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By: Ahmed Ishtiaq

Ultra-deepwater drilling is on the up due to the increased demand for crude oil. Exploration companies are looking to expand their production by going farther offshore. Companies like British Petroleum (BP) and Chevron Corporation (CVX) dominate the Gulf of Mexico area for deepwater drilling. The increase in ultra-deepwater drilling activity is a welcome sign for Seadrill (SDRL) and its peers. This is no coincidence that currently Seadrill has the biggest backlog of orders and has become one of the biggest players in the market. The company has used its position in the market extremely efficiently and acquired a substantial portion of orders from this booming sector.

Recently, the company reported its third quarter earnings, which fell a little short of the numbers reported in the previous quarter. Let's take a deeper look at the earnings and the dividend of the company. Dividend payments are an essential part of an investment in Seadrill, so we will also discuss its dividends and future prospects.

Third Quarter earnings:

Seadrill generated $1.092 billion in revenues during the third quarter compared to $1.12 billion in the second quarter. Further, operating profit for the quarter also came down from $483 million at the end of the second quarter to $413 million for the third quarter. Decrease in operating profit was caused mainly by losses of $158 million from financial items, and $53 million, from 39.9% stake in Archer Limited. Seadrill reported net income of $216 million, or $0.40 per share at the end of the third quarter. The market was expecting the company to report EPS of $0.68 for the quarter.

For the nine months, Seadrill has operating revenues of $3.26 billion and operating income of $1.35 billion. Net income for the first nine months of the year stood at $1.2 billion. On the balance sheet, total assets increased by $545 million from the second quarter. Liquidity position of the company improved compared to the last quarter - Seadrill had $2.298 billion in current assets compared to $1.97 billion at the end of the second quarter. Furthermore, the non-current assets increased $17.18 billion compared to $16.9 billion mainly due to payments for West Carina and West Saturn.

Long-term debt also increased for the company during the quarter and stood at $9.29 billion at the end of the quarter. Moreover, cash provided by operating activities for the first nine months of the year was $1.349 billion. There were 48 offshore drilling units in operation during the third quarter. For drillships and semi-submersible rigs, economic utilization rate came down to 82% from 88% due to the rig moves. At the moment, the company has an order backlog of $21.3 billion.

Dividend Profile:

Juicy dividends are a huge attraction for Seadrill investors. Over the years, the company has been paying special cash dividends along with the regular dividends. At the moment, the stock has a dividend yield of 8.8%. In case of Seadrill, dividends give a clear indication about the direction and expectations of the company. As I mentioned above, Seadrill has the biggest order backlog which gives substantial stability to its revenues. The company has boosted its quarterly dividend, and it will pay an accelerated dividend for the fourth quarter along with the third-quarter dividend.

Seadrill has locked in revenues for the most of its assets on attractive rates. Revenue stability will allow the company to generate substantial cash flows. In addition, the company is hoping that spin-off of Seadrill Partners (SDPL) will help bring down the cost of capital.

Competition:

SeaDrill competitors include Transocean Ltd (RIG), Ensco PLC (ESV) and Noble Corporation (NE).

SDRL

RIG

ESV

NE

P/E

22.60

N/A

11.2

16.70

P/B

2.90

1.10

1.10

1.10

P/S

4.50

1.60

3.10

2.60

EPS Growth

N/A

N/A

-27.40%

-36.90%

Operating Margin

43.30%

-48.20%

34.50%

21.90%

Net Margin

19.80%

-67.50%

27.90%

15.70%

ROE TTM

13.10%

-37.70%

10.50%

7.00%

Debt to Equity

1.50

0.80

0.40

0.60

Source: Morningstar.com

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. The company has a debt to equity ratio of 1.5, considerably higher than its peers.

Summary:

Ultra-deepwater drilling is experiencing a boom at the moment, and Seadrill is well positioned to exploit the growth opportunity. The company has 22 units under construction, of which the company has already acquired contracts for 14 units. The business model in the drilling industry is quite simple. Companies try to profit from the difference between the daily rates that they charge their customers, and the daily operating expenditures. As long as daily rates remain high and operating expenditures remain low, ultra-deepwater drillers will make a neat profit. I believe Seadrill still has a lot of potential, and the stock will continue its rise in the next year.

Source: Seadrill: Drilling Deep Into Earnings And Dividends