On August 27, before the market opens, Seadrill (NYSE:SDRL) will announce earnings. Consensus analyst estimates are the company to report earnings of $0.74/share, down from 90 day-ago estimates of $0.85/share. With respect to the deployed rigs and day rates, nothing material changed in the quarter. SDRL did redeem $650 million in debt earlier this quarter ("Update: Seadrill Bond Conversion A Done Deal; Little Guys Might Not Benefit", which included a conversion premium of $0.17/share. Despite the financing charges, I would expect SDRL to beat earnings estimates for the quarter on the back of strong operational efficiencies and minimal "games" due to a well-contracted fleet.
Four things to look for following earnings and earnings call are 1) contract activity, 2) overall market trends, 3) comments specifically related activity or partners in Russia and any discussion regarding the 4) dividend.
With 82% of SDRL's fleet under contract through the end of June 2015, the Company is in the best shape with respect to all of the major underwater drillers. However, I am particularly interested in any news regarding the contract of the too-be-launched (third quarter of 2014) semi-submersible Sevan Developer. The West Mira, scheduled for completion in the first quarter of 2015 is under contract at a day rate of $590,000. The failure to contract Sevan Developer would be a blow to both SDRL's bottom line as well as its reputation.
While less significant to the bottom line, two jack-ups, the West Cressida and West Vigilant are scheduled to be out-of-contract in August and November, 2014, respectively. I am interested in learning about any re-contracting successes (or activity). Current day rates are $129,500 and $167,000, significantly less than a drillship or semi-submersible, but still material cost over a quarter if idle.
Overall Market Trends
The overall tone of the market has been decidedly negative, with downbeat analyst reports by Raymond James and Deutsche Bank combined with a downbeat forecast by industry giant, Transocean (NYSE:RIG). Positive news, such as legislation deregulating the Mexican energy sector has been viewed as a "far-away" event. Look for any news about positive short-term trends related to producers seeking to replenish reserves or seek "safer" environments in the wake of recent events in the Middle-East. The good news for SDRL investors is we seem to be at a bottom from an analyst sentiment perspective. Good news will likely have a multiplier effect as sentiment changes and momentum increases. Not yet, but look for positive signs.
SDRL owns a majority stake in North Atlantic Drilling (NYSE:NADL), which recently announced that Rosneft (OTC:RNFTF), Russia's largest oil producer will acquire 30% of NADL. In July, Rosneft agreed to lease six rigs in a $4 billion+ agreement. Due to recent sanctions by the EU against Russia, investors are skittish about this deal. Look for any clarification of the presumably legal transaction to better inform investors and assuage concerns.
SDRL pays a very strong $4.00/share dividend, representing a 10.9% yield as of the August 22 closing price. The dividend was recently increased from $3.92/share and is expected to be unchanged. Investors should listen for the expected commitment by the Company to the dividend as well as any discussion on funding sources.
The author continues to be long SDRL, having recently added to his position. While I would appreciate good news and positive stock movement, my investment thesis is focused on the solid middle-to-long term performance I expect from this well-positioned and contracted stock ("Seadrill: Best Prospects Among The Driller And A 'Buy'"). This article reflects the author's opinions and is not meant to be the basis of an investors' buy or sell decisions. All investors should conduct their own due diligence and make investment decisions solely on their research.
Disclosure: The author is long SDRL.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.