Seadrill's (SDRL) stock currently sits 98.8% below its all-time high, which it set right before oil prices began crashing in 2014. Unfortunately for long-suffering shareholders like myself, the stock likely has farther to fall. That's because it's growing increasingly plausible that the company will file for bankruptcy, which could completely wipe out investors.
Drilling down into Seadrill's problems
Seadrill's issues stem from the fact it borrowed billions of dollars to finance the construction of a boatload of offshore drilling rigs that it thought would generate robust cash flow for years to come. As a result of that building boom, the company racked up more than $14 billion of debt and other liabilities. Worse yet, it primarily used bank debt that it secured with the value of its drilling rigs. While that enabled it to borrow more money at lower rates, this debt is harder to get out from underneath now that the dayrates for rigs have plunged along with oil prices and taken rig values down with it.
Seadrill is well aware of its problems and has been working with creditors for several months to find a comprehensive solution. However, with no agreement in sight and the clock ticking away, the company's warnings have grown dire.
Using the dreaded "B" word
Last month the company bought itself a bit more time after agreeing to an extension with lenders that pushed out the maturity dates of several of its credit facilities, as well as those of its MLP Seadrill Partners (SDLP), for several months. However, while the company noted that these extensions gave it more time to work with lenders and potential new money investors, the feedback it had received from those groups was very ominous. According to a statement from the company, it:
Currently believe[s] 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.
As the company's statement makes clear, it doesn't currently believe that investors will receive much or any value for their existing shares. That's because if the company does stay afloat without declaring bankruptcy, it will need to issue a significant amount of equity capital to new investors, which would lead to substantial dilution. Meanwhile, if it goes the bankruptcy route, it's likely that the result would be the cancellation of the common stock and new equity issued to creditors.
Is there any reason to hope?
Unless oil prices stage a remarkable recovery in a short amount of time, it's hard to see any optimistic scenario where current investors don't lose just about everything. That's because the company doesn't have the levers that could pull it out of its current nosedive. Selling assets isn't an answer because it won't get full value for them in the current market environment. That's clear from a recent transaction where the company sold three jack-ups for $225 million. While that's more than the $102 million in debt the company had outstanding on the units, it's a drop in the bucket compared to what it owes creditors. Further, the sale price is more than 45% below the $415 million carrying value for those rigs on its balance sheet, which will lead the company to record a $190 million loss on the sale.
That discount to the carrying value of the rigs is an interesting data point to consider. That's because Seadrill ended last year with $21.7 billion in assets on its balance sheet, which when measured against its $11.6 billion in liabilities, left shareholders with $10 billion in equity. However, if the company had to liquidate its assets at current market prices, it might get around the $0.50 on the dollar that it received in the jack-ups sale. If that were the case, it's easy to see how quickly shareholder equity could get wiped out.
It doesn't look like there will be anything left over for current shareholders once Seadrill completes its debt restructuring. At best, we might get to keep our common stock, which even after the dilution might one day be worth more than the current price. That said, it's growing more likely that the outcome is that the common stock goes to zero, in which case investors won't get a penny.