Seadrill (SDRL +4%) opens higher after reporting better than expected Q3 earnings despite a 25% Y/Y drop in revenues, citing dayrate reductions and a drop in rig utilization.
SDRL unit North Atlantic Drilling (NADL +13.1%) also moves higher after reporting a smaller than expected Q3 loss.
SDRL sees Q4 EBITDA dropping to ~$340M from $441M in Q3, as seven of its rigs will be idle for the quarter and two rigs will be paid lower rates; Q4 operating profit is seen at $146M.
SDRL says it has cut 23% of its staff to 5,500 since the end of last year, and that it has reduced rig operating costs by 28% from 2014 levels; last week, SDRL announced an extension on its main lending facility to give it more breathing space.
"The offshore drilling market continues to be challenging, however we are seeing an improvement in the level of bidding activity," CEO Per Wullf says.
Including drilling units owned and operated by Seadrill Partners (SDLP +3.4%), the SDRL group owns 54 rigs, with 34 operating and 20 idle; total order backlog for the group is $7B, with SDRL’s portion at $3B.
Seadrill (SDRL +25.1%) surges but is off earlier gains of as much as 46% following a Bloomberg report that 23% shareholder John Fredriksen could provide a loan to help the company restructure its debt; Seadrill Partners (SDLP +3.9%) and North Atlantic Drilling (NADL +3%) also are higher.
Fredriksen is willing to lend as much as $1.2B as part of a potential deal with banks that would imply a postponement of all bank maturities to at least 2020, helping the lenders avoid outright losses, according to the report.
In response, SDRL says only that it is "in discussions with its stakeholders regarding its refinancing and recapitalization plans and there are no material developments to disclose."
The pressure from weak crude oil prices is particularly high on SDRL, whose net interest-bearing debt of $9.1B at the end of Q2 is the highest among its peers; the company will need at least $1B in new capital, analysts from banks including Nordea and DNB have said.
Seadrill (SDRL, SDLP) says it is disputing Tullow Oil's (OTCPK:TUWLF, OTCPK:TUWOY) claim of force majeure on a contract for the West Leo drilling rig employed offshore Ghana on the TEN development project.
Tullow claims the field is subject to a drilling moratorium by Ghana's government due to an ongoing border dispute; SDRL says additional Tullow-operated fields within Ghana where the West Leo previously has operated under the contract are not subject to such arbitration proceedings, but Tullow is asserting that a further drilling moratorium applies to these additional fields.
Seadrill Partners (SDLP -6.8%) is downgraded to Underperform from Market Perform at Wells Fargo, which says "continuing risks ranging from counterparty/rollover risks to credit/covenant/cross default risks make any case for residual value thesis for the equity difficult."
Wells says that while SDLP’s liquidity/leverage is in good shape for now, tangible risks to its cash flow combined with covenant requirements for term loan B makes an eventual covenant breach a likely scenario in late 2017 or early 2018.
The firm also notes the risk of cross default from parent Seadrill remains on the table, as SDLP has two facilities – West Vela and West Polaris - with cross defaults with the parent; even as SDLP continues to build cash, Wells thinks there’s likely a long line of claims for that cash almost all of which is senior to common unit holders.
Seadrill Partners (SDLP -28.9%) sinks after cutting its quarterly distribution to $0.10/unit from $0.25, citing the increase in the extended standby rate period for the West Capricorn rig and the termination of the drilling contract for the West Capella.
SDLP says it still has an average contact term of 2.7 years, total contract backlog of $3.4B and 64% of its rigs on contract until 2018, despite some contract cancellations.
Morgan Stanley downgrades SDLP, as well as Transocean Partners (RIGP +0.2%), to Equal Weight from Overweight on valuation and its view that floater and jackup utilization could plummet to levels witnessed in the 1980s as offshore drilling headwinds persist.
Ensco (ESV +5.9%) surges after Susquehanna upgrades shares to Neutral from Negative, citing recovering crude oil prices and the stock's valuation and relative underperformance; of course, rising crude prices today also are helping.
The firm says higher crude prices has not sparked improved demand for offshore rigs, and it could take through 2018 before any material demand potentially arises, but ESV has underperformed other offshore drillers by a wide margin and now trades below the average for offshore drillers.
But Evercore ISI remains cautious on offshore drillers, arguing that "not a single stock screens 'cheap,'" although it prefers ESV, Noble Corp. (NE +1.2%) and Rowan (RDC +3.5%) as relative Buys for their superior fleet quality, low operating cost basis, low capex and solid backlog, while Hold-rated Ocean Rig UDW (ORIG +3.6%) and Diamond Offshore (DO +1.8%) deserve "a degree of valuation differentiation due to its highly contracted fleet in the near term."