Brazil Projects May Improve Future Contract Utilization, But Competition Risks Remain

Key Takeaways

• Strategic focus on Brazil projects and premium assets is expected to enhance revenue and net margins through better contract utilization.
  
• Efficient operations and disciplined capital allocation could boost earnings per share and shareholder returns amid industry upcycle opportunities.
  
• Increasing market competition, deferred projects, and regional rig clustering may challenge Seadrill's revenue stability and growth, affecting profitability and operational flexibility.

Catalysts

Provides offshore contract drilling services to the oil and gas industry worldwide.

• The continued operations and progress on Brazil projects, with rigs like the West Auriga and West Polaris, are expected to generate meaningful EBITDA and cash flow when they begin their new contracts, positively impacting revenue.
  
• Seadrill's strategy to operate a floater-focused fleet with strong contract coverage and premium assets in key regions like the Gulf of Mexico and Brazil could lead to increased contract utilization, positively affecting net margins.
  
• The company plans to focus on optimizing operations in 2025, potentially reducing bureaucracy and adjusting costs, which should enhance net margins by operating more efficiently.
  
• Seadrill has demonstrated a disciplined approach to capital allocation, including successful share repurchases that improve per share performance, positively impacting earnings per share (EPS).
  
• The anticipated industry upcycle and potential recontracting and repricing opportunities in 2026 could drive significant revenue growth and improved shareholder returns.

Seadrill Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seadrill's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.4% today to 18.4% in 3 years time.
• Analysts expect earnings to reach $340.7 million (and earnings per share of $5.3) by about December 2027, down from $418.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $549.2 million in earnings, and the most bearish expecting $300.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2027 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Energy Services industry at 15.6x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Seadrill Future Earnings Per Share Growth

Risks

• The slow pace of contracting and the deferral of drilling projects due to market uncertainties and capital restraint could lead to periods of underutilization, impacting future revenue stability and cash flow.
  
• Increasing market competition and potential downward pressure on day rates may affect profitability and operating margins, particularly as more rigs become available without sufficient demand.
  
• The clustering of rigs in specific regions to optimize operations may limit geographical revenue diversification, posing risks if demand weakens in those areas.
  
• The need to dynamically adjust costs in response to fluctuations in rig utilization and market uncertainty could lead to challenges in maintaining consistent earnings and operational efficiency.
  
• Continued emphasis on share buybacks might limit capital available for strategic investments, potentially affecting long-term growth opportunities and financial flexibility.

Valuation

• The analysts have a consensus price target of $54.78 for Seadrill based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $80.0, and the most bearish reporting a price target of just $42.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $340.7 million, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 8.3%.
• Given the current share price of $37.31, the analyst's price target of $54.78 is 31.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.