Seadrill's Third Quarter Results Show A Company Well Positioned For Future Growth

Dec.19.13 | About: Seadrill Limited (SDRL)

As my long-time readers are likely already aware, I try to release an analysis of Seadrill's (NYSE:SDRL) quarterly earnings results promptly after the company announces them. I have been somewhat delayed this quarter and I apologize for that. I have simply been very busy with other professional projects in the past few months. I expect that I will be able to get back to some sense of normalcy by the time of next quarter's results though and so I expect that I will be able to be more prompt at getting them released. With that out of the way, let's get to the real reason that everybody clicked on the link to view this article, an analysis of Seadrill's third-quarter 2013 results. The company announced its results on Monday, November 25 and they were relatively lackluster, at least according to some analysts. Actually, its results were relatively in line with the company's past few quarters. The company's growth potential remains intact, but management has expressed some concern about the current industry environment with the market no longer being undersupplied due to cash flow difficulties at some exploration and production companies. I will discuss that later in this article. Before doing that, however, please allow me to share the highlights from the company's third-quarter results:

  • The company reported a third-quarter EBITDA of $663 million. This is slightly lower than the second quarter's EBITDA of $665 million but significantly better than what the company reported in the prior year quarter. In the third quarter of 2013, Seadrill reported an EBITDA of $574 million.
  • The company reported third-quarter net income of $315 million. This works out to $0.61 per basic share and $0.60 per diluted share.
  • The company reported total consolidated revenue of $1,280 million in the quarter. This represents a 0.9% increase from the previous quarter's revenue of $1,268 million.
  • The company's operating profit declined quarter-over-quarter. In the third quarter of 2013, Seadrill reported an operating profit of $471 million. In the second quarter of 2013, the company reported an operating profit of $507 million.
  • Seadrill increased its quarterly dividend to $0.95 per share from the previous level of $0.91 per share.

Seadrill saw its fleet composition go through significant changes in the third quarter but, despite this, the company was able to keep its revenues and EBITDA relatively stable. This is a promising sign. Those investors who have been following this company for quite some time likely remember that Seadrill announced at the end of last year that it would be selling its tender rig division to Malaysia-based SapuraKencana Petroleum. The sale of this division resulted in the company selling off several rigs that were generating strong profits for it and this would ordinarily have resulted in a sharp revenue decline since it no longer had the rigs that were responsible for a significant portion of its earnings and cash flow prior to the sale. However, Seadrill was able to put the money from this transaction to use in acquiring other productive assets which made up for the loss of these rigs. This is clearly visible in the third-quarter results as this was the first full quarter in which the company did not have its tender rigs producing revenue and profits for it. These rigs officially left the company's fleet at the end of April, or about 2/3 of the way through the second quarter. In July, Seadrill increased its ownership interest in Sevan Drilling (OTCPK:SDRNF) from 29.9% to 50.1% and then immediately issued a tender offer for all of the shares of the company that it did not already own. However, the price that the company was offering for the remaining outstanding shares of Sevan Drilling's stock was insufficient to entice the then current owners of the stock and so Seadrill was only able to increase its ownership stake in that company to 50.11% through this tender offer. However, this was still sufficient to allow Seadrill to consolidate Sevan Drilling's results into its own which helped to offset some of the revenue that the company gave up through the sale of its tender rig division. I discussed the implications of this consolidation in a recent article that was posted to this site.

Seadrill has a history of solid operating performance due largely to its modern fleet of high-specification rigs. The company continued this performance in the third quarter, although its operating performance was down slightly from the second quarter. In the third quarter, Seadrill achieved a technical utilization of 94% from its floater fleet, very much in line with the second quarter in which the company floater rigs also had a technical utilization of 94%. The company would have had better performance here were it not for two of its rigs, West Polaris and West Sirius experiencing a total of 26 days of downtime due to their respective and planned five-year maintenance cycle. Both rigs are now back in operation and should once again contribute to the company's results in the fourth quarter. This was a one-time event and so should not impact the company again. Seadrill's utilization was also negatively impacted by downtime on two rigs, West Taurus and West Aquarius. Unfortunately, Seadrill did not quantify the amount of downtime that the rigs experienced but both should be back in operation now and once again generating revenue and cash flow for the company which will be visible on the company's fourth-quarter results. Although the unplanned downtime was disappointing, Seadrill still managed to achieve solid utilization rates, but many of its smaller peers that operate similarly new floater fleets reported utilization rates over 95% in the third quarter so the company did not perform as well as those firms did. The company also managed to achieve solid technical utilization numbers from its jack-up fleet, with those rigs achieving technical uptime of 97%. This is slightly lower than the 98% that the fleet achieved in the second quarter but it is still quite respectable. As I have discussed in many other articles, technical uptime is a measure of how close an offshore driller came to achieving its theoretical maximum revenue based on its current contracts. As is apparent by the numbers, Seadrill did an admirable job of maximizing its revenue in the third quarter. However, as investors we are also concerned about the future. So, how good a job is Seadrill doing of maximizing its revenue in the fourth quarter? Well, so far at least, the company's floater fleet has achieved technical uptime of 95% and the company's jack-up fleet has achieved technical uptime of 97%. Therefore, the company's revenues may be slightly higher if it can maintain this than in the third quarter due to the reduced downtime on its floating rigs (which carry higher dayrates). Of course, the company's actual results thus far will depend on exactly which rigs have experienced the limited downtime that it has seen in the fourth quarter since not all of its rigs have the same dayrate. Unfortunately, Seadrill did not specify this in its quarterly report. However, so far at least, the limited amount of downtime that the company has seen is an encouraging sign for the future.

