Seadrill Limited: Sinking like a Stone in the Sea

Follow up to prior analysis


As we previously discussed, the debt restructuring of SDRL is inevitable. The company has now disclosed that it may have to file for Chapter 11 bankruptcy protection if it fails to reach the restructuring agreement with its lenders. The company said it would be challenging to find a “fully consensual agreement” before an April 30 deadline. For months SDRL has been in discussions with more than 40 banks, as well as bondholders, to reach a deal. The mentioning of bankruptcy might be a tactical input from Fredriksen, as the bondholders are playing hard-ball, and Fredriksen wants them to realize that there is also a downside for them in the negotiations.

Update on the debt situation

The total debt maturity for FY17 is USD 3,230 M. In addition, the company also has USD ~1,300 M in “Other current liabilities” (interest rate swap agreements not qualified for hedge accounting). Total current assets is at USD 2,716 M, of which USD 1,368 M consist of cash on hand. My forecasted CFO for FY17 is at USD 779 M and my forecasted net interest is > USD 400 M.

Summarizing, I estimate a shortage of cash of around USD 1,500 M for FY17. The company has guided for a restructuring to happen around April 2017, in which the company will raise at least one billion dollar in capital. At current price (USD 1.3/share), this would result in an additional 770 shares (504 million shares outstanding today).

The restructuring is definitely possible in practise, but if the shorters keep pushing the stock down, the dilution will be massive. Part of the Norwegian and Swedish trading community is currently propagating that SDRL is a buy after the restructuring has taken place, basing this on that a similar short squeeze as in March 2016 will take place. I don’t agree with this opinion, as its fails to see the larger picture. Even if the current restructuring plan turns into a success, the debt in FY18 & 19 (USD 2,480 M and USD 2,893 M) won’t be possible to cover. I expect CFO to be below net interest for both FY 18 & 19, which would mean the entire USD 5,373 M would be needed to be covered by issuance of equity.

But wait there is more… I’ve still been ignoring the new builds that are due.

Fredriksen throwing in the towel?

From a game theory perspective, it make no sense for Fredriksen (or for anybody else) to pour additional money into an already sunken ship. Why would anyone put up their own money to bail out SDRL in the short term when the company’s debt profile is not sustainable in the long run.

In regular fashion, John Fredriksen has not lost appetite for oil rigs despite the huge financial problems for SDRL. His private Cyprus company, Seatankers, is buying up to two completed semi-submersible drilling rigs from South Korea’s Hyundai Heavy Industries (HHI) in what appears to be a pure asset play. The word on the street is that Seatankers has a firm deal to buy the sixth-generation ultra-deepwater rig West Mira (built 2014), which was ordered in 2012 by SDRL.The yard could not complete the rig ordered in time, so the contract was cancelled. Fredriksen is understood to be paying $360m for the vessel, which is about half of cost price. In addition, Seatankers has secured an option to buy a second semi-submersible rig from HHI. The option for the rig Bollsta Dolphin runs till 2019. The yard will be responsible for warehousing the rig in the meantime. This unit was ordered by Fred Olsen Energy and was due to be delivered in the first half of 2015, but the contract was also cancelled due to delays.

This is standard behaviour in a down turn in the offshore drilling sector – You let the current shareholders take the blow in the already damaged company, and simultaneously shift your attention to a new debt free company, created for the purpose of buying cheap rigs at depressed prices.

I advise the long term investor to avoid SDRL as I see the company heading for bankruptcy.


Update 

John Fredriksen is planning to register a brand new offshore drilling company in Norway called Northern Drilling. This is similar to what John Fredriksen did with Frontline back in 2012.

Northern Drilling, which is purely an investment company and not a rig operator, will be registered on the Norwegian over-the-counter market — making shares available to securities dealers — and a full public listing on the Oslo stock exchange is planned for later this year, a person familiar with the matter said Friday. Fredriksen has raised about $230 million in capital for the company, about half of which he contributed himself, the person said.

“Northern Drilling will leave commercial and technical management of any rigs it owns to Seadrill, which had originally ordered the West Mira rig before canceling the contract. The objective is for Northern Drilling to sell its rigs at a profit in the future, and the intention is to give Seadrill the opportunity to match any future offer to acquire them, the person said.”

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