Seadrill Agrees To Swap Bonds For Equity Again

| About: Seadrill Limited (SDRL)

Summary

SDRL exchanges $50 million in principal of its outstanding 5-5/8% Senior Notes due 2017 for 7,500,00 new shares.

The deal implies a bond price of 54.75 cents on the dollar, a 3.8 percent premium to Wednesday’s closing price, Nordea Bank AB said in a note.

I recommend SDRL as a Hold now with a cautious accumulation possible under $3.

Image: The West Vela drillship.

Seadrill Ltd. (NYSE:SDRL)

This article is following my preceding article on May 18, 2016.

Today, June 9, 2016, Seadrill announced the following:

Has entered into a privately negotiated exchange agreement with certain holders of its outstanding 5-5/8% Senior Notes due 2017 (the "2017 Notes"), pursuant to which the Company has agreed to issue a total of 7,500,000 new shares of its common stock, par value $2.00 per share, in exchange for $50.0 million principal amount of the 2017 Notes in accordance with Section 3(a)(9) of the U.S. Securities Act of 1933, as amended (the "Exchange"). Settlement is expected to occur on June 13, 2016, upon which the Company will have a total of 508,444,280 shares of its common stock issued and outstanding.

Nordea Bank AB said in a note:

The deal implies a bond price of 54.75 cents on the dollar, a 3.8 percent premium to Wednesday's closing price,

Seadrill's Recent moves in the "funding plan."

Date Swap Amount

Price/bond value

$

Shares issued Shares Oustanding Information 5-5/8% Senior Notes due 2017
April 28, 2016 - - - 500,944,280 Amendments to credit facilities $948 million
May 18, 2016 $55 million 3.72/55.36~ 8,184,340 500,944,280 Bonds swap $893 million
June 9, 2016 $50 million 3.65/54.75 7,500,000 508,444,280 Bonds swap $843 million
Click to enlarge

1 - On April 28, 2016, Seadrill Announced Amendments To The Secured Credit Facilities. First Steps In The Company's Funding Plan.

M. Mark Morris, Chief Financial Officer said:

This is an important first step in our funding plan. By deferring our imminent borrowing maturities, resetting a number of covenants and removing the risk of facility prepayments related to declining rig values we have established a more stable platform to pursue and conclude negotiations with our stakeholders. We are pleased with the support shown by our banking group and continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge us to a recovery in the sector.

Reading the 20-F page 29, the company also indicates that:

In addition, we expect to take additional steps to further delay newbuild deliveries until the dayrates justify taking delivery. We do not expect to take delivery of any units in 2016 and currently have $4.0 billion of newbuild yard installments due in 2017, 2018 and 2019 that we will be working with shipyards to defer.

Which is an important step in the current market.

For a complete look at the long-term debt, please go to the 20-F filing starting page F-52 related to Note 23 - Long-term debt.

As of 12/31/15 Value in $ billion
Total credit facilities 7,373
Total Ship Finance Loan 0,831
Total unsecured bonds 2,381
other 0,076
Total debt Principal 10,661
Current portion long-term 1,526
Long-term Portion 9,135
Click to enlarge

2 - On May 18, 2016, Seadrill announced the following:

Today that it has entered into a privately negotiated exchange agreement with certain holders of its outstanding 5-5/8% Senior Notes due 2017 (the "2017 Notes"), pursuant to which the Company has agreed to issue a total of 8,184,340 new shares of its common stock, par value $2.00 per share, in exchange for $55.0 million principal amount of the 2017 Notes in accordance with Section 3(a)(9) of the U.S. Securities Act of 1933, as amended (the "Exchange").

Settlement is expected to occur on May 20, 2016, upon which the Company will have a total of 500,944,280 shares of its common stock issued and outstanding.

Commentary:

Seadrill has approximately a little more than $3.7 billion of debt due by the end of 2017, and "it is likely that we will see additional transactions like this, given the implied premium to current bond prices." According to M. Kristoffer Pedersen, who is an analyst at Nordea Bank in Oslo.

According to M. Kristoffer Pedersen at Nordea again,

Following the latest deal, $843 million of the bond remains outstanding.

Based on an exchange at $54.75/$3.65, the bonds remaining ($843 million) would eventually translate to an additional 127 million shares outstanding or a dilution of 25%.

This dilution involves only the 5-5/8% Senior Notes due 2017, and if we extend this theoretical reasoning to the entire $3.7 billion of a "giant immediate swap", the share outstanding count jumps from the actual 508 million to approximately 1,065 billion shares.

To evaluate the real effects of this situation, in matter of a stock dilution, is a very tricky exercise.

Yes, the shares outstanding count will be much higher, and at first glance, we can imagine a strong dilution for common shareholders. Based on my calculation above, the price per share could eventually be divided by 2.1 or $1.76 in theory.

However, by swapping debt-to-equity, Seadrill will become much "healthier" financially, and will be able to reduce its debt load by nearly $4 billion, thereby, making a giant step to a stronger balance sheet, which will allow the company to eventually survive this terrible cycle.

The question is whether or not, the actual stock price -- let say between $3 to $4 -- has factored in, the positive and the negative related to the debt?

Of course, there is no real answer to this question, and I would say, it will depend on the market.

In my opinion, I think Seadrill is trading at support around $2.75/$3 and may eventually start to trend up if oil price momentum can translate to some new drilling contracts, starting in H1 or H2 2017.

I recommend SDRL as a Hold now with a cautious accumulation possible under $3.

Important Note: Do not forget to be one of my follower and get updates on SDRL and other offshore drillers regularly. Thank you

Disclosure: I am/we are long SDRL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I actually trade SDRL much more frequently and hold a small long position.