In a research report issued Friday, Canaccord analyst Alex Brooks reiterated a Sell rating on Seadrill Ltd (NYSE:SDRL) with a NOK75.00 price target, as the company announced that of the four deepwater contracts with Petrobras announced with its third-quarter results, only two will be completed as originally anticipated.
Brooks wrote, “We believe there are two key benchmarks for current deepwater rig contracts. ENI and Ocean Rig signed contracts on 8 January that effectively gave ENI an incremental 20 rig-months on 6G units at a day-rate of $308k. In December, Transocean and Petronas signed contracts on the M G Hulme Jr semisub (4G, 1996 upgrade) at $174k. Diamond Offshore recently commented that rigs are “de-rating” when bidding, ie. 6G units are effectively having to compete on contracts with 5G or even 4G units. We therefore think 6G bidding rates in the low $200s are likely.”
The analyst continued, “The broader issue is what we believe is the increasing desire by rig customers to find ways out of existing contracts. We estimate the present value of existing contracts at Seadrill is $8.8bn, which compares to the current equity value of $6.1bn (and total enterprise value of around $23bn). Currently prevailing day-rates imply new contracts will have a present value that is effectively zero: and hence the extreme sensitivity of the equity market to any contract cancellation.”
Furthermore, “We now estimate that in 2015, Seadrill needs to raise $1.8bn in new capital, largely scheduled amortization and bond bullets. In 2016, after our capex cuts, there is a further $0.9bn; and in 2017, $4.3bn. We do not believe the current market enables Seadrill to generate contract collateral to fund this, and we expect the rig market to turn beyond 2017. We therefore struggle to identify funding sources for Seadrill and believe returns to equity holders, if any, remain far into the future.”
Seadrill Limited, an offshore drilling contractor, provides offshore drilling services to the oil and gas industry worldwide.