Citi revised its stance on Seadrill Ltd. (NYSE: SDRL), raising the stock rating from Neutral to Buy, albeit with a reduced price target to $52 from the previous $60. The adjustment reflects a change in the company's forecast methodology, which now accounts for fewer rig reactivations, increased downtime in 2025, and slightly lower rates for 6th generation floaters.
The offshore drilling sector poses a challenging decision for energy investors, according to Citi's analysis. A slight increase in rig demand by 2026 could lead to attractive free cash flow (FCF) yields exceeding 20%. Despite this potential, the revised forecast suggests a possible decline in the company's EBITDA expectations for 2025.
The investment firm notes that recent market pullbacks and discussions indicate that some of these concerns may already be factored into the current stock price. In light of this, Citi has rearranged its preference order among drilling companies, taking into account the potential for stock buybacks and mergers and acquisitions (M&A) activity.
Seadrill's upgrade to a Buy status is underpinned by the anticipation of more than a 20% FCF yield in 2026, confidence in the renewal of the company's Brazilian rigs at strong rates, and an increased likelihood of the company being acquired.
Concurrently, Citi downgraded Transocean Ltd . (NYSE: NYSE:RIG) to a Neutral rating with a price target of $4.50, citing that the strengths of their contract are already well acknowledged and that their valuation remains at a premium based on more conservative assumptions. Additionally, Transocean could potentially acquire Seadrill, as per Citi's analysis.
In other recent news, Seadrill Limited has shared its financial results for the second quarter of 2024. The offshore drilling contractor reported an EBITDA of $133 million and operating revenues of $375 million. However, due to revised contract start dates and uncommitted rig availability, the company has adjusted its earnings forecast for the second half of the year.
In a move to streamline operations, Seadrill will terminate its secondary listing on the Oslo Stock Exchange on September 9, focusing solely on the New York Stock Exchange. The company's full-year EBITDA is now projected between $315 million to $365 million, with revenues expected to be $1.355 billion to $1.405 billion.
The recent developments also include the completion of a $500 million buyback and the initiation of another program of equal value. While the company faces near-term challenges due to the volatility and demand uncertainties in the deepwater drilling industry, it continues to be driven by strong market fundamentals.
InvestingPro Insights
As Citi adjusts its stance on Seadrill Ltd. (NYSE: SDRL), highlighting the potential for a 20% free cash flow yield and a positive outlook on rig renewals, key metrics from InvestingPro provide a deeper financial perspective. Seadrill's market capitalization stands at $2.46 billion, reflecting its scale within the offshore drilling sector. The company's P/E ratio is notably low at 5.82, suggesting that the stock might be undervalued compared to earnings. Moreover, the adjusted P/E ratio for the last twelve months as of Q2 2024 is 8.79, which could indicate a change in earnings or stock price since the standard P/E was calculated.
InvestingPro Tips include a closer look at Seadrill's financial health and market performance. The company's revenue growth for the last twelve months as of Q2 2024 was a robust 32.29%, a sign of strong business expansion. However, this should be balanced against a quarterly revenue decline of 10.0% in Q2 2024, which may reflect the increased downtime and lower rates mentioned by Citi. Additionally, Seadrill's price is currently at 65.89% of its 52-week high, indicating potential room for growth if market conditions favor the offshore drilling sector.
For investors seeking comprehensive analysis and additional guidance, InvestingPro offers a suite of tips. There are 15 more InvestingPro Tips available that delve into Seadrill's financials and market potential, helping investors make informed decisions backed by real-time data and expert insights.
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