SeaDrill Ltd. (SDRL) released its first quarter 2012 earnings report on May 14. This was an excellent report that showcases the strength and potential that the company has in the current market environment. Before beginning the analysis, let's take a look at the results. Here are the highlights from the earnings report:
- The company generated first quarter EBITDA of $595 million.
- The company had net income of $439 million for the quarter. This works out to $0.89 per share.
- SeaDrill secured new contracts worth $870 million in total potential revenue.
- SeaDrill increased its regular dividend to $0.82 per share per quarter. The company also announced a special dividend of $0.15 per share.
The company's revenues came in slightly lower than in the preceding quarter. SeaDrill had total revenues of $1,050 million in the first quarter of 2012 compared to $1,059 million in the first quarter. SeaDrill did not specify what caused the decline. This is nothing to worry about, however. Such small fluctuations from quarter to quarter are normal for this company and industry.
The more important things to look at are the operating profit and the net cash from operations which were both up from the preceding quarter. The company reported operating profit of $456 million compared to $436 million in the fourth quarter of 2011. SeaDrill's net cash from operations came in at $454 million compared to $427 million in the preceding quarter.
SeaDrill's operational metrics improved during the quarter (although the metrics were quite good before). The company's economic utilization rate tells us how close a drilling company got to achieving its maximum potential (theoretical) revenue. Here are the numbers that company achieved in the first quarter of 2012 compared to the fourth quarter of 2011:
(click to enlarge)
Source: SeaDrill Q1 Earnings Press Release
As this table clearly shows, the economic utilization rate for every segment of SeaDrill's fleet increased from the preceding quarter. The utilization rates that SeaDrill achieved were very good. The company's utilization rates for both the jack-up and tender rig segments were in line with the highest rates that SeaDrill has ever achieved. The company did achieve some improvement in its floater segment but, at 94%, the floater utilization rate remained well below the best that SeaDrill has ever accomplished. The reason why this rate remained depressed during the quarter is because of rig downtime due to maintenance on the blowout preventer.
Three rigs received maintenance on this device during the quarter and experienced some downtime as a result. This is not a problem that is unique to SeaDrill, most offshore drilling companies have experienced some rig downtime due to BOP (blowout preventer) maintenance in the aftermath of the Macondo spill. The floater segment which is being plagued with this downtime consists of the drillships and semisubmersibles command the highest dayrates of any classification of offshore rig.
This means that poor performance here will have a larger negative effect on SeaDrill's cash flows and profits than if the downtime affected the jack-up segment of the company's fleet. However, even with the downtime, SeaDrill still managed to achieve much better utilization rates than its competitors such as Transocean (RIG) and Ensco (ESV) accomplished over the same period. This means that SeaDrill is doing a better job at maximizing its revenues from its fleet considering its current contracts than any of its competitors are doing.
SeaDrill made a point of describing the fundamental strength in the offshore drilling market in its earnings press release. This echoes some of the statements that Transocean made during its conference call earlier this month which I wrote about last week. SeaDrill stated that dayrates for ultra-deepwater rigs have reached the $550,000 - $650,000 level that marked the high point during the last industry cycle. However, there are now many more customers in the market for rig capacity than there were during the last industry cycle.
Thus, demand has increased and supply has not kept pace with the increasing demand which has led to a tight rig market. SeaDrill notes that it is already in discussions with customers to secure contracts for floater rigs that do not become available until 2014. This is a very telling sign and it reveals that the strong market fundamentals are likely to persist for quite some time.
The company is also seeing improvement in the market for premium jack-up rigs. Dayrates are beginning to trend upward in this market in a similar way to the floater market and, perhaps more importantly, contract lengths are being significantly extended. There is a big reason for this and that is the reduction of supply to the market. Jack-up rig demand began to recover from the industry downcycle in early 2010. However, at this time, rig contractors had a large supply of stacked rigs.
As the contractors began to reactivate these rigs, the market was sufficiently supplied with the capacity needed to meet customer demand. That is now beginning to change because rig contractors do not have many stacked rigs left that can be economically activated. As such, the supply has decreased but demand has not and this is pressuring the market in a way that it did not last year. This has begun to affect dayrates for premium jack-up rigs. SeaDrill predicts that day rates for these rigs will increase by $20-$30,000 over the coming months.
SeaDrill has increased its already substantial income backlog since the beginning of the year. The company entered into new contracts with total revenue potential of $1.9 billion so far in 2012. This has caused SeaDrill's revenue backlog to surge to a new all-time high of $13.8 billion coupled with an impressive EBITDA margin of 60%. The company's high economic utilization rate ensures that it will capture nearly all of this potential revenue. SeaDrill's high margins ensure that as much of this revenue as possible will be reflected in EBITDA and operating cash flow and its dividend philosophy means that the shareholders will share in this prosperity through dividends.
SeaDrill will likely not see much if any cash flow growth in the second quarter. The company has two new rigs, West Leo and West Capricorn, scheduled to begin operations (and thus begin earning money) in April and June, respectively. Another newbuild, West Elara, began working for Statoil (STO) in March and so the second quarter will be the first full quarter that it will be generating cash flow for the company. These favorable events will be offset by the mobilization of two jack-up rigs, West Triton and Offshore Defender. SeaDrill is collecting fees from the customers (the mobilization fee) during this time but this will be realized as contract revenue and thus will not show up on SeaDrill's second quarter financial results.
Another jack-up, Offshore Vigilant, completed its contract with BHP in April and is currently being repositioned. SeaDrill will not be collecting any further revenue from this rig during the second quarter. Additionally, SeaDrill has already seen a total of twenty days of downtime on four ultra-deepwater rigs during the second quarter due to BOP maintenance. This has adversely affected the company's revenues for the quarter. This all positions the company quite well for the third quarter but the second looks as though it will show little if any cash flow growth.
