Exclusive Update

Following last quarter's report, the hope was that the company would see improvement in its rig utilization rate, have less downtime, and continue to sign new contracts for its drilling rigs, especially the ones still under construction (it would be bad if those newbuild rigs were delivered without work waiting for them).

The company did report progress, but not as much as we might hope.

Rig TypeQ3 2012Q4 2012
Floaters (drillships and semi-submersibles) 82% 86%
Jackups 83% 94%
Tenders 98% 98%
Source: Company earnings release.

The tender fleet stayed just as busy as before. However, after the quarter ended, the company finalized the deal to sell almost all of its tender rigs to SapuraKencana. This deal is expected to close in April, at which point tenders become almost a moot point for Seadrill. That's OK, though, because tender rigs have the lowest average day rates of the various types operated by the company, and the cash and reduction of debt as a result of the deal will help Seadrill.

The jackups saw a nice increase in utilization; that should increase a bit more as several rigs will be fully constructed and moving to their initial contract locations later this year.

The disappointing rig class, however, remains the floaters, which bring in the highest dayrates. This is the second quarter in a row where more downtime happened than was expected. Blowout preventers (the part that failed in the Macondo well incident) needed additional work in the quarter, work that's continuing into the current quarter, leading to even more downtime. Once this is resolved, however, management expects utilization rates to climb, something we'll have to keep an eye on.

The company still has 22 rigs under construction, having taken delivery of a jackup and a tender rig at the turn of the year and ordering two new jackup rigs in early February. Right now, 12 of these have contracts to work on when they are delivered, and the company is in negotiations for most of the others. This is the one big thing investors should watch. We definitely want to see contracts signed for these newbuilds so that they don't become a drag upon the company's operations.

Demand for offshore drilling remains strong and Seadrill's rigs have contracts lasting for several years, so it's likely that the company's $21 billion revenue backlog will come through. As long as that situation holds, the company should do well.

Finally, because the company accelerated the Q4 dividend to be paid last December (instead of its normal schedule of being paid in Q1), there won't be another dividend paid until after Q1 is over. Look for an announcement in May; the dividend is expected to be paid in June.

Bottom line: Expect another disappointing utilization rate for the floater fleet this quarter, but then for that to start moving up through the rest of the year. If that doesn't happen, begin to question the validity of investing in this company.

Jim Mueller owns shares of Seadrill, as does The Motley Fool.