Oil’s Plunge Came at a Bad Time for Seadrill

Citigroup’s Mukhtar Garadaghi and Nikhil Gupta explain why the fall in oil prices is bad news for Seadrill (SDRL):

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The rapid fall in oil price has coincided with budgeting season for the industry and is likely to have lasting implications, with more pronounced effects for the services sector. Capital discipline is likely to gain further focus, with our Oil Vision database pointing to 30% lower activity levels stress testing projects at $70/bbl vs $100/bbl. For OFS, an industry dependent on continued sanctioning of new investment this is likely to lead to reduced visibility, lower asset utilisations and hence lower margins in the near and medium term. Our growth estimates are lowered across the sector to reflect a slow-down in investment, especially at the top-end of the cost curve (LNG, heavy oil, parts of deepwater). This places the sector on 9x 2016E earnings (vs market at 12x), however we see 25%+ downside risk to earnings if lower commodity prices are sustained…

We downgrade Seadrill to Neutral/High Risk from Buy…A combination of disappointing exploration, further FID delays and increased oil price uncertainty lead to a 10% reduction in our medium-term rig demand forecast. Combined with significant supply added in 2015 this is likely to extend the current market weakness into 2016, which could materially affect Seadrill's ability to sign (and hence finance) the next wave of its newbuilds. We see increased risk of dividend cuts to maintain the leverage ratio within covenants.

Shares of Seadrill have fallen 43% so far this year and 17% in October alone, so it probably shouldn’t come as a surprise that its shares have gained 1.7% to $23.44 at 12:28 p.m. today–even as the price of oil continues to fall.

In fact, it’s a good day for offshore drillers all around, as Atwood Oceanics (ATW) has jumped 2.3% to $40.80, Rowan (RDC) has climbed 2.1% to $22.923 and Transocean (RIG) has advanced 0.7% to $28.98 and Noble (NE) is up 1.1% at $19.72.