SeaDrill: Avoid Despite Potential New Contract

Summary

• According to three sources, Norway's Statoil has shortlisted Seadrill and is on the verge of awarding a contract to secure a drillship, understood to be the West Neptune.
• Seadrill topped rivals Transocean and Maersk Drilling, and is now expected to sign a contract with Statoil over the next few weeks.
• SDRL is extremely difficult to trade and I do not recommend any investing or trading at this present stage.

Investment Thesis:

Sadly, filing for bankruptcy is now a familiar occurrence in the offshore drilling industry. After Hercules offshore, now gone, Paragon offshore (OTCPK:PGNPQ), Ocean Rig UDW (ORIG) and probably soon Pacific Drilling (PACD); we are waiting now for Seadrill (NYSE:SDRL) to release the "news".

Meanwhile, SDRL is extremely difficult to trade and I do not recommend any investing or trading at this present stage, because the risk is too high and the outlook is too blurry.

Everyone here knows that Seadrill and its subsidiaries such as North Atlantic Drilling (NYSE:NADL) are in the process of restructuring their huge debt (~$14 billion), either through an out-of-court deal or through Chapter 11.

We all expect an agreement by the end of July, after the company announced early April that it managed to get another delay to complete the restructuring plan.

As I said before, very often in these particular situations, shareholders will be offered a tiny percentage of the new stock, and I believe Seadrill restructuring plan will leave between 1% to 5% to present shareholders assuming a pre-packaged bankruptcy deal.

The company warned in April that shareholders will get a "minimal recovery" which implies that SDRL shareholders should expect for a "tiny stake" in exchange of their present shares -- obviously different from zero -- in the new reorganized Seadrill.

It is difficult to translate the word "minimal" in terms of value, especially depending on which side of the fence you are standing on. Furthermore, Seadrill may still come up with an out-of-court deal -- with the consent of the majority of the bondholders -- which is generally more favorable for present shareholders, in my opinion.

Basically, the major difference in this particular restructuring case is that the main player is John Fredriksen, worth over $9 billion, who owns 23.41% of the company stocks through Hemen Holdings Ltd.

Hence, the best strategy is to adopt a "middle way attitude", based on the "most likely" scenario which is a restructuring under a pre-packaged bankruptcy deal that leaves a small stake to shareholders in the new company.

However, this restructuring is not the end of the road and the company will emerge from this financial mess in a better shape financially and with a strong fleet better adapted to compete.

This article is about Seadrill's fleet and the potential of new contracts after the restructuring is completed.

Last week's news:

On November 23, 2016, Petrobras announced:

The company has completed the sale of its stake in the exploration block BM-S-8 to Statoil Brasil Óleo e Gás LTDA, as announced on July 29, 2016. The deal was completed with a payment of USD 1.25 billion, which represents 50% of the total sale amount, from Statoil, after complying with all previous conditions provided for in the agreement

On July 5, 2017, according to Upstream,

Statoil is in final negotiations with Norwegian drilling contractor Seadrill for the charter of a high-specification drillship to carry out a wildcatting programme in the prolific Santos basin pre-salt province off Brazil.

According to three sources, Norway's Statoil has shortlisted Seadrill and is on the verge of awarding a contract to secure a drillship, understood to be the West Neptune, to spud the Guanxuma well in Block BM-S-8 in the fourth quarter of 2017.

Upstream understands that Seadrill topped rivals Transocean (RIG) and Maersk Drilling, and is now expected to sign a contract with Statoil (STO) over the next few weeks.

"There is already an informal agreement between the two parties. The contract will be signed soon," said one source.

The drillship West Neptune is a sixth-generation drillship equipped with a DP3 dynamic positioning system capable of operating in up to 3600 metres of water and drilling wells to final depths of 11,400 metres.

The rig is presently on a three-year charter with Llog Exploration in the US Gulf of Mexico until December 2017 for a day rate of $573,000.

Norwegian giant Statoil has wrapped up its acquisition of a 66% stake in Block BM-S-8 off Brazil's offshore Santos basin from state-run oil company Petrobras. Block BM-S-8 is comprised of the Carcara field which was discovered in 2012 and Statoil estimates the license to hold between 700 million and 1.3 billion barrels of oil equivalent.

A potential charter agreement for the West Neptune will increase to four the number of rigs Seadrill has operating off Brazil.

Seadrill has three rigs on long-term contracts with Petrobras - the semisub Sevan Brasil and the drillships West Carina and West Tellus - with contracts expiring from June 2018 to October 2019.

Following the drilling and drillstem test at Guanxuma, Statoil may opt to use the rig to investigate its deep-water concessions in the Espirito Santo basin.

A look at the Seadrill estimated backlog as of July 10, 2016. Total $3.2 billion.

Conclusion:

Seadrill will emerge from this difficult restructuring in a better financial position, probably around October 2017. The new company will be able to better compete in this harsh environment with day rates close to breakeven level.

I am hopeful the company will see a way to keep a tiny share of the new company to the actual shareholders who have suffered a tremendous loss already. I would be really surprised if the company declares the actual SDRL shares worthless. The stock is now trading around 0.35 and seems to indicate that a 2% stake is the probable outcome that the street is betting on.

Another paramount question any investor should ask is if the new company will be able to ride the downturn, out until the oil sector recovers, which seems very elusive as we speak?
It will depend on the future oil prices mainly and it is difficult to venture any guess now. The quid pro quo between OPEC and the US Shale is here to stay and will keep oil prices between $40 to $60 per barrel as far as we the eyes can see.

Nonetheless, it will be a time when oil majors will be forced to invest in exploration CapEx again, even if oil prices are not fully recovering. The shallow and the deep waters will eventually get a boost starting H2 2018 because it is where the real reserve potential lies, period.

Important note: Do not forget to follow me on Seadrill and other offshore drillers. Thank you for your support.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I am day trading SDRL on special occasions.