On Thursday, Stifel has adjusted its outlook on Seadrill Ltd. (NYSE: SDRL), lowering the price target to $65 from the previous $70, while still endorsing the stock with a Buy rating. The adjustment reflects anticipated challenges in the offshore drilling sector, which could affect near-term market conditions and cash flow.
The firm notes that, although current rig rates are maintaining stability, there is an expectation of gaps in rig contracts. These gaps, referred to as "white space," are likely to occur between existing contracts, potentially impacting the company's cash flow in 2025.
However, the forecast for 2026 is more optimistic, with predictions of a significant increase in cash flow as older contracts with lower rates expire and are replaced with contracts at substantially higher rates.
The analyst from Stifel highlighted the uneven nature of the coming year for Seadrill, acknowledging that while 2025 may present some financial turbulence, the stock is still considered fundamentally undervalued. The firm anticipates that the value discrepancy will correct itself with the projected cash flow increase in 2026.
Seadrill, which operates within the offshore drilling industry, is navigating a period where market conditions have shown signs of softening. Despite this, the firm's analysis suggests that the company's financial health will strengthen in the longer term, making it a worthwhile investment at its current valuation.
Investors are being guided to look beyond the immediate challenges, focusing on the potential for recovery and profitability in the subsequent years. The updated price target of $65 reflects both the short-term headwinds and the long-term prospects for Seadrill.
In other recent news, Seadrill Limited recently reported its financial results for Q2 of 2024, revealing an EBITDA of $133 million and operating revenues of $375 million. However, due to revised contract start dates and uncommitted rig availability, the company adjusted its earnings forecast for the second half of the year. In an effort to streamline operations, Seadrill plans to terminate its secondary listing on the Oslo Stock Exchange, 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.
Additionally, Seadrill has completed a $500 million buyback and initiated another program of equal value. Citi has upgraded Seadrill's stock rating from Neutral to Buy, despite reducing the price target to $52 from the previous $60. This change in rating reflects a change in the company's forecast methodology, accounting for fewer rig reactivations, increased downtime in 2025, and slightly lower rates for 6th generation floaters.
Citi's analysis suggests a possible decline in the company's EBITDA expectations for 2025, but also anticipates more than a 20% FCF yield in 2026 for Seadrill. These are among the recent developments for the company.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Seadrill's financial position and market performance, complementing Stifel's analysis. Despite the lowered price target, Seadrill's current market valuation of $2.47 billion suggests there may be room for growth, especially considering the company's strong fundamentals.
Seadrill's P/E ratio of 5.82 indicates that the stock is trading at a relatively low multiple compared to its earnings, which aligns with Stifel's view that the stock is undervalued. This is further supported by the price-to-book ratio of 0.81, suggesting that the market values Seadrill at less than its book value.
An InvestingPro Tip highlights that Seadrill's earnings per share have shown strong growth recently. This is consistent with the company's impressive revenue growth of 32.29% over the last twelve months as of Q2 2024, and an EBITDA growth of 47.06% over the same period. These metrics underscore the company's ability to generate increasing profits, which could help buffer against the anticipated "white space" in rig contracts mentioned in Stifel's analysis.
Another relevant InvestingPro Tip notes that analysts have recently revised their earnings expectations for Seadrill upwards. This positive sentiment from analysts could indicate confidence in the company's ability to navigate the challenges outlined by Stifel and capitalize on the expected improvements in 2026.
For investors seeking a more comprehensive analysis, InvestingPro offers 16 additional tips for Seadrill, providing a deeper understanding of the company's financial health and market position.
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