Why Is RLI Corp. (RLI) Up 3.4% Since Last Earnings Report?
SeaDrill Limited SDRL recently announced that it has successfully completed restructuring and emerged from the Chapter 11 bankruptcy process which was launched last year. Notably, post the announcement, shares of the offshore drilling rig contractor touched a 52-week low of 10 cents during the trading session on Jul 2.
It should not come as a surprise that its shares have plunged more than 50%, since the company had already warned that post restructuring, investors will be receiving minimal recovery from their existing shares. Unfortunately, during the bankruptcy restructuring, shareholders are the last in the priority line to claim the company’s assets. In many cases, the existing equity becomes absolutely worthless, with the common stockholders getting completely wiped out. In this case, SeaDrill’s shareholders will own 1.9% of the restructured company, effective Jul 3.
Let’s Look Back
Hit by the industry downturn, SeaDrill had been going through a rough patch over the past two years, with its shares plummeting around 97% during the time frame, owing to increased debts and bankruptcy fears. Reduced demand for drilling and diminishing contracts negatively impacted the company’s revenues, earnings, and cash flows. Notably, it has been facing top-line pressure owing to idle rigs and lower day rates. SeaDrill incurred a net loss of $3,102 million in 2017 owing to higher operational and restructuring costs, along with low revenues.
The company filed for bankruptcy protection on Sep 12, 2017 to restructure its balance sheet amid volatile oil prices. After months of negotiations and delays, SeaDrill announced a global settlement in the restructuring deal in February 2018. In April, the restructuring plan won approval from the U.S. Bankruptcy Court.
Notably, SeaDrill’s Chapter 11 filing was just another disruption in the offshore drilling industry. Many offshore drilling companies like Ocean Rig UDW LLC., Paragon Offshore, Hercules Offshore, Inc. and Vantage Drilling Company had also filed for bankruptcy protection amid declining oil prices.
The Restructured Status
Effective Jul 3, the existing shares of SeaDrill will be exchanged for 0.0037345 shares of the newly restructured company, with the number of common outstanding shares falling from 504.4 million to 100 million. The fiscal reset provides the company with $2.1 billion in cash, improving its liquidity position. Further, total backlog of the company currently stands at $2.3 billion.
Per the plan, the maturities of all secured credit facilities worth $5.7 billion have been deferred by five years, with no amortization payments till 2020, along with significant covenant relief. Under the plan, roughly $2.4 billion of bonds have been exchanged for equity. The scheme has also equitized more than $1 billion in contingent newbuild obligations. SeaDrill has raised $1.08 billion of fresh capital that would comprise $880 million secured loans and $200 million equity.
SeaDrill has been given the approval to list its new common shares on the New York Stock Exchange under the same ticker symbol ‘SDRL’. Trading in about 16 million new shares will commence on Jul 3, with additional new shares likely to begin trading in the subsequent weeks. The company intends to report first-half year and third-quarter results in November.
SeaDrill, having one of the youngest and most advanced drilling fleets, will be now be poised to secure more contracts post restructuring, thereby helping to stabilize its revenues. Especially with the rise in commodity prices owing to robust demand and OPEC production-cuts, market scenario for the drilling and oilfield services companies looks promising with increased upstream spending.
SeaDrill, whose peers include Diamond Offshore Drilling, Inc. DO and Nabors Industries Limited NBR, among others, has a high economic utilization for its floaters. With successful emergence from bankruptcy, the company is likely to gain a competitive advantage with the newly restructured balance sheet.
SeaDrill intends to expand its relationship ties with Schlumberger Limited SLB — the world’s largest oilfield service provider — with which it is already collaborating to offer integrated services to India. The company is also in talks with other major oil service companies for strategic collaboration opportunities. As it is, a wave of consolidation has hit the industry in the last couple of years amid the oil slump, in order to take advantage of integrated offerings, increased scale, synergies and new capabilities. The service providers believe that mergers and acquisitions will help them cut their average costs and benefit from mutual technical expertise exchange.
Although SeaDrill has no immediate consolidation plans, the company’s CEO Dibowitz is looking for strategic opportunities to enhance its long-term growth prospects. SeaDrill currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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