By Ishtiaq Ahmed
Seadrill Limited (NYSE:SDRL) is an offshore drilling company providing offshore drilling services to the oil and gas industry worldwide. The principal business of Seadrill is the operation and ownership of tender rigs, jack-up rigs and semi-submersible rigs. In addition, the company uses drill ships for operations in deepwater, and mid and shallow areas. Seadrill offers extremely attractive dividends and has an impressive history of dividend increases. The company announced an increase of $0.02 in its quarterly dividend, which took its dividend yield to over 8%. At the current stock price of $41.43 and annual dividend of $3.36, the company offers a dividend yield of 8.11%.
In my previous dividend safety article, I briefly analyzed the earnings, debt and cash flows of Seadrill. In this article, I will analyze in detail the cash flows and the debt of the company over the past three years. Further, I will also look at the future expectations and how those expectations can affect the metrics used in the analysis. I have used company filings for my analysis.
Free Cash Flows
Free Cash Flows
Depreciation and Amortization
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC Filings
Over the past three years, net income of the company has shown a mixed trend. At the end of 2009, net income stood at $1,261 million, declining to $1,117 million in 2010. However, net income for Seadrill rose again to $1,401 million in 2011 due to an increase in contracts. Seadrill funds from operations followed the trend shown by net income over the previous three years. FFO for Seadrill declined to $1,597 million at the end of 2010 before increasing again to $1,964 million at the end of 2011.
Cash flows from operations also demonstrated the same pattern as funds from operations. At the end of 2011, cash flows from operations stood at $1,816 million, as compared with $1,452 million at the end of 2009. Seadrill has made significant capital expenditures in the previous three years. The company spent $6.28 billion in capital expenditures during the past three years. As a result, the company generated negative free cash flows in the past two years.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Interest Coverage Ratio
Debt Service coverage
FFO to total debt ratio has deteriorated slightly for Seadrill over the past three years. At the moment, FFO is about 20% of the total long-term debt, which declined from 22% at the end of 2009. The FFO to capital spending requirements ratio has also declined significantly, indicating the firm is not able to meet capital spending requirements internally. The firm borrowed funds to finance its capital spending requirements. At the end of 2009, the company was able to cover its capital spending requirements internally. However, in the following two years, the ratio fell, indicating the firm had to borrow to meet capital spending requirements. During the past two years, Seadrill's debt went up by almost $2.6 billion.
On the other hand, Seadrill looks comfortable in borrowing, based on the coverage ratios of the company. An interest coverage ratio of over six indicates that the firm has substantial room for interest payments. Even though the company increased its debt levels, the interest coverage ratio has been fairly stable. It indicates that the decision to borrow was justified, and the new investments helped augment the operating income to maintain the interest coverage ratio. Further, debt service coverage has shown a decline, but still indicates the firm is able to cover its debt service internally. Based on the coverage ratios, Seadrill should not have any trouble meeting its debt obligations.
Current Year Results and Future Expectations
For the most recent quarter, the company reported EBITDA of $634 million for the, and net income of $554 million. In addition, Seadrill announced that it had started operations with the ultra-deepwater new builds West Capricorn and West Leo in the Gulf of Mexico and Ghana, respectively. Furthermore, North Atlantic Drilling Ltd (OTCQB:NATDF) secured a two-year extension for the semi-submersible rig West Alpha, with a total revenue potential of US$410 million. In total, the company had secured commitments and contracts that took its total backlog to $20.3 billion.
Seadrill has made significant strides in the market, and Transocean (NYSE:RIG) is no longer necessarily the go-to name any more for investors who want exposure to deepwater drilling. Moreover, offshore drilling and energy service demand is on the rise, particularly in North America. These recent contracts give me reason to believe that the company will do well, and profitability will improve further. As a result, the above mentioned metrics will improve for the company.
In addition to its healthy growth prospects, Seadrill's dividend yield is an extremely important factor for the company being a pull for investors. At the moment, free cash flows for the company are negative due to heavy capital expenditures, and its payout is substantially high. However, I believe the firm is on the right track and the new investments should augment operating income and cash flows. A heavy backlog and new contracts provide Seadrill an opportunity to grow its market and achieve higher revenues. I am confident the firm will be able to maintain its current dividend levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.