Is Seadrill About To Follow Ocean Rig Steps Or Will 'Big John' Surprise Us All Again?

Summary

Seadrill: closer to reach agreement on a rescue plan, said major shareholder John Fredriksen.
What does it really mean for common shareholders? It is the fundamental question and the answer is complicated.
SDRL continues to be an excellent tool for trading and something is telling me that it is not about to end.

Courtesy: John Fredriksen, Photo: Elin Høyland

Investment Thesis:

The interview yesterday by Bloomberg of John Fredriksen was quite interesting indeed. (Translated from Norwegian by Google).

STOCKHOLM (Bloomberg) Seadrill is closer to reach an agreement on a rescue plan, "said the company's major shareholder John Fredriksen to Bloomberg News.

"We clean up all the time. It is a great work. There is a lot that could have been made differently, especially on the financial side. We are closer than we have been for a longtime but it will still take some time before we reach a solution, "he said.

Seadrill wrote in his year-end report on February 28 that it will be challenging to reach a full consensus agreement in the discussions with the banks and potential new investors before 30 April, when one of the company's major credit due.

John Fredriksen has been active in the market lately. He has bought a drilling rig and registered a new company, Northern Drilling, in order to take advantage of depressed prices.

Northern Drilling going according to plan "clean up after Seadrill" and "get more capital to Seadrill," he told Bloomberg News.

On a separate news, another struggling offshore company Ocean Rig UDW (NASDAQ:ORIG), announced yesterday, the following:

... have entered into a Restructuring Support Agreement (the "RSA") with creditors representing over 72% of Ocean Rig's outstanding consolidated indebtedness for a financial restructuring (the "Restructuring")...

... In addition, on March 27, 2017, the JPLs (in their capacity as foreign representatives of the Scheme Companies) commenced cases under Chapter 15 of the U.S. Bankruptcy Code for each of the Scheme Companies seeking, among other things, recognition of the Provisional Liquidation Proceedings as foreign main proceedings.

After Vantage Drilling (OTCPK:VTGDF), Hercules offshore (defunct), Paragon Offshore (OTCPK:PGNPQ), now Ocean Rig is joining the losers' team.

Pacific Drilling (NYSE:PACD) will be the next one, and Seadrill's (NYSE:SDRL) own fate is still unclear. After the release of the news, ORIG tumbled nearly 70% yesterday to an all time low at 0.23 and is still falling as I speak, especially after the street read the following:

If the Schemes are sanctioned, the existing shareholders of the Company will be diluted to an insignificant amount of the post-restructuring equity of the Company.

Seadrill is facing the same outlook, if it cannot find an agreement with the banks/lenders and decides to file a restructuring under Bankruptcy protection. As always, John Fredriksen is one fundamental part here...

Seadrill has struggled with its large debts, and is working hard to get all the lenders and the stakeholders on the same page and agree to a practical solution in which shareholders will eventually avoid a blood bath. No less than 42 banks are involved in the process...

What is at stake here?

On January 31, 2017, Reuters released the following:

Seadrill is looking to raise at least $1 billion in new capital as talks to restructure its debt and liabilities worth $14 billion are taking longer than expected, wiping more than a fifth off its market value...

...Tuesday's announcement focused on the company's $8.2 billion secured debt. In addition, Seadrill has unsecured debt of $2.3 billion and contingent liabilities of $3.5 billion, bringing its total liabilities to $14 billion.

Note: As a reminder, On October 4, 2016, Bloomberg announced that "Big John" may be willing to lend Seadrill between $800 Million to $1.2 Billion.

Why April 30, 2017 is so important and what represents the West Eminence facility?

On November 16, 2016, Seadrill Ltd., announced the following:

[I]t has reached an agreement with 100% of the lenders under the West Eminence Facility and the requisite majority of lenders under all of its other bank facilities to extend the West Eminence facility maturity date from December 31, 2016 to April 30, 2017.

... We now expect to conclude the restructuring by the end of April 2017. Extending the West Eminence facility will provide us with sufficient time to conclude these negotiations.

That's right! The West Eminence facility is maturing in April 30, 2017, and if the company cannot get another agreement with 100% of the lenders under the West Eminence Facility and the requisite majority of lenders under all of its other bank facilities, SDRL will have to come up with an agreement before April 30, 2017, and Per Wullf, CEO, said it is not likely at the last conference call.

M. Mark Morris, CFO, said it honestly in the 4Q'16 results conference call:

Regarding our restructuring, our objective is to find a solution that bridges us to a recovery in the sector, achieves a sustainable capital structure, and protects value for our stakeholders. We've been engaged in extensive discussions with our lenders and potential new investors, including Hemen, regarding the terms of a comprehensive restructuring. These discussions have also included the ad hoc committee of bondholders. While the ad hoc committee is not presently restricted, they have indicated a willingness to become restricted again in the future.

We currently believe that material additional amendments to the terms of the proposed bank amendments will be necessary to raise the new capital. Feedback from stakeholders and potential new inventors also indicates that a comprehensive and consensual agreement will likely require conversion of our bonds to equity. Under such circumstances, the new capital raise and any resulting debt conversion would likely result in substantial dilution to our shareholders and potential losses for other financial stakeholders.

Obviously, It is taking longer than previously expected, and perhaps the next news could be another extension of the West Eminence facility maturity date from April 30, 2016 to June 30, 2017?

It will give enough time to find an agreement. At least, it seems logical to me, and I do not see the banks and lenders denying this necessary delay?

Conclusion:

The actual situation is particularly difficult to decipher for an outsider like you or me.

On one side, we have an armada of banks and lenders, and on the other side, we have John Fredriksen/Hemen Holdings. If we could create mentally a giant balance and put the first group on one side, and John Fredriksen on the other side, we could see a state of equilibrium.

The stock price is now between $1.45 to $1.55 and represents the actual status quo. But, we may be in the eye of the hurricane moving fast?

What we need to know is the second move? And the news is about to hit the wire any moment in my opinion. John Fredriksen holds literally SDRL future right in his hand.

I am almost certain that he will do anything in his power to avoid a bankruptcy that could be interpreted as a failure. However, even if bankruptcy is not really in the card, shareholders will not avoid a significant dilution, no matter what. The question is to figure out what has been factored in, in the $1.45? Quite simple isn't it?

My thinking is that any move that suggest an agreement without bankruptcy will be a boost for SDRL and conversely anything to the opposite (bankruptcy) may push the stock into oblivion like ORIG.

I like the odds here, however, I am well aware of the risk. Do not get involved if you are not willing to lose your bet.

In my opinion, SDRL is negotiating a small extension again for the West Eminence, in order to finalize an arrangement out of bankruptcy.

My thinking is that if it was no deal in the making, SDRL would have declared bankruptcy two weeks ago and SDRL did not.

Hemen is ready to provide the cash needed, we already know it for a long while, and the only contentious point at this time is who gets what?

Technical analysis.

SDRL is still in a falling wedge pattern, just my opinion. The Falling Wedge is a bullish pattern in general, which means that we may eventually experience a positive breakout to $3+. However, first resistance is about $1.80.

To be confirmed, a breakout must come with high-volume. I recommend to buy at or below $1.15.

Warning: Trading