4. Seadrill Limited (NYSE:SDRL)
52 Week Range: $36.01 – $56.46
Current Share Price: $36.54
Number of Hedge Fund Holders: 41
Analyst Upside Potential: 62.23%
Seadrill Limited (NYSE:SDRL) ranks 4th on our list of best-depressed stocks to buy heading into 2025. It operates in offshore drilling, primarily for the oil and gas industry. They specialize in drilling in various seawater depths from shallow waters to more than 12,000 feet around the world. The company operates through a fleet of specialized vessels and rigs including, drillships, Semi-submersible Rigs, and Jack-up Rigs.
In the second quarter of fiscal 2024, Seadrill Limited (NYSE:SDRL) reported an EBITDA of $133 million on total operating revenues of $375 million, resulting in an EBITDA margin of 35.5%. The company had a strong first half of the year ending June 2024, achieving a combined EBITDA of $257 million. However, expectations for the second half have been lowered due to revised contract start dates for two rigs moving to Brazil and uncommitted availability on other rigs.
Management is preparing for a transition year in 2024, operating fewer rigs while focusing on long-term contracts and necessary maintenance. The company is willing to incur idle time to reposition and reintegrate rigs effectively. For instance, the West Polaris was relocated from a contract in India to a market-rate contract in Brazil.
Operationally speaking, 5 rigs of the company achieved nearly 100% uptime during the quarter, showcasing strong performance and commitment to continuous improvement. Moreover, it also generated $79 million in cash flow from operations and $36 million in free cash flow during the quarter.
Patient Capital Management stated the following regarding Seadrill Limited (NYSE:SDRL) in its Q3 2024 investor letter:
“Energy names disappointed in the quarter following commodity prices lower throughout the period. We took the opportunity to add to our highest conviction ideas. We look to names that have idiosyncratic opportunities and are attractive in a variety of different commodity price environments. Many see risk to energy prices over the next year as supply is expected to outstrip demand by 1.3mb/d even before assuming any incremental OPEC supply comes onto the market. With commodities, consensus is rarely right. We assess companies on through cycle returns and normalized prices. From this perspective, we see a handful of attractive opportunities, including Energy Transfer (ET), Seadrill Limited (NYSE:SDRL) and Kosmos (KOS).
Seadrill benefits from a consolidated industry, with more rational players, and an emerging supply and demand imbalance. We think over time as offshore drilling plays a bigger role as the marginal producer, Seadrill will benefit from more attractive contract prices.
Seadrill Limited (SDRL) is the fourth largest pure play deepwater drilling specialist. The company emerged from bankruptcy in February 2022 with a net cash position. The company is set to benefit from limited supply and increasing demand in the deepwater drilling rig market. Nearly half of all deepwater drilling rigs in the world were scrapped during the last decade. In addition, player consolidation puts the industry in a more rational position than we have seen historically. As land-based oil production growth comes under pressure, offshore production is receiving renewed interest. With a highly specialized rig base, the company is benefiting from increasing prices which are leading to strong FCF yields given the limited need for CAPEX. The company has committed to returning 50% of free cash flow to shareholders via dividends and buybacks. Over the last 12-months, the company has reduced shares outstanding by 17%. As old contracts roll-over and new contracts are signed at the higher day rates, operating profit and FCF are expected to expand dramatically. Seadrill could either consolidate the space or be acquired.”
