2 days ago
Seadrill: A Battle Between Potential and Risk
Seadrill Limited (SDRL, Financial) is at a crossroads right now. After investors became optimistic about the company, recent results have raised questions about whether the company can keep up its performance amid volatility in the offshore drilling sector. A decrease in rig utilization, higher maintenance costs and falling earnings have all dampened the mood. However, there are good reasons to keep following it. It has signed contracts with leading companies, has kept its fleet up to date and enjoys a solid cash reserve. Even now, respected value investors are watching the company and believing in its rise.
Keeping all the aspects in consideration, Seadrill still isn't an obvious buy, but it's also not one to ignore. People should keep a close watch and wait patiently until the company shows it can carry out its plans well.
Seadrill operates a large and modern fleet of drillships, semi-submersible platforms and jack-up rigs. Currently, the company operates 13 rigs that are under active contract and also has three additional rigs stacked in Namibia and Norway. Since these rigs can be reinstated fast if demand rises, it could boost the company's income. SDRL has won contracts in many regions, including Brazil and the US Gulf of Mexico, from leading energy companies such as TotalEnergies (TTE), Petrobras (PBR), and Equinor (EQNR). In Brazil, SDRL's contracts with Petrobras total more than $2 billion and cover four agreements that will end between 2027 and 2029. The company still sees South America as a major growth region.
Looking closely at its backlog, nearly half the backlog comes from Petrobras which has a BB- credit rating and can be cancelled with a 90-day notice. So, if Petrobras chooses to leave before the contract ends, much of the expected income would be at risk. However, if Petrobras completes the whole contract term, Seadrill will receive the entire amount. Meanwhile, TotalEnergies has 18% of the backlog and contracts that cannot be canceled unless there is a force majeure. Though the total number of backlog contracts is promising, the varied creditworthiness and flexible arrangements of clients increase some instability. Hence, investors should not completely rely on the full backlog.
Source: Author Generated Based on Data
Seadrill's current fleet use, in contrast, tells a better story. So far, about 70% of the fleet is booked for this year, but that number drops to 43% for 2026. Nearly all the rigs in the fleet are recent and advanced such as West Auriga (7th gen) and West Polaris (6th gen). In 2024, the company secured a new backlog of $1 billion for contracts in Brazil at West Jupiter and West Tellus. The company's main strategic goals now are to secure new contracts for West Capella and three drillships and to renew the legacy contract for West Carina. Restarting the West Carina contract at the current market rates is predicted to immediately boost revenues.
Source: Seadrilling Market (Investor Material)
Moreover, offshore development is expected to receive $95 billion in 2025, rising further to $115 billion in 2026. According to predictions, the percentage of energy provided by oil will go from 30% now to 27% by 2050, while coal will fall from 26% to just 6%. It means offshore oil drilling will keep playing a major role in the world's energy sector. The Sevan Louisiana, a 6th generation semi-submersible rig built in 2013 and brought into service in 2014, is considered a key asset for SDRL in the US Gulf. At this moment, the rig is on a contract with Walter Oil & Gas and advanced talks are taking place to extend the deal until July. With so many rigs not being used in the Gulf, getting this contract extension is crucial to holding onto a robust position in the market.
The Q1 2025 results from Seadrill demonstrate a slow beginning to the year, caused by reduced rig utilization and lower contract revenues that affected both income and profits. Although it wasn't all good news, some better contracts in Brazil and the U.S. Gulf helped dayrate numbers and the company still managed to increase management contract revenue. With that, let's find out what is really happening and dig into the nitty-gritty of the company's Q1 results.
Soft Topline Performance Reflects Lower Utilization and Fewer Operating Rigs: Seadrill's Q1 2025 revenue clocked in at $335 million, which is a 9% drop from $367 million annually. The decrease was mainly a result of contract revenue falling from $275 million to $248 million because companies operated fewer rigs and used them less. The rig count went down from ten to nine mainly because the West Phoenix was still stacked and both West Neptune and West Capella worked fewer days. Even though Dril-Quip received higher dayrates due to premium rates in Brazil and the U.S. Gulf, the company's use of its equipment decreased from 97% to 84%, probably because of extra breaks in drilling. Though management contract revenue increased, it did not stop the decline in the company's total revenue.
