Can Seadrill (SDRL) Pull A Surprise This Earnings Season?

International offshore drilling company SeaDrill Limited (NYSE:SDRL) is set to release second-quarter 2017 results before the opening bell on Aug 24.

In the last quarter, SeaDrill delivered a positive earnings surprise of 220% on the back of cost-cutting initiatives and strong economic utilization of fleets. The company surpassed estimates in each of the last four quarters with an average positive surprise of 97.13%. Let’s see how things are shaping up for this announcement.

Factors at Play

SeaDrill – which counts Helmerich & Payne, Inc. (NYSE:HP) and Diamond Offshore Drilling, Inc. (NYSE:DO) as some of its peers – is a leading offshore drilling contractor in the world with one of the youngest and most advanced fleets. Further, we appreciate the company’s aggressive cost-cutting initiatives and impressive earnings surprise history. The company has also been awarded a number of contracts lately.

SeaDrill recently won a contract from Statoil (OL:STL) ASA (NYSE:STO) for exploration drilling in Santos Basin. The offshore driller's subsidiary – North Atlantic Drilling – also secured a contract for semi-submersible West Hercules to work in the UK. Uptick in drilling contracts bodes well for the company which already has a robust backlog of over $3.5 billion.

However, the company’s price performance lacks luster. Over the last one year, SeaDrill’s stock has underperformed the industry to which it belongs to. During the aforesaid period, SeaDrill’s shares have tanked more than 89%, compared with the 36% decline for the broader industry.

Debt woes and bankruptcy fears are likely to hurt SeaDrill's near-term business to a considerable extent. SeaDrill, being one of the worst sufferers of the industry’s downturn, has the maximum debt in the oil rig industry. The company has been contemplating restructuring measures under bankruptcy for quite some time now and cautioned shareholders for the second time of severe losses due to the same. The company restated that current common stockholders will have minimal recovery, suggesting that debt holders will get the majority of the equity holdings even if the restructuring takes place.

Earnings Whispers

Our proven model does not conclusively show that SeaDrill will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate estimate and the Zacks Consensus Estimate are both pegged at a loss of 5 cents. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: SeaDrill currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Though a Zacks Rank #3 increases the predictive power of ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

Note that we caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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