Understanding Seadrill And Future Dividends

| About: Seadrill Limited (SDRL)

Seadrill (NYSE:SDRL) is an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry. Seadrill's primary business is the ownership and operation of jack up rigs, tender rigs, semi-submersible rigs, and drillships.

Historically, Seadrill has financed its growth through the issuance of debt and has returns a large portion of its operating cash flow to its shareholders in the form of dividends. It currently pays a quarterly dividend of $.85 per share ($3.40 per year) and yields 9.2% given that it is trading at $37.00 per share. (NOTE - Seadrill paid its Q1-2013 dividend early and has announced special dividends in the past)

Reviewing the fleet status report of Seadrill, Fleet Status, you can view all the rigs owned by Seadrill and the contract terms. Seadrill boasts an impressive $21.3B backlog order backlog, so revenue is all but guaranteed for the next 5-6 years.

As far as computing future revenue, you have to take into account a number of important changes that were made last quarter. Seadrill sold 18 of its Tender Rigs to SapuraKencana for an enterprise value of $2.9B. 3 other Tender rigs were promised to Seadrill Partners LLC (NYSE:SDLP). All together, this will decrease overall revenue by $178M per quarter, and over EBITDA by $99M per quarter once the deal goes through. Keep in mind Seadrill still owns 24.3% of Seadrill Partners LLC and will own 13% of SapuraKencana once the sale of the rigs is complete.

Without the tender rigs, operating income for the quarter ended September 30, 2012 would have been $329M (from $413M) and EBITDA would have been $475M (from $574M).

Seadrill has an exciting lineup of rigs that have yet to come online that will bolster earnings in coming quarters.

Jack up rigs Delivery Day Rate Quarterly Revenue
  West Telesto 1Q2013 $185,000.00 $16,835,000.00
  West Tucana 1Q2013 $160,000.00 $14,560,000.00
  West Castor 1Q2013 $198,500.00 $18,063,500.00
  West Oberon 1Q2013 $149,500.00 $13,604,500.00
  West Linus 3Q2013 $368,000.00 $33,488,000.00
      Total $96,551,000.00
  West Mira 4Q2014 $590,000.00 $53,690,000.00
  West Rigel 1Q2015 $590,000.00 $53,690,000.00
  West Auriga 2Q2013 $565,000.00 $51,415,000.00
  West Vela 2Q2013 $565,000.00 $51,415,000.00
  West Tellus 3Q2013 $565,000.00 $51,415,000.00E
  West Neptune 2Q2014 $565,000.00 $51,415,000.00E
  West Jupiter 3Q2014 $565,000.00 $51,415,000.00E
  West Saturn 2Q2014 $565,000.00 $51,415,000.00E
  West Carina 4Q2014 $565,000.00 $51,415,000.00E
      Total $467,285,000.00

E -- Contracts rates are estimated

The above table shows potential future revenue additions and the quarters they can be expected.

The table below shows the current EBITDA calculations per the 3Q2012 10Q.

Jack up Rigs   Rev $588,000,000.00
      EBITDA $280,000,000.00
      % 47.619%
Tender Rigs   Rev $530,000,000.00
      EBITDA $275,000,000.00
      % 51.887%
Floaters   Rev $2,049,000,000.00
      EBITDA $1,248,000,000.00
      % 60.908%

To summarize, Seadrill will have the following additions to revenue and EBITDA in future quarters assuming their margin is consistent with 3Q2012.

  Revenue EBITDA
1Q2013 $63,063,000.00 $30,030,000.00
2Q2013 $102,830,000.00 $62,631,449.49
3Q2013 $84,903,000.00 $47,262,391.41
4Q2013 $0.00 $0.00
1Q2014 $0.00 $0.00
2Q2014 $102,830,000.00 $62,631,449.49
3Q2014 $51,415,000.00 $31,315,724.74
4Q2014 $105,105,000.00 $64,017,101.02
1Q2015 $53,690,000.00 $32,701,376.28

All else equal, using the $475M EBITDA number from Q3-2012, assuming the sale of the Tender Rigs as proposed, the table below shows Revenue and EBITDA for Seadrill for future quarters

  Revenue EBITDA EBITDA per share
3Q2012 $878,000,000.00 $475,000,000.00 $1.01
4Q2012 $878,000,000.00 $475,000,000.00 $1.01
1Q2013 $941,063,000.00 $505,030,000.00 $1.08
2Q2013 $1,043,893,000.00 $567,661,449.49 $1.21
3Q2013 $1,128,796,000.00 $614,923,840.90 $1.31
4Q2013 $1,128,796,000.00 $614,923,840.90 $1.31
1Q2014 $1,128,796,000.00 $614,923,840.90 $1.31
2Q2014 $1,231,626,000.00 $677,555,290.39 $1.44
3Q2014 $1,283,041,000.00 $708,871,015.13 $1.51
4Q2014 $1,388,146,000.00 $772,888,116.15 $1.65
1Q2015 $1,441,836,000.00 $805,589,492.44 $1.72

In Q3-2012, Seadrill paid out roughly 70% of its EBITDA in the form of a Dividend. If Seadrill maintains this, the 2015 dividend would be $4.81 per share

My conclusion: At $37 per share, Seadrill is undervalued. As its rigs come on line, Revenue, EBITDA, and its Dividend grow, the stock price will rise.

Important Assumptions:

  • That all proposed rigs come on line per the schedule outlined in Seadrill's fleet status report
  • That Seadrill maintains a minimum economic utilization rate of 82% for floaters and 83% for jack-ups (as reported in Q3-2012)
  • That the shares outstanding remains constant at 469.1M
  • That the EBITDA margin remains constant
  • That the day rate for its drillships coming online in 2014 is $565,000
  • Foreign tax rates do not change
  • That the sale of the tender rigs to SapuraKencana goes as planned

It is also important to note that for the longevity of the company, Seadrill must continue to secure leases for its rigs when the current ones expire. Seadrill has an impressive order backlog but they must continue to grow or maintain that backlog. Most of its current contracts expire between 2016-2019. The positive side of that is that Seadrill's fleet is one of the youngest in the industry with many yet to come online.

Disclosure: I am long SDRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.