3. Seadrill Ltd. (NYSE:SDRL)
3-Year CAGR as of February 11: 24.03%
Number of Hedge Fund Holders: 42
Seadrill Ltd. (NYSE:SDRL) provides offshore contract drilling services to the oil and gas industry globally. It owns and operates drillships, semi-submersible rigs, and jack-up rigs for shallow and ultra-deepwater operations in various environments. It serves major oil companies, national oil companies, and independent oil and gas companies.
Its main business is deepwater drilling. In Q3 2024, it earned $263 million from contract drilling, which was flat year-over-year. The revenue from contract drilling depends on how many of the company’s drillships are working and the daily rate they charge. In Q3, some drillships finished their contracts and were taken out of service, which impacted revenue. However, the Sevan Louisiana drillship continued working at a higher rate, which helped balance things out.
As for 2025, Seadrill Ltd. (NYSE:SDRL) has already secured contracts for 70% of its available drillships. The company expects this number to increase as it secures more deals. Its strategy is to operate the “right rigs in the right regions.” It focuses on drillships that can do multiple tasks at once and are mostly newer, seventh-generation models. The company concentrates its operations in an area called the “Golden Triangle,” which includes the Gulf of Mexico, South America, and West Africa, where most deepwater drilling happens.
Due to a favorable industry structure, increasing demand for deepwater drilling, strong financials, and potential for free cash flow growth and shareholder returns, Patient Capital Management added to its Seadrill Ltd. (NYSE:SDRL) position. It said the following 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.”
