Seadrill Bankruptcy: Race to the Bottom
- By Rupert Hargreaves
Seadrill (SDRL) filed for bankruptcy protection in the Southern District of Texas on Sept. 13 after reaching an agreement with its creditors. This deal, while good for Seadrill employees and managers, is bad news for almost everyone else, and it will likely only extend the offshore drilling industry's slump.
According to Seadrill's reporting on the topic, the deal will inject $1 billion of new money into the company under a prearranged plan of reorganization. Under the proposal, lenders will extend the maturity on $5.7 billion in debt with no amortization payments due until 2020. Additionally, the company will get a new $1 billion capital injection in the form of $860 million in secured notes and $200 million in equity. Bondholders will be converted into a 15% pro forma ownership stake in the restructured company - if they sign up.
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The intrinsic value of RDC
On the day of the deal, Bloomberg reported the following:
"The deal gives us a great liquidity cushion," allowing Seadrill to survive the "mother of all downturns," CEO Anton Dibowitz said by phone. The new capital is "underpinned" by top shareholder Hemen Holding Ltd. and more than 40% of bondholders support the plan along with 97% of Seadrill's secured bank lenders, he said. Dibowitz expects more bondholders to sign up to the deal."
Bad news all around
Unfortunately, this deal is bad news for all of the offshore drilling industry and only kicks the can down the road for Seadrill.
The offshore drilling industry is trying to navigate one of the worst downturns in its history. Day rates have fallen from around $800,000 for the top-spec rigs to $200,000, barely enough to cover costs. At the same time, the resale rate for drilling units at the top end have fallen from $600 million-plus to less than $100 million, rendering the asset base of these businesses almost entirely worthless.
The situation has only been exacerbated by the fact that before the downturn, drillers had been on a debt-funded expansion drive, and now, as rates have collapsed, they cannot fulfill their obligations.
But rolling over debt and restructuring obligations is not the solution.
Race to the bottom
Over the past two years, Ocean Rig UDW Inc. (ORIG), Hercules Offshore Inc. (HEROQ), GulfMark Offshore Inc. (GLFMQ), Toisa Ltd., Vantage Drilling Co. (VTGDF) and Paragon Offshore PLC (PGNPQ) have all spent time in the bankruptcy courts; Paragon has even had the privilege of collapsing twice in the space of a month. Hercules Offshore filed for bankruptcy protection six months after emerging from its first bankruptcy.
These bankruptcies have helped operators keep operating, but they've not done anything to curtail the main issue overhanging the industry: oversupply.
According to data from IHS Markit, at the end of June offshore rig utilization saw a very modest increase from around 52% to 53%. Of the 822 jackups, semis and drillships in the current global fleet, a total of 437 were under contract in the month. As for rigs that are working, the count stood at around 388 units in June - the highest mark since August of last year. But while utilization is rising, day rates are not. For high-spec drillships, the average day rate has fallen from around $300,000 at the beginning of the year to $200,000 for August.
I have kept an eye on the offshore drilling industry for the past few years as at some point, with many of the sector's constituents trading below book value per share, there will be value on offer, but it looks as if the industry is now facing a race to the bottom as restructured businesses, flush with excess capital, are able to slash rates, which is pulling down even the healthiest businesses such as Rowan Companies (RDC) (last quarter net gearing of only 26%). As rates continue to face downward pressure, with no sign of tightness in the market as of yet, all of the remaining drillers - Rowan, Ensco (ESV), Transocean (RIG), Atwood (ATW) and Diamond (DO) - should be avoided as the race lower continues.
Disclosure: The author owns no share mentioned.
This article first appeared on GuruFocus.
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The intrinsic value of RDC
