Shares of offshore driller Seadrill Ltd. (NYSE:SDRL) have steadily fallen since mid-2014, when the ongoing oil downturn started. At this writing, investors who bought at that time have already lost 99% of their investment dollars, and many have already made the (probably smart) decision to salvage what was left and move on. However, with a still-viable fleet of high-quality vessels and a well-trained crew of operators, Seadrill remains a going interest months after the company warned investors that bankruptcy is becoming increasingly likely.
Trading in Seadrill's stock continues, and June was another bad month, with shares falling 19.9% and now dwelling solidly in penny-stock territory. The stock is trading for around $0.36 each. For some context on how far Seadrill has fallen, the company was paying a dividend nearly triple that on a quarterly basis only three years ago.
Seadrill, like most of its offshore-drilling peers, rode oil prices down last month. June was one of the worst months for crude-oil futures this year, with prices finishing the month nearly 4% lower than they started. But that doesn't tell the whole story, since a late-month rally reversed a scary trend that saw Brent and West Texas Intermediate prices down more than 11% at one point:
How does this affect Seadrill? It's a twofold answer.
First, in the short term, it doesn't really affect the company or its operations, which are almost exclusively on a contract basis. But in the long term, higher oil prices are relatively important, because the viability of every undeveloped oil asset is tied to the market price of crude oil. And since offshore oil is incredibly expensive and time-consuming to develop, low oil prices have seen many producers dedicate more of their capital spending to onshore exploration and production growth.
In other words, having oil prices trend lower is concerning for offshore, particularly as long as producers with onshore assets can grow production enough to continue to meet global demand. We are already in the midst of what has become the worst downturn for offshore drillers in the history of offshore drilling, and with Seadrill running out of time to renegotiate multibillion-dollar debt maturities set to expire at month's end, you have a clear reason investors would be selling out of Seadrill and sending its stock price even lower.
With Seadrill there are two stories: Seadrill the stock, and Seadrill the company.
For Seadrill the company, there is a path forward, and that's exactly what management is negotiating with its creditors now. There's very little likelihood that the company would be liquidated, since its assets are some of the best in the water, and it is well known for being a safe and efficient operator in many conditions. So looking ahead a couple of years, when the offshore cycle has turned, Seadrill will almost certainly be one of the biggest drillers operating.
But it's likely to be a far different story for Seadrill the stock and investors who bought at a higher price than the current one -- and possibly those who buy at this price. After all, management has filed multiple SEC filings in recent months, stating that Chapter 11 is very likely, and that current common shareholders are likely to have very little -- if any -- stake in the company once restructuring negotiations with the holders of Seadrill's $9.6 billion in debt is complete.
Bottom line: There's a faint sliver of hope that common shareholders could get a stake in the restructured Seadrill. If that happens, there's definitely upside from current prices -- but it's almost certainly not $10 per share of upside, or anything close to that. But that sliver of upside is not very big, and probably not worth the risk of a total loss.