There's no way around it: Seadrill (NYSE:SDRL) is really in a bind. The long slog of low oil prices has left the company with little new work for its fleet of rigs, and a lot of its creditors are calling right now. This has led management to make a last-ditch effort to keep the company afloat.
With such a major event looming, management put on its best face to investors during its conference call, to show that there are some positives for the company and that these credit negotiations may not be the end of the road, just a major speed bump. Here are some selected quotes from the company's most recent conference call to give you an idea of where management's head is at.
Part of the reason Seadrill finds itself in the current mess is that the company's massive expansion plans were simply too much to handle during this downturn in oil and gas prices. Sure, the company had a lot of debt at the beginning of the downturn, but that could have been manageable with the large cash flow it was churning out at the time. Trouble was, it had too many obligations toward capital spending, and new rigs under construction.
The company has been trying and trying to push back the delivery of several newbuilds as long as possible. And on the most recent call, CEO Per Wullf did highlight that there were a couple of rigs on which it has been able to delay delivery:
As you are aware, we have two Samsung units scheduled for delivery in March and April. However, I can confirm that it will not be the case as the units are still incomplete and we remain in constructive discussions to defer delivery of both Samsung units until we can find a bindable contract.
Whether the company actually finds a bindable contract that will make taking delivery of those rigs worthwhile -- think those long-term contracts that integrated oil and gas companies sign when they start a multiyear drilling and development plan -- remains to be seen. Based on the company's market outlook, that may be tough to achieve.
Speaking of the outlook
In terms of what is on the company's horizon, Anton Dibowitz, executive vice president, sees some small glimmers of hope, but prospects haven't materialized into anything significant to date:
The short- to medium-term outlook for the charter in market remains extremely challenging. Whilst tendering activity has continued at increased levels over the past few months, near-term drilling programs continue to be largely based on spot market activity and the number of oil companies continue to have excess rig capacity on contract. Available work is fiercely competitive, with drilling contractors bidding at or below cash breakeven rates in order to keep rigs working.
In the floater segment, we continue to expect utilization levels to get worse during 2017 before it gets better as more units become available than are required in the short term. Scrapping and cold stacking of all the units continues, and a rational analysis of the cost of reactivation versus the remaining useful lives for these units will mean that many of these older, less capable rigs should never return to the competitive market.
A place where drilling could boom soon?
If there is one place that looks rather attractive for Seadrill right now, it's Mexico. Back in December, multiple blocks were made available in Mexico's first offshore auction in decades, and several big-name integrated oil and gas companies won areas. With some of the blocks having similar geology to the U.S. side of the Gulf, there are good chances that those integrated oil majors will commence exploration activity there relatively soon.
According to Wullf, this could play well into Seadrill's hands since the company already has extensive relationships in the country with the national oil company PEMEX, and experience in these waters:
We've obviously been in Mexico for a significant period of time, both on the deepwater side and on the jack-ups side right now. So we have experience in drilling deepwater wells in Mexico and, in fact, I think we drilled the deepest well drilled in Mexico with the West Pegasus. It's a very interesting market. The liberalization of that market and the steps they've taken to open up that market to the international oil companies leave us with good promise. We obviously know the market. It was a significant part of the reason why we got the contract with ENI to take the West Castor in there because it is a difficult market to get started off in. And having an idea of how to operate on the ground was a -- and our track record there was a good part of why we were able to secure that work. So we feel quite good about our competitive advantage in able -- in being able to secure additional work in Mexico.
The really bad news
All of that was probably the best news the company could give, because CFO Mark Morris had to explain to everyone that the company is in some hot water with its creditors:
Feedback from stakeholders and potential new investors also indicates that a comprehensive and consensual agreement will likely require conversion of our bonds to equity. Under such circumstances, the new capital raised and any resulting debt conversion would likely result in substantial dilution to our shareholders and potential losses for other financial stakeholders.
Discussions with all parties actively continue. However, given timing, it will be challenging for us to finalize a consensual agreement before the 30th of April. Although an extension of this date is possible with lender consents, we may be unable to obtain an extension on terms acceptable to the company. In the event that a consensual restructuring agreement is not concluded or an agreement to an extension is not reached, we are also preparing various contingency plans, including potential schemes of arrangement or chapter 11 proceedings.
From an investor standpoint, this is the only thing that matters right now. The next few weeks are going to be real nail-biters as the company hopes to renegotiate these debts. It seems that, based on the CFO's statements, the best-case scenario will be a renegotiation with significant shareholder dilution. The worst-case scenario is bankruptcy. The only factor offering investors hope that they won't get completely wiped out is that the chairman of the board -- John Fredriksen -- owns 24% of all shares outstanding. Chances are, he doesn't want his holding in the company he started to get wiped out, either.
Ill effects with customers?
There are knock-on effects when a company is in open negotiations with its creditors and is at risk of bankruptcy. One is that customers may be a little nervous about counterparty risk. When asked about these credit renegotiations and whether they have impacted negotiations with potential customers, Dibowitz was a little more upbeat than one might expect:
No. Obviously having the restructuring discussions in front of us don't make it any easier. But I think we've demonstrated an operational track record. Our customers understand the performance we deliver and I hope by -- you can see by the number of 11 commercial deals that we've done since our last earnings call that we are still managing to get our rigs contracted.
It's slightly encouraging that customers still want to use Seadrill's assets, because losing its customer base would be a double whammy that would permanently sink the company.
Ultimately, though, it all boils down to the kind of deal that can be hammered out in the next several weeks. It seems that the outcome is very much in the air right now, and hopefully the company can find enough of its creditors willing to do a debt-for-equity swap. There is also the option to sell some rigs, too, as one of Seadrill's competitors has signaled it is on the market to add some rigs to its fleet. Until then, we wait.