Source: Seadrill Ltd.
Things couldn't have gone worse for Seadrill Ltd (SDRL) in 2014. The company entered the year amid an uncertain offshore drilling market, which ended up imploding when oil prices plummeted. That implosion caused some cracks in Seadrill's business model to break open, causing its stock to sink 70% on the year. Right now, the company has three big problems that it needs to fix in 2015 if it has any hope of turning around its awful stock performance from 2014.
No. 1 problem to fix: Its balance sheet
When Seadrill obliterated its dividend in November, it said that the decision was made to enable the company to strengthen its balance sheet. The company said it would take the $2 billion it's saving in dividends and use at least half of that cash to de-leverage its balance sheet. This became a necessity as the company started to notice that, "the financing market has become incrementally worse, and although Seadrill still has significant access to funding, some markets have become unattractive."
This could have posed a problem for the company because it needed to tap the financing market to finish funding its newbuild fleet. As the following slide shows, the company needed several billion dollars during the next two years to fund the remaining yard installments on its new floaters and jack-ups.
Sources: Seadrill Ltd Investor Presentation.
The company already had $12.6 billion in total net interest-bearing debt as of the end of the third quarter. Meanwhile, in addition to funding $3.9 billion in yard installments during the next two years, the company also has debt refinancing to undertake. Between bond and rig specific debt, the company has $1.1 billion in refinancing that needs to be made by the end of 2016. Suffice it to say the company needs to clean up these refinancing issues and reduce overall debt by the end of 2015 to put it on the correct course for a turnaround.
No. 2 problem to fix: Its shaky deal with Rosneft
Seadrill made a big bet on securing future growth by entering into a $4.24 billion partnership with Russian oil giant Rosneft. The five-year deal would have put five drilling rigs to work starting this year, while also creating a broader partnership between the two companies and Seadrill subsidiary North Atlantic Drilling Ltd (NYSE: NADL). However, trade sanctions from the West have put that deal in jeopardy, with the deadline for breaking the accord extended to May of 2015.
Seadrill is currently exploring alternative assignments for the first two drilling rigs from that deal that would have started this year. However, given the massive size of this deal, the company needs it to go through, especially given the current market turmoil. Bottom line here: Seadrill needs to figure out a way for this deal to work, or it has to quickly find new customers for its drilling rigs at a time when dayrates are plunging.
Source: Seadrill Ltd.
No. 3 problem to fix: Its reputation
The last thing Seadrill needs to fix is its reputation, which has been badly damaged by backtracking on previous promises. In the second quarter, the company pronounced that its dividend was safe through the end of 2015, and that the company was "increasingly comfortable that this period can be extended well into 2016 without any significant recovery in the market." Then, three months later, the company cut the payout all the way to zero in response to the sell-off in the price of oil. While the move appears to be the correct one in light of the company's need to fix its balance sheet, its reputation took a big hit, as it should never have boasted that the dividend was safe for the next two years if there was any risk that it could be cut.
It will take the company a while to regain investors' trust. The best way it can do that is to over deliver on its promises this year. The company will need to work hard to cut costs in order to boost cash flow and deliver earnings that are above expectations. It also needs to make good on its promise to reduce its debt, and should give strong consideration to changing its business model to make it less reliant on credit to fund growth. Finally, it wouldn't hurt if the company reinstated the dividend before the clock runs out on 2015.
Investor takeaway
Seadrill has a lot of work to do to fix its problems. While a return of high oil prices would help, the company still needs to take better care of those things that are under its control. If it does fix these issues, and oil prices cooperate, then the company's stock could rebound nicely in 2015.
