Seadrill Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Seadrill Limited is a leading offshore drilling contractor, providing drilling services primarily to the oil and gas industry. Its operations encompass a diverse fleet of drilling rigs, focusing on both harsh-environment and deepwater regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Seadrill operates in a volatile and capital-intensive industry that is extremely sensitive to commodity prices. Here’s a breakdown of their business:

  • Revenues Distribution:
    • Seadrill’s primary source of income is from contracting its rigs for offshore drilling projects. These contracts typically involve day rates plus reimbursements for certain operating expenses.
    • Revenues are sensitive to the day rate, utilization rate of its rigs, and contract terms, all of which depend on the commodity prices, which could be oil, natural gas or a combination.
    • Recently they entered into a Joint Agreement with Angola to create a Joint Venture company providing Well Intervention services. This is a major shift in business from mostly drilling operations.
  • Industry Trends:

    • The oil and gas industry is cyclical, and Seadrill’s business is closely tied to fluctuations in commodity prices. Higher oil prices tend to spur drilling activity, boosting demand for Seadrill’s services, while lower prices have the opposite effect.

    • The offshore drilling market has experienced significant volatility with downturns in the industry, which could be caused by factors like changes in oil prices, supply-demand balance, or broader economic conditions.

    • The industry is currently transitioning from high-cost deepwater rigs to more focus on mid-tier rigs in shallower waters, as this offers a more cost effective alternative for exploration and production.

  • Competitive Landscape:
    • The offshore drilling market is highly competitive, with numerous players ranging from large multinational corporations to smaller regional operators.
    • The competitive dynamics is that the prices are usually driven by utilization, and also that the companies compete in terms of their quality, uptime, equipment, operational efficiencies, experience, technology, and safety records.
    • Competitors include Transocean, Valaris, Diamond Offshore, Borr Drilling, and Noble Corporation, among others.
  • What makes Seadrill different?:
    • Seadrill operates more than 20 floaters (drillships, semisubs), and the focus is in the harsh-environment or ultra-deepwater areas. These are specialized and complex drilling rigs and it is difficult to operate them effectively. However, even if it is difficult it is not impossible for others to replicate.
    • The company has historically maintained a diversified portfolio of drilling rigs, but recent asset sales are narrowing down the focus to harsh and ultra-deep waters.
    • Seadrill has a global reach, operating in various offshore oil and gas producing regions, making it more exposed to global downturns but also offering a more diversified presence.
  • Margins:
    • Seadrill’s profitability depends heavily on day rates and utilization levels of its fleet.

    • Operating costs, including personnel, maintenance, and fuel, can vary widely, which greatly affects profit margins.

    • Given the industry’s cyclicality, margins can swing significantly based on market demand and competition.

Financial Analysis Let’s dive into Seadrill’s financials to understand its health and how it is handling its business:

  • Revenues:
    • Revenue has been volatile and affected by the nature of its contracts. However, a recovery has been underway since the beginning of 2022, as oil prices started rising.
    • Revenues in Q3 2023 were $314 million, a significant increase compared to last year.
  • Profitability:
    • Net income in Q3 was about 78 million, compared to -172 million last year. This shows a strong turnaround due to improved pricing and operational efficiencies.
    • Adjusted EBITDA was $187 million, highlighting better performance by the company due to higher day rates, and better efficiency.
*  **Balance Sheet**:
      *  Seadrill went through bankruptcy which led to restructuring the company and the emergence of new debt and equity holders.
      *    This led to the lowering of the Debt pile from over 7 billion to 2.8 billion dollars, however still at a level that can severely affect performance when the market worsens.
     *  The current assets are just above $1 billion, while the long term debt is 2.8 Billion and total liabilities is around $3.3 billion.
     *   Even though the company had a positive cash flow in this quarter, a lot of capital will be needed to continue operating and paying down debt.

Risks & Resilience Seadrill faces both short-term and long-term risks, but some factors increase its resilience:

* **Risks:**
    *   **Industry Cyclicality:** The oil and gas industry is highly cyclical, making Seadrill vulnerable to sharp downturns, both economically and industry-wide, which is reflected in their historic financial performance. The volatility of crude oil prices will continue to drive demand for drilling, this can be a pro or a con for the company.
    *   **High Debt Load:** Although Seadrill has reduced its debt following restructuring, it still has a significant amount of debt. In an industry as capital-intensive as offshore drilling, being highly leveraged increases a company's vulnerability to downturns.
    *  **Limited pricing power**: Since Seadrill provides commoditized services, there isn't much to differentiate its offering other than operational efficiencies. As such, it often does not get to set the prices for its services, relying on what other companies charge.
    *  **High fixed costs:** A company like Seadrill which needs highly complex machines that may have very specialized maintenance needs, means it is important for the company to always get the highest utilization rates for its fleet, otherwise it is extremely vulnerable.
   *    **Technological Changes:** Although the company has complex, specialized technology, disruption still can come from more efficient technologies or even the emergence of new energy sources that displace demand for oil and gas exploration.
*   **Resilience:**
    *  **Operational Expertise:** The company has been operating for a long time and has built up know how in operating and maintaining complex drilling equipment.
    *   **Shift towards mid-tier rigs:** As the industry becomes more reliant on more economical offshore projects, Seadrill has the fleet with rigs that can cover that market. 
  *   **Global presence:** Diversification across different global markets may help to spread the risks associated with being in the industry and provide a degree of stability.
    *   **Backlog:** Seadrill's current contract backlog at over $2.7 billion provides revenue visibility to withstand the risks and continue to make improvements.

Understandability

Seadrill’s business is relatively simple to understand on a high-level—it provides drilling services. But comprehending its complex financial structure, the specific details of operations, and the nuances of the energy market requires a good level of understanding of finance and the oil industry, which makes it a little less intuitive. However, it is not a very difficult business to understand.

Moat Rating: 2/5

  • Seadrill has a narrow moat based on technology and experience, but there are many players in the market that make the competition high. As a very cyclical industry, the moat could come down and disappear very rapidly. Understandability: 3/5
  • The business is easy to understand on a high level, but comprehending the finances, contract terms, operations, market forces and industry nuances is complex. Balance Sheet Health: 2/5
  • While improved from the bankruptcy, Seadrill still has a high debt level that may jeopardize performance if market conditions worsen. Moreover, it relies on external forces to raise revenue which are unstable, so if oil prices go down, they would have a lot of liabilities but no profits.