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SeaDrill Amends Credit Facility to Save Arm from Bankruptcy

Zacks Equity Research

SeaDrill Limited SDRL, which has been grappling withbankruptcy issues of late,recently announced the completion of the amendment of three credit facilities. This move was in line with the company’s objective to protect its subsidiary SeadrillPartners LLC from going bankrupt. Following the announcement, units of Seadrill Partners rallied 17.98% to eventually close at $3.15 on Aug 17.

The Bleak Scenario of SeaDrill

SeaDrill, being one of the worst sufferers of the industry downturn, has the maximum debt in the oil rig industry. The company has been contemplating restructuring measures under bankruptcy for quite some time now. SeaDrill is again cautioning shareholders of severe losses due to the restructuring process. The company restated that current common stockholders will have minimal recovery, suggesting that the debt holders will get majority of the equity holdings even if the restructuring takes place.

The Amendment and its Impact on Seadrill Partners

However, the recent amendment transactions bring some ray of hope for Seadrill Partners. The transaction being part of the company’s restructuring plans is likely to preserve the value of its equity stakes in its subsidiary.

With SeaDrill completing the amendments of the credit facilities relating to the rigs purchased by Seadrill Partners, the latter no longer remains a borrower/ guarantor for any of its parent company’s debt. The three credit covenants involve $1.45 billion facility relating to the West Vela and West Tellus drillships, $420 million facility relating to the West Polaris drillship and $440 million facility T-15 & T-16 tender rigs and the West Telesto jack-up.

With the amendment, the partnership sets itself free from the possibility of default by Seadrill restructuring process, wherein the lenders cannot take any action against the partnership’s assets during negotiations. As part of the amendment transaction, Seadrill Partners also intends to prepay US$100 million upon the closing of the deal and also make two subsequent prepayments of US$25 million. The partnership will also call off the $100 million of revolving credit facility provided by its parent company. The maturities of the partnership’s facilities have also been extended by 2.5 years.  

Seadrill Partners intends to resume its quarterly cash distribution to unit holders which it had deferred owing to the prolonged financial restructuring efforts. The partnership announced quarterly cash distribution of 10 cents per unit for both the first and the second quarter. The amount will be paid on Sep 5, to unit holders of record as on Aug 29.

With a modest backlog of $2.1 billion along with decent fleets, most of which are operational, the partnership is poised to gain in the long run. Also, with sufficient liquidity and no new construction commitments the stock seems to be a safer bet since it is no longer accountable for the bankruptcy proceedings of the parent company.

Zacks Rank and Key Picks

Headquartered in London, SeaDrill has a solid earnings surprise history, having surpassed the Zacks Consensus Estimate in the trailing four quarters at an average of 97.13%.

However, the company’s price performance lacks luster. Over the last one year, SeaDrill’s stock has underperformed the industry to which it belongs. During the aforesaid period, SeaDrill’s shares have crashed more than 89%, compared with the 36% decline for the broader industry. SeaDrill currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space are Penn Virginia Corporation PVAC, Range Resources Corporation RRC and Rex Energy Corporation REXX .

Penn Virginia and Range Resources sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Rex Energy currently carries a Zacks Rank #2(Buy).

Penn Virginia delivered a positive average surprise of 32.93% in the trailing four quarters.

Range Resources is expected to post year-over-year growth of 124.78% and 116.47% in sales and earnings, respectively in 2017.

Rex Energy posted a positive average surprise of 7.93% in the trailing four quarters.

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