It’s important to watch how Seadrill manages its fleet. As vessels are added or subtracted it can have a noticeable effect on the company’s quarterly results. For example, in this past quarter, the additions of both the West Eclipse and the West Hercules boosted both revenue and fleet utilization while the sale of West Janus helped to boost profits.
What to expect next
Don’t expect these portfolio adjustments to slow down as Seadrill is in the midst of a major growth phase. The company has 19 rigs under construction, which are expected to be delivered between now and the end of 2015. So far, 10 of those newbuilds have already secured long-term contracts. Having a large contract backlog is crucial to Seadrill’s business because it enables the company to fund its growth, maintain its balance sheet all while funding a very strong dividend.
As last count the company’s backlog stood at $19.1 billion, which is down $1.9 billion from its previous report. However, this decrease is largely related to the sale of its tender fleet to SapuraKencana, which accounted for virtually all of the decrease. Seadrill does have a few vessels not currently under contract; however, it is involved in active discussions and expects to announce new contracts for all these units over the coming months. While this is an area to watch, given the strong offshore market these days there is no reason to be concerned.
This strong backlog gives Seadrill the clarity of earnings to pay out a very substantial dividend. That backlog, when combined with its excellent results this quarter, enabled Seadrill to raise the payout to $0.88 which implies a current yield of about 8.7%. The payout looks very secure which has been enhanced by the company’s ability to drop down assets to Seadrill Partners LLC (NYSE:SDLP). The company can pull this important new lever to free up capital to pursue growth opportunities by shedding slower growth assets.
Foolish bottom line
Seadrill delivered its best quarterly operating results ever. The future looks even brighter as the company continues to build its fleet to take advantage of the major growth opportunities in offshore drilling. Best of all, investors are being paid very well to hold shares and will likely be paid more in the future as the company executes on its plan.
The article Drilling Down Into Seadrill’s First-Quarter Results originally appeared on Fool.com.
Matt DiLallo has the following options: Short Jul 2013 $35 Puts on Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill.
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