Rising Idle Rigs And Market Risks Will Strain Profits While Durable Backlogs Offer Hope

Key Takeaways

• Growing renewable adoption and shifting capital allocation threaten Seadrill's long-term contract pipeline, earnings visibility, and demand outlook despite current offshore strengths.
  
• Regulatory costs, ESG pressures, and fleet renewal needs may compress margins and profitability even as Seadrill invests in technology and operational excellence.
  
• Softening rig demand, regional instability, and legacy challenges create risks for contract reliability, cash flow, and long-term earnings stability.

Catalysts

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

• While the global demand for oil and gas continues to underpin long-term opportunities for offshore drilling and Seadrill is benefiting from the shift of exploration spending from land to sea, the persistent advancement in renewable energy and government net-zero targets could gradually erode demand for new offshore contracts, limiting revenue growth and backlog duration beyond the next upcycle.
  
• Although recent multi-year deepwater contract awards and a backlog extending into 2028 demonstrate the durability of demand for Seadrill's modern rig fleet, accelerating adoption of electric vehicles and improvements in alternative energy storage threaten to suppress oil consumption over the long term, which may reduce utilization rates and eventually pressure both contract volumes and future dayrates, tightening earnings potential.
  
• While Seadrill's focus on operational excellence and investment in new technology such as its real-time operations center and MPD-equipped rigs could position them to capture higher-margin, complex projects, heightened ESG scrutiny and regulatory requirements could increase costs and delay new developments, compressing net margins and slowing free cash flow growth.
  
• Seadrill's improved capital structure and strategic deleveraging since its restructuring strengthen its ability to reinvest or return capital to shareholders, yet the company still faces risks related to aging stacked assets, which require material capex for reactivation or disposal; delayed fleet renewal could expose Seadrill to higher maintenance costs, undermining net profitability when demand stabilizes.
  
• Despite robust operator interest and increased FIDs forecast for 2026 and 2027, the risk of further capital reallocation by oil majors toward renewable projects, coupled with the risk of white space idle time between contracts, could persistently impact quarterly revenue and limit predictability of earnings, particularly if anticipated offshore demand fails to fully materialize.

Seadrill Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Seadrill compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Seadrill's revenue will grow by 4.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.0% today to 12.1% in 3 years time.
• The bearish analysts expect earnings to reach $175.3 million (and earnings per share of $2.84) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the US Energy Services industry at 12.2x.
• 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

• Seadrill is experiencing near-term softness in rig utilization and increased competition, which is placing downward pressure on day rates and leading to more idle periods; if these conditions persist longer than anticipated it could negatively affect revenues and EBITDA margins.
  
• The company's reliance on winning continuous work for non-stacked rigs involves execution risk, especially in competitive markets like the U.S. Gulf and Brazil, meaning any failure to quickly secure back-to-back contracts could reduce both utilization rates and net profits.
  
• Political and administrative instability in key operating regions such as Angola has already led to delays in contract approvals and market uncertainty, potentially threatening backlog reliability and leading to revenue shortfalls if these risks intensify or persist.
  
• Several idle or long-stacked rigs within Seadrill's fleet would require significant capital expenditures to reactivate; if demand does not materialize as forecast, the need for future investment or extended idle time could pressure free cash flow and increase maintenance costs, ultimately weighing on net margins.
  
• The company's past history of litigation (such as the ongoing Sonadrill joint venture dispute) and financial restructuring, coupled with acknowledged macroeconomic headwinds and uncertainty around capital allocation decisions, could limit access to attractive financing or delay planned shareholder returns, impacting the company's long-term earnings stability and share price.

Valuation

• The assumed bearish price target for Seadrill is $32.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $175.3 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $29.18, the bearish analyst price target of $32.0 is 8.8% 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.