Lower oil prices — they’ve made for some pretty nasty returns across the energy sector. But none have been as nasty as Seadrill Ltd (NYSE:SDRL). Since oil prices started declining back in 2014, the deepwater driller has lost a staggering 93% of its value. Heck, year-to-date alone, SDRL stock is down by 42%. And that decline isn’t the market being unfair or mispricing risk. Many factors continue to conspire against the advanced deepwater driller.
And those factors aren’t letting up anytime soon.
While Seadrill has announced and started a major turnaround plan, those efforts might be pretty futile. The combination of bearish factors might be too much for the once mighty dividend kingpin to bare. Don’t let the firm’s past history or low share price fool you.
SDRL is sinking.
A Complete Collapse At SDRL
A few years ago, SDRL couldn’t help but make money hand over fist. With oil prices hitting $100 per barrel plus, deepwater drilling was all the rage. But when you’re drilling down 10,000 ft, it takes some pretty big muscle and Seadrill was willing to rent that muscle for more than $600,000 per day.
The problem is, when oil is closer to $40 per barrel, deepwater drilling simply doesn’t make sense. And for SDRL stock, that’s a huge problem. Seadrill owns one of the most technologically advanced fleets in the business and it simply can’t find work for its jack-ups, drillships and other deepwater equipment. Its backlog of contracted work has shrunk by 12% quarter-over-quarter.
To make matters worse, the drop in energy prices has made firms that are already contracted and drilling think twice about using Seadrill. Contract cancellation and renegotiation are now the deepwater drilling norm, and SDRL has been a huge victim of that. Recently, Mexico’s PEMEX bailed on its contract with Seadrill.
Furthermore, Norwegian oil giant Statoil ASA(ADR) (NYSE:STO) was willing to pay Seadrill $61 million and Exxon Mobil Corporation (NYSE:XOM) was OK with paying $125 million in order to walk away from their contracts. That’s right, two of the world’s largest oil firms are willing to pay money not to drill.
In order to keep business going, SDRL has had to resort to dropping day rates to basically break-even prices. Even then, contracts continue to be broken and its rigs aren’t working. Roughly 20% of its floater fleet has been cold stacked — meaning it has been put into storage because Seadrill’s management doesn’t think it’ll be working anytime soon. Another 20% of its floater and jack-up fleet is sitting idle at the docks.
As a result, earnings and cash flows at the firm have become abysmal. All the year-over-year numbers for the second quarter saw huge double-digit declines. Revenues for Seadrill fell by 24%, net income slid by 35% and earnings-per-share dropped by more than 32%.
The Looming Debt Bomb For SDRL
All of this wouldn’t necessarily be a problem for Seadrill, if it wasn’t for its big time debt problems. As of the end of last quarter, SDRL had a whopping $9.5 billion in long-term debt. That is less than it had a year ago. The firm has undergone some successful amendments to a few credit facilities and has done some small debt-for-equity swaps in recent months.
The problem is that it may not be enough to stay afloat.
SDRL has a ton of debt coming due very soon. There’s roughly $400 million due by the end of the year and another $2 billion due before next June. After that, the hits keep coming for SDRL as more debt comes due.
The problem is that the lack of cash flows from lower revenues and canceled contracts is making paying that huge debt pretty darn hard. Seadrill managed to generate only $303 million in cash from operations during the last quarter. Now, the firm has about $1.2 billion in cash on hand, but based on its cash burn and needs, that won’t be enough to last as its debts start coming due. Especially, since its backlog is being reduced faster than it is replenishing it.
Analysts are now pointing to the fact that SDRL will be forced to do another huge equity raise in order stay afloat. The problem here is when your shares are already trading for $2 and the prospects for your sector are dim, the chances of doing a successful raise are pretty much, next to none.
The wild card is billionaire shipping magnet John Fredriksen. Fredriksen owns the vast bulk of SDRL stock as well as other shipping and drilling firms. Fredriksen could provide the backstop for Seadrill, by increasing his stake in an equity raise. But that dilution would be massive and doesn’t necessarily leave much for current shareholders.
In the end, it may be the bankruptcy gods that come calling for Seadrill.
Just Walk Away From SDRL Stock
Given that huge looming debt bomb and the continued deterioration of the offshore/deepwater drilling environment, Seadrill stock is a basket case. There is a lot of “what ifs” when it comes to shares and its $2 price tag reflects position. It may be tempting to snag shares — given its awesome fleet — but the relativity is that the sort of high oil costs needed to make Seadrill’s offerings a big buy won’t be there for quite some time.
The value of that low share price will be lost as SDRL could finally succumb to its debts.
In the end, there are better oils service stocks that will benefit from deep water and offshore drilling that don’t have the same kind of risks that Seadrill has. It’s time to end the SDRL story and move on.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.