Seadrill Ltd. Earnings: What to Expect Tuesday

Seadrill (SDRL +0.00%) will release its quarterly report on Tuesday, and the company will have a lot of nervous investors to address after the drubbing its shares have seen in the past several months. Even though competitors Transocean (RIG +1.22%), Noble (NE +0.00%), and Ensco (ESV +0.00%) have all suffered significant stock declines, Seadrill still has to look for ways to find ways to maximize its opportunity in the lucrative but highly competitive deepwater drilling industry.

For years, Seadrill has been a darling of the energy industry, with its ultra-deepwater exposure commanding hundreds of thousands of dollars for dayrates for some of its drilling rigs. Yet as Transocean, Noble, Ensco, and other companies have seen the potential for growth in the area, bulding of new floaters and jack-ups has soared, setting the stage for the same potential drop in prices that the tanker and dry-bulk shipping industry experienced in the aftermath of the financial crisis. How can Seadrill avoid a similar fate? Let's take an early look at what's been happening with Seadrill over the past quarter and what we're likely to see in its report.

Image source: Seadrill.

Stats on Seadrill

Source: Yahoo! Finance.

Can Seadrill earnings dip deeper for profits?
In recent months, analysts have scaled back their expectations for Seadrill earnings, reducing their fourth-quarter estimates by $0.07 per share and their full-year 2014 projections by almost twice that. The stock has suffered accordingly, falling 18% since mid-November.

Seadrill's third-quarter report created some anxiety among shareholders, as the company produced mixed results. Revenue jumped more than 17%, which was more than investors had expected to see. But net income fell short of hopes, with Seadrill blaming the shortfall in part on higher expenses for operating its new rigs. Even a dividend increase of more than 4% wasn't enough to keep shares from falling on the news.

Much of the problem in the industry comes from concerns about changing dynamics. Seadrill commented that the supply of rigs for the industry is finally catching up with demand, as Transocean, Noble, Ensco, and other rig operators have looked to take advantage of the profit opportunities in the area. Transocean recently noted that more than three dozen rigs didn't have contracts in place beyond this year, which is high compared to recent history.

But Seadrill has identified this true threat to its long-term prospects and is acting aggressively to meet it. By making sure that its fleet is as up-to-date as possible with the specifications that exploration and productions companies want, Seadrill is protecting the business it has gotten while also building a reputation that should draw new customers in the future.

Still, macroeconomic factors could also plague Seadrill and the industry in the future. With Iranian tensions easing, oil prices have remained relatively calm, and that could lead producers to pull back on their growth expectations for future drilling projects. Because ultra-deepwater drilling is so expensive, Seadrill will be the first to feel the pinch when marginal projects go back to the drawing board.

In the Seadrill earnings report, watch to see whether the company expresses concerns about its leverage levels in light of a perceived industry slowdown. Seadrill is making an aggressive bet that the industry's growth will continue, and that creates both huge risks and big potential rewards for shareholders willing to make that bet.

Click here to add Seadrill to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.