In an article authored by an analyst and published on Motley Fool, it is highlighted that if OPEC goes right, Seadrill Ltd (NYSE:SDRL) can turn out to be a winner for investors. In event of oil price rise by year 2020, offshore drilling firms are expected to become big winners.
The author mentioned that not all oil drilling is developed equal. They are associated with different cost structures for distinct wells, varying timelines, and even varying quality of the extracted products. This dynamic suggests there are distinct strategies in different segments of the drilling segment. The growth of shale drilling can soon turn into a dramatic fall as oil prices decline, for example.
The companies can reduce expenditures by the month or week onshore based on the oil price movements. However, offshore drilling, especially ultra-deepwater segment, requires years of planning and is less prone to short-term oil price movements. Considering the chaos in the energy industry, firms with revenue certainty will make a place on investors’ radar. Seadrill has a backlog of as much as $7.5 billion and $14 billion for its own fleet and for Seadrill Group, respectively. The group includes SeaMex and Seadrill Partners (NYSE:SDLP).
As it indicates, this backlog provides investors surety that Seadrill will easily go through its operations in next two years. Almost 75% of the company’s floater fleet is under contract for the year, and for 2016 and 2017, 74% and 50%, respectively is the figure. Here, it is important to mention that the jack-up division isn’t quite strong, but then contracts are shorter for shallow-water rigs.
However, 57% of the total fleet’s capacity boasts contract coverage for 2016, so it doesn’t looks as if business will be declining drastically. While U.S. onshore drilling industry saw rig activity decline in 2015, it doesn’t stand equally true for offshore drilling.