Seadrill, Ltd.'s (SDRL +0.00%) second quarter earnings are out, and there's a lot of good news to talk about. The highlights:
- $0.77 earnings per share, well ahead of Wall Street estimates of $0.63.
- Reduction in long-term debt.
- Delayed delivery of 10 newbuilds for more than one year.
In short, the offshore market remains ugly -- and seems likely to get even worse before it gets better -- but Seadrill's management is taking steps to navigate through the downturn. Let's take a closer look at the details.
Newbuild update
At the end of Q1, Seadrill was on the hook to receive 10 newbuilds before year-end and another three in 2016, at a remaining cost of about $3.5 billion. The current state of the market would have seen the company likely take delivery of these ships without work, meaning additional operating costs but no revenues. In the current state of demand, this isn't the kind of situation that Seadrill can afford to be in.
However, in the Q2 release, the company disclosed that it had delayed delivery of four of the vessels scheduled for delivery in 2015, pushing two drillships to 2017 and two jackups to 2016, and further deferred the delivery dates on another six later into 2016 and 2017. The company still has two drillships and three semisubmersibles set for 2015 delivery, and the release said that, "[d]iscussions with shipyards are ongoing in regards to the delivery dates for the remaining units," so it sounds like Seadrill is working to push out some of those vessels as well.
Considering the $4.5 billion in remaining payments on all the newbuilds, and the current state of the offshore market, delaying receipt of newbuilds is a very good thing for Seadrill right now. Frankly, the company would have an incredibly difficult time putting new vessels to work in the current environment, and most experts expect 2016 to be just as bad if not worse than 2015 is turning out to be.
The reality is that the market is oversupplied right now, and so far scrapping and idling activity of older vessels hasn't happened at the rate many expected. Until more older vessels get retired, newbuild delays are ideal.
Current fleet status and backlog
Seadrill ended the second quarter with four semi-submersibles, four jackups, and one drillship out of work and not under contract, excluding newbuilds. This compares to one semi-submersible, two jackups, and one drillship at the end of the first quarter. Total backlog for Seadrill and its subsidiaries declined from $15.4 billion to $14 billion, and from $8.9 billion to $7.5 billion for Seadrill itself, since the first quarter.
This is further evidence that the offshore market is deteriorating, and the company's efforts to delay newbuilds are only part of the equation.
Operating expenses, debt, and the balance sheet
Revenue fell almost $100 million sequentially, largely due to vessels coming off contract, but Seadrill was also able to cut costs pretty significantly in the quarter. Operating expenses were $37 million lower than the first quarter, largely due to vessel and rig operating expenses being down. This was a product of both efforts to reduce these costs, but also lower expenses from non-working ships.
Interest expense was down $12 million from Q1 and $24 million less than a year ago due to a $1.1 billion reduction in long-term debt. But before you get too excited about that, it was only partly the company actually paying debt down. Seadrill transferred the loan on the West Polaris to Seadrill Partners in the quarter. So the debt and interest expense comes off Seadrill's books, but the company is affected by that debt, which will increase Seadrill Partners' expenses.
In short, the cost-savings is good, but much of the debt is still held by Seadrill or a related party. The rest of the balance sheet stayed relatively unchanged, with cash increasing slightly to just over $900 million.
Putting it all together
Seadrill made some very solid progress in the quarter, reducing expenses and also making headways in delaying newbuilds in a deteriorating offshore drilling market. The company was also solidly profitable, but that's about where the good news ends.
Nearly half of Seadrill's current fleet are either currently out of work, or under contracts that expire by mid-2016 -- and that's before the 11 newbuilds scheduled for delivery in 2015 and 2016 are factored in. In other words, the company's current book of business offers stability for the next few quarters, but don't assume that just because the company beat earnings estimates that the worst is over. The reality it,demand for offshore drilling is expected to be weak for the rest of this year and next. Seadrill management has a lot of work ahead of it to navigate a downturn that may just really be getting started.
