Please ensure Javascript is enabled for purposes of website accessibility

Seadrill Ltd. Shares Down 12% As Industry Consolidation Kicks Off

By Jason Hall – May 30, 2017 at 4:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Today's announcement that ENSCO PLC is acquiring Atwood Oceanics could be sending ripples through the industry.

What happened

Shares of in-trouble offshore driller Seadrill Ltd. (SDRL) had sunk 12% for the day at 3 p.m. EDT on May 30. They're now well into penny territory, at less than $0.50 per share. 

So what

Today's big price drop is probably a reaction to a few things. First, most offshore drillers were down today, as oil prices have continued to fall since mid-last week. With Seadrill in the midst of negotiations with its debtholders to restructure the company and its debt, its shares are almost always going to be more volatile on days when its peers are moving big, as many are today. 

Offshore oil rig at night.

Image source: Getty Images.

Second, the first big industry consolidation move was announced today, with ENSCO PLC (VAL) agreeing to acquire Atwood Oceanics, Inc. (ATW), in an all-stock deal. 

While there haven't been any rumors, it's possible some Seadrill shareholders have been holding out hope that the company would be acquired, saving investors from the outcome of getting wiped out by bankruptcy -- a likelihood that increases with each passing day at this point. 

Like Atwood, Seadrill possesses one of the newest and most advanced fleets in the industry. But unlike Atwood, Seadrill has one of the biggest debt loads in the industry, both on a per-vessel and total amount. 

Furthermore, Atwood is also a relatively small company, making it a much more likely target than the much bigger Seadrill. 

It was also reported over the weekend that Seadrill had dropped out of the running for a multi-year, multi-vessel drilling contract. That news also probably played some role in today's big sell-off. 

Now what

While it may be tempting to buy shares of Seadrill today after this big drop -- especially if you're willing to take on the risk -- it doesn't reduce your risk for permanent losses. At this stage, the writing is on the wall that Seadrill is headed for major reorganization that will wipe out most, if not all, of common shareholders' equity. 

If you're looking to take on some risk in the offshore industry after a sell-off, ENSCO may be a better place to look. Shares are down 5% following today's acquisition announcement, and frankly, its move to acquire Atwood Oceanics looks really smart.

It will probably take some time for the benefits to hit the bottom line, but a few years down the road, it should work out well for ENSCO shareholders, and for Atwood shareholders who take shares of ENSCO when the merger happens.  

Jason Hall owns shares of Atwood Oceanics, Ensco, and Seadrill. Jason Hall has the following options: long July 2017 $3 calls on Seadrill. The Motley Fool owns shares of and recommends Atwood Oceanics. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SeaDrill Limited Stock Quote
SeaDrill Limited
Valaris plc Stock Quote
Valaris plc
Atwood Oceanics, Inc. Stock Quote
Atwood Oceanics, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.