Seadrill: The Contrarian's Deepwater Gem?

The offshore drilling sector has long been a graveyard for optimists, but sometimes the smell of oil and the sound of rig drills can mask a diamond in the rough. Seadrill Limited (SDRL) is currently trading at a valuation so low it's practically begging for a second glance. Let's dive into the numbers and see if this is a contrarian value play or a sinking ship.

The Turnaround Tale: EBITDA Soars, but Earnings? Not Yet

Seadrill's Q1 2025 results are a classic case of “ugly duckling” metrics with a golden lining. The company reported a net loss of $14 million—a stark contrast to the $101 million profit in Q4 2024. However, the Adjusted EBITDA (a metric that matters far more for capital-intensive businesses) jumped to $73 million, up from $28 million the prior quarter. This surge came from two new contracts: the West Auriga and West Polaris rigs, which started work in late 2024 and early 2025.

The key takeaway? Operational execution is improving, even if the P&L is noisy. Revenue hit $335 million, beating estimates by $0.5 million—a razor-thin margin, but a win nonetheless. Operating expenses dropped $6 million due to lower merger costs, proving management's cost discipline.

But here's the catch: Free Cash Flow remains negative at -$72 million, mainly because of mobilization costs for those new rigs. That's a short-term drag, but these investments are locking in multiyear contracts. The $2.8 billion order backlog (extending to 2028) is the real trophy here. If Seadrill can convert that backlog into cash flow, this ship could turn.

Valuation: The Contrarian's Playbook

Now, let's talk valuation multiples—the lifeblood of any value investor.

• P/E Ratio: 5.23. That's way below the average for offshore drillers, which typically hover in the teens. At first glance, it suggests the market is pricing in perpetual losses. But dig deeper: Seadrill's trailing 12-month EBITDA is $323 million, and its EV/EBITDA is 6.27—a figure that's dropped 17% year-over-year.
• Debt Dynamics: Gross debt is $625 million, but the company holds $430 million in cash, giving it a net debt position of $195 million. That's manageable given its backlog and cash flow potential.

The forward P/E of 39.36 looks sky-high, but it's based on projected earnings that could soar if those new contracts ramp up. If Seadrill hits its 2025 guidance (Adjusted EBITDA of $320–$380 million), the valuation multiples compress further.

Risks: Brazil Blues and Market Myopia

No free lunch here. Two red flags stand out:
1. Brazil's Underperformance: Lower utilization in Brazil (a key market) is a drag. Seadrill's fleet strategy is laser-focused on floaters (deepwater rigs), but Brazil's regulatory delays and sluggish demand could prolong this headwind.
2. Market Sentiment: The stock has been a rollercoaster in June, dropping 4.76% on June 23 after a sharp rally. Investors are punishing volatility, not just fundamentals.

The Bottom Line: Buy the Dip, but Beware

Seadrill isn't for the faint-hearted. The stock's 43.85% one-year decline shows how brutal sentiment can be. But here's why contrarians should take notice:

• Valuation: A P/E of 5.23 and EV/EBITDA of 6.27 are screaming “bargain” if the backlog converts as promised.
• Turnaround Momentum: New contracts are boosting margins, and management is executing a ruthless fleet rationalization (phasing out less-profitable rigs).
• Leverage to Oil Prices: If oil stays above $70/barrel (a reasonable bet), deepwater projects will flourish—exactly what Seadrill's floater fleet needs.

Action to Take:
- BUY SDRL around $26–$28, aiming for a $35–$40 price target if the backlog turns to cash flow.
- Avoid if oil crashes below $60 or Brazil's issues worsen.

This isn't a “set it and forget it” stock—monitor those quarterly cash flow updates closely. But for investors willing to stomach volatility, Seadrill could be the offshore drilling play that turns the tide.

DISCLAIMER: Past performance ≠ future results. Consult your financial advisor before making decisions.