New Brazil Contracts And Deepwater Projects Will Boost Future Growth Despite Market Softening And Regulatory Risks

Key Takeaways

• Long-term contracts and focus on Deepwater projects could drive future revenue growth and stabilize earnings.
  
• Cost management and technology adoption might improve net margins and positively impact net earnings.
  
• Regulatory and litigation issues, along with market softening, could negatively impact Seadrill's revenue, margins, and overall financial health.

Catalysts

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

• The announcement of long-term contracts in Brazil commencing in 2026, adding $1 billion in backlog, provides visibility into future revenue growth. This forward-looking catalyst is expected to boost both top-line revenue and stabilize earnings from 2026 onwards.
  
• Seadrill's focus on Deepwater projects, which are expected to see increased demand due to their profitability and lower carbon emissions, could positively impact future revenue growth. As the market rebounds, this strategic alignment is anticipated to improve earnings.
  
• The company’s managed pressure drilling technology is gaining interest, which could lead to additional contracts and increased revenue. The adoption of such technology enhances the rigs’ net present value and could improve net margins.
  
• The reintegration of rigs into the fleet from the Aquadrill merger eliminates costly management fees and achieves synergy targets, which can lead to cost savings and potentially improve net margins and EBITDA.
  
• Despite a challenging market, Seadrill’s disciplined approach to cost management and possible future buyback operations could help in EPS growth. The strategic sale of non-core assets to optimize capital can also positively affect net earnings.

Seadrill Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seadrill's revenue will grow by 9.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.9% today to 19.0% in 3 years time.
• Analysts expect earnings to reach $328.0 million (and earnings per share of $5.2) by about March 2028, down from $446.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $401 million in earnings, and the most bearish expecting $255 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 3.2x today. This future PE is lower than the current PE for the US Energy Services industry at 12.7x.
• 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 9.01%, as per the Simply Wall St company report.

Seadrill Future Earnings Per Share Growth

Risks

• Market outlook shows demand deferral with near-term rig availability, leading to a potentially softening market in 2025 and lower day rates by trade rivals, impacting revenue and earnings.
  
• Regulatory scrutiny in Brazil has caused downtime for rigs, leading to non-revenue days and impacting net margins and operational efficiency.
  
• Litigation risks, including potential penalties from Petrobras and a recent court ruling in Norway, could lead to financial liabilities impacting net margins and cash reserves.
  
• Increased operating expenses and non-revenue days, as seen with some rigs, could lead to reduced EBITDA and pressure on profit margins.
  
• The slow pace of contracting and visible market demand, with some rigs potentially remaining idle or being cold stacked, affects utilization rates and revenue projections.

Valuation

• The analysts have a consensus price target of $50.222 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 $41.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $328.0 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $23.22, the analyst price target of $50.22 is 53.8% 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.