How Valuable Is SeaDrill?
When it comes to the oil and gas industry, assets matter a lot. For companies operating here, there's nothing more important than reserves, rigs, submersibles, and refineries. However, these assets must be capable of generating profitable returns.
Value for money
These returns indicate whether a given company has the capability of using its assets efficiently and profitably. After all, it makes little sense for an exploration and production company to have a lot of acreage, but not the ability to pull out the oil (or natural gas for that matter) within. In short, it pays to find out how valuable these assets are to the company.
Here, we will find out whether a given company's assets are profitable and efficient compared with its peers based on some important metrics:
- Return on assets, or net income divided by total assets, shows how much the company is earning compared against the assets it controls. The ratio is an indication of how effectively the company is converting the money it has invested in reserves, property, and other equipment into net earnings. Higher the value, more profitable the assets are. The metric is pretty useful when used as a comparative measure -- against peers and also against the industry in general. A value greater than 6.1% is what investors should be looking for in this industry.
- Fixed-asset turnover ratio, or revenues divided by total fixed assets (like plant, property and equipment). Fixed assets form a major chunk of total assets for companies in this industry. This metric shows how efficiently the company is using its fixed assets to generate revenues. The higher the turnover rate, the better. A value above 0.55 looks pretty good.
- Total enterprise value/NTM EBITDA shows how expensive the company is when compared against its earnings before interest, tax, depreciation, and amortization in the next 12 months.
With these factors in mind, let's take a look at SeaDrill (NYS: SDRL) and see how it stacks up against its peers:
Return on Assets (TTM)
Fixed-Asset Turnover Ratio
|Transocean (NYS: RIG)||2.3%||0.4||0.75||6.1|
|Ensco (NYS: ESV)||3.2%||0.3||1.09||7.5|
|Diamond Offshore Drilling (NYS: DO)||12.8%||0.8||2.05||6.9|
Source: S&P Capital IQ; TTM = trailing 12 months, NTM = next 12 months.
SeaDrill's assets generate healthy returns when compared with its peers. Additionally, at 6.4%, its ROA is higher than the industry average. However, its fixed-asset turnover needs some work.
Deeper analysis suggests that the company is more expensive when compared against its book value and earnings before interests, tax, depreciation, and amortization. However, this might not be too surprising given SeaDrill's future growth prospects. Demand for premium drilling units has risen significantly. As a result of rising global orders for ultra-deepwater rigs, available rigs had dropped from 18 to 8 at the end of 2010.
The best part is demand is not just concentrated to the Gulf of Mexico. Brazilian and West African discoveries have huge potential to create demand. Additionally, investor confidence in SeaDrill is much higher when compared to its closest competitor, Transocean, following last year's Gulf oil spill.
Foolish bottom line
This isn't the only criterion you can use, although assets generally indicate how oil and gas companies have been faring in terms of operations. You can get a more comprehensive understanding by digging deeper. However, on the surface, SeaDrill seems to be doing fine.
We, at Motley Fool, will help you to stay up to speed on the top news and analysis on SeaDrill. You can start by adding it to your watchlist.
At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Transocean and Ensco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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