Seadrill Impresses Again With Continued Growth

| About: Seadrill Limited (SDRL)

There have been concerns about the off-shore drilling segment and the day rates due to the oversupply. However, despite the concerns, the bigger players in the sector have been performing well. Seadrill (NYSE:SDRL) has reported its fourth quarter earnings and the results have again been impressive for the company. Let's look at the figures reported by the company.

Continued Improvement in Earnings

The company reported fourth quarter EBITDA of $768 million, showing an increase of about 27% compared to the EBITDA for the same quarter last year. Net income for the quarter stood at $281 million, or $0.49 per share, a massive improvement on the net income of just $50 million reported at the end of the same quarter last year. Total revenue for the fourth quarter was $1.469 billion, compared to $1.280 billion reported at the end of the last quarter - the growth in revenues mainly came from West Tellus, West Auriga, West Vela, West Tucana and AOD entering service as well as a day rate increase on the West Gemini.

Moving onto the utilization rates - for floaters, utilization rate was 94%, same as the previous quarter. However, for jack-up fleet, the utilization rate went up to 98%, compared to 97% at the end of the last quarter. With these utilization rates, the fears about the reduction in utilization rates can also be put to rest in the short-term as the utilization rates are will remain high, in my opinion.

Let's now talk about the dividend. Recently, there has been a lot of chatter about the dividend of the company. I have said in my previous articles that the dividend of the company is under no threat in the short-medium term, and the earnings visibility will allow the company to continue to grow its dividend. An increase of 3 cents in quarterly dividend indicates that the company expects continued growth in earnings and cash flows, and it will be able to meet its dividend obligations. After the increase, quarterly dividend stands at $0.98 per share - if the company does not increase dividend over the next year, the dividend yield on expected dividend will be over 10% -- the dividend yield is based on the current stock price.

Let's not look at the future growth opportunity. The company has announced five jack-up contracts with Pemex - the contracts will start in the first half of 2014 and have the total potential of $1.8 billion. Furthermore, Total S.A. (NYSE:TOT) has exercised the option to decrease the contract tenure for West Capella from 5 years to 3 years, which has resulted in the day rates to go up to $627,500 per day from $580,000 per day. Moreover, the company has continued its policy to drop down its assets to Seadrill Partners (NYSE:SDLP) by selling part of semi-submersible rigs, West Leo and West Sirius.

Moving onto the debt and total assets situation of the company - the total debt for the company has come under scrutiny due to the elevated levels of debt. Total interest bearing debt went to $13.87 billion from $12.64 billion at the end of the last quarter, mainly due to the new $1.75 billion Sevan credit facility, re-financing of West Eminence. Furthermore, North Atlantic Drilling (NDAL) also completed the private placement of $600 million worth of unsecured bond issue. Total long-term assets of the company stand at over $23 billion, which gives it debt-to-long-term-assets ratio of close to 51%. Finally, the cash position of the company has also improved. Cash and cash equivalents at the end of the quarter were $744 million, up about $193 million compared to the last quarter. Furthermore, the operating cash flows stood at $1.69 billion while the investing cash flows of $2.9 billion show that the activity in capital investment was the highest. At the end of the quarter, order backlog of the company stood at $20.2 billion, excluding the Saturn and Jupiter discussion.


After going through the results of the company, it is clear that the growth has been strong in EBITDA for the company. The ability of the company to secure new contracts for its newbuilds is extremely important. It is also interesting to note that the company is now mainly getting financing through its subsidiaries, and at the same time, it is dropping down some assets to its partnership. The decision to use subsidiaries should allow the company to gain financing in the future and offer some financial flexibility. I maintain that the company will continue to grow its dividends as the growth in EBITDA and cash flows is strong, and it will take quite a drastic change in the industry dynamics for Seadrill to cut its dividend, which I do not see in the short-medium term.

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.