Key Takeaways from Seadrill's 2Q15 Earnings
Cost-cutting measures
To withstand the current industry downturn, offshore drilling companies (IYE) have no choice but to reduce their costs as much as possible. Seadrill (SDRL), along with its peers Diamond Offshore (DO), Noble Corporation (NE), Ensco (ESV), Atwood Oceanics (ATW), Rowan Companies (RDC), and Transocean (RIGN), has announced cost reduction plans to maintain margins in this revenue-dropping scenario. Seadrill’s focus is on reducing or postponing operating expenses, general and administrative expenses, and capital expenditures.
Expenses
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Seadrill’s rig operating expenses were down to $422 million in 2Q15 from $466 million in the previous quarter. This reduction in costs is mainly attributable to the jack-up segment, whose operating costs in 2Q15 were $128 million compared to $168 million in previous quarter. This was probably due to deferred survey and maintenance costs, as the company had mentioned in their first quarter call.
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Under its cost savings initiative, Seadrill also reduced its general and administrative expenses from $75 million in 2Q14 to $61 million in 2Q15. In 1Q15, these expenses were $65 million.
EBITDA
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Even after successful reduction in costs, Seadrill’s EBITDA (earnings before interest, taxes, depreciation, and amortization) fell to $651 million in 2Q15 compared to $711 million in the previous quarter.
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The company states that the decline was mostly driven by idle time on the West Tellus and West Eclipse rigs. It was also due to a full quarter of deconsolidation of SeaMex, Seadrill’s 50/50 joint venture with Fintech Advisory for the ownership and operation of five jack-up units in Mexico with Pemex.
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Compared to 2Q14, Seadrill’s EBITDA has increased by roughly 8% YoY (year-over-year). The company states that EBITDA margins, after adjustment for any disposals between the two comparative periods, increased on a similar basis by 5%.
Management’s EBITDA expectations
Seadrill’s management states that in 3Q15, it expects EBITDA to be approximately $160 million less than in the second quarter, which will be driven by:
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idle time on incremental four floaters in addition to the existing two
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idle time on incremental two jack-ups in addition to the existing two
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planned SPS (Special Periodical Surveys) on two rigs
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renegotiations on existing contracts
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a full quarter of deconsolidation of the West Polaris rig, which is sold to Seadrill Partners
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