Revenue Mix Shift Highlights Structural Changes in Operations: Seadrill's revenue mix in the first quarter of 2025 also shows changes in the way it operates. The company's management contract income went up to $61 million due to consistent work under the Sonadrill joint venture. However, because there were fewer customer-requested services, reimbursable revenue fell by $5 million and the 2024 disposal of Gulfdrill rigs on lease led to a $3 million decline in leasing revenue. The change reveals that income is coming more from services as investment offshore becomes more limited. With the start of contracts for the West Auriga, West Polaris and West Capella, amortization of mobilization revenue increased by $11 million. Essentially, these actions prove that Seadrill is being flexible as contract and customer spending fall, though they also show how its major drilling operations are at risk.
Profitability Hit by Maintenance Costs and Rising Depreciation: Seadrill's operating profit fell sharply, from $80 million last year to just $18 million this year. A big part of the $17 million increase in depreciation and amortization was related to investment in new capital and new rigs. The company also saw expenses in management contracts rise 18%, because of more costs for staff and for keeping things running, though other operating expenses stayed about the same. Significantly, the business did not receive the $16 million of one-time income from Brazilian tax credits that it reported last year. Because of increased costs and less income, margins started to shrink significantly. While the cost of rig operations did not change much, the fact that fixed costs increase while income falls puts the company at risk yet offers opportunities, depending on what happens with future demand.
Bottom Line Turns Negative as Free Cash Flow Weakens: The company suffered a $14 million net loss in Q1 2025 versus a $60 million profit for the same quarter last year. The decline was caused by both falling operating income and a 50% rise in tax expenses, mainly because of lost deferred tax benefits and an unprofitable mix of income from different countries. For this reason, earnings per share decreased to a loss of $0.23, down from $0.83. In addition, the business saw operations cash fall to $(27) million which was much lower than the $29 million it received last year, as it spent more on long-term maintenance and its working capital was strained. This development may appear unimportant alone, but it reveals Seadrill's exposure to fluctuating utilization. If rig activity or dayrate efficiency does not improve, the pressure on free cash flow will not be resolved.
Liquidity Remains Strong, But Execution Will Be Key: Last but not least, Seadrill finished the quarter with a good amount of cash on hand. At the time, the company had $404 million in cash and could use its $225 million revolving credit facility which amounted to $629 million in total available cash. Thanks to its low and easily managed debt and zero approaching maturity, this capital structure gives the company useful flexibility. Even so, a $269 million drop in the contract backlog, down to $2.91 billion, makes us worry about future earnings and demand. In addition, while the company is enjoying better dayrates and is participating in more activities in Brazil, the gains are being canceled out by cost increases and periods where operations are not running.
The company's near-term success will depend largely on how well it can regain stability for its vessels, keep a lid on expenses and ensure it is investing its funds properly.
The company appears to be priced low when you first look at it, although the lower price mainly comes from investors' concerns about the risks involved.
Source: SDRL stock valuation versus peers (Seeking Alpha)
First, the forward P/E GAAP ratio is 22.75 which is higher than Helmerich & Payne (HP, Financial) 17.71, possibly reflecting growth, but the trailing ratio is just 4.10, much lower than HP's 7.11. The difference probably stems from the major drop in profitability in Q1 2025 which indicates investors have doubts about how long the earnings can last. Since Patterson-UTI Energy (PTEN, Financial) and Transocean (RIG, Financial) have undefined P/E ratios, Seadrill seems better positioned, though it still reflects that the whole industry is struggling with earnings. Therefore, the low trailing P/E at Seadrill may only represent a brief problem, as its strong past performance is unlikely to be repeated shortly.
Though the P/B ratio of 0.49 is appealing, especially when set against PTEN's and HP's 0.64 and 0.53 respectively, it also shows that the market is valuing Seadrill's assets less than others. With a pile of rigs and lower utilization, investors are right to ask about how much these assets will earn in the future. Similarly, by measuring EV/EBITDA forward multiple of 4.59, slightly above HP's 4.21 and well below RIG's 6.44, Seadrill appears to be reasonably valued. Even so, this is based on steady EBITDA, but recent developments make that unclear.
