think it'll be somewhat insulated from a price war taking place on the low end of the offshore drilling rig market.

Seadrill is on the edge of boom or bust
At the end of the day, Seadrill is still highly profitable with one of the best positioned fleets in the industry. Backlog of $12.6 billion for the floater fleet and $5.5 billion for jack-ups should also give some stability and flexibility to the company going forward.

The long-term question is whether or not oil explorers will increase their drilling rate enough to absorb new rigs over the next 3-5 years. If they do, Seadrill should see an explosion in revenue and profits as new rigs come online. If not, dayrates can fall quickly and Seadrill may be forced to reduce its dividend, sell assets, or even increase debt further.

I think the drilling market will pick up and the recently signed contracts for newbuilds show evidence of that. But this isn't an investment for low-risk investors, and if you don't have a very long-term investment horizon this isn't a stock I would recommend because the drilling market can be too volatile quarter to quarter.

Travis Hoium manages an account that owns shares of Seadrill. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers