Seadrill Ltd. What Part Of 'Success Story' Did Analysts Not Understand Yet?

May.30.14 | About: Seadrill Limited (SDRL)

Summary

Seadrill Limited is a top-tier offshore driller company with an impressive state-of-the-art and highly competitive fleet.

The fleet analysis and financial results for the first-quarter 2014 are showing how successful the company has been so far, with $912 million in cash flow for the quarter.

SDRL is a perfect success story with a future growth and increasing dividends reaching the $1 mark. It is a BUY.

Seadrill Ltd. (NYSE:SDRL)

Click to enlarge

One Seadrill jackup from "world maritime news."

In 2005, the billionaire John Fredriksen founded Seadrill Ltd.

Seadrill Limited provides offshore drilling services for energy companies worldwide. The company operates in three segments: Floaters, Jack-up Rigs, and Tender Rigs:

The Floaters segment offers services, such as drilling, completion, and maintenance of offshore exploration and production wells under contracts relating to semi-submersible rigs and drillships for harsh and benign environments in mid, deep, and ultra-deep waters.

The Jack-up Rigs segment provides services, which include drilling, completion, and maintenance of offshore exploration and production wells under contracts relating to jack-up rigs for operations in harsh and benign environments.

The Tender Rigs segment operates self-erecting tender barges and semi-submersible tender rigs, which are used for production drilling and well maintenance.

The company owns and operates a fleet of 69 offshore drilling units As of Q3 2013 (20 under construction), which consist of:

  1. Drillships. (15)
  2. Semi-submersibles. (19)
  3. Jack-ups. (32)
  4. Tender rigs. (2)
  5. Semi-tender rigs. (1)

It serves oil and gas exploration and production companies, including integrated oil companies, independent oil and gas producers, and government-owned oil and gas companies. The company has a strategic partnership with North Atlantic Drilling Limited (NYSE:NADL). Seadrill Limited is headquartered in Hamilton, Bermuda.

Seadrill has 7,900 employees.

From the last 6K filing:

Seadrill has the highest percentage of its assets in premium classes amongst all drillers. 93% of our floater fleet is 6th generation ultra deepwater and 100% of our jack-up fleet is high specification.

Seadrill Ltd. Associated companies:

  1. Seadrill Partners, LLC (NYSE:SDLP): SDRL owns 39,635,400 shares or 53.2% (Majority holder.) Which represents a gross value of $1.22 billion as of May 27, 2014.
  2. North Atlantic Drilling: SDRL owns 169,663,723 shares or 70.36% (Majority holder.) Which represents a gross value of $1.64 billion as of May 27, 2014.
  3. Archer Ltd. Listed on Oslo exchange: SDRL owns 231,053,239 shares or about 40% of the company. On February 21, 2014, Archer announced an impairment charge of $430 million, which impaired subsequently SDRL fourth-quarter revenues. SDRL stake in the company represents $365 million as of May 27, 2014.
  4. Sevan Drilling ASA listed on Oslo exchange: SDRL owns 50.11% of the total company representing a gross value of $159 million as of May 27, 2014.
  5. SapuraKencana Petroleum BHD listed on the Malaysian exchange: SDRL owns 490 million shares of the company representing about 8%, which is a gross value of $627 million as of May 27, 2014.
Associated Co. SDLP NADL Archer Ltd. Sevan Drilling

Sapura

Kencana

Shares owned by SDRL

Million

39.64 169.66 231.05 ? 490
% owned 53.2 70.36 39.9 50.11 *8.2
Gross value $ Billion 1.22 1.64 0.365 0.159 0.627
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* After selling $300 million in shares this quarter.

Total gross owned by SDRL, in these five companies is around $4 billion as of May 27,2014.

Important links:

- Seadrill Website.

- Fleet status report May 28, 2014.

- Presentation Q1 2014.

- Conference call Q1 20014 transcript.

- Seadrill quarterly report 6K SEC filing.

Complete fleet analysis as of May 28, 2014.

SDRL has a total of 15 UDW drillships, but only 8 are actually used or about to be used and contracted; and 7 are still under construction either at Samsung (5) or DSME (2). The seven new UDW drillships under construction are all ultra-deepwater drillships with a drilling depth of 40,000 feet and water depth of 12, 000'. Many ships are shared with Seadrill's associated companies that I have talked about in my introduction.

1 - Ultra-Deepwater Drillships.

# Drillships

Type/Year

Built

Day rate

K $

Contract

End

Location
1 West Navigator

UDW

2000

589

621

9/14

10/14-12/14

Norway
2 West Polaris

UDW

2008

655.74 3/18 Angola
3 West Capella

UDW

2008

627.5 4/17 Nigeria
4 West Gemini

UDW

2010

656 10/17 Angola
5 West Auriga

UDW

2013

565 10/20 USA
6 West Vega

UDW

2013

565 11/20 USA
7 West Tellus

UDW

2013

635 1/14-7/14 Liberia
8 West Neptune

UDW

2Q2014

Mobilization

570

1/14-10/14

10/14-10/17

USA
9 West Saturn

UDW

3Q2014

Samsung - -
10 West Jupiter

UDW

4Q2014

Samsung - -
11 West Carina

UDW

3Q2015

Samsung - -
12 West Draco

UDW

4Q2015

Samsung - -
13 West Dorado

UDW

4Q2015

Samsung - -
14 West Aquila

UDW

4Q2015

DSME - -
15 West Libra

UDW

4Q2015

DSME - -
Click to enlarge

2 - Semi-Submersibles.

SDRL has a total of 19 semi-submersibles but only 17 are actually used/rented and 3 are still under-construction either at Costco (1) or Jurong (1) or Hyunday (1).

# Semi-Sub.

Type/Year

Built

Day Rate K $

Contract

End

Location
1 West Alpha

4th-HE

1986

535

547

7/16

8/16-7/17

option

Norway

Russia

2 West Venture

5th-HE

2000

441 7/15 Norway
3 West Phoenix

6th-HE

2008

464 10/15 UK
4 West Hercules

6th-HE

2008

497

497

1/17

1/17-1/18 option

Faroe Island
5 West Sirius

6th-BE

2008

490.17

535

7/14

7/14-7/19

USA
6 West Taurus

6th-BE

2008

656.66 2/15 Brazil
7 West Eminence

6th-HE

2009

624.46 7/15 Brazil
8 West Aquarius

6th-HE

2009

540

615

10/15

10/15-4/17

Canada
9 Sevan Driller

6th-BE

2009

419.82 5/16 Brazil
10 West Orion

6th-BE

2010

624.46 7/16 Brazil
11 West Pegasus

6th-HE

2011

555

Market rate

8/14

8/14-8/16

Mexico

Pemex

12 West Capricorn

6th-BE

2011

495.65

9/17

9/17-8/19 option

USA
13 West Eclipse

6th-BE

2011

450

455

455

1/15

1/15-1/16 option

1/16-1/17 option

Angola
14 West Leo

6th-HE

2012

605 6/18 Africa
15 Sevan Brasil

6th-BE

2012

398.56 7/18 Brazil
16 Sevan Louisiana

6th-BE

2013

505

5/14-1/17 USA
17 Sevan Developer

6th-HE

3Q2014

Available

- -
18 West Mira

6th-HE

1Q2015

590 6/15-6/20 Husky
19 West Rigel

6th-HE

2Q2015

Available - -
Click to enlarge

3 - Jack-ups.

SDRL has a total of 32 jackups but only 23 are actually used/rented, one in transit and 8 are still under-construction in Dalian.

# Jack-up

Type/Year

Built

Day Rate

K$

Contract

End

Location
1 West Epsilon Heavy-duty-HE 286 12/16 Norway
2 West Elara Heavy-duty-HE 360 3/17 Norway
3 West Linus Heavy-duty-HE

375

375

5/19

5/19-5/21 option

Norway
4 West Defender BE

Mob.

155.5

6/14

6/14-6/20

Mexico
5 West Resolute BE

140

140

10/15

10/15-10/16 option

Kuwait-Saudi Arabia
6 West Prospero BE 155.77 5/16 Malaysia
7 West Couragous BE

Transit

155.5

7/14

7/14-5/21

Mexico
8 West Triton BE

145

145

8/15

8/15-8/16 option

Saudi Arabia/Kuwait
9 West Vigilant BE 167 11/14 Malaysia
10 West Intrepid BE 155.5

6/14-1/21

Mexico
11 West Ariel BE

Mob.

220

8/14

8/14-8/15

Congo
12 West Cressida BE 129.5 8/14 Thailand
13 West Freedom BE

187

225

6/14

6/14-12/16

Trinidad & Tobago

Venezuela

14 West Callisto BE 150

11/15

11/16 option

Saudi Arabia
15 West Leda BE 165 3/15 Malaysia
16 West Mischief BE

175

195

12/14

12/14-4/15

Congo
17 AOD I BE

180

205

5/16

5/16-5/17 option

Saudi Arabia
18 AOD II

BE

2013

180

205

6/16

6/16-6/17 option

Saudi Arabia
19 AOD III

BE

2013

180

205

10/16

10/16-10/17 option

Saudi Arabia
20 West Tucana

BE

2013

167

Mob.

220

10/14

10/14-11/14

11/14-11/16

Vietnam

Angola

21 West Telesto

BE

2013

149.5

156.98

Mob.

265

7/14

7/14-10/14

10/14-11/14

11/14-3/15

Vietnam

Vietnam

Transit

Australia

22 West Castor

BE

2013

155 5/16 Brunei
23 West Oberon

BE

2013

171.5 5/20 Mexico
24 West Titania

BE

1Q2014

In transit 6 years contact Mexico
25 West Titan

BE

1Q2015

Available - -
26 West Proteus

BE

2Q2015

Available - -
27 West Rhea

BE

3Q2015

Available - -
28 West Tethys

BE

4Q2015

Available - -
29 West Hyperion

BE

4Q2015

Available - -
30 West Umbriel

BE

1Q2016

Available - -
31 West Dione

BE

2Q2016

Available - -
32 West Mimas

BE

3Q2016

Available - -
Click to enlarge

4. Tender Rigs and semi-tender rig.

SDRL also owns two Barges and one semi-tender. There is no tender rig in construction now.

# Tender Rig

Type/Year

Built

Day Rate

K $

Contract

End

Location
1 T15 2013 122.72 7/18 Thailand
2 T16 2013 121.27 8/18 Thailand
3 West Vencedor 2010 213.93 3/15 Angola
Click to enlarge

First-quarter 2014 results snapshot - May 28,2014.

- Revenue for the quarter were $1.221 billion. Decrease revenue was due, in part, to the downtime of the West Alpha, West Phoenix, West Polaris and West Pegasus.

- Earnings were $3.094 billion or $6.54 per diluted share. The financial results of the Seadrill Partners, LLC (SDPL) were deconsolated from Seadrill results.

- For the first-quarter, the company reported $890 million in net operating income as compared to $552 million the previous year. Operating income was affected in part by the partial sale of the UDW drillship West Auriga to SDLP for $1.24 billion.

- SDRL had a strong cash flow of $912 million for the quarter.

- SDRL generated consolidated EBITDA of $788 million for the quarter, despite a rate of utilization of its floaters at 88% which was below average. Excluding the gain of the partial sale of the West Auriga the EBITDA was $624 million.

- Order backlog is $18.8 billion on a consolidated basis.

- North Atlantic Drilling completes its initial public offering of 13,513,514 common shares and began trading on January 29, 2014 on the NYSE under the symbol . Seadrill owns 70.36% of NADL.

- Long-term interest bearing debt was $10.728 billion.

- Shares outstanding as of March 31,2014 were 469,115,743.

Operations:

During the first-quarter SDRL had 17 floaters and 24 jack-up rigs in operation. SDRL manage also 3 tender rigs owns by SapuraKencana.

NADL announced extensive Investment and Co-operation Agreement with Rosneft to partner in the Russian market (Details to follow soon.)

Dividends:

The quarterly dividends have been raised again by 2 cents, and are $1.00 per share or between 10% to 11% depending on the share price. Also, SDRL decided to add a dividend capacity fund by preserving 20% of any net proceeds from the MLP drop-downs. Seadrill has raised already $133 million or 0.28 per shares.

Impressive contract coverage for 2014, 2015 and 2016:

2014 2015 2016
96% to 98% 66% to 72% 47%
Click to enlarge

For 2015/2015, coverage will go to 98%/72% with the West Jupiter and West Saturn soon to be disclosed. I believe that the recent Rosneft/NADL deal to be announced may also have some implication with SDRL, and impact positively the contract coverage indicated here.

Outlook:

The long-term fundamental is very positive for SDRL and its modern fleet. There is a near-term outlook for the ultra-deepwater market that continues to be challenging and will impact negatively the revenues and day rates for the rest of 2014 and part of 2015.

It is a well-known situation that has been over-used by analysts, and I will not extend more on this subject. It is important to look at the fleet and understand what is going on.

The day rate bifurcation issue:

The main factor is the bifurcation of the day rates between modern drillships of the 6th and 7th generation, and the ones older or the 4th and 5th generation. Aging 4th and 5th generation rigs are becoming nearly obsolete in this rapid growing market, and after the Macondo incident that requires higher specification for safety reasons. Some companies may have to accelerate their cold stacking or accept more challenging low day rate to keep their rigs in business a bit longer.

I will use a schema here, that I took from the presentation of Pacific Drilling (NYSE:PACD) which I studied recently, to show how the bifurcation between day rates is widening now.

As we can see, Seadrill Ltd is shielded from a dramatic drop, both in day rate because its fleet is ultra-modern, and also because its contract coverage until 2015 is high.

Conclusion:

Seadrill Ltd. Is the best offshore driller among its peers not only by its size and business structure, but also with its state-of-the-art and modern fleet.

The fundamentals are very strong despite a short softness of the Ultra-deepwater market. I have been amazed by the lack of support by the analyst community in general. Quarter after quarter all the critics and concerns that pushed them to downgrade SDRL were proven false or overblown. Let's take, for example, the issues raised about the high-level debt or the pseudo-unsustainable level of the dividends. The facts are clearly here to prove my point.

Year to date chart:

SDRL Chart

SDRL data by YCharts

SDRL is a successful, well-managed first-class company with an impressive growth potential. Two thumbs up for Per Wullf, CEO and Rune Lundeträ, CFO.

I have been a long investor in SDRL and cannot be more satisfied with what I have seen and heard so far. I am confident that the stock price will recover quickly from its recent lows and will reach the $50, and the $60 mark where it belongs.

Disclosure: I am long SDRL. 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.