Seadrill (SDRL, Financial), which continues to navigate through challenging times, has been trading sideways for the last two months. During this period, oil has trended marginally higher, and there have been few positive developments specific to the company.
In terms of positive recent developments, Seadrill announced on April 27 that the company has sold its remaining stake in SapuraKencana (XKLS:5218, Financial) for approximately $195 million. With liquidity the key requirement for Seadrill, the development did infuse some positivity. It shows that Seadrill is moving in the right direction from a deleveraging perspective.
A more important development was announced on April 29 when Seadrill reached agreement with its banking group to extend its three nearest maturing borrowing facilities and amend certain covenants across its secured credit facilities. When Seadrill reported fourth-quarter results, the company pointed to restructuring in the first half of 2016, and this development is an important part of the restructuring process. The extension of the maturity profile for a few facilities provides some breathing room for Seadrill.
However, these are developments that might have been largely discounted in the stock, and the stock still remains sideways in anticipation of a bigger restructuring plan that might include potential sale of assets in 2016. This is the development that is likely to trigger stock upside and with restructuring likely to be announced in the first half of 2016, investors can expect positive news within the next two months.
From a restructuring perspective, I expect the following developments:
- Seadrill still has a meaningful new rig delivery backlog, and I expect significant extension of the delivery dates or potential cancellation of new rig deliveries.
- Consolidation of group entities or further stake sale in group companies should increase the cash buffer.
- There have been several initiatives on the OPEX and SG&A cost control front, and that should continue. In particular, accelerated cold stacking or opportunistic selling of relatively old rigs is likely.
- A broader debt restructuring agreement with bankers where existing debt is refinanced with new debt that has relatively easier covenants and an extended maturity profile.
- Common share offering that will be used to improve the liquidity buffer and reduce the net debt position of the company.
While these are just potential options or likely options, one or more of these steps will certainly trigger positive price action for Seadrill.
Seadrill has been moving sideways, and the reason for this movement is market participants are waiting for more news from the company related to restructuring. Once there is more clarity on that, the stock is likely to trend higher.
Going forward there are several other challenges that are in store for the company. As contracts are renewed in the coming quarters and years, there is likely to be significant EBITDA margin compression, and that will impact stock sentiments. For this reason, my time horizon is for the medium term; if investors make money in the stock in the next three to six months, profit booking is advisable.
Disclosure: No positions in the stock.
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