Back in January, I suggested that a good use of the money that Seadrill got from SapuraKencana through the sale of its tender rig division to the Malaysian company may be to acquire Sevan Drilling . The company actually attempted to do that in the third quarter, but only managed to acquire 50.11% of its stock (because the stock price for Sevan Drilling was significantly higher than Seadrill's tender offer). However, this is still sufficient for the company to be able to consolidate the results of Sevan Drilling's third quarter into its own. This was one way that Seadrill was able to avoid the large cash flow and revenue decline that looked likely following its divestment of its tender rig division. The Sevan Drilling consolidation also significantly improved Seadrill's forward growth prospects. This is because Sevan Drilling has one rig, Sevan Louisiana, that is scheduled to begin drilling operations in the Gulf of Mexico in Februrary 2014. The rig has a dayrate of $505,000 which will effectively grow Seadrill's revenue by that amount for every day that the rig is in operation. However, this will not be visible on Seadrill's fourth-quarter results because, as already noted, the rig's contract does not begin until February 2014. This will be the rig's first contract, therefore this will all be new revenue and is not a case where the rig is generating money already and will simply be generating more money come February. The impact of this rig will be first visible in the company's first quarter 2014 results but it will be even more noticeable in the second quarter of 2014 as that will be the rig's first full quarter in operation.

However, Seadrill does have some other rigs that will have a positive impact on the company's fourth-quarter results. For starters, West Auriga, West Vela, and West Tellus will all begin work on their first contracts in the fourth quarter. West Auriga and West Vela will both begin operating for BP (NYSE:BP) in the U.S. Gulf of Mexico; West Auriga will begin its work in October 2013 and West Vela will begin its work in November 2013. Both rigs carry a dayrate of $565,000 which will have an immediate positive effect on the company's fourth-quarter results. Like the Sevan Louisiana, neither of these rigs had any previous contract and so that all represents new money for the company. While the presence of these two rigs will certainly make itself known in the fourth quarter, the impact that they have in the first quarter will be even greater since the rigs will be operating for the entire first quarter. Depending on the actual day in October that West Auriga began operating, its first-quarter impact may not be significantly greater than the fourth-quarter impact, though. Another rig will begin operating in the fourth quarter that will also have a significant impact on the company's forward growth. In November, West Tellus will begin its contractual assignment with Chevron (NYSE:CVX) off of the coast of China. Then, in January, the rig will travel to Liberia to continue its work for the oil major. This contract is a bit different than most rig contracts as it is effectively two contracts. While in China, the rig will be earning a dayrate of $610,000. This rate will then increase to $635,000 per day once the rig arrives in Liberia. Therefore, this rig will have a significant impact on the fourth and first quarters as it first begins operations (this is the rig's first assignment) in the fourth quarter, then the dayrate increases early in the first quarter. Additionally, the fourth quarter's results will be positively impacted by a higher dayrate for the West Gemini that took effect in October and by the start up of two new jack-up rigs. Also, the ultra-deepwater drillship West Capella will generate more revenue and cash flow since its rate increased during the fourth quarter. All in all, the fourth quarter should show some of the strong growth that attracted many investors to this company in the first place.

The company's management is so confident in this growth story that the Board of Directors has elected to increase Seadrill's regular quarterly dividend to its highest level ever, $0.95 per share. This gives the company an annualized dividend of $3.80 per share. This gives the stock an annual dividend yield of 9.59% at the current stock price. This makes the company one of the highest yielding stocks on the New York Stock Exchange. This dividend hike also continues the company's very strong history of dividend increases over time.

Click to enlarge

Source: Seadrill

Overall, Seadrill appears to remain well-positioned for forward growth. There have been some concerns about the next year due to the large number of ultra-deepwater rigs that will be coming available. This is likely to change the market from and undersupplied condition to one that is adequately supplied. This could create downward pressure on dayrates and fears of a downturn have been one major reason why the stock has been declining for the past few weeks. However, the brunt of this downturn will likely impact vintage rigs positioned at the lower-end of the market. Seadrill has the most modern fleet of all the major offshore drilling companies and so it is certainly not positioned at the lower end of the market. To the contrary, Seadrill is positioned quite well at the upper end of the market with a modern fleet of high-specification rigs. Therefore, the company is likely in a better position to weather the current market situation than its peers. I discussed this in a series of recent articles on this site which can be found here and here.

Disclosure: I am long SDRL, OTCPK:SDRNF. 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.

Additional disclosure: I am long shares of Sevan Drilling on the Oslo stock exchange. I do not own the over-the-counter traded shares.