Seadrill: Another Restructuring In The Making

Summary

• Seadrill hires financial and legal advisors for the upcoming restructuring.
• The company decides to delist from NYSE.
• Common equity holders are set to get zero recovery in the upcoming restructuring.

Seadrill (NYSE:SDRL) has just provided its first-quarter results and fleet status report. The first-quarter report is full of important information, so let's get straight to the key catalysts:

1. Seadrill decided to delist from NYSE and focus on the Oslo Stock Exchange. The company anticipates that the last day of trading on the NYSE will be on or about June 19, 2020. This move indicates that Seadrill is not willing to re-list on NYSE once it gets out of its second restructuring.
2. Seadrill was not able to reach consensus with its banks (that's not surprising) and has retained financial and legal advisors to prepare for a comprehensive restructuring of the balance sheet. The company commented: "Whilst we continue to evaluate various alternatives to address the cost of debt service and overall volume of debt, we do anticipate that a comprehensive restructuring may require a substantial conversion of our indebtedness into equity".
3. Seadrill recorded a $1.2 billion impairment as it believes that up to 10 assets (mainly semi-subs) will not be able to get back to the market. Currently, Seadrill has 8 stacked semi-subs.
4. Seadrill openly discusses the "mass restructuring" scenario: "This industry has two fundamental challenges which are emphasized by recent events - there are too many rigs carrying too much debt […] a number of our assets are increasingly unlikely to return to the market and need to be scrapped. Assets across the industry also carry debt levels which are unlikely to be sustainable and consequently we should expect to see substantial indebtedness being converted into equity".

Seadrill finished the first quarter with $1.03 billion of cash and $78 million of restricted cash on the balance sheet. The company's debt due within one year was $398 million, while long-term debt stood at $6.24 billion, and long-term debt due to related parties was $243 million. In the first quarter, the company recorded negative operating cash flow of $116 million.

Obviously, this situation is not sustainable, especially in the light of additional deterioration of the offshore drilling market conditions. Seadrill's semi-sub West Phoenix received a notice of termination from Neptune, and the rig is expected to conclude its current contract in July 2020. Drillship West Gemini may be suspended until January 2021. On the positive side, drillship West Saturn got a contract with Exxon Mobil (XOM) in Brazil from January 2021 to June 2021 at a dayrate of $225,000. However, it should be noted that the rig does not have employment up until the beginning of the next year.

Such contracting situation will continue to put pressure on Seadrill's cash flow. Fortunately, for the company as a business, it has a significant amount of cash which will allow it to comfortably enter restructuring. However, the restructuring plan may be hard to achieve as the company's lenders will have to take a huge haircut for Seadrill to remain a viable enterprise.

From a big picture point of view, this "restructuring season" may finally solve one of the industry's main problems - the oversupply of rigs. Due to cash outflows across the industry, rigs that do not find follow-up work will be either cold-stacked or scrapped immediately, reducing available supply for years to come. Also, the industry will finally get rid of older jack-ups. Once this rationalization of supply is completed, the post-restructuring offshore drillers may provide interesting investment opportunities, assuming that oil demand recovers from the hit dealt by the pandemic.

In the near term, this process does not provide any hopes for common equity holders. In Seadrill's case, there's simply too much debt, and the bankruptcy judge will not approve an unrealistic restructuring plan for the second time in several years. The new plan will have to be conservative, which means that lenders will have to take a huge haircut, while common equity holders will get zero.

Seadrill still has about $45 million of market capitalization left, but its true value is zero as common equity is set to be completely wiped out in the upcoming restructuring.

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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.

Comments

[Zavva]

@Vladimir Zernov
Would love your take on Northern Ocean - NOL.

[vodkandtonic]

As these companies keep fading away what does it do to the surviving companies or is it going to happen to all of them??

[Tudor Invest Holdings]

@Vladimir Zernov

I like their CEO commenting that the industry has "too many rigs carrying too much debt".

I wonder who ordered these rigs and who borrowed like crazy. Hmmmm

LR

[Vladimir Zernov]

@Tudor Invest Holdings When you go for a second restructuring in a few years, you can afford the luxury of stating the obvious.

