What happened

Shares of Seadrill (NYSE:SDRL) rocketed in May, ending the month up 78%. Fueling the offshore driller's rebound were fading investor fears after the company received approval for its plan to exit bankruptcy in April.

So what

In mid-April, a U.S. judge approved Seadrill's plan to exit Chapter 11 bankruptcy. That deal will extend the maturities of $5 billion in bank loans and convert $2.3 billion of bond debt into equity. Further, Seadrill will receive a $1 billion capital injection led by the company's largest shareholder.

An offshore driling rig with the sun setting in the background.

Image source: Getty Images.

Unlike most bankruptcy outcomes, legacy shareholders didn't see their investment in the company wiped out during the proceedings. While they'll only get 2% of the equity in the post-bankruptcy company, that's certainly better than nothing. Because shares won't be extinguished, investors are now starting to focus on the potential of Seadrill going forward, which is a company with a much stronger balance sheet that's in a better position to benefit from an improving offshore drilling market now that oil prices are meaningfully higher. That seemingly brighter future is why shares rallied sharply last month.

Now what

Seadrill will emerge from bankruptcy as a financially stronger entity that should benefit from an improving offshore drilling market. However, shares of the offshore driller could be excruciatingly volatile in the coming year due to the likelihood that creditors will sell the equity they receive in the bankruptcy settlement. On top of that, the oil market remains in a fragile state, which could also affect the stock if oil prices take another tumble. Because of that, investors might want to watch this one from the sidelines and consider investing in one of these top oil stocks instead.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.