Seadrill: West Elara Contract Continues The Trend

| About: Seadrill Limited (SDRL)


Seadrill's subsidiary North Atlantic Drilling announces contract for West Elara.

The backlog increases by $10 million.

Sporadic short-term contracts will likely dominate the scene in 2017.

This article is a direct continuation of the discussion which began in the previous one, "Seadrill: West Phoenix Contract Shows OPEC Deal Has Not Changed Anything Yet."

Seadrill (NYSE:SDRL) subsidiary North Atlantic Drilling (NYSE:NADL) announced that jack-up West Elara had been awarded a one-well extension plus one optional well from Statoil (NYSE:STO). The work will begin as a direct continuation from the existing contract and the backlog for the firm portion of the new contract is $10 million.

I firmly believe that North Atlantic Drilling will be reabsorbed by Seadrill as part of its restructuring as North Atlantic Drilling is not viable on its own due to the debt burden and poor backlog. In my view, North Atlantic Drilling shares remain an avoid for all types of investors and traders who do not already have a position and I think that all North Atlantic Drilling contracts should be viewed in the context of its parent's restructuring.

The exact dayrate for the West Elara contract was not provided. The duration of the one-well contract was not provided as well, so we can only guess what kind of dayrate was assigned.

Previously, West Elara was on a contract with Statoil from March 2012 to March 2017. The dayrate was $318,000. I estimate that the new dayrate was in the $160,000 - $175,000 range, a 45% - 50% discount from the previous one which assumes work for about 2 months. If the well could be completed in 45 days, the rate could be as high as $220,000, but such an estimate looks unrealistic to me.

The fact that West Elara contract immediately followed the West Phoenix contract may create some cautious optimism among investors. However, the contracts look fully in line with estimates for this year - sporadic opportunistic contracts at or near rock-bottom dayrates. There is no surprise that news of the contract failed to create any meaningful movement in North Atlantic Drilling shares:

The stock only gained 8% on the day of the contract announcement, which is a routine move for the stock of North Atlantic Drilling's price and, importantly, float.

As for Seadrill, it looks like the downside momentum intensifies. The stock seemingly broke out of the sleepy downside channel and looks ready for more decisive action:

Of course, any addition to the backlog is positive in the current environment. However, the pace of backlog additions is miniscule. This month, Seadrill (through North Atlantic Drilling) added $27 million to the backlog. This is an insignificant number for a driller of Seadrill's size.

The latest rally in Seadrill shares was based on expectation that OPEC/non-OPEC deal will improve the situation in the offshore drilling market. However, when the dust settled it became clear that we can expect no near-term improvements. At best, in the short-term, OPEC/non-OPEC deal saved the market from further deterioration.

Given the upcoming restructuring, Seadrill does not have the time to reap the positive benefits of the deal if they emerge sometime in the future. The closer to the restructuring date (assuming it will not be postponed once again), the more investors and traders alike will look at actual data rather than hopes and dreams. Actual data tells us that Seadrill's backlog shrinks month after month and the process seems bottomless at this point. Inevitably, this puts pressure on the company's share price.

In case there's no help from oil (WTI does not rise above $55 and Brent does not rise above $57.50), Seadrill shares will gravitate towards lows seen in autumn of 2016.

At the same time, I see increased risks of various rumors as we get close to restructuring date, so betting big on the downside in Seadrill shares is extremely risky. I expect increased volatility as we get closer to the quarterly report and the restructuring date and I believe that those who have no positions in Seadrill will be better off waiting for the results of the restructuring.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I may trade any of the abovementioned stocks.

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