For a while SeaDrill Ltd (NYSE:SDRL) was a high-dividend play, pushing out almost $4 per share in cash every year, amounting to about at 10% yield. As an oil driller, the business behind SDRL stock was always subject to supply-and-demand … as an offshore driller, that was even more true. So when oil prices started to crash in 2014, so did the oil drilling industry, and so did Seadrill, and energy stocks in general.
Oil drilling is very capital intensive, and SDRL stock had a lot of debt — a mountain that is now standing at $14 billion against which it pays about $372 million annually in debt service.
Although Q1 results were better than expected, it really doesn’t do much to change the fate of Seadrill stock, which is undergoing a restructuring — and which will wipe out most but not all of existing shareholder value. So before you jump in at $0.42 per share thinking it’s a value play, you should know a new company is going to emerge from the ashes.
That being said, there are possible trades here thanks to volatility.
Here’s What SDRL Stock Has to Offer
First, you should know that, according to the 10-K, SDRL actually owns large portions of other drilling operations.
Seadrill owns about 47% of Seadrill Partners LLC (NYSE:SDLP), 70% of North Atlantic Drilling Ltd. (NYSE:NADL) and about 17% of Norwegian firm Archer Ltd. (OTCMKTS:ARHVF). Sevan Drilling ASA (OTCMKTS:SVVDF) is also a Norwegian company that SDRL owns 50.1% of. SeaMex Ltd. is a private joint venture (50-50 ownership) with The Fintech Advisory. The company also owns two-thirds of another private company called Asia Offshore Drilling.
Despite all these ownership stakes, and the diversification is one reason why I can see investors would want to have owned SDRL stock, the oil drilling business was devastated because of the oil prices. Revenues have been more than halved since Q4 of 2014, which has directly translated into a halving of EBITDA.
Seadrill has been transparent about what is likely to happen with itself in its latest communications: “It is likely that the comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment and losses for other stakeholders, including shipyards. As a result, the Company currently expects that shareholders are likely to receive minimal recovery for their existing shares.”
In other words, do not invest in the equity. On the other hand, if you are cool receiving 5% of the value of your shares in a new company, be my guest. The quarterly report said all will be revealed before July 31.
Bottom Line on Seadrill
So while I would stay away from investing, there may be some significant trading upside. Right now, Nasdaq.com reports about 20% of the float being held short. The announcement of the restructuring itself could be one catalyst to send shares higher. As always, a spike in oil prices could cause the same.
Most intriguing is the speculation that Norwegian shipping mogul John Fredriksen, who is the world’s largest owner of oil tankers, and has substantial shipping holdings, including a stake in SDRL, will pony up as much as $1.2 billion into the company. That could also trigger a short squeeze.
Seadrill does have about $3.4 billion in backlog, so that is of some comfort. The problem with deep-sea rigs is that oil prices really need to be stable in the $70-area to be solidly profitable. Oil has been trending between $45 and $55-per-barrel, and that’s simply not high enough.
I would say that aggressive speculators and traders may have upside into the $0.70-$0.75 range here. Arguably, thirty cents of possible upside against 42 cents of possible downside is not the worst of all worlds.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had no positions in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.