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Behind Seadrill’s Cost-Cutting Measures

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Seadrill’s vessel operating expenses

As the chart below shows, from 4Q16 and 1Q17, Seadrill’s (SDRL) vessel operating expenses fell $23 million to $211 million—a 10% fall. These expenses were much lower than the $290 million reported in 1Q16.

The offshore drilling downturn started in late 2015. To fight this downturn, Seadrill took various cost reduction efforts. The company’s number of employees from the previous quarter remained same, at 760 onshore and 4,400 offshore workers. This is an almost 26% reduction from its number of employees at the end of 2015, but the layoffs reduced rig operating costs for the company.

The operating costs for rigs, including overhead, for Seadrill’s floaters have been reduced from $200,000 per day in 2014 to $145,000 per day currently—a 28% reduction. Similarly, Seadrill’s jack-up operating costs have been reduced by 29% to $63,000 per day from $90,000 per day in 2014.

Notably, Transocean (RIG), Rowan Companies (RDC), Diamond Offshore Drilling (DO), Atwood Oceanics (ATW), Ocean Rig (ORIG), and Noble (NE) have also resorted to cost-cutting initiatives.

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Margins and G&A

Even after its cost reductions, however, Seadrill’s expense-to-revenue ratio rose to 37% in the first quarter from 35% in the previous quarter and 33% in 1Q16. This tells us that Seadrill’s revenue dropped at a greater speed than its costs.

In 1Q17, Seadrill’s G&A (general and administrative) expenses fell to $61 million, or $7 million lower than the $69 million it reported for the previous quarter. However, G&A rose from its $60 million in 1Q16. The company projects its G&A costs for 2017 to be ~$220 million, down from the $234 million it saw in 2016 and the $248 million it reported for 2015.

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