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Offshore drilling rig owner
on Wednesday, Aug. 27, before the market opens, and this will be
a key report for the company in 2014. The offshore drilling
industry has gone through something of a slump early in 2014, and
stock prices have struggled as a result. But Seadrill and its
peers have said they expect drilling activity and contracting to
pick up later this year, which will be necessary to keep the
company's eye-popping 11.1% dividend yield alive.
Here are two keys items to watch when earnings are
Will the drilling market improve in 2014?
Across the board, offshore drilling rig owners have said the
first half of 2014 was weaker than they expected. Exploration and
production companies have had little appetite to tie themselves
to multiyear contracts that can cost billions of dollars in an
uncertain energy market with geopolitical risks all over the
But most drilling companies also expect the second half of the
year to be better and have a strong long-term outlook,
particularly in ultra-deepwater. There is good reason for this
bullishness, because more than three-quarters of the new oil
discovered last year was offshore, and over half of it in
ultra-deepwater, Seadrill's wheelhouse. But that long-term
optimism doesn't mean drilling results will be smooth from
quarter to quarter, and the industry is seeing the downside of
that lumpiness right now.
Seadrill has experienced some of the weakness, but even after
the first quarter 96% of its floater fleet was contracted for
2014 and 66% was contracted for 2015. Jack-ups are 97% contracted
for 2014 and 74% for 2015, so Seadrill has been somewhat
insulated from the industry troubles.
What investors should be watching for in the second quarter is
both tangible and intangible (according to management's comments)
evidence that the drilling market is picking up. Seadrill just
signed a contract for the newbuild West Saturn drillship, which
will be completed in September, so that's a tangible positive for
the company. The two-year contract is with an
subsidiary for $497 million, with a one-year extension option.
The potential dayrate of $680,000 would be among the highest the
company has ever received.
More evidence that these dayrates will be the norm for
newbuilds completed over the next year and a half would certainly
help the stock.
An offshore platform operated by ExxonMobil. Source:
Dropdowns improving Seadrill's balance sheet
One key development for Seadrill over the past year was the
, a company that owns rigs and pays a consistent distributions to
investors, much like an MLP. The goal with Seadrill Partners was
to find a way to push assets down to an affiliated company to
generate cash while maintaining an economic interest in the
rigs. You can find a good explanation of the very complex
corporate structure from fellow Fool Daniel Gibbs
The cash generated from such a venture isn't trivial, even for
a $17.3 billion company like Seadrill. Cash proceeds from
dropdowns were $356 million for the West Sirius and West Leo
drillships and another $350 million for West Auriga, which is
being used to reduce debt at Seadrill's level. In the first
quarter, total cash increased $206 million to $1.12 billion and
debt fell $1.08 billion to $12.39 billion.
Deleveraging the balance sheet is key because Seadrill must
pay for 20 new rigs under construction, along with an 11.1%
dividend yield that investors are counting on. Without the
ability to raise cash through dropdowns to Seadrill Partners it's
possible Seadrill would have to go to equity markets to raise
cash, or lower the dividend, which would likely be a negative for
Progress on the balance sheet will be key to continue
throughout 2014, because even the most aggressive dividend
investors has to be a bit squeamish about the ever-expanding
dividend yield and upcoming newbuild spending.
The modern fleet will put Seadrill in a strong
One thing very evident in today's offshore drilling market is
that having a new, technically advanced fleet of drilling rigs
will put a company in better position than its competitors. So
far, Seadrill hasn't had the same revenue and earnings volatility
as competitors, in large part because of that new, technically
advanced fleet with a focus on ultra-deepwater.
Investors need to make sure that the long-term investment
thesis stays intact, with improving contract activity in late
2014 and into 2015 and strong dayrates that make Seadrill's
strong returns possible. Check back to Fool.com for our take once
earnings are released.
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2 Things to Know Before Seadrill Reports
originally appeared on Fool.com.
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