A Strategic and Financial Valuation of Seadrill Limited

Camilla Sjøthun

Student thesis: Master thesis

Abstract

The purpose of this thesis is to find the fundamental value of the offshore drilling company Seadrill Limited. A strategic and a financial analysis were conducted to find the fair value of the company. The findings from the strategic analysis indicate that the offshore drilling industry has a positive market outlook. The oil and gas prices have increased steadily since the economic downturn in 2008 and this has led to higher budgets for exploration of oil. New, big fields finding over the last years have pushed a further boost into the industry. Deepwater drilling will be the future because onshore and shallow based fields are starting to decline in production. Seadrill has specialized in deepwater drilling and has heavily invested in a new and modern fleet to meet the demand. The financial analysis shows that Seadrill has grown tremendously since its founding in 2005. Heavy investments in newbuildings and acquisitions have left the company with a very high debt. Seadrill is profitable, but pay out the highest dividend in the industry and borrow money to grow. The high risk of this business model must be taken into consideration in the valuation. The valuation was conducted using DCF-model and supported by a multiple valuation. The opportunity cost of capital (WACC) was found to be 8%, which is used to discount the future cash flow. The value of the share was found to be USD 45,3. The closing price at cut-off date was USD 40,08, giving a potential upside of 13%. The value is highly sensitive to changes in the WACC, growth in the terminal period and changes in day rates, drilling units and utilization rates. The value is therefore tested for changes in these parameters through a sensitivity analysis. Taken the high risk of the industry and Seadrill’s debt structure, the thesis concludes that the strong market outlook outweighs the risk and it is recommended to buy Seadrill’s share as it is undervalued.

EducationsMSc in International Business, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2014
Number of pages100