[newburgh]

Any rumors on SLDPF.?

[Vladimir Zernov]

Nothing at this point. Their position is hopeless anyway...

[Amit Chokshi, CFA]

VAL, SDRL, NE, and DO will all liquidate significant parts of their fleet which will help RIG the most. DO will come out potentially very strong if I had to speculate, given where Edwards pulled the bk trigger, only $450MM of its revolver and debt with just $250MM of market value at the time representing $2.5B+. DO will probably be a modest to low leverage driller coming out of bk.

VAL and SDRL are hopeless. SDRL's entire biz is around shoddy jurisdictions. VAL has some good assets but still way too much garbage and the worst mgmt team, no creditors will stick around to let them come out. Thats why they cant even draw their revolver.

RIG could come out the best and still stick the landing, i'd be shocked but if this scrapping commences in 2020-2021, while these guys are restructuring and unable to competitively get new biz (exploration cos may not be interested in a restructuring driller for new biz given uncertainity), RIG could own the industry.

[PapaWhisky]

@Amit Chokshi, CFA

"exploration cos may not be interested in a restructuring driller for new biz given uncertainity (sic)"

Exxon just contracted Seadrill for two wells in Brazil with an additional two years of options.

[Bull#1]

RIG is certainly the best of a bad bunch.

[Henrik Alex]

SDRL isn't hopeless. They still have lots of liquidity and with the debt gone, the company would look quite good.

[mc2 finex]

The Rise of a company goes fast, but the other way is slow beyond imagination.The reason is:

"No one wants to hear the truth if it isn't what they want to hear".

Tell a creditor he is going to lose the money and he will close his eyes and ears and deny it, until he, according to himself, surprisingly and suddenly lose the money.

Creditors in SDRL are in for this sudden surprise.

After that, if anything is left, SDRL will get back to normal and leave the status as a Penny Stock.

One thing might keep the lie going, an advisor who knows this rule and thus tells the creditors, there is still hope, cash the fee and wait for the next round of fees after the hope proved wrong. There is more fees in rosy reconstruction budgets than in budgets based on reality. Creditors love rosy budgets and prefer to pay for them, rather than for the truth.

[User 13435622]

After they emerge from the second bankruptcy, they will file for a third one in 2023. Business as usual.

[KTW]

As mentioned to many assists, along with all oil companies only want new. There will have to be a consolidation of Companies as there are to many drillers too. Until then bankrupt and many un-contracted assets!

[lukes266]

You're wasting your talents. No one will invest in offshore anytime soon. We all know they're selling sand at the beach

[deva33]

JF fred, held on long time to his baby, no? he tried all possible of many years...it was a good co when started. he maybe took alot of money from his well working salmon co. to insert in SDRL and driller went down over years so he gave up...

[deva33]

sad story. it was such a great co in the past.

[Carbpow]

Carrying rusting rigs that cannot ever be put back into service as an asset is for all practical purposes a fraud. To my knowledge there is no market for rust. The OSD business has been doing this for many years. I know of none who are worth the paper their reports are written on. That any include "Good Will" in their reports is hilarious.

[Vladimir Zernov]

Balance sheet values have long been disconnected with market values. At the same time, who wanted to start scrapping modern rigs when others did not do this? Who'd like to look like a fool in case of a swift recovery?

[Henrik Alex]

I still expect current equityholders to retain a small stake in the restructured company as most of the debt is with banks.

[Vladimir Zernov]

That would be an infinitely small stake. With too many banks and a complex situation, they may be positioned for a rough reorg.

[User 46598876]

Send me $100 and I'll give you $1 back, FAR better deal than you'll get on Seadrill!

[Amit Chokshi, CFA]

$1B or so is secured senior notes held by hedge funds like Canyon and its trading at 36 cents on the dollar. There's $1.2B of cash, there's no way the banks knowing the value of the rigs nor the secured senior notes holders will let equityholders participate in a recovery. lot easier to go to Frederickson and ask him to pump fresh equity after flushing him down again.

[Invader from Earth]

Offshore oil drill can not be profitable until prices regain $57 or so. Until then, these rigs should increasingly become idle rusting hulks...