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SeaDrill (SDRL) Q3 Earnings Preview: A Surprise in Store?

Offshore contract driller SeaDrill LimitedSDRL is expected to release third-quarter 2015 results before the start of the trading session on Nov 24.

The company surpassed estimates in three of the trailing four quarters, with an average positive surprise of 20.48%. In the last reported quarter, SeaDrill comfortably beat the Zacks Consensus Estimate by 18 cents. Improved performance by its jack-up rigs and lower operating expenses drove the upside.

Let's see how things are shaping up for this announcement.

Factors to Consider

SeaDrill Limited has one of the youngest drilling fleet among offshore drilling contractors. Also, over 70% of the company's floater rigs are under contract through 2016. This bodes well for the firm and is expected to provide it with a steady flow of income. Economic utilization of the company's fleet has been high over the past few quarters.

However, SeaDrill derives its revenues from companies in the oil and gas exploration and production industry, which remain susceptible to weakness in commodity prices. The weak price environment has curtailed deepwater drilling and dampened equipment demand, which in turn has adversely affected bookings at SeaDrill.

Though some other companies from the drilling space like Transocean RIG have beat estimates in the third quarter, we remain cautious about SeaDrill. Also, brokerage firms have lowered third-quarter estimates for SeaDrill over the past few weeks, suggesting further bearishness ahead.

Earnings Whispers

Our proven model does not conclusively show that SeaDrill is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -2.22%. This is because the Most Accurate estimate stands at 44 cents, while the Zacks Consensus Estimate for SeaDrill is pegged at 45 cents.

Zacks Rank: SeaDrill carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, our prediction is complicated by the company's negative ESP.

We caution against Sell-rated stocks (Zacks Ranks #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter.

Seadrill Partners LLC SDLP has an Earnings ESP of +12.00% and a Zacks Rank #1. The partnership is expected to release earnings on Nov 24.

Ocean Rig UDW Inc. ORIG has an Earnings ESP of +24.32% and a Zacks Rank #3. The company is expected to release earnings on Nov 25.

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TRANSOCEAN LTD (RIG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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