Seadrill entered 2014 to a bit more market uncertainty than normal. Oil companies were struggling to generate a lot of cash flow at $100 oil so they started to pull back on spending directed toward drilling expensive offshore wells. This caused the offshore industry to slow down as drillers struggled to find new contracts for drilling rigs. However, no one foresaw that the industry wouldabsolutely implode in 2014 from plummeting oil prices. Seadrill, like so many others, was blindsided by that shock, which caused its stock to drop an excruciating 70% in 2014.
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Here's a replay of how the former darling of the offshore drilling industry missed the turn in oil and burned investors in the process.
Misjudged marketSeadrill, along with nearly every other oil company in the world, severely misjudged the direction of the oil market. This is clear from statements the company made in its second-quarter report, which was delivered after oil prices had started to retreat. The company's market commentary was actually quite bullish as we see in the following statement, which was made at the end of August:
Because of the company's bullish outlook it suggested that its dividend level was "sustainable until at least the end of 2015 [... and ...] we feel increasingly comfortable that this period can be extended well into 2016 without any significant recovery in the market."
Unfortunately, just 90 days later the company retracted that statement in its third-quarter report by saying:
By completely obliterating what was thought to be a secure dividend Seadrill blindsided investors, which unloaded the stock in a hurry. However, the company made these moves to ensure that it would not only survive the current downturn, but thrive once things improved.
Long-term vision is unchangedSeadrill remains very bullish on the long-term future of the offshore drilling industry. The company supported this belief by saying:
While the price of oil has continued to drop, Seadrill, and most other oil companies, believe its stay at current levels will be brief. That's because current oil supplies will eventually deplete and will likely be replaced by more expensive oil supplies, some of which will come from offshore oil wells. Because of this the company continues to plan for that future, even as it adjusts to current uncertainties that are impacting today's oil market. So, while 2014 was rather bleak, Seadrill remains very excited about what its future holds.
The article This Is Why Seadrill Ltd.s Stock Sprung a Leak and Sank 70% in 2014 originally appeared on Fool.com.
Matt DiLallo owns shares of Seadrill. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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