Seadrill Continues To Execute Well On Growth Strategy In Latest Quarter

Aug.30.12 | About: Seadrill Limited (SDRL)

Seadrill Limited (NYSE:SDRL) announced its second quarter 2012 results before the market opened on August 27, 2012. Overall, these results were relatively along the lines of what I expected (although EPS was refreshingly higher than what I or analysts expected) and the results further reinforced my convictions that Seadrill is an excellent investment for people that are looking for growth and income in the energy sector. Here are the highlights from the company's second quarter:

  • Seadrill's consolidated revenues totaled $1,122 million for the quarter. This represents an increase of 6.85% over the $1,050 million in revenue that Seadrill had in the first quarter.
  • Seadrill's operating profit was $483 million in the second quarter. This represents a 5.9% increase from the previous quarter.
  • Seadrill reported an EBITDA of $634 million in the quarter.
  • The company reported net income of $554 million. This works out to $1.12 per share.
  • Seadrill once again increased its dividend. The new regular quarterly dividend is $0.84 per share.

These results show that Seadrill's growth strategy is continuing to pay off, as it has for the last several quarters. The company saw growth in revenues, operating income (operating profit), and operating cash flow compared to the preceding quarter. EBITDA and net income also increased significantly compared to the preceding quarter but that was also partly due to a one-time gain on a financial item - as will be discussed later. Seadrill also grew its shareholders' equity and reduced both short-term and long-term debt during the quarter. Net interest bearing debt increased due to the company decreasing its cash on hand.

Over the weekend, I submitted an article to Seeking Alpha (published early on Monday) that discussed how the mobilization and repositioning of three jack-up rigs would have a negative effect on Seadrill's second quarter results. This can be seen in the poor economic utilization rate of Seadrill's jack-up fleet. Seadrill's jack-up segment achieved a 79% economic utilization rate in the second quarter compared to 98% in the first. This poor performance is not due to any operational problems at Seadrill. Rather, it is simply unfortunate timing of contract terms. The West Triton and West Defender (formerly Offshore Defender) were being mobilized to new locations and the West Vigilant only operated for three weeks due to its former assignment being completed. That rig is currently being repositioned. The West Vigilant is currently the only jack-up rig that Seadrill has available this year and the company expects to sign a contract for it shortly.

Seadrill did not materially suffer from the downtime due to blow-out preventer maintenance in the second quarter. This maintenance, which I discussed in my previous article (linked above), is an industry-wide issue that is causing downtime in ultra-deepwater fleets. Seadrill managed this quite well in the second quarter and the economic utilization rate of the company's floater rigs increased by 1% versus the preceding quarter. This segment of Seadrill's fleet achieved a 95% economic utilization rate compared to 94% in the previous quarter. This downtime looks likely to be an issue in the third quarter as well.

Seadrill has suffered 90 rig days of downtime so far in the third quarter. At the time of the first quarter report, which came about halfway through the second quarter, the company had suffered 20 days of downtime. So, it does appear that the negative impact due to downtime will be much worse in the third quarter than in the first or the second. Seadrill states that it has resolved this problem and the company seems to expect that this will not be as big of a problem going forward. This issue and similar issues related to the blow-out preventers have been plaguing the entire industry since the Macondo disaster of 2010. Seadrill has, overall, been handling it much better than its peers and has one of the best records of keeping downtime to a minimum.

Seadrill enjoyed some success with its tender rig segment during the quarter, even though the economic utilization rate for the rig segment decreased slighty. Seadrill stated in its earnings report that customers continue to show strong interest in the tender rig concept. The company reports that dayrates for these rigs are increasing and that customers are becoming more interested in longer-term contracts than they used to be. The earnings from this segment of Seadrill's fleet prove this. The company's tender rigs brought in $183 million in contract revenue in the second quarter. This compares favorably with the $169 million that this fleet segment brought in during the first quarter. This is even more convincing because of the lower economic utilization rate. That lower, although still very good, rate acted as a drag on revenues quarter over quarter. The fact that this was achieved despite this lower economic utilization rate makes it all the more evident that the company's tender fleet is becoming a source of growth for the company. Seadrill is the only major offshore drilling company with a presence in this market and this could prove to be beneficial for Seadrill.

Seadrill also strengthened its forward earnings potential in this quarter. In its earnings conference call, Seadrill states that it has secured sufficient new contracts and commitments to push its earnings backlog to $20.3 billion. This is the highest backlog that Seadrill has ever had. Competitors have also been seeing increasing backlogs. This all points to continuing and growing strength in the offshore drilling industry. This is equal to 18 quarters of revenues based on the second quarter revenues. In other words, Seadrill could keep generating revenues at its current level for four-and-a-half years without securing a single new contract! In these uncertain economic times, that is a good position to be in. At the very least, it should make it easier for an investor in Seadrill to sleep at night.

Earlier in this article, I mentioned that Seadrill benefited from a one-time financial item during the second quarter. This is due to a windfall from the SapuraKencana merger that was the source of funds for last quarter's special dividend. I discussed this in a previous article posted to this site. In the second quarter, Seadrill recorded a non-cash gain of $169 million due to this merger. Additionally, SeaDrill sold 300 million shares of SapuraKencana in the second quarter. This produced a gain of $84 million. Thus, Seadrill's total gain from this transaction was $253 million. This works out to approximately $0.54 per share. Some of the money that Seadrill received from this merger was distributed to stockholders in the form of a $0.15 per share special dividend that was declared and paid last quarter.

Seadrill raised its dividend this quarter because the company's higher quarter over quarter cash flow appears to be sustainable. The new dividend is $0.84 per share per quarter or $3.36 annualized. At the end of the second quarter, Seadrill had 468,262,574 shares outstanding. This increased dividend will thus cost the company $393 million per quarter. Seadrill's operating cash flows are now up to $482 million so that company certainly does appear able to sustain this going forward. The aforementioned downtime will be a drag on the company's cash flow in the third quarter; however, this will be offset by West Leo and West Capricorn being in operation for a full quarter (West Capricorn in particular will have a large positive impact) as well as the two jack-ups that were being mobilized in the second quarter returning to work.

Overall, this was a very good report. Seadrill is continuing to execute very well on its growth strategy. Ultimately, this should prove quite beneficial to investors.

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.