Shares of Seadrill (SDRL) are down 26.8% as of 11:45 a.m. EST today after the company announced it was in negotiations with its creditors to restructure its debt.
This debt restructuring was probably a long time coming, but in some ways, it may have not been easy to predict back when the oil market was humming along in 2013-2014. At the time, Seadrill had the newest, most capable fleet on the ocean with a big backlog of work. There were concerns, of course, with the total amount of debt, but the company's cash flows looked to be easily covering those obligations at the time.
Then the oil crash hit. Hard.
If this was any other industry cycle, perhaps Seadrill's woes wouldn't be as much of a concern because all it takes is a lack of investment for a while to raise prices and restart the investment cycle. That would have put Seadrill's rigs back to work and corrected its cash flow situation.
What is different this time, though, is that shale drilling in the U.S. has thrown a new dynamic into the mix. This quick to develop resource has gone from barely economical at $90 per barrel to very economical at $55 a barrel, and it means that producers are electing to drill shale rather than head offshore for new sources.
That leads to where we are today, a company that was built to handle a much shorter downturn in the industry and is now struggling to make payments on or refinance its debt. As a result, it is in discussions with its lenders. Here's what CEO Per Wullf had to say in today's press release:
These negotiations have proved to be more complex than we had originally anticipated. Nevertheless, key stakeholders have demonstrated a clear desire to be part of a solution and with the right structure and terms we believe there is significant capital available to us. Seadrill is a great company with excellent people, assets and customers and we look forward to concluding a transaction that ensures Seadrill continues to be well positioned for the eventual recovery in the industry.
The goal of the deal is to extend the maturities of several of its bank loans and unsecured notes as well as raise $1 billion in capital. In order to do so, management stated the three words that no investor wants to hear: "significant share dilution." As you can imagine, the combination of raising $1 billion in the same paragraph with significant shareholder dilution is bound to send investors for the hills.
Perhaps I'm a little biased here as a shareholder, but it seems to me that there is some value left in Seadrill. Shale drilling can only absorb so much demand in the global oil market, and eventually we will need offshore oil to step in and fill that need. Seadrill's rigs are some of the best in the business and are a highly desirable product that will certainly generate a profit someday.
That being said, investors today are likely going to take a hard hit from any debt restructuring deal. Until we see some details on this debt restructuring deal, it's probably best to stay away.