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To: Dennis Roth who wrote (176485)	3/1/2013 9:52:18 AM
From: Dennis Roth	2 Recommendations Read Replies (1) of 206084

CS on Seadrill (SDRL) Too Bad Not Just A Drilling Company As Equity Income Still a Drag, EPS estimates cut G. Lewis Our Thoughts. SDRL posted OK numbers (recall UDW floater downtime owing to BOP issues - pre-announced) above the line - but Archer continues to drive negative equity income. Nevertheless SDRL continues to leverage itself to an extended offshore drilling cycle - two new high spec jackup newbuilds (ordered earlier this year). Additionally, with two tender rigs (T- 15, T-16) and the West Leo and Mira all on deck as potential dropdowns to SDLP, the deleveraging and cash flow ramp up story should continue. We expect a drop down of the tender rigs sooner not later. Jackup Contracts Mixed. SDRL announced new contract extensions for the West Prospero and West Ariel in Vietnam for 7 months each at $151K which while 17% higher from its prior rate is a 6% discount to similar fixtures in Vietnam. However, the West Courageous' 1-year contract at $150K in Malaysia (12% higher than prior rate) is 14% higher than recent fixtures. Utilization Moving Higher, Average Dayrates Flat. Utilization of the floater fleet improved by 400bps Q-Q, the jackup fleet improved 1100bps Q-Q. Average dayrates for floaters were flat and jackups were up 1% Q-Q. Earnings Miss. SDRL reported adjusted Q4 EPS of $0.04 (includes a loss of $0.44 from equity income) missing consensus of $0.58 (Credit Suisse $0.62). Drilling revenue was $1,126M (Credit Suisse $1,054M) up 7% Q-Q and 8% Y-Y. OPEX was $448M (Credit Suisse $407M) which was up 6% Q-Q and 10%. EBITDA was $604M (Credit Suisse $589M) and margins were 300bps lower Q-Q at 50% (TTM 55%) driven by higher reimbursables. The $0.85 dividend (already paid) represented a 110% payout of operating cash flow (adjusted for impairment). Equity Investments Still In Early Innings Archer continues to bring down SDRL's equity investment income as it was impaired by $221M. At this point with Archer impairing its assets (Q3), SDRL impairing the investment itself (Q4) and a private placement (Q1) infusing additional capital into the business (SDRL maintained its ownership percentage via participating in the placement), we expect smoother sailing going forward. While the other businesses were profitable in Q4 we see a great deal of leverage specifically in Sevan. The company has two UDW rigs that is only generating a roughly ~15% net income margin (paying interest on 2 additional UDW units). As the company takes delivery of these units we would expect significant margin expansion and an annual EPS impact of almost $0.10 in 2015 ($0.01 in 2012). Reducing Estimates. We are reducing our 2013 EPS estimate to $2.68 (from $2.90) to account for the timing of newbuilds commencing drilling. We are lowering our 2014 EPS estimates to $3.41 from $3.45. Click here for Full Note

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