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Typically, when conversing with others about Seadrill LTD. (NYSE:SDRL), a debate ensues as to whether Seadrill will be able to continue paying its above-average yielding quarterly dividend to shareholders. Few investors take a moment to debate Seadrill's growth potential. Enough has been written and discussed on the subject of the dividend and dividend growth. This article addresses Seadrill's outstanding growth potential combined with outstanding performance. I will use mathematics and two percentages in this equation. One will be an average percentage of contract revenue earned to total contract value (90.579%). The other will be an average percentage of net income to contract revenue (31.3%). These percentages were determined by starting with 2.75 EPS, the answer to the equation, and working backwards. If analysts determine average EPS to be 2.75 then, on average analysts estimate Seadrill to earn 90.579 percent of total contract value. On average, analysts estimate that Seadrill will report 31.3 percent of contract revenue earned as net income. If the correct average percentages are used the result would be the average of all EPS estimates performed by analysts. Two estimates will be made. The first estimate will be made to verify the percentages. The first estimate will equal the average analyst estimate of 2.75 EPS. The second will be an estimate based off contract revenue reported on the Q1 2013 financial statements. Since the first estimate proves that the percentages are correct, the second estimate will result in what should be called: "average forward earnings per share."

Below are a compilation of highlights from Seadrill's fleet status report:

Rig Type/Name

Generation/Type

Built

Water depth(ft.)

Drilling Depth (ft.)

Location

Client

Contract Start

Contract Expire

Dayrate in USD

Drill Ships

West Auriga

Ultra-Deepwater

2013

12,000

40,000

In transit to USA

BP

08-13

08-20

$565,000

West Vela

Ultra-Deepwater

2Q13

12,000

40,000

Under Construction

BP

11-13

11-20

$565,000

West Tellus

Ultra-Deepwater

3Q13

12,000

40,000

Under Construction

none

Un-contracted As of may 28

Jack-ups

West Linus

Heavy Duty- HE

4Q13

450

40,000

Under Construction

Conoco Phillips

04-14

Option: 04-19

04-19

Option: 03-23

$372,000

West Castor

HE

3Q13

400

30,000

Under Construction

none

Un-contracted

As of may 28

West Tucana

BE

3Q13

400

30,000

Under Construction

PVEP

08-13

12-13

$160,000

West Telesto

BE

3Q13

400

30,000

Under Construction

Premier

09-13

Option: 03-14

03-14

Option: 08-14

$149,500

West Oberon

BE

4Q13

400

30,000

Under Construction

none

Un-contracted As of may 28

AOD I

BE

2013

400

20,000

Saudi Arabia

Saudi Aramco

05-13

Option: 05-16

05-16

Option: 05-17

$180,000

AOD II

BE

2013

400

20,000

In transit to Saudi Arabia

Saudi Aramco

10-13

Option: 07-16

06-16

Option: 06-17

$180,000

AOD III

BE

3Q13

400

20,000

Under Construction

Saudi Aramco

10-13

Option: 10-16

10-16

Option: 10-17

$180,000

Tender Rigs

T15

Barge

2012

6,500

30,000

Thailand

Chevron

05-13

05-18

$115,500

T16

Barge

1Q13

6,500

30,000

Under Construction

Chevron

06-13

03-15

$115,500

West Linus, T-15 and T-16 are not included in that 257.4 million (rounded down) because although West Linus is being constructed in 2013 and will soon be mobilized, it is owned by North Atlantic Drilling (OTC: NATDF) (subsidiary of Seadrill Ltd.) and its contract does not begin until Q2 14. It has a day rate of $372,000.00. T-15 and T-16 are intended to be sold to Seadrill Partners LLC, a subsidiary of Seadrill Limited, of which Seadrill Limited is a 75 percent owner, and they will be managed by SapuraKencana Petroleum Berhad (KLSE: SKPETRO)

The Estimates

Contract Begins

Month\Quarter

Rig

New Contract Revenue Per Month

Total New Contract Revenue by Year End

May Q2 13

AOD-1

$5,580,000.00

$44,100,000.00

July Q3 2013

AOD-2

$5,580,000.00

$33,120,000.00

August Q3 2013

West Auriga

West Tuscana

$22,475,000.00

$110,925,000.00

September Q3 13

West Telesto

$4,485,000.00

$18,239,000.00

October Q4 13

AOD-3

$5,580,000.00

$16,560,000.00

November Q4 13

West Vela

$16,950,000.00

$34,465,000.00

Total: $257,409,000.00

*The figures in "New Contract Revenue Per Month" are based on the amount of days in the month the contract began (May has 31 days while September has only 30) and the "Total New Contract Revenue by Year End" accounts for the total amount of days left in the year after the contract began.

"The dayrates set forth in the report are estimates based upon the full contractual operating dayrate. However, the actual average dayrate earned over the course of any given contract will be lower and could be substantially lower. The actual average dayrate will depend upon a number of factors (rig downtime, suspension of operations, etc.) including some beyond the control of Seadrill Limited."

