If you want to find one of the worst causalities of the declines in oil prices, SeaDrill Ltd (NYSE:SDRL) would have to be it. SDRL stock has cratered into penny stock status as drilling offshore for oil just doesn’t make sense at the current juncture. Add in a hefty dose of debt and it’s easy to see why investors have been abandoning shares and that the company is flirting with bankruptcy.
But investors in SeaDrill stock were treated with some crazy gains heading into the long weekend.
Rumors have begun to circulate that management may have found a suitor for the company’s struggling assets. The sheer thought alone sent SDRL stock surging up more than 75%.
Don’t believe the hype.
Despite the positive news and its potential, SeaDrill stock is as good as dead. Any hopes for M&A — and recovery for the stock — are long out of the picture. SDRL is as good as dead.
SeaDrill Sees Some Hope
Given how far oil prices have fallen, it’s not shocking to see that many energy stocks have turned to mergers and buyouts as a way to survive and keep on growing in the new pricing environment. A big hefty dose of that has been in the oil services sector, which has felt the low oil price squeeze worse than most.
Thanks to its massive debt load and deteriorating financials, any chance at M&A for SDRL would be met with welcome arms.
So when Bloomberg reported that SeaDrill may finally have a suitor, the stock went crazy — gaining more than 75% late Friday afternoon.
The rumor comes from China Merchants Group (CMG), which is a state-owned enterprise that owns a variety of shipping and transportation assets. According to Bloomberg, a person with knowledge of the matter said that CMG had been considering deals in the struggling sector and is in the early stage of its analysis. The person named that offshore drillers like SDRL and rival Shelf Drilling Ltd were part of its analysis.
The moves make sense given CMG vast empire of shipping and merchant assets. Those assets include a firm that builds offshore oil rigs, drill ships and other equipment needed to extract oil in the deep-water. So adding SeaDrill makes a lot a sense.
Don’t Hold Your Breath for SDRL
On one hand, it’s easy to feel excited for SDRL. The stock is down more than 90% this year and it has been one of worst performing energy stocks in recent memory. It’s 100% understandable why investors sent the stock through the roof when the report was released.
The problem is, investors probably shouldn’t get too excited. SeaDrill is still going the way of the dodo.
For one thing, there isn’t an official deal and China Merchants Group hasn’t made an official offer for Seadrill. And in fact, an updated version of the story, Bloomberg reported that through an emailed statement, CMG hasn’t even considered buying offshore drilling operators such as Seadrill and Shelf Drilling. Even SDRL had no idea what the basis for the rumor was.
There’s simply no truth to the buyout rumor that propelled the stock in the first place.
Secondly, SeaDrill’s high debts makes a buyout pretty hard. SDRL has been trying for more than a year to try and restructure and remove billions of dollars’ worth of debt from its balance sheet. With the firm reporting another loss last quarter — this time $33 million — those restructuring efforts have increasingly turned towards Chapter 11 bankruptcy.
And it will most likely go that course. During its earnings report, SeaDrill’s management mentioned that “shareholders are likely to receive minimal or no recovery for their existing shares.” That’s actually a change of language and represents that difficultly that SDRL is facing through its restructuring efforts. Shareholders simply won’t have anything left after it files for bankruptcy sometime around Sept. 14.
As for the buyout, even if CMG was interested, there’s no reason to buy SDRL today when it can get it out of receivership with that debt gone. Moreover, they wouldn’t be buying equity, they’d be buying SeaDrill’s secured debt to have a seat at the table for its remaining assets. Neither of these scenarios would be great for current shareholders of SDRL.
Just Run From SDRL Stock
In the end, the buyout rumor was a nice distraction for SDRL’s current woes. However, the truth is, SeaDrill is still going to file to bankruptcy and current shareholders are going to be left holding the bag. Then and only then, will someone like CMG consider buying the new SeaDrill and its zero debt.
The bottom line is that SDRL stock is still as good as dead. If you still are holding this, use the M&A gain and walk away from the table.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.