Seadrill: Another Restructuring In The Making (NYSE:SDRL)

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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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.

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