Seadrill - Bankruptcy Imminent

| About: Seadrill Limited (SDRL)


The company reported declining revenue and operating income in the 4Q2016 earnings release on Feb. 28.

Management provided an update on the restructuring negotiations with creditors, stating the company may be forced to file Chapter 11 bankruptcy should they fail to reach an agreement.

Any new agreement with creditors will involve additional amendments to the currently proposal and a conversion of debt to equity.

Shares of Seadrill Limited (NYSE:SDRL) plunged more than 14% after the company reported 4Q2016 financial results Tuesday Feb. 28, in which management provided an update on the restructuring process.

As discussed in my previous article "Seadrill - Shareholder Dilution Impending," existing and potential future creditors seek a near total wipeout of current shareholder value through their proposal in which 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 cash sweeps starting in 2018.

In the quarterly earnings announcement, Seadrill management noted they "currently believe that material additional amendments to the terms of the proposed bank amendments will be necessary to raise the required new capital." In short, Seadrill is likely to reject the current proposal set forth by creditors.

Further, the report acknowledged the likely near-wipeout of existing shareholder value:

"Feedback from certain stakeholders and potential new money providers also indicate that a comprehensive and consensual agreement will likely require conversion of our bonds to equity. Under such circumstances, the new capital raise and any resulting debt conversion would likely result in substantial dilution to current shareholders and potential losses for other financial stakeholders."

In the event a consensual restructuring agreement is not concluded or an agreement to an extension is not reached, the company announced it is preparing various contingency plans, including potential Chapter 11 bankruptcy proceedings.

To make matters worse, the company's earnings results affirmed the declining performance of Seadrill's underlying business operations. Revenue declined by approximately 30% from the same quarter in the prior year and by more than 10% from the quarter three months prior ending September 2016.

Operating income declined by approximately 47% from the same quarter in the prior year and by more than 52% from the quarter three months prior ending September 2016.

Moreover, management provided guidance for the first quarter of 2017 of expected operating income at just $50 million, an approximate 57% decline from the current quarter. Management highlighted the number of units coming off contract and the impact of lower day rates in the weak guidance.

This will likely be the last quarterly result released under the company's existing capital structure.

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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