Digging Deep Into SeaDrill

| About: Seadrill Limited (SDRL)

By Ahmed Ishtiaq

SeaDrill (NYSE:SDRL) owns ships and mobile rigs that operate in ultra-deepwater, including 10 semisubmersible rigs and four drillships. If there's oil at the bottom of the deepest seas, SeaDrill wouldn't mind drilling for it. The company reported extremely impressive second-quarter results, which exceeded market expectations. Moreover, the company announced new contracts and commitments worth $7.6 billion.

Impressive earnings and future growth prospects through new contracts pushed the stock price up. As a result, the stock has had an exceptional summer and gained almost 17% over the past four months. The stock was trading at $35 at the end of June, but closed at $41.01 on Nov. 1, recording a gain of almost 17%.

Click to enlarge image.

Husky Contract in Newfoundland

SeaDrill is close to winning a contract with the Canadian Energy company, Husky Energy. Husky wants a rig for five years to drill delineation and exploration wells in less than 130 and 450 meters of water, respectively. SeaDrill has proposed either of its two Moss Maritime CS60-design semisubs, West Rigel and West Mira. Both of the rigs being proposed are under construction at present. SeaDrill will get delivery of its rigs by 2015, which coincides with the white rose extension development plans of Husky. It will be the second contract for SeaDrill this year off Newfoundland, after a three-well program with Statoil (NYSE:STO) in May. SeaDrill's main rival for the Husky contract was Fred Olsen Energy, which offered its semisub Bollsta Dolphin.

However, Bollsta Dolphin has secured a long-term contract from an undisclosed client. It is believed that the rig will be drilling development wells for Chevron (NYSE:CVX) on the Rosebank project. The Fred Olson rig contract is worth $1.06 billion over five years including a mobilization fee of $42 million. The contract has an additional $40 million price tag to install a second blow-out preventer. The overall capital cost of Bollsta Dolphin will be about $740 million. The contract value equates to a day rate of about $582,000 for the harsh-environment semisub. The analysts believe that SeaDrill is likely to command a similar day rate on Husky's contract. At such a rate, Husky contract will be a great addition to already impressive collection of contracts.

Expected Takeover of Asia Offshore Drilling

Recently, SeaDrill bought 12 million shares of Asia Offshore Drilling (NYSE:AOD). The shares were acquired at a price of $5 per share, which took SeaDrill's stake in the company to 64.23%. As a result, the company plans to go ahead with the launch of mandatory cash offer for the remaining shares of AOD. Asia Offshore Drilling has three KFELS Mod V-B class jack-up rigs under construction at Keppel FELS in Singapore. The rigs will be delivered by the third quarter of 2013. Acquisition of AOD will increase the portfolio of the company substantially. AOD announced that a company will take the AOR-1 for a three-year period for $197 million, plus a $39.5 million mobilization fee.


SeaDrill's major competitors are Transocean Ltd (NYSE:RIG), Ensco PLC (NYSE:ESV), and Noble Corporation (NYSE:NE).




















EPS Growth





Operating Margin





Net Margin










Debt to Equity





Source: Morningstar.com.

SeaDrill is trading at a relative premium compared to its peers. Almost all of its competitors have better multiples than SeaDrill. However, most of its peers show negative or poor margins and considerably low ROE. SeaDrill has the highest operating margin compared to its peers. Furthermore, the company has the highest ROE in the group. The only red flag for SeaDrill are its high levels of debt. The company has a debt-to-equity ratio of 1.5, considerably higher than its peers.


Global economy will come out of the current slump, which will result in increased demand for energy. As a result, the demand for SeaDrill's services will be high in the future. At the moment, the company has an order backlog of over $20 billion. The company is working aggressively to win contracts and ensure revenues. An order backlog of $20 billion gives the company a reasonable amount of surety in terms of its revenues. I expect the company to continue its impressive growth in contracts. Based on the multiples, the stock looks expensive, but growth prospects make it an attractive long-term investment.

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 Ahmed Ishtiaq, one of our equity researchers. 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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , , Oil & Gas Drilling & Exploration
Problem with this article? Please tell us. Disagree with this article? .