The most serious sign is the price-to-cash-flow ratio which has reached 44.37. This is better than HP's 2.67, PTEN's 2.16 and even RIG's 3.81. The wide difference suggests that traders think Seadrill is overpriced in terms of liquidity because Q1 brought low operating cash flow and high spending on maintenance. Even with these low headline multiples, Seadrill's valuation is unattractive as long as this situation remains unchanged.
In short, Seadrill looks inexpensive on some measures, but after further analysis, it's clear that the market is accounting for the significant risk of inconsistent operations and cash flow problems and i see it as a value trap as of now. If the company cannot stabilize utilization, improve how it collects cash and recover margins, the market is treating its current valuation like a protective move, not a chance to buy.
Seadrill's 1-year price chart paints a troubling picture. The past 1-year's price chart for SDRL stock tells a concerning story.
The stock dropped more than 55% in the last year, likely because investors are worried about the company's shifting operations, fewer renewals and less profit. Rig utilization and decreasing cash flows began to lower by Q4 2024 which is when the decline started to pick up pace. Even though May 2025 saw a small rise, the downward trend in the stock has not yet been interrupted by a technical breakaway. Even so, Seadrill is currently near its past support of between $20 and $22. When utilization remains stable and the company's liquidity buffer is secure, there is a good chance the stock could rise to the $2730 level. Yet, the company can only recover fully if it improves its project output and increases margins.
For now, any upside can only go so far and another weak report could send prices back towards their previous lows.
Though the company's share price has fallen by nearly half in just a year, analysts are still expecting some improvement. On average, experts see the average 12-month price target for Seadrill at $41 which is a 77.72% surge from the current level and the high end of the range is $80. It's worth mentioning that $23, the low estimate, is just above the stock's present value, so a limited downside is expected. This positive tilt is supported by analysts, whose average rating of 1.6 and "Outperform" recommendation from ten firms.
That said, I'm not entirely sold on chasing this potential upside just yet. The stock's fundamentals raise valid concerns. I believe the valuation, while cheap on certain metrics, reflects justified skepticism. Unless Seadrill can meaningfully boost rig activity and restore profitability, I view it as more of a speculative hold than a confident buy. I would expect the stock to trade in a range of $20 to $35 over the near to medium term, with a sustainable breakout unlikely unless operational performance significantly improves.
The latest Guru trading in Seadrill outlines a stock at a crucial turning point. During the past three years, investors have gone from buying a lot to reconsidering their positions. Between mid-2022 and late 2023, Gurus added to their positions when the stock rose, a sign they believed in Seadrill's comeback because of better drilling conditions and lower debt. There was little selling at this time which continued to support a positive sentiment.
Things shifted in the market heading into early 2024. Although buying went on, Guru sells started to appear more significantly which meant that that institutional investors were not all on the same page.
Subsequently, the resilience started to decrease. Guru sells escalated, especially during Q4, despite the fact the stock price remained fairly high. Worries about pricing, external factors or how the company works triggered this approach. Still, increased buying in Q1 2025 pointed to the fact that Gurus weren't totally losing their confidence in stocks.
Interestingly, Ray Dalio (Trades, Portfolio), David Einhorn (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio) all increased their holdings of the company. This suggests they believe Seadrill's true value is higher than what the market thinks today. That said, uncertainty remains as Paul Tudor Jones (Trades, Portfolio) sold off 89% of his shares in the stock.
All in all, the confidence is not the same as before, however, Seadrill is still the focus of the Gurus and they are watching it closely.
Seadrill is dealing with several major challenges at this time. Seeing that rig use has dropped and the backlog is smaller, it's evident that the core drilling area is struggling. Still, the company owns modern aircraft and has strong ties in markets like Brazil which gives them a solid start for future growth. The toughest thing is to pick up activity and get higher dayrates locked in so that cash flow increases. It's good that the company has plenty of money on hand and debt is low for it, helping it recover. Nonetheless, being conservative in pricing reflects the real risks of doing business today. At this point, Seadrill has to gain stability before being a true buy. Until that happens, it's not a solid investment.
This article first appeared on GuruFocus.
