Should Investors Be Worried About Seadrill's Liquidity?

Seadrill had to cancel a bond issue, but does that mean investors should be concerned about the company's liquidity?

Rupert Hargreaves
Rupert Hargreaves
Jul 16, 2014 at 12:45PM
Energy, Materials, and Utilities

Last week, Seadrill (NYSE:SDRL) sought to take advantage of its strong share price by issuing $1 billion in 2019 convertible bond.The issue would have a conversion premium of 30%-35%.

Surprising turn
However, within 24 hours of this issue being announced, in a rather surprising turn of events, Seadrill pulled the issue. The company claimed that due to the adverse movement of its share price after the announcement of the bond (the shares dropped around 5%), the issue would have been offered at an unattractive conversion price. The order book for the issue was well covered when it was pulled, indicating a strong demand for the bonds.

There is no reason for Seadill's investors to fret following this news. Management revealed that this was a non-essential issue, viewed more as an opportunity rather than a necessity. Additionally, management stated that it will have cash of approximately $1.5 billion at the end of July, a strong and liquid position.

And it seems as if this issue really was an opportunity rather than necessity. Bankers are virtually queuing up to lend to Seadrill.

Busy week
It was a busy week for Seadrill in terms of financing. Along with the convertible bonds, the company also refinanced credit facilities secured by the West Pegasus, West Gemini, and West Orion. The original refinancing request was for a sum of $900 million, although demand was so strong, Seadrill threw in another deepwater drillship as collateral and the facility was upsized to $1.35 billion.

The facility carries an interest rate of Libor plus 2%. Although it was only designed to refinance vessels, this deal will provide Seadrill with an additional $350 million in cash -- 35% of the cash the company tried to raise with the convertible deal.

On the conclusion of this refinancing deal, Seadrill will be left with one ultra-deepwater and four jack-up units to be refinanced during 2015, and one ultra-deepwater and four jack-up units to be refinanced during 2016, a total of $1.2 billion to be refinanced. Based on the strong interest for the recent refinancing, it should be easy for Seadrill to find banks willing to offer the company cash to meet these obligations.

Reducing leverage
Seadrill's level of debt is nothing to worry about just yet; the company has plenty of cash on hand. Additionally, total debt to earnings before interest, tax, depreciation, and amortization is a manageable 2x.

However, the company's smaller peer, Vantage Drilling (UNKNOWN:VTG.DL) is struggling with a debt to EBITDA ratio of over five times, although the company has plans in place to quickly reduce this debt burden.

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Indeed, during the first quarter of this year Vantage paid down $30 million worth of debt. The company intends to increase repayments to approximately $50 million per quarter on average.

In the grand scheme of things, these repayments are minimal; during the first quarter the company had $2.9 billion of debt, so repayments of $30 million are only a dent. Nevertheless, Vantage has put in place an annual debt reduction goal of no less than $175 million.

All in all, though, Vantage's debt appears to be manageable. The company has no significant maturities until 2017 and cash flows are set to cover all debt service through 2018. By then, if Vantage hits its $175 million per annum debt reduction target, total debt should have fallen to $2.2 billion.

What's more, interest costs should have fallen by a significant amount and Vantage, with its lower debt pile, should be able to roll maturities falling due during 2019 and 2023.

The bottom line
So overall, investors don't need to be worried about Seadrill's liquidity. Banks are queuing up to lend to the offshore drilling giant, and barring any serious unforeseen circumstances, this should continue.

On the other hand, Seadrill's smaller peer Vantage does have a worrying level of debt, although the company has plans in place to reduce this to a more manageable level over the next few years.