As of 11:45 a.m. EDT today, a quick glance at any of the major financial websites for the share price of Seadrill Ltd. (NYSE:SDRL) makes it look like the stock is up an insane 21,253%. That's based on yesterday's closing price of $0.12 per share, and the current price of $18. But a whole lot of other things happened overnight, completely changing the math based on the company's emergence from Chapter 11 bankruptcy on Monday.
An 80% reduction in the number of shares outstanding and a 98.1% reduction in the percentage of equity owned by common shareholders before the bankruptcy emergence mean that anyone who owned shares at market close yesterday is actually losing money -- more than 40% -- today.
In short, everything changed overnight, following the company's announcement that it had emerged from bankruptcy, a move which drove its stock price down more than 40% yesterday. Based on how the market has priced all of its competitors, yesterday's decline shouldn't have shocked anyone who's followed the sector. Here's a quick look at the new equity structure, from Seadrill's press release:
- 14.25% of the new common shares issued to holders of unsecured claims against the company and certain of its Chapter 11 debtor affiliates;
- 23.75% of the new common shares issued to participants in the $200 million equity investment under the Plan;
- 54.625% of the new common shares issued to participants in the $880 million new secured notes investment under the Plan;
- 1.9% of the new common shares issued to holders of existing common equity interest in the company as of the effective date, an effective exchange ratio of approximately 0.0037345 new common shares per each existing share, and
- 5.475% of the new common shares issued as a structuring fee to certain of the new money investors.
Further confusing the matter for the average investor, there's incorrect math on most of the financial websites, showing Seadrill as having a market cap above $9 billion today. That would make it by far the most valuable of the major offshore drillers:
But it's a miscalculation based on the company's pre-bankruptcy share count, which was just over 504 million. As of today, Seadrill has 100 million shares outstanding. If we multiply the current $18 share price by the new share count, we get a market cap of $1.8 billion, making Seadrill one of the cheaper-valued offshore drillers.
If you owned Seadrill shares yesterday, your investment is actually worth less money today than yesterday. Here's how:
If you owned 1,000 shares at the close yesterday, you would own 3.7345 shares of the "new" Seadrill now. At yesterday's close, your 1,000 shares would have been worth $120 based on the $0.12 per share closing price. Today, your 3.7345 shares would be worth $67.22 based on the $18 price today. That's another 44% loss after yesterday's massive drop.
Bottom line: All of the moving numbers in the background are creating a lot of noise, and this is exactly why I cautioned investors against looking at yesterday's big sell-off as a buying opportunity.
Ironically, the current price might be an excellent value point, based on the carrying value of the company's assets when it last filed financials. Trading for less than $1.9 billion in market cap, with a very high-quality fleet of drilling vessels and what should be a strong balance sheet, it's moving up my list of buy candidates.
But just as I wrote yesterday, until I see its balance sheet -- including all assets and liabilities -- the math on any valuation is a little too "back of the napkin" for me. While I don't think it would be unreasonable to take on a little risk to buy a small position today, I plan to wait for updated financials and balance-sheet data before acting. After all, there are plenty of opportunities in the oil patch now.