To say Seadrill Ltd (NYSE:SDRL) is a maddening name to own — or even just watch — would be an understatement. Somehow it’s still turning a profit, yet in more than one of its recent filings confirmed that a Chapter 11 bankruptcy filing is on the radar … if it can’t restructure some debt coming due within the next few weeks.
Some would say the company and owners of SDRL stock are merely getting what’s fair, should it come to that. More than most any other offshore drilling name, Seadrill took on a stunning amount of debt prior to 2014 to ensure its fleet and equipment were top-of-the-line, ignoring the distinct possibility that an oil glut was looming.
On the other hand, Seadrill is one of those companies a lot of investors are secretly cheering for, with the company doing everything it feasibly can as well as it can to effect a turnaround.
The question is, will it be enough?
The Seadrill Saga
The short version of a long story, for those who may not be overly familiar with the organization: Seadrill owns offshore drilling rigs and vessels that it leases to explorers. Though started in 2005, the company turned the heat up in 2009 and kept it turned up through 2013. As of the end of that year, Seadrill was sitting on $13.3 billion in long-term debt (versus $5.3 billion in revenue that year), certain the oil heyday would never end.
It did end, of course, with crude peaking at $106 per barrel in mid-2014 and falling to an early-2016 low of $27. Oil prices have recovered in the meantime, presently trading around $45 per barrel. The industry is hardly thriving though.
And yet, Seadrill remains mostly profitable. Earnings of 13 cents per share of SDRL stock last quarter may not have been red hot, but Seadrill is turning an operating profit. That’s more than many of its peers can say.
Problem is, it’s just not enough.
Math Is Immutable
Kudos to the company for doing something to protect the value of SDRL stock. Though it hasn’t actually helped — SDRL shares have fallen from $40 in 2014 to 40 cents as of today — Seadrill has made a point of whittling its long-term debt down from nearly $15 billion as of early 2014 to less than $10 billion as of the end of the first quarter of 2017. Its annual interest payments have been pared back from $478 million in 2014 to $412 million last year.
As was noted though, it’s still not enough. It’s that debt, in fact, the contract driller is trying to renegotiate now.
The near-term target is $2.85 billion worth of debt, which is going to mature before Seadrill has the money to repay the principal; it’s only got $1.56 billion in cash in the bank as of right now. Though it all doesn’t necessarily come due then, the self-imposed debt-restructuring deadline of July 31 is indicative of how quickly Seadrill has to accomplish something. Otherwise, it may well have to pull the trigger on the Chapter 11 filing idea it floated a few weeks ago.
The irony is that Seadrill is doing better. Last quarter’s operating expenses were deliberately cut by 10%, and between February and May the company’s work backlog had grown from $2.5 billion to $3.4 billion. That’s impressive considering rivals like Rowan Companies PLC (NYSE:RDC) and Atwood Oceanics, Inc. (NYSE:ATW) saw their backlogs shrink during that same timeframe.
A closer look at that improvement makes a difference in how it’s interpreted though. The crux if it came from new agreements with ConocoPhillips (NYSE:COP), but ConocoPhillips only extended its agreement to lease a couple of jack-up rigs for another ten years. The actual backlog for the last three-quarters of the year is only $1.7 billion, which is actually down compared to the backlog tally for the prior three quarters.
Seadrill needs a lot more money a lot faster than it’s lining it up.
Looking Ahead for SDRL Stock
Seadrill gave it the ol’ college try, to be sure, and it’s difficult for some investors to digest the fact that lenders may not be willing to work with a company that’s still turning a profit … even if only a marginal profit. Nobody comes out ahead if the organization files bankruptcy. Nevertheless, the odds-on favorite outcome here seems to be a Chapter 11 filing.
Even if that’s not how things pan out, though, SDRL shares are still effectively doomed. Most debt-renegotiation scenarios ultimately call for the issuance of more SDRL stock, which would further dilute already-anemic per-share results.
Some say oil needs to be priced between $65-$75 per barrel for Seadrill to have a legitimate shot at paying all of its bills as the company is capitalized right now, and that’s just not in the cards any time soon.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.