Seadrill: More Reasons To Be Positive

| About: Seadrill Limited (SDRL)

Summary

New contract wins show the company's ability to perform well in the less-than impressive conditions in the off-shore drilling sector.

The utilization rate will continue to remain high showing the strong position of the company.

The company's strong ties with the major players in the sector will play a vital role in the future growth.

Seadrill (NYSE:SDRL) has gained about 6% since I last wrote about the stock - the title of the article was "Seadrill: A Good Opportunity To Buy?" It was certainly a good time to buy as I argued the sector was down due to the recent sell-off. My regular readers know I have a bullish stance on the off-shore sector and Seadrill in particular. In my previous articles, I have covered different aspects of the company in detail, and the recent announcement of new contract wins for jack-up units have further cemented my belief in the company. We are currently seeing a minor slow down in the off-shore drilling sector due to the limited CapEx by the oil and gas companies. However, if the company is able to secure contracts during the slow down; I have no doubt it will do even better when the sector make s a solid recovery in about two years.

The contract wins, however, do not come as a surprise to me. In my previous articles, I have said that the company will be able to secure new contracts for its new builds as well as previously contracted rigs. I am not claiming any inside knowledge, or any inside source - I formed my opinion while thoroughly going through the company material and the trend in the sector. The management was confident about securing contracts for various rigs and negotiations were at the advanced stages for some rigs.

Let's now look at the units that have won new contracts. The image below was taken from Seadrill's fleet report updated on February 25. The highlighted jack-up units have won new contracts and extensions. Four jack-up units have won new contracts and one unit has extended its current contract.

Click to enlarge

The first rig in the list is the West Prospero - this rig was working in Vietnam and the contract expired in March. The previous contract was at a day rate of $170,000. This unit has won a contract with JVPC in Vietnam and the contract is for one well, and it is expected to be for the firm period of 40 days. The total contract value is $6.5 million, which means the day rate based on the expected 40 days period is $162,500. The day rate for West Prospero has come down slightly; however, it still remains extremely impressive. The unit will start its charter during the current month.

The second unit is the West Ariel, which is also working in Vietnam and the contract for this jack-up unit also ended in March. The day rate for West Ariel was also $170,000. The total revenue potential for the primary contract is $89 million, and the contract is for 12-months with an option to extend for further 12-months. The unit will be moved to off-shore Congo and the contract also includes $8.5 million for mobilization.

The West Mischief is currently deployed in off-shore Congo - the unit had the contract till December at a day rate of $175,000. Seadrill secured an extension for this unit at an increased day rate and the unit is now contracted till May 2015.

The West Tucana was previously working in Vietnam and the contract expired for this unit during the last month. Seadrill won a contract for West Tucana with Chevron's (NYSE:CVX) wholly owned subsidiary in off-shore Angola. The contract is for 24-month period and the total revenue potential is $168 million, including $8.5 million for mobilization. The previous day rate for the unit was $164,000.

The West Telesto is the last unit on the list - it secured a contract for two wells in off-shore Australia - plus an option for two more wells. The total revenue potential of the contract is $31 million and the contract is for the expected period of 51 days. The above mentioned number also includes mobilization cost - at the moment, the unit is operating in Vietnam.

With these contract wins, the company now has 92% of its jack-up capacity contracted for the current year and 64% for the next year. The total order backlog for the jack-up segment has gone up to $4.4 billion. The utilization rate in the jack-up segment has also remained over 90% for the company, indicating that the segment has strong demand. These contract wins give further clarity to the revenue and earnings potential of the company. Seadrill is on its way to achieve $4 billion in EBITDA, which I have discussed in detail in my previous articles.

Investors should also keep an eye on North Atlantic Drilling (NYSE:NADL) - the stock of this driller is up about 4.5% since its IPO earlier this year. NADL is a subsidiary of Seadrill and it has a small fleet (3 ultra-deep water rigs) that is capable of working in the harsh environment. At the moment, all of the rigs for this company are contracted in The North Sea. Subsidiaries and partnerships like NADL and Seadrill Partners (NYSE:SDLP) play a vital role in the capital structure of the company as the cash flows generated by these companies flow to Seadrill. Also, these businesses will allow the company to have better financial flexibility.

Bottom Line

Seadrill is probably the best positioned driller in the sector - the company has a young fleet, mainly comprised of the ultra-deep water units. The day rates remain attractive despite a slowdown in the sector and I expect the day rates to recover as the CapEx by the oil and gas companies go up over the next two years. Furthermore, the company's ability to win contracts for its existing rigs and new builds shows that Seadrill has very strong business ties with some of the biggest oil and gas companies in the sector and these companies trust Seadrill with their off-shore operations

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.