Beleaguered offshore drilling company, Seadrill (NYSE: SDRL) may not hurtle towards bankruptcy, but restructuring, a second one, is likely on the cards. The company came out of the previous restructuring carrying debts and desperately in need of a strong market where its drilling assets could be put to work. SDRL stock is currently up a couple of percent but has been in strong in a strong bear trend.
Why SDRL Stock is Down
However, the Coronavirus pandemic and Russia’s exit from OPEC has come as a double whammy for the Seadrill. The company has enough cash in hand to tide over immediate and near-term issues, but forthcoming discussions with lenders about its future will involve restructuring.
Months back, the Seadrill was hoping that banks would once again take a lenient view of its financial situation. It could hope to persuade banks to do so based on the fact that it did not face the amortization of debts till 2021 and therefore had the opportunity to wait for a strong recovery in dayrates.
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But now, because of the two factors mentioned above, banks are left with little choice but to force the company to restructure.
Is SeaDrill Stock SDRL A Buy or Sell?
One of the more risky investment sectors is oil exploration. The lure of “black gold” has destroyed many portfolios. Seadrill may be a good company, but the risks in this sector far outweigh the reward for most investors. SDRL stock is in a deep bearish trend and is unlikely to change soon.
While Seadrill has valuable assets that include its line of modern semi-submersibles such as West Eminence, West Pegasus, West Taurus, Sevan Driller, West Orion, West Eclipse, and Sevan Brazil, these rigs are not active as of now, and there’s little chance of them being reactivated this year or even over the next few years. They are, right now, a drain on the company’s resources. When working, these rigs were a revenue-earning asset for the company and the lenders, but that is no longer the case.
The SDRL drillships, West Saturn and West Jupiter, do not have any drilling jobs on hand, and it is unlikely that in the present scenario, these will get any fresh contracts. Their maintenance and upkeep are going to lead to more cash usage. The company’s modern stacked jack-ups, namely West Prospero, West Vigilant, West Ariel, West Freedom, West Leda, will not be reactivated this year.
Even with the joint venture with Angola, the SDRL has been provided by the other party. While originally, it was reported that two drillships from SeaDrill would be a part of the venture, that has not been the case, and it is unlikely that it will happen soon. Capital markets, too, are not interested in the drillers right now.
These reasons have contributed to an increased likelihood of a restructuring. Seadrill’s shares are worth $60 million of capitalization, and it has more than $1 billion in unrestricted cash.
Thus, there are no near-term liquidity fears. However, the company has to come up with a plan that works for it and its lenders, and it has to do so before the amortization payments become due in 2021. The existing debt levels are $343 million over the short term and $6.3 billion over the long term. These debts cannot be sustained, and therefore either there will be no equity left for the shareholders, or they may see a minor recovery.
If the COVID-19 pandemic and the Russian exit from the OPEC deal had not happened, Seadrill would’ve still had a chance to negotiate an extension of the amortization plan with the lenders.
Moreover, there are other companies in the same business on the way to restructuring – Valaris and Noble Corp. – these are competitors of Seadrill. Under the circumstances, the company feels that waiting out the matter and carrying debt is a less appealing alternative; restructuring seems a better idea.
Even in this bearish phase, astute investors may be able to make a profit from Seadrill shares by riding a wave of bear rallies as and when they occur. In the larger scheme of things, investing in Seadrill is fraught with risk. There’s every chance of even the principal being wiped out.