Bermuda-based offshore drilling contractor Seadrill Ltd (NYSE:SDRL) reported better than expected Q4 results with revenue and net income (excluding one-offs) coming in at $667 million and $111 million, respectively. But that’s not what investors were waiting for. Similar to a reduction of nearly a third of its market-capitalization when it updated the market on its debt-restructuring efforts a month ago, the stock fell almost 15% in early trading on Tuesday as the company’s latest announcement indicated that a deal with its lenders is unlikely before April 30 — “the maturity date of the West Eminence facility and also a milestone under the bank facility amendments entered into in April 2016”. Such an event can lead to bankruptcy if its top lenders (banks) decide so.
SDRL has been facing financial distress due to its high-debt levels in the wake of historic weakness in the oil sector that resulted in a struggling offshore drilling industry. To survive the downturn, the company-proposed a debt restructuring plan, which was criticized for its overly optimistic industry outlook over the next three years, substantial losses for lenders, and a lack of intent towards deleveraging – a prudent path for long-term survival.
A group of SDRL-bondholders (apart from banks), who rejected the proposal, came up with an alternative plan that could reduce debt (to the tune of $1 billion) to a certain extent through conversion into equity, which could be a positive development, but would have resulted in massive dilution in equity. The plan also includes issuing convertibles (at a premium) in lieu of the remaining debt.
On the receiving end
An agreement seems unlikely with SDRL now looking for further material amendments to its prior-proposed bank amendments that would allow it to raise new capital. It’s hard to judge to what extent banks and unsecured lenders would recover their capital in case SDRL goes through chapter-11 proceedings (bankruptcy), given a steep decline in value of the company’s long-lived assets. Nothing so far seems to be going in the favor of shareholders, who are at the losing end of the deal—facing the risk of complete loss or substantial dilution—in most scenarios going forward.