Investors shrug at Seadrill's quarterly shortfall

Shares barely budged even after the deepwater drilling company reported an earnings stumble. Here's why.

By Jim J. Jubak Feb 28, 2013 6:47PM
The rigs are coming, the rigs are coming . . .

And in yet more of Seadrill’s (SDRL) aggressive use of its balance sheet, the company will fund its purchase of new, higher margin, ultra deepwater rigs by selling lower margin tender rigs -- in a deal that will close in April.

It’s that aggressive increase in assets -- and its ability to find a low cash cost way to fund it -- that made Thursday’s shortfall on fourth quarter earnings irrelevant to the market.

Shares of Seadrill were up 0.24% as of 1:30 p.m. ET Thursday. EBITDA (earnings before interest, taxes, depreciation and amortization) climbed just 5% for the quarter to $604 million. That missed analyst expectations, lowered in recent weeks on increased downtime for the company’s deepwater rigs, of $619 million in EBITDA.

Total downtime for the company’s fleet came to100 days in the fourth quarter. That resulted in a $60 million hit to revenue in the period. (The day rates that oil companies pay to hire Seadrill’s fleet have stabilized at $580,000 to $620,000, Seadrill reported.)

And here’s why the market has been willing to look past these quarterly numbers. Seadrill
expects delivery of 10 new rigs in 2013 and eight more in 2014 to 2015. That will push the annual EBITDA run to $3 billion by the fourth quarter of 2013 -- up from $2.4 billion in 2012 -- and then to $4 billion in 2015, the company projects.

The company reported its downtime in the first two months of the new quarter had already totaled 117 days. But a key rig has been restored to service, and the company projects it will be able to improve utilization rates for its deepwater rigs to 95% by the end of the first quarter. That would continue the improvement that the company has seen from the low 82% utilization rate in the third quarter to 86% in the fourth quarter.

The stock hasn't gone much of anywhere (well, actually, it’s gone down almost 8%) since I added it to my Jubak’s Picks portfolio on March 2, 2012. That's not surprising given the difficulties the company has had with downtime in the second half of the year. As of Thursday, I’m lowering my 12-month target price slightly to $49 a share from the prior $51. The stock now trades below my March 2012 purchase price of $40.05, so even
with the lower target I’m still looking for a potential gain of 32.8%.

The shares also pay a 9.2% dividend -- based on payouts during the last 12 months. That yield is probably somewhat inflated by the special dividend paid at the end of 2012, but I think it’s reasonable to expect a yield of 7% to 8% or better on these shares if you buy them at the current price.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. When in 2010 he started the mutual fund he managesJubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not own positions in any stock mentioned. The fund did own shares of Seadrill as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Tags: SDRL
Feb 28, 2013 10:47PM
Great article on the entrepreneurial spirit, planning for the future is the key to success, today's investment pays off tomorrow. Something our government needs to learn.
Feb 28, 2013 11:57PM

Mr. Jubak!  I am not remarking on your artical; It sounds pretty factual.  What amazes me is that deep water drilling can compete with

land surface drilling given the expected shale oil availability in the future.  Of course shale drilling is expected to be expensive, but

water drillers ought to be cautious; maybe they know something that I don,t know.  I hope your known alertness will warn us which to bow when when the information becomes public.

Mar 1, 2013 4:22PM
To the (TBTF) Banking Cartel   DIE BANK OF AMERICA DIE  !!
Feb 28, 2013 9:14PM

You're pretty much out-to-sea, Jim. The whole focus is on corruption. Drilling benefits Big Oil. What good is finding more oil, refined into gas, that is too expensive at the pump? Let us know when they start drilling for long-life batteries or some safe naturally occurring infinite supply alternative fuel.

Big Oil = Bush Scam. Bush sabotaged our economy and country.

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