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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 rigsDeliveryDay RateQuarterly Revenue
 West Telesto1Q2013$185,000.00$16,835,000.00
 West Tucana1Q2013$160,000.00$14,560,000.00
 West Castor1Q2013$198,500.00$18,063,500.00
 West Oberon1Q2013$149,500.00$13,604,500.00
 West Linus3Q2013$368,000.00$33,488,000.00
   Total$96,551,000.00
     
Semi-submersible   
 West Mira4Q2014$590,000.00$53,690,000.00
 West Rigel1Q2015$590,000.00$53,690,000.00
     
Drillships   
 West Auriga2Q2013$565,000.00$51,415,000.00
 West Vela2Q2013$565,000.00$51,415,000.00
 West Tellus3Q2013$565,000.00$51,415,000.00E
 West Neptune2Q2014$565,000.00$51,415,000.00E
 West Jupiter3Q2014$565,000.00$51,415,000.00E
 West Saturn2Q2014$565,000.00$51,415,000.00E
 West Carina4Q2014$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.

 RevenueEBITDA
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

 RevenueEBITDAEBITDA 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.

Source: Understanding Seadrill And Future Dividends