-Seadrill Ltd. Fleet Status Report

Estimate #1

First of all, Seadrill aims to earn 95 percent of total contract value and are on pace to do so. However, they operate in some regions of the world known for nasty weather. A few of the regions that figuratively jumped off the page were: Norway, the Gulf of Mexico, and the South China Sea. The strait of water in between the eastern coast of Vietnam and the west of the Philippines is known as "Typhoon Ally" by U.S. military service members stationed in the region. I speculate the average analyst estimate of 90.579 percent of total contract value is more realistic. On average analysts estimate that 31.3 percent of that 90.579 percent will be reported as net income. Oddly, those two percentages are nearly identical to 3-year averages of net income to contract revenue and contract revenue to total contract value. When the total contract value (in day rates) on the Fleet Status report is calculated, the result is the total possible amount the fleet could earn in a day. This is called the fleet's day rate.

$11761900.00

Fleet day rate

X 365

Multiplied by days in a year

=$4293093500.00

+ $257409000.00

Plus newbuild total contract value

= $4550502500.00

Equals total contract value

X .90579

Average estimated percentage of contract revenue earned to total contract value

= 4121799659.00

Equals average estimated contract revenue earned

X .313

Multiplied by average estimated percentage of net income to contract revenue

=$1290123293.00

Average net income estimate

/ 469129874

Divided by shares outstanding

= 2.75

Equals Average Estimated EPS

Estimate #2

Now that the percentages have been determined and proven correct the average forward EPS can be calculated using the actual 1st quarter total contract revenue.

$1,195,000,000.00

1st Quarter Contract Revenue

x 4

Multiplied by 4

=$4780000000.00

+ $257409000.00

Plus new build total contract value

+$58809500.00

Fleet dayrate multiplied by 5(remaining 3 quarters have 5 more days than Q1)

=$5096218500.00

X .90579

Average estimated percentage of contract revenue earned to total contract value

=$4616103755.00

Equals average forward contract revenue estimate

X .313

Average estimated percentage of net income to contract revenue

$1444840475.00

Average estimated forward net income

/ 469129874

Divided by outstanding shares

3.07

Equals average forward EPS

Investors should realize that total contract revenue (1.195 billion) in 1st quarter is higher than total contract value for 1st quarter. It's off by about 70 million. The difference is the exchange rate between foreign currency (British Pounds, Euros, Brazilian Real) to U.S. Dollars fluctuates and some rigs receive performance bonuses. Also, a portion of mobilization fees, (which is included in contract revenue and not reimbursable revenue) assessed for the mobilization of newbuilds, were taken to income in March. Basically, total contract value fluctuates. Contract revenue earned in 1st quarter was higher than total contract value for 1st quarter because Seadrill is benefiting from a strengthening U.S. dollar and receiving performance bonuses from a select few rigs with a performance bonus written into the contract.

Conclusion

What does all this mean? If, on average, analysts expect Seadrill to earn $2.75 per share then the result of the equation is known. If the result is the average EPS estimate (2.75), then 90.579 percent of total contract value and 31.3 percent of net income to contract revenue are correct. If the result is an average, then 90.579 and 31.3 are also averages. Once those percentages have been determined one can use them in combination with actual contract revenue reported to determine an "average forward EPS". If the average forward EPS is significantly higher than that would indicate that a stock is on pace to beat analysts' estimates for the remainder of in the year. Basically if Seadrill has a 90.579 percent operating efficiency on a total contract value of 1.119 billion (per quarter) and reports 31.3 percent of contract revenue as net income Seadrill will outperform.

Mathematically, Seadrill receives an outperform rating. Some analysts currently have an outperform rating on Seadrill. Although calculating average forward EPS changes nothing in regards to how analysts rate Seadrill, it does provide investors with a tool which puts that rating into perspective. Should significant downtime occur, due to equipment failure, investors could deduct that downtime from the total contract value and determine how this downtime would affect Seadrill's year-end results. The 1st and 2nd quarter results added together and multiplied by 2 would equate to a much more accurate average forward EPS estimate.

Seadrill has recently crossed above its 200-day moving average before the ex dividend date and crossed bellow just weeks after the ex-dividend date had passed. If Seadrill is expected to outperform how do investors make sense of this? Doesn't crossing the 200-day moving average imply a stock is on a downward trend? In some cases, it does imply the beginning of a downward trend but not in this case. Seadrill usually crosses above and below a moving average of some sort before and after the quarterly ex-dividend date. Since the 1st quarter 2013, dividend was lumped together with the 4th quarter 2012 dividend payment. Seadrill is, simply, crossing the 200-day moving average because of the gap in dividend payment. I can state this with confidence because the numbers don't indicate a downward trend. Since much of Seadrill's revenue consists of sale of assets, contract revenue and reimbursable revenue, earnings are fairly transparent. Seadrill did not report any down time, due to repair of equipment, thus far into 2nd quarter. Mother Nature has been gracious and has blessed the offshore driller with fairing seas. Thus far into 2nd quarter, no downtime was reported due to weather. It should be fairly obvious that 2nd quarter earnings will be comparable to 1st quarter. The biggest difference would be a dividend was paid and a T-15 was sold to Seadrill Partners LLC. Since, on average, analysts expect Seadrill to earn 69 cents per share in 2nd quarter, as opposed to 60 cents in 1st quarter; those differences shouldn't have a negative effect on average forward EPS.

Source: Seadrill Offers Dividend And Growth