Seadrill - Shareholder Dilution Impending

| About: Seadrill Limited (SDRL)

Summary

Seadrill released a 6K on January 31, 2017 outlining the status of negotiations with existing creditors.

Existing and potential future creditors seek a near total wipeout of current shareholder value.

Given the likely possibility of a complete wipeout of common equity, investors should be cautious over the next several months as the company attempts to restructure.

Shares of Seadrill (NYSE:SDRL) decreased by more than 35% in the past month as investors reacted to a press release on January 31, 2017 detailing the company's progress, or lack thereof, in restructuring its massive debt burden, $2.4 billion of which matures by mid-2017. Accord to President and CEO Per Wullf, negotiations have taken longer than expected:

"These negotiations have proved to be more complex than we had originally anticipated. Nevertheless, key stakeholders have demonstrated a clear desire to be part of a solution and with the right structure and terms we believe there is significant capital available to us. Seadrill is a great company with excellent people, assets and customers and we look forward to concluding a transaction that ensures Seadrill continues to be well positioned for the eventual recovery in the industry."

The announcement also stated the company plans to extend maturities until at least 2021 and raise $1.0 billion in new capital. As discussed in my article released December 2, 2016 titled "Seadrill: Trouble Brewing On The Horizon," the company reported cash and cash equivalents of just $1.3 billion and net cash provided by operating activities for the three month period ended Sept. 30, 2016 of only $242 million. Seadrill is unlikely to have enough cash to meet its near-term debt obligation and warned that any comprehensive agreement raising new capital is likely to result in significant dilution to current shareholders.

As part of the Bondholder Informal Group Restructuring Proposal made public alongside the press release on January 31, two new intermediate holding companies, IHCo and RigCo, would likely erode the majority of what little existing shareholder equity remains. Current shareholders would be allocated a nominal amount of out of the money warrants post-restructuring and all proposed secured credit facilities would benefit from a cash sweep starting in 2018. The proposal identifies a cash sweep of excess cash at the RigCo holding company commencing at the end of 2018 with the following percentage swept to banks:

  • 2018 threshold: $700m; 60% of excess cash swept to Banks
  • 2019 threshold: $600m; 70% of excess cash swept to Banks
  • 2020, 2021, 2022 and 2023 threshold: $500m; 80% of excess cash swept to Banks

With these unfavorable terms, billionaire chairman and largest shareholder, John Fredriksen, is more likely to be willing to lend to the company himself. Fredriksen holds more than 20% of Seadrill's shares through various entities he controls, primarily a family trust, so it would certainly be in his best interest to help the company deal with its short-term debt obligations. Rumors of a bailout were stoked when Geveran Trading Co., a company controlled by Fredriksen, sold more than $500 million worth of Marine Harvest ASA in March 2016.

Still, any bailout from Fredriksen would likely come at significant shareholder dilution. Given the likely possibility of a complete or near-complete wipeout of common equity, investors should be cautious over the next several months as the company attempts to restructure.

Seadrill is scheduled to release its fourth quarter and preliminary 2016 results on Thursday February 23, 2017.

Disclosure: I am/we are short 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.

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