What: Shares of Seadrill (NYSE:SDRL) were sinking on Thursday, down more than 11% by 2:15 p.m. EDT. Weighing on the stock was news that the company had completed another bond swap in an effort to trim its mighty debt load.
So what: In Seadrill's latest bond swap, it will issue 7.5 million new shares of stock in exchange for $50 million in debt due next year. Given its recent stock price, that exchange implies that the company is paying just $0.5475 on the dollar for this debt. That's a roughly similar discount to its prior exchange, when Seadrill issued 8.18 million in new shares in exchange for $55 million in debt that was also due next year.
The primary reason this debt swap is weighing on the stock today stems from the fact that Seadrill has the equivalent of more than $3.7 billion in debt due by the end of next year. Because of that, its debt-for-equity swaps are really just a drop in the bucket given the sheer volume of debt the company has to address. Further, it suggests that significant dilution is a possibility in order for the company to make a meaningful dent in its debt.
Investors need to look no further than troubled natural gas producer Chesapeake Energy (OTC:CHKA.Q) for a recent example of the dilution to current investors from these debt exchanges. Last month, Chesapeake Energy issued new shares representing 10% of its outstanding stock to complete two separate debt-for-equity exchanges. That said, despite all of that dilution, the company was only able to reduce its outstanding debt by 4%. Because of that, analysts warned that more dilution was likely on the horizon given the amount of debt Chesapeake Energy still needed to address to satisfy its own near-term bond maturities.
Now what: Seadrill has a lot of debt to address by the next year, and that has investors concerned about dilution. That being said, it would be a much better fate for the company to reduce its debt and stay out of bankruptcy than for the company to sink under the weight of its debt, causing its equity holders to end up with nothing. In other words, it's not the best scenario, but it's not the worst, either.