Lately, in the deepwater drilling market, there always seems to be something going wrong. An oil spill, upgrades to equipment, and now delays due to bolts on blowout preventers. These added costs caused driller Seadrill (SDRL +0.00%) to post results that fell short of expectations.
Revenue was still strong, growing 15% from a year ago to $1.22 billion. That was also ahead of the $1.11 billion analysts expected. But additional costs led to net income of just $50 million, or $0.04 per share, which was well below the $0.58 analysts expected.
The added cost and downtime was the result of corroding General Electric (GE 1.09%) connectors used in blowout preventers at the bottom of the sea floor. The company had significant downtime, resulting in 86% utilization rate in the floater segment during the quarter.
This challenge should continue throughout the drilling industry. We know that Transocean (RIG +4.38%) said it has 55 of the GE connectors and Diamond Offshore (DO +0.00%) has 30. I expect that Noble (NE +0.00%) will also have significant downtime given it uses similar equipment to Transocean and Seadrill.
Hope for the future
For Seadrill, the hope is that new rigs will turn a small profit into big gains for shareholders. The company will take delivery of 10 new rigs this year, and eight more during 2014-2015. In total, the company has 22 rigs under construction, highlighted by seven ultra-deepwater drillships and two ultra-deepwater semi-submersibles. With dayrates averaging near $600,000 per day, these new rigs should add to the bottom line immediately.
The short-term blip in earnings is notable, but a lot of the downtime is a one-time occurrence, something that always seems to be the case. Given the upside potential with newbuilds coming online this year, I still think Seadrill is a great pick in drilling. It just needs to pick up performance, something that will be its focus in months to come.
