Seadrill: Net Asset Value

| About: Seadrill Limited (SDRL)

Summary

Replacement cost value is above current prices.

DCF value is contingent upon assumptions of the market participants.

Dayrates, discount rates and estimated operational life have a profound effect on the overall value.

If I were a shareholder of Seadrill (NYSE:SDRL) I may not have the clarity of mind to write an objective piece. The sheer number of negative comments on dozens of SA articles is an excellent indication regarding the sentiment toward this company. However, sentiment aside, like any other business Seadrill has a certain value and it is my job to assess the discrepancy between fair value and what is currently assigned by the market.

I'll be very blunt, I'm happy Seadrill has found itself in this predicament. They were engaged in the business of flipping rigs as much as operating them. The company is single-handedly responsible for UDW oversupply and acted as if it was on steroids by constructing several rigs a year, leveraging every single newbuild and mocking all major competitors in the process. In the meantime, other industry names and pure speculators buoyed by Seadrill's profitable flipping experience entered into speculative newbuild contracts and further exacerbated potential supply imbalance.

With all this said, I'm not going to let my personal view of the company obscure its objective value and this article will focus on Seadrill's net asset value based on replacement cost and DCF models.

I meant to start a series on offshore drillers' Net Asset Values a bit later and really had no intention to start it with Seadrill, but the company is now such a hotly debated topic, it makes sense to present it at this time, especially for the benefit of those who are holding Seadrill from high $30s - low $40s.

First let's start with what Seadrill owns outright. Since its corporate structure is cumbersome most non-professional investors have a difficult time understanding what Seadrill actually owns. The company claims to have a fleet of 69 rigs, but it doesn't own them outright and I have constructed a table to help understand the actual number of rigs attributable to SDRL.

Fleet:

Rig

Year built

SDRL ownership

Related company ownership

SDRL's effective ownership (46% of SDLP, 70% of NADL, 50.1% of Sevan, 50% of Seamex, 66% AOD)

Dayrate

End of Contract

Semisubs

           

West Alpha

1986

0%

100%

70%

539K

07-16

West Venture

2000

0%

100%

70%

431K

07-15

West Phoenix

2008

0%

100%

70%

465K

09-15

West Hercules

2008

100%

 

100%

503K

01-17

West Sirius

2008

49%

51%

72.5%

535K

07-19

West Taurus

2008

100%

 

100%

502K

1q 2018

West Eminence

2009

100%

 

100%

502K

3q 2018

West Aquarius

2009

42%

58%

68.7%

540K

04-17

Sevan Driller

2009

0%

100%

50.1%

410K

06-16

West Orion

2010

100%

 

100%

627K

07-16

West Pegasus

2011

100%

 

100%

467K

08-16

West Capricorn

2011

49%

51%

72.5%

495K

09-17

West Eclipse

2011

100%

 

100%

450K

06-15

West Leo

2012

42%

58%

68.7%

605K

07-18

Sevan Brasil

2012

0

100%

50.1%

404K

07-18

Sevan Louisiana

2013

0

100%

50.1%

350K

05-17

Drillships

           

West Navigator

2000

0

100%

70%

610K

12-14

West Polaris

2008

100%

 

100%

655K

03-18

West Capella

2008

67.5%

32.5%

82.5%

627K

04-17

West Gemini

2010

100%

 

100%

656K

10-17

West Auriga

2013

49%

51%

72.5%

565K

10-20

West Vela

2013

49%

51%

72.5%

565K

11-20

West Tellus

2013

100%

 

100%

502K

1q 2018

West Neptune

2014

100%

 

100%

570K

12-17

West Saturn

2014

100%

 

100%

634K

12-16

West Jupiter

2014

100%

 

100%

567K

12-19

West Carina

2014

100%

 

100%

502K

2q 2018

Jackups

           

West Epsilon

1993

0

100%

70%

278K

12-16

West Elara

2011

0

100%

70%

351K

03-17

West Linus

2014

0

100%

70%

365K

05-19

West Defender

2007

50%

50%

50%

155K

09-20

West Resolute

2007

100%

 

100%

140K

10-15

West Prospero

2007

100%

 

100%

156K

05-16

West Courageous

2007

50%

50%

50%

155K

07-21

West Triton

2008

100%

 

100%

145K

11-14

West Vigilant

2008

100%

 

100%

140K

11-16

West Intrepid

2008

50%

50%

50%

155K

01-21

West Ariel

2008

100%

 

100%

205K

08-16

West Cressida

2009

100%

 

100%

Idle

 

West Freedom

2009

100%

 

100%

225K

04-17

West Callisto

2010

100%

 

100%

150K

11-15

West Leda

2010

100%

 

100%

165K

07-15

West Mischief

2010

100%

 

100%

175K

04-15

AOD I

2013

0

100%

66%

180K

05-16

AOD II

2013

0

100%

66%

180K

06-16

AOD III

2013

0

100%

66%

180K

10-16

West Tuscana

2013

100%

 

100%

167K

05-17

West Telesto

2013

100%

 

100%

265K

06-15

West Castor

2013

100%

 

100%

155K

05-16

West Oberon

2013

50%

50%

50%

171K

05-20

West Titania

2014

50%

50%

50%

155K?

