By: Ahmed Ishtiaq
Seadrill limited (SDRL) has become one of the biggest offshore drilling contractors in the world. The company is growing rapidly and holds a significant portion of this high growth market. At the moment, the company has the industry leading market capitalization of $ 18.01 billion. The principal business of SeaDrill is the operation and ownership of tender rigs, jack-up rigs and semisubmersible rigs. Seadrill has made massive strides during the current year. The company has been successful in winning some of the most attractive drilling contracts in the industry.
At the moment, the company has the biggest contract backlog in its history. However, Seadrill is not stopping there and continues to win contracts at impressive day rates. In my previous article, I wrote that the company was close to sealing a contract with the Canadian Energy company, Husky Energy (HES: Toronto). In a recent press release, Seadrill announced that they have received a letter of award for the contract from Husky Energy.
Award of Husky Contract:
Husky wanted a rig to drill delineation and exploration wells in less than 130 and 450 meters of water, respectively. Seadrill offered two of it's under construction rigs, West Rigel and West Mira for the job. Now, Husky has decided to go with West Mira for its operations in Canada and Greenland. The rig is currently under construction at Hyundai Samho Shipyard, South Korea. Seadrill will get delivery of West Mira in the fourth quarter of 2014, and operations will start in the second quarter of 2015. The rig is designed for drilling in harsh environments and water depths up to 10,000 feet. In addition, the rig will be equipped with dynamic positioning and 12 point mooring capability.
Based on the industry rates for similar contracts, we expected the company to secure a contract at around $1.06 billion for five years. However, Seadrill has received better contract than we expected. The total revenue potential of the contract is around $1.18 billion. The total amount also includes performance bonuses and mobilization costs.
At the moment, there is a great opportunity in the deepwater drilling market and the company is planning to capture as much as it can. From the remarks of the Chairman, John Fredriksen, it seems that Seadrill will buy more deep water rigs. Deepwater drilling is growing at a rapid pace and offers a lot of potential. As a result, the operators are turning their focus to the deepwater drilling. The biggest competitor for Seadrill, Transocean Ltd (RIG) is also shedding its shallow water assets to focus on deepwater drilling. Transocean sold its shallow water fleet for $1.05 billion and recognized a loss.
Recently, Seadrill sold its assets in Asia to raise cash for more Deepwater rigs. At the moment, the company has 10 semi submersible rigs capable of operating in the harsh environment. Charter rates have gone through the roof in the deepwater drilling segment of the industry. Exploration efforts in Brazil, Asia and East Africa have driven charter prices up. Seadrill has taken advantage of the poor state of the shipping industry over the past four years. The company decided to get more deepwater rigs as the cost of building went down significantly due to the economic crisis. A deep sea rig costs around $650 million and the deal to Husky entails a charter rate of approximately $650,000.
Debt to Equity
SeaDrill is trading at a relative premium compared to its peers. Almost all of its competitors have better multiples than SeaDrill. However, most of its peers show negative or poor margins and considerably low ROE. SeaDrill has the highest operating margin compared to its peers. Furthermore, the company has the highest ROE in the group. Only red flag for SeaDrill can be high levels of debt. The company has a debt to equity ratio of 1.5, considerably higher than its peers.
Seadrill has been on a contract spree during the current year. The company has secured extremely impressive contracts at exceptional rates. As a result, the company has locked in a healthy revenue stream in the future. There is still a lot of potential in the deepwater drilling segment of the industry. I expect Seadrill to add to its impressive collection of contracts. Taking into account the potential of the company, I believe the stock is trading at a discount. In addition, the stock offers a bumper dividend yield in excess of 8%. I expect Seadrill to move higher and prove to be a smart investment.