What happened

Shares of Seadrill Limited (NYSE:SDRL) are down 52% as of noon EDT. The sharp decline comes after the company announced it had extended the renegotiation period with its lenders to find a solution for the company's debt load.

Offshore rig at sunset

Image source: Getty Images.

So what

At first, the announcement that the company had extended the renegotiation period for its upcoming credit facilities sounded like good news: It meant that creditors were giving Seadrill more time to sort things out. Unfortunately, that wasn't the case.

Following the announcement that creditors had extended the maturity date of those credit facilities, here's what management said:

While no definitive terms have been reached, based on stakeholder and new money investor feedback, as well as the Company's existing leverage, we currently believe that a comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment, losses or substantial dilution for other stakeholders. As a result, the Company currently expects that shareholders are likely to receive minimal recovery for their existing shares.

We expect the implementation of a comprehensive restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings, and we are preparing accordingly.

The press release continued to say that this won't impact the operations of the company. For investors, though, that message is little solace.

Now what

This announcement shouldn't come as too much of a surprise. Back in January, the company had said it was already struggling to renegotiate this debt, and that April was going to be the cutoff date for whether the company would come up with a solution that could result in bankruptcy. Seadrill was looking very much like a binary-outcome stock.

Today, that binary outcome is shifting more toward bankruptcy. Even if management can avoid filing for Chapter 11 protection, it's almost certain that current shareholders will get wiped out. For the next several months Seadrill's stock will be a dead man walking, and should be avoided.

Tyler Crowe owns shares of Seadrill. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.