2021?

Tender rigs

           

West Vencedor

2010

42%

58%

68.7%

218K

03-15

T-15

2013

0

100%

46%

123K

07-18

T-16

2013

0

100%

46%

121K

08-18

Clean ownership of rigs:

 

Number of rigs

Number of rigs attributable to SDRL

Semisubs

16

12.42

Drillships

11

10

Jackups

24

19.68

Tender

3

1.6

Average rates:

 

Overall average

Average attributable to SDRL

Semisubs

489K

386K

Drillships

586K

532K

Jackups

190K

154K

Tender

154K

87K

Replacement cost calculation:

I'm not a fan of this particular method, but nevertheless it helps to have a replacement value estimate to go with DCF estimates.

The entire SDRL fleet is comprised of 22.4 UDW drillships/semisubs, 19.68 jackups, and 1.6 tender rigs. Seadrill cleanly owns 20.3 sixth-generation UDW rigs and 2.1 HE rigs. It also owns 2.1 heavy duty jackups and 17.5 regular jackups.

It is difficult to assign a specific value to each rig on SDRL's balance sheet, so I'm going to generalize. New drillships ordered at shipyards in Korea or Singapore have a construction cost of $620-630 million. Most of these orders are done primarily using debt financing, so companies capitalize interest throughout the duration of the construction. In addition, once the rig leaves the yard it has specific equipment and spares added before becoming operational. All in all, ready-to-operate cost approaches $700 million.

I will value UDW and HE floaters on Seadrill's balance sheet at $600 million each by taking into account depreciation that these rigs have already gone through.

I will assign a $400 million value to each HE jackup and $230 million value to each regular jackup valuing them at 85-90% of newbuilt costs. Tender rigs will be valued at $170 million on average.

 

Number of rigs attributable to SDRL

Average price

Total

UDW rigs

22.42

$600 million

$13.45 billion

Heavy duty jackups

2.1

$400 million

$840 million

Regular jackups

17.58

$230 million

$4.03 billion

Tender rigs

1.6

$170 million

$272 million

     

$18.59 billion

The replacement value of the current fleet is $18.59 billion based on the assumptions above. In addition, SDRL has a newbuild program, which I have not accounted for yet. For replacement value calculation I will use the amount SDRL has already paid to shipyards and according to the latest quarterly report that amount stood at $3.5 billion. However, that amount includes partial payments for West Neptune, West Saturn and West Jupiter. I have included these three drillships in my analysis as part of the operating fleet rather than "under construction." Since final payments for these three drillships will be done using a $1.5 billion loan facility, which is not yet on the books, I will simply reduce $3.5 billion in newbuild prepayments by $1.5 billion to offset additional debt.

This adjustment results in total company replacement cost value of $20.59 billion. Seadrill also has investments in Sapurakencana and Archer, which total around $640 million and also there is cash at the end of Q3 of $640 million. Total debt stood at $13.1 billion and equity based on the replacement cost calculation amounts to roughly $8.8 billion or $17.78 per share.

DCF calculation

Assumptions make and break this calculation. Here's a slide from Seadrill's presentation showing revenue and cost structure of operating a UDW rig.

This slide assumes dayrates of $565K per day. To construct my model I will use average dayrates of $480K for UDW fleet from 2017 onwards for the next fifteen years. I will assume that rigs are operating at 94% efficiency and will have three periodic surveys in the process priced at $40 million each to account for possible maintenance and part replacements. After fifteen years the average UDW rig will have $100 million of salvage value.

I will use a WACC rate of 10%, which is calculated by using debt interest rate of 5% and equity discount rate of 17%. Equity discount rate is based on a beta of 2.5.

For jackups I'm assuming an average dayrate of $170K/day at 97% revenue efficiency, average operating cost of $65K/day and current interest expense of $15K/day. Once again three periodic surveys over the next fifteen years costing $20 million each and salvage value at the end of the period of $50 million.

I also will assume that all operating costs will increase at a 2% annual clip and that interest expenses will slowly diminish as principal is amortized.

Using these assumptions I get $580 million per UDW rig and $190 million per jackup, which is quite less than the replacement value calculation. $10K difference in dayrates changes the value of each rig by $30 million. Additional one-year of operations adds 3-4% to the value of each rig. One percent change in WACC changes the value of each rig by $40 million.

Using my assumptions SDRL's current fleet DCF value is $17 billion. If we were to subtract $12.4 billion of net debt, equity would equal to $4.6 billion or $8.8 per share, excluding $1.30 per share in Sapurakencana and Archer. This calculation does not account for newbuild prepayments the company has already made and which accounted for $2 billion in replacement value calculation. Of the newbuilds arriving next year only West Rigel has a firm contract in place and for DCF value purposes others are worth zero. Nevertheless, if one were to account for DCF value to newbuild cost ratio as presumed by the results of this exercise then it would add approximately $3.50 per share if newly built rigs get contracted out at rates of 480K per floater and $170K per jackup.

Conclusion

Valuation is not an exact science. There are many assumptions and the price of the security is dependent upon what the prevailing consensus is at a particular point in time. I have provided my subjective assumptions to further your own analysis of what constitutes a fair price for Seadrill.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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