What: Shares of Seadrill (NYSE:SDRL) jumped more than 55% by 11:30 a.m. ET on Friday. This is due to increased speculation that the company is about to receive a cash infusion from its chairman, which is causing short-sellers to run for cover.
So what: Bloomberg reported today that John Fredrikson, Seadrill chairman and 24% shareholder, might be raising cash to bail out the beleaguered offshore driller. That was initially speculated yesterday after it was reported that he had sold part of his stake in salmon farmer Marine Harvest ASA. That sale brought in $510 million in cash, which analysts view as likely being earmarked to bail out Seadrill.
Seadrill, which said it is working on a funding plan to address its more than $10 billion in debt, is thought to be considering issuing more than $1 billion in new equity to pare down its debt. Fredrikson is seen as a likely source of that equity given that he already owns a large stake in the company and has bailed out his investments in the past when they've run into trouble.
The thought that he could be about to bail the company out is causing short-sellers to buy Seadrill stock in order to cover their short bets. As of the end of January, more than 16% of Seadrill shares had been shorted as traders bet the company could go bust amid the downturn in the offshore drilling sector. However, with the company working on a plan to address its problems, including a possible equity infusion from its top shareholder, it's starting to blow a hole in the short thesis.
Now what: Despite market speculation, Seadrill has yet to release its funding plan. So, in essence the market is buying the rumor, which could lead to a lot of selling on the actual news. That's unless, of course, the funding plan is better than expected, which would only happen if the company is able to address a meaningful amount of debt without significantly diluting current shareholders. Furthermore, another big issue is the continued weakness in the offshore drilling market, which is a long way away from recovering given that the price of oil remains stuck in the $30-a-barrel range. Until that price vastly improves, fueling increased investment in offshore drilling, Seadrill's future will remain cloudy even if it puts together a stellar funding plan.