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High-Yielding Seadrill Will Sail Through Difficult Waters

The drop in rates highlights the weakness in the industry, which, according to analysts, will likely persist for the next couple of years.

The industry will witness an influx of a large number of new builds while the contracts for the units in operation will expire. This was also evident in Seadrill's quarterly results.

Seadrill has 11 floaters and 8 jack-up rigs currently under construction which will be delivered through 2016 while the company has been unable to secure a new contract for its drillship West Tellus. The drillship has been working for Chevron (CVX) but its contract will expire this Saturday.

The demand for floaters can remain weak due to the increase in supply. For this reason, Seadrill is not committing to any additional units, besides the ones currently under construction.

However, Seadrill is still ahead of its competitors such as Ensco (ESV) and Transocean (RIG) in terms of utilization rates.

Furthermore, West Tellus is just one of Seadrill's large fleet of two dozen floaters, which includes drillships and semi-submersibles.

A significant portion of this fleet is contracted out through 2015, which means that the company can easily navigate through this tough business environment.

Seadrill's contract coverage for floaters is 96% for this year, 66% for 2015 and 47% for 2016. This does not include the new five-year $1.1 billion contract for the West Jupiter drillship with Total (TOT). Moreover, Seadrill is also eying the first contract for West Saturn, another new drillship which will be delivered in the third quarter of this year.

By including the contracts for these two drillships, Seadrill's contract coverage climbs to 98% for 2015 and 72% for 2016.

A couple of weeks ago, North Atlantic Drilling (NADL), which is 70% owned by Seadrill, signed an agreement with Russia's Roseneft. The Russian energy behemoth will become one of the biggest shareholders in North Atlantic while Seadrill will remain the biggest stakeholder.

Rosneft will initially start working with nine North Atlantic rigs but the deal can open doors for some big opportunities for North Atlantic and Seadrill in the Russian market. Seadrill's management isn't worried about the ongoing tensions between the U.S. and Russia over the Ukraine crisis.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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