Seadrill Sells 3 Jack-Ups For $225 Million and the future of oil and gas drilling contractors

The Oil slump since 2014 have been the worse oil slump for the Oil and Gas industry since the Oil embargo of the 1970’s and now the Drilling contractors the main players are going thru bankruptcy and realignment of the business structure.

Without a drilling rig, no gas or oil wells can be drilled to produce oil and gas. The killing of the Oil contractors who own drilling rigs will lead to a shortage oil and gas and push up the prices of petroleum products to the region of 130 to 180 USD in 4 to 5 years because of the short term depressed prices for petroleum products. There is going to be a very real shortage of drilling rigs in 2019 and this will push the day rates for a high tech Jack up rig from now depressed day of USD 100,00 for a 300 million Jack up rig to at least 250,00 to 300,000 in 2019. Reason is that need to have skilled workers to man these rigs and having rigs is another thing and having a manned rig is a ready to work  rig and rig without workers is not a ready to work rig. The oil slump have forced the retrenchment of hundreds of thousands of skill oilfield workers and only 30 to 40 % may return because the balance 40% who are experienced and born during the baby boomer years are now on forced retirement and unlikely to return to work. The only way the baby boomers are going to return if the wages double up in real take home wages, the other 20% who were fresh from school and only have a short working spell before getting retrenched will unlikely return to the hardships of oilfield work lifestyle. These now are comfortable with their jobs in other fields and unlikely to return.

The oil producing countries and the oil major producing companies have literally shot themselves in the foot big time because when the upturn comes in 2019, the day rates are going to be in the 200,000s for a Jack up rig and that is the minimum. Cost are going sky high and cutting into the oil majors profits. This time the Drilling contractors who suffer and when boom time the oil majors will suffer most for squeezing the oil contractors during slump time. The oil contractors will not make a mistake again with oversupply of rigs and will be more organized in the future 

Summary

Seadrill sells 3 jack-ups to Shelf Drilling.

The valuation looks fair, and Seadrill is able to decrease its debt and raise some cash.

Fundamentally, the story is unchanged. In the short-term, traders may try to play this news in hope for a short squeeze.

Seadrill (NYSE:SDRL) has just announced that it sold 3 jack-ups to Shelf Drilling for $225 million. The jack-ups are West Triton, West Resolute and West Mischief. All three jack-ups were without work. The total debt on these units was $102 million, so Seadrill will receive monetary proceeds of $123 million. This transaction values each jack-up at $75 million, which seems like a fair valuation given current market conditions.

Seadrill continues its preparation for restructuring following the deal with Archer and the extension of credit facility to North Atlantic Drilling (NADL). Judging by recent transactions, the company wants to simplify its debt and raise some cash in process. Following Transocean's (NYSE:RIG) deal with Borr Drilling (