Why Seadrill Is Likely Facing More Operational Challenges

Source: Thinkstock

Source: Thinkstock

Seadrill Limited (NYSE:SDRL) is an offshore drilling contractor that provides offshore drilling services to the oil and gas industry worldwide. The company operates in three segments: Floaters, Jack-up Rigs, and Tender Rigs. The Floaters segment offers services, such as drilling, completion, and maintenance of offshore exploration and production wells under contracts relating to semi-submersible rigs and drillships for harsh and benign environments in mid, deep, and ultra-deep waters. The Jack-up Rigs segment provides services, including drilling, completion, and maintenance of offshore exploration and production wells under contracts relating to jack-up rigs for operations in harsh and benign environment. The Tender Rigs segment operates self-erecting tender barges and semi-submersible tender rigs, which are used for production drilling and well maintenance in Southeast Asia and West Africa.

The company has a fleet of 69 units consisting of 15 semi-submersible rigs, 7 drillships, 20 jack-up rigs, 3 tender rigs, and 24 units under construction. Its customers include oil and gas exploration and production companies, including integrated oil companies, independent oil and gas producers, and government-owned oil and gas companies. However, there is likely to be more pain ahead as evidenced by Seadrill’s mediocre quarterly results.

Revenues for the first-quarter of 2014 were $1.22 billion compared to $1,47 billion in the fourth-quarter of 2014. The decrease is primarily due to the deconsolidation of the Seadrill Partners and downtime on the West Alpha, West Phoenix, West Pegasus, and West Polaris. Offsetting these items was the inclusion of the West Auriga, West Tellus, West Vela, West Castor, and West Telesto for a full quarter. On a consolidated basis revenues for the first-quarter were $1,44 billion. Operating profit for the quarter was $890 million compared to $568 million in the preceding quarter. The increase is primarily a result of the gain on sale for the West Auriga and new rigs entering service.

On a consolidated basis, operating profit for the quarter was $574 million. Net financial and other items for the quarter showed a gain of $2.24 billion compared to a loss of $286 million in the previous quarter. Income taxes for the first-quarter were $35 million, an increase of $34 million from the previous quarter. Net income for the quarter was $3.09 billion representing basic and diluted earnings per share of $6.54 and $6.23, respectively. At the end of the quarter, total assets on the books for the company were $27.49 billion, an increase of $1.191 billion compared to the prior quarter. Thus, total current assets increased to $4.03 billion from $2.83 billion over the course of the quarter, primarily driven by an increase in related party receivables and marketable securities resulting from the deconsolidation of Seadrill Partners. Seadrill’s total cash and cash equivalents were $912 million, an increase of $168 million compared to the previous quarter.

What is interesting to note is that no guidance was given for the company for the rest of the year. Further, notice that it compared this quarter to last quarter, as opposed to comparing it to the comparable year ago quarter. Doing this analysis, I find that operating results declined over 20 percent year-over-year. Thus, Seadrill’s report as hints of financial engineering to cover the difficult quarter. Management glossed over the difficult operating environment that the company is facing. Thus, I believe that more pain on the horizon and as such rate Seadrill as a hold.

Disclosure: Christopher F. Davis holds no position in Seadrill and has no intentions of initiating a position in the next 72 hours. He has a hold rating on the stock and a $35 price target.

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