Calculated Moves In Brazil And The Golden Triangle Position Company For Robust Earnings Growth

Key Takeaways

• Strategic focus on long-term contracts in Brazil and conversations for future work in West Africa indicate planning for stable revenue and market penetration.
  
• Emphasis on standardized rig fleet and operational efficiency in key geographies, alongside a prudent balance sheet, aims to enhance earnings and cost management.
  
• Seadrill faces challenges like delayed revenue, increased competition, and market volatility, which could adversely affect cash flow, net margins, and financial health.

Catalysts

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

• The moving and preparation of rigs for long-term contracts in Brazil suggest a strategy to secure stable and continuous revenue streams, impacting future revenue positively.
  
• Focusing on highly standardized rig fleet in advantaged geographies, primarily across the Golden Triangle, is expected to improve operational efficiency and revenue generation capabilities.
  
• Maintaining a prudent balance sheet to invest in maximizing the useful life and performance of rigs highlights a strategy for improving future earnings through cost management and asset optimization.
  
• The emphasis on safe, efficient, and responsible drilling operations aims to maximize uptime, directly influencing future earnings by reducing operational risks and potential costs associated with downtime.
  
• Active conversation for future work beyond 2025 in West Africa, driven by key geographies like Namibia and Nigeria, suggests long-term planning for securing contracts that could significantly impact revenue and net margins through continued and new market penetration.

Assumptions

• Analysts are assuming Seadrill's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.3% today to 26.3% in 3 years time.
• Analysts expect earnings to reach $539.9 million (and earnings per share of $8.43) by about September 2027, up from $476.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $659.7 million in earnings, and the most bearish expecting $457.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.5x on those 2027 earnings, down from 5.3x today. This future PE is lower than the current PE for the US Energy Services industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 22.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.22%, as per the Simply Wall St company report.

Risks

• The revision of contract start dates for 2 rigs moving to Brazil and uncommitted near-term availability could delay revenue recognition and impact overall financial performance.
  
• Lowered second half expectations due to challenges like revised estimates and intensifying competition signal potential uncertainty in earnings stability.
  
• Constraints in readily securing contracts and the emergence of volatility in the oilfield services sector underscore risks to predictable cash flow and revenue generation.
  
• While the company is taking steps to navigate through-cycle resiliency, the ongoing market challenges they face, including limited contracting options and increased competition, could adversely affect their net margins and profitability.
  
• The softer outlook for speculative rig contracting mentioned for the remainder of the year, particularly for the Sevan Louisiana and the Phoenix, hints at potential dips in utilization and earnings before interest, taxes, depreciation, and amortization (EBITDA) performance, affecting financial health.

Valuation

• The analysts have a consensus price target of $63.25 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 $57.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.1 billion, earnings will come to $539.9 million, and it would be trading on a PE ratio of 4.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of $38.19, the analyst's price target of $63.25 is 39.6% higher.
  
• 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.