Global Energy Trends Will Unlock Premium Deepwater Contracts

Key Takeaways

• Seadrill's advanced fleet, digitalization, and proprietary technology position it for industry-leading margins, pricing power, and sustained cash flow in a multi-year offshore upcycle.
  
• Accelerated offshore activity and strategic customer shifts signal contract backlog growth and operating leverage well above consensus, supporting outsized earnings and shareholder returns.
  
• Seadrill faces margin and earnings pressure from energy transition, ESG trends, aging fleet costs, industry oversupply, and high leverage tied to past restructuring and legal disputes.

Catalysts

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

• Analyst consensus views long-term Brazilian contracts and $1 billion in backlog as providing revenue visibility, but this likely understates the impact: accelerated exploration, expanding licensing rounds, and super-major re-engagement in Brazil suggest backlog growth could easily surpass consensus forecasts, pointing to significant top-line revenue upside through 2028 and beyond.
  
• While analyst consensus expects improved net margins and earnings from managed pressure drilling (MPD) adoption, the company's leadership in this technology-supported by proprietary training and demonstrated ability to win premium U.S. Gulf and Brazil contracts-positions Seadrill to set industry pricing and secure materially higher margins as MPD becomes mandatory across more basins.
  
• Seadrill's modern, high-specification fleet is uniquely positioned to capture rising demand as global underinvestment in oil and gas production triggers a multi-year offshore drilling upcycle, driving both day rates and utilization above recent historical highs, which could deliver substantial operating leverage to revenue and EBITDA.
  
• The convergence of global energy security priorities and a strategic shift by key customers from onshore to offshore, with projected deepwater spending growth exceeding 80% in 2026 and 130% in 2027, positions Seadrill to unlock record contract backlogs and sustained cash flow generation.
  
• The company's advanced digitalization (West Minerva center) and highly trained workforce via Seadrill Academy represent a structural advantage, which-combined with a disciplined capital strategy and lowest peer leverage-enables outsized earnings growth and potential return of capital to shareholders even as competitors face higher reinvestment risk or obsolescence.

Seadrill Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Seadrill compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Seadrill's revenue will grow by 9.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.0% today to 26.9% in 3 years time.
• The bullish analysts expect earnings to reach $459.4 million (and earnings per share of $7.4) by about August 2028, up from $77.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 23.1x today. This future PE is lower than the current PE for the US Energy Services industry at 13.6x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Seadrill Future Earnings Per Share Growth

Risks

• The acceleration of global energy transition and decarbonization initiatives threatens to reduce long-term demand for offshore oil, which could decrease fleet utilization and put persistent pressure on Seadrill's revenues and EBITDA.
  
• Structural capital allocation trends toward renewables and growing ESG mandates may limit investor appetite for oilfield service companies like Seadrill, which could drive up its cost of capital, complicate refinancing, and ultimately weigh on net margins and earnings.
  
• The company's exposure to an aging fleet-with several cold-stacked rigs requiring significant capital for reactivation or upgrades-creates a risk of declining competitiveness in dayrate negotiations and increases the possibility of asset impairment or idling, which would negatively impact both revenue and EBITDA.
  
• Persistent rig oversupply in the industry, highlighted by regional temporary gluts and ongoing stacked capacity, may lead to heightened pricing pressure and lower average dayrates, compressing Seadrill's margins and reducing the upside for earnings growth even if utilization recovers.
  
• High leverage from prior bankruptcy and restructuring, combined with episodic legal liabilities (such as the recent Sonadrill JV judgment and long-running disputes in Brazil), could limit Seadrill's ability to invest in modernization or survive downturns, threatening both long-term net margin stability and future earnings growth.

Valuation

• The assumed bullish price target for Seadrill is $76.57, which represents two standard deviations above the consensus price target of $42.83. This valuation is based on what can be assumed as the expectations of Seadrill's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $32.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $459.4 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.1%.
• Given the current share price of $28.6, the bullish analyst price target of $76.57 is 62.6% 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.