Will Q2 Earnings Hold A Surprise For SeaDrill (SDRL) Stock?

Leading contract driller SeaDrill Limited (NYSE:SDRL) is expected to report second-quarter 2016 earnings on Thursday, Aug 25.

In the last quarter, the company’s earnings of 26 cents per share missed the Zacks Consensus Estimate of 38 cents. In fact, the company posted an average negative earnings surprise of 8.60% in the last four quarters. Let’s see how things are shaping up prior to the announcement.

Factors Likely to Influence This Quarter

SeaDrill is one of the leading offshore drilling contractors in the world with one of the youngest but most advanced fleets. The company has a strong backlog of $4.3 billion, which not only reflects steady demand from its customers but also offers an unmatched level of earnings and cash flow visibility. Moreover, SeaDrill has high economic utilization for its floaters, which is expected to help it maintain a steady flow of income.

However, SeaDrill derives its revenues from companies in the oil and gas exploration and production industry, a highly volatile and cyclical sector that is directly exposed to commodity price fluctuations. The weak commodity prices are likely to hurt the company’s near-term business to a considerable extent.

It is also to be noted that the company projects second-quarter 2016 operating income of almost $510 million, which is less than the first-quarter level of $528 million.

Earnings Whispers

Our proven model does not conclusively show that SeaDrill is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This 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 -2.44%. This is because the Most Accurate estimate stands at earnings of 40 cents, while the Zacks Consensus Estimate is pegged at earnings of 41 cents.

Zacks Rank: SeaDrill currently carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

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

Stocks to Consider

While earnings beat looks uncertain for SeaDrill, here are some companies from diverse sectors you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter.

The Bank of Nova Scotia (TO:BNS) has an Earnings ESP of +1.75% and a Zacks Rank #2. The company is expected to release its earnings on Aug 30.

Dollar Tree, Inc. (NASDAQ:DLTR) has an Earnings ESP of +4.11% and a Zacks Rank #2. The company is expected to release its earnings on Aug 25.

eGain Corporation (NASDAQ:EGAN) has an Earnings ESP of +50.00 % and a Zacks Rank #2. The company is expected to release its earnings on Sep 8.