Seadrill Plunges After Failing To Reach Agreement With Creditors

Read here about Seadrill an oil drilling company

Summary

Seadrill announced yesterday the company had failed to reach a comprehensive agreement with creditors and extended the deadline for such an agreement from April 30 to July 31.

The company warned investors are likely to receive minimal recovery for their existing shares.

The company also stated that the implementation of a comprehensive restructuring plan would likely involve schemes of arrangement or chapter 11 proceedings.

Shares of Seadrill (NYSE: SDRL) plunged more than 55% on Tuesday after the company announced it had failed to reach a comprehensive agreement with creditors to avoid insolvency. Seadrill also announced the company had extended the deadline for a restructuring agreement to July 31 from the end of April as it had previously indicated.

The company stated:

"While no definitive terms have been reached, based on stakeholder and new money investor feedback, as well as the Company's existing leverage, we currently believe that a comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment, losses or substantial dilution for other stakeholders. As a result, the Company currently expects that shareholders are likely to receive minimal recovery for their existing shares."

The announcement also came with news that Seadrill had negotiated to extend the maturities on 3 lines of credit totaling $2.85 billion:

1. The US$450 million credit facility maturing on 30 April 2017 was extended until 15 August 2017.
2. The US$400 million credit facility maturing on 31 May 2017 was extended until 31 August 2017.
3. The US$2.0 billion NADL credit facility maturing on 30 June 2017 was extended until 14 September 2017.

As discussed in my previous article "Seadrill - Shareholder Dilution Impending," existing and potential future creditors seek a near total wipeout of current shareholder value through their proposal in which current shareholders would be allocated a nominal amount of out of the money warrants post-restructuring and all proposed secured credit facilities would benefit from cash sweeps starting in 2018.

Creditors are unlikely to change their requested restructuring materially as Seadrill's management provided guidance for the first quarter of 2017 that suggested a further deterioration of operations with an expected operating income of just $50 million, an approximate 57% decline from the current quarter. Management highlighted the number of units coming off contract and the impact of lower day rates in the weak guidance.

Investors holding equity now should expect extremely unfavorable terms should the company reach an agreement with creditors before the end of July. Shares of Seadrill are down more than 78% year-to-date.

Disclosure: I am/we are short SDRL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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