Fundamental Analysis Of Seadrill Ltd.

Jun. 3.13 | About: Seadrill Limited (SDRL)

The oil and gas drilling and exploration industry is a major contributor to the market capitalization of the basic product industry, coming in after the integrated oil and gas industry. The oil and gas drilling and exploration industry contributes around 2% of the market capitalization, and Seadrill contributes 0.4% of the market capitalization in the industry. It is evident that now investors are fairly comfortable with the outlook of not only the deep-water drilling names, like Ensco PLC (NYSE:ESV), Transocean Ltd (NYSE:RIG), etc., but also with the subsea-level equipment providers. However, the companies under the large cap segment have lagged and the exposure to the growth is not reflected by their stock prices.

Industry Overview

With a composite value of 1005.9, the oil & gas drilling and exploration industry is one of the highest contributors of GDP growth in North America. The share price performance of Seadrill and its competitors are shown below.

Valuation

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Seadrill Limited (NYSE:SDRL) is having below-average company valuation, which indicates a lower attractiveness for investors. It has a P/E Ratio of 17.41, which is lower than the industry average and lower than its peer competitors (other than Ensco Plc). As compared to the industry average, multiple stocks are undervalued, but as compared to the average multiple it is slightly overvalued. The PEG ratio is within the permitted range of 0 to 1, which is the indicator of a higher return in the future. Its P/B ratio and ROA are showing better financials as compared to its other competitors. It shows that the book value of the company is giving substantial returns as compared to its peer competitors. ROE is higher than its peer group of players in the industry, from which it is evident that equity shareholders can expect a good return out of their investment.

Economic Value Added (NYSE:EVA) Analysis

EVA can be defined as the value that is created when the return on the firm's economic capital is greater than the cost of capital of the firm. The calculations for EVA analysis are shown below:

Decreasing EVA is an indicator of:

* Lower efficiency: Operating profit may go down without employing more capital.

* Declining profit: Additional capital is invested in projects that return less than the cost of obtaining new capital.

Risk Factors

Risks are the factors that could significantly and negatively affect the business, operating results, financial conditions and trading prices of the company.

  1. Risks Inherent to Business

Volatile Price: The growth of Seadrill is fairly dependent on the level of activity in the offshore oil and natural gas industry. It can be affected by volatile oil and natural gas prices.

Increasing Operating & Maintenance Cost: The operating and maintenance cost includes crew cost, provisions, equipment, insurance, and shipyard cost, out of which many expenses are beyond the scope of our control, that could affect the entire offshore drilling industry.

Economic Downturn: It can materially and adversely affect the revenue, profitability and the financial position of the company. It may prevent the company from obtaining credit from financial institutions on acceptable terms and prevent them from expanding its business.

  1. Risks Inherent to Investment in the US

Limited Voting Rights: The voting rights of the unit-holders are limited as the operating agreement of Seadrill restricts voting to those unit-holders who own more than 5% of the common units.

Increase in Interest Rates: An increase in interest rates may result in a corresponding decline in demand for equity investment, which in turn can decrease the trading price of the company.

Conclusion

The estimates and analysis suggest that Seadrill is on a growing stage and it is earning profit, which is again reinvested to acquire assets. The company is paying a very appealing dividend at the rate of just over 9%, and it is planning a major new-build program in which 22 units are anticipated to be delivered in the next few years. It can be expected that there will be a substantial growth of the company in the coming year, but as EVA is decreasing, it may turn negative. It is expected that the deep-water drilling industry will grow in the future, which means a flow of opportunities for Seadrill to increase its contracted backlogs. So, in my opinion, I suggest buying the share at its current price--it is a very good share with good long-term opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.