BORR - Seadrill: Buy On Major Contract Awards And Material Share Repurchase Activity

2024-01-04 16:59:28 ET

Summary

• Seadrill Limited secured two major contract awards with Petrobras offshore Brazil for drillships "West Auriga" and "West Polaris" with an aggregate value of $1.1 billion thus increasing backlog by 40%.
• Adjusted for mobilization fees and required additional services, "clean" dayrates are estimated at $450,000 (West Auriga) and $400,000 (West Polaris) which still represent decent numbers for Brazil.
• Reducing 2024 expectations to account for anticipated idle time and upgrade requirements ahead of contract commencement in November but increasing 2025 projections.
• With earnings and cash generation projected to reach an inflection point next year in combination with a healthy balance sheet and ongoing commitment to share repurchases, Seadrill remains a top pick in the offshore drilling space. Reiterating "Buy" rating and raising price target from $60 to $62.

Note:

Seadrill Limited ( SDRL ) has been covered by me previously, so investors should view this as an update to my earlier articles on the company.

Leading offshore driller Seadrill Limited or "Seadrill" finished 2023 on a high note as the company secured two major contract awards which resulted in backlog increasing by a whopping 40% to $3.1 billion (emphasis added by author):

Seadrill Limited today announced that Petrobras has awarded 1,064-day fixed-term contracts to each of the West Auriga and the West Polaris following a competitive bidding process . The contracts are expected to commence in the fourth quarter of 2024 and represent total contract value of approximately $1.1 billion, inclusive of additional services and mobilization fees. The West Auriga and the West Polaris will transition to Seadrill from the existing third-party managers before undertaking the campaigns with Petrobras.

Commenting on the awards, Simon Johnson, Seadrill’s President & Chief Executive Officer, stated, “We have secured long-term contracts for the West Auriga and the West Polaris alongside our four high-specification drillships already working in Brazil. Petrobras is an important and longstanding customer for Seadrill. We are excited to expand our contractual relationship with them and increase our rig count in this key geography.”

The drillships will work at the Buzios field in the Santos Basin offshore Brazil, one of the country's largest pre-salt reservoirs.

The company also released an updated fleet status report containing additional details:

The total contract value for the West Auriga is approximately $577 million, inclusive of mobilization fee and additional services. The total contract value for the West Polaris is approximately $518 million, inclusive of mobilization fee and additional services.

Please note that West Auriga is a 7th generation high-specification drillship whereas West Polaris is a somewhat less capable 6th generation unit.

While calculated dayrates of $542,000 ( West Auriga ) and 487,000 ( West Polaris ) look impressive, it is important to note that these numbers include mobilization fees and the usual requirement by Petrobras ( PBR ) to provide a certain amount of additional services.

Moreover, both rigs are likely to require customer-specific upgrades.

Given these issues, I would estimate "clean" dayrates likely being around $450,000 for West Auriga and $400,000 for West Polaris which are still decent numbers for Brazil.

Assuming an economic utilization of 93% and adjusted EBITDA margin of 38%, aggregate annual EBITDA contribution would calculate to approximately $110 million.

So far, so good.

However, with contract commencements currently scheduled for November 2024 and West Polaris rolling off contract in a couple of weeks, the drillship is likely to sit idle for several months before entering the shipyard for its 15-year special periodic survey and contract preparations later this year.

West Auriga is scheduled to roll off contract in May thus also facing substantial idle time.

In addition to elevated idle time, the rigs are likely to incur material costs for maintenance, periodic surveys and required upgrades.

Accordingly, I am reducing my 2024 adjusted EBITDA estimate from $475 million to $425 million while raising my 2025 projections from $695 million to $730 million as I had already modeled contributions for both rigs. However, my estimate for West Polaris was too low thus the increase to 2025 EBITDA expectations.

Based on a 2025 EV/Adjusted EBITDA multiple of 6x, I am raising my price target from $60 to $62 thus providing for more than 30% upside from current levels:

While the company's 2024 outlook remains muted , profitability and cash generation should increase dramatically next year.

Please note that Seadrill has spent approximately $265 million for buying back almost 6.2 million shares since September with $235 million still available under the company's current repurchase program.

Given the company's best-in-class balance sheet and decent liquidity, I would expect material share repurchases to continue for the time.

Bottom Line

Seadrill secured important long-term work for two drillships offshore Brazil at healthy dayrates with the contract awards boosting backlog by $1.1 billion or approximately 40%.

On the flipside, both rigs are likely to face substantial idle time before commencing their new contracts in November which in combination with required maintenance, special periodic surveys and customer-specific upgrades would hurt the company's profitability and cash flow this year.

However, the awards provide some proof to my thesis of earnings and cash flow generation reaching an important inflection point next year.

In combination with its healthy financial condition and ongoing commitment to share repurchases, Seadrill remains a top pick in the offshore drilling space and as such has recently been added to the 2024 speculative model portfolio of our investing group.

Consequently, I am reiterating my " Buy " rating on the shares while raising my price target from $60 to $62.

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