SeaDrill's Shares Ride High on Confirmed Restructuring Plans

SeaDrill Limited’s SDRL shares have increased 64.68% to eventually close at 36.56 cents on Apr 18, reflecting investors’ optimism on the stock after the company’s restructuring plan won approval from the U.S. Bankruptcy Court.  

Looking Back

Hit by the industry downturn, SeaDrill had been going through a rough patch over the last two years, with its shares plummeting more than 91% during the time frame, owing to increased debts and bankruptcy fears. Reduced demand for drilling and diminishing contracts negatively impacted the company’s revenues, earnings and cash flows.

Notably, it has been facing pressure in its top line owing to idle rigs and lower day rates. SeaDrill incurred a net loss of $3,102 million in 2017 owing to higher operational and restructuring costs, along with low revenues.

The company filed for bankruptcy protection on Sep 12, 2017 to restructure its balance sheet amid volatile oil prices. After months of negotiations and delays, it announced a global settlement in the restructuring deal on Feb 26, 2018.

SeaDrill’s Chapter 11 filing was just another disruption in the offshore drilling industry. Many offshore drilling companies like Ocean Rig UDW LLC., Paragon Offshore, Hercules Offshore, Inc. and Vantage Drilling Company had also filed for bankruptcy protection amid declining oil prices.

The Restructuring Plan

Seadrill has received virtually unanimous backing for its reorganization plan. The company’s financial restructuring plan received approval from 99.8% of the creditors and has also been officially confirmed by the U.S. Bankruptcy Court. The company now expects to emerge from Chapter 11 in two to three months.

Per the restructuring agreement, the international offshore drilling company will witness capital injection of $1.08 billion that would comprise $880 million secured loans and $200 million equity.

Under the restructuring plan, banks will defer the maturities of all secured credit facilities worth $5.7 billion by five years, with no amortization payments till 2020, along with significant covenant relief. The plan will also witness the conversion of $2.3 billion worth unsecured bonds into 15% of equity in the restructured company.

However, shareholders will be receiving a minimal recovery from their existing shares. Existing shareholders will receive only 1.9% stake in the post restructuring equity.

What’s Ahead?

With the rise in commodity prices owing to robust demand and OPEC production-cuts, market scenario for the drilling and oilfield services companies looks promising with increased upstream spending. Especially, the North American land markets are expected to have the best margin opportunities; however, the offshore drilling environment still looks a bit challenging.

Nonetheless, with Seadrill nearing bankruptcy exit with its restructuring plan, it will improve the liquidity position of the company and provide growth opportunities. SeaDrill, having one of the youngest and most advanced drilling fleets, will be poised to secure more contracts post the restructuring, helping the company to stabilize revenues.

SeaDrill, whose peers include Diamond Offshore Drilling, Inc. DO and Nabors Industries Limited NBR among others, has a high economic utilization for its floaters. Post restructuring, the company is likely to gain a competitive advantage with its newly restructured balance sheet.

SeaDrill also intends to expand its relationship ties with Schlumberger Limited SLB — the world’s largest oilfield service provider — with which it is already collaborating to offer integrated services in India.

Importantly, per Reuters, the company is also in talks with other major oil service companies for strategic collaboration opportunities. As it is, a wave of consolidation has hit the industry in the last couple of years amid the oil slump, in order to take advantages of integrated offerings, increased scale, synergies and new capabilities. The service providers believe that mergers and acquisitions will help them cut their average costs and benefit from mutual technical expertise exchange.

Although SeaDrill has no immediate consolidation plans, the company’s CEO Dibowitz is looking for strategic opportunities to enhance its long-term growth prospects. SeaDrill carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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