Oil prices are continuously falling, and it is highly possible that 2016 will be a disaster for the offshore drillers in terms of rig contracts. In the face of investors' Seadrill Ltd.’s (NYSE:SDRL) management is speaking out to reassure that the company is quite active in dealing with the ongoing oil industry challenges.
On February 2, Seadrill announced that it has further deepened its cost reduction in 2016, to see off the worst downturn in decades. The cost reduction will likely exceed the company’s target of $200 million, announced back in November 2015. This aggressive reduction in capital expenditure forms a part of the company’s broader strategy, as it attempts to remain operational amid the collapse in oil prices since June 2014. Crude oil producers continue to slash operating and capital costs as drilling activities plunge.
Recently, Seadrill has renegotiated several rig contracts, postponed the delivery of new rigs, and also stopped issuance of dividends; in order to tackle the prevalent challenges. Moreover, the company’s balance sheet is highly indebted; more so than its peers. Its debt to equity is 116.30%, which is higher than Transocean LTD (NYSE:RIG) and Diamond Offshore Drilling Inc. (NYSE:DO) ratios of 62.34% and 45.48%, respectively.
According to Seadrill’s President and CEO, Per Wulff, competitors in the offshore drilling industry need to scrap another 60 to 70 rigs, to stabilize oil prices.However, the company has no intention to retire any of its units as its fleet is among the youngest in the industry. It is awaiting the retirement of rigs by some of its rivals which may resume upward pressure on depressed rates of oil. Once prices rebound, Seadrill intends to buy more rigs at a much lower cost.
We believe that Seadrill’s current price speaks itself regarding the risks. The recent dip in oil price reflects that the company’s stock price is far from recovery. The offshore-drilling company is expected to report its financial results for the fourth quarter of this fiscal, on February 25, 2015. The Street expects the company to report earnings of 46 cents and revenue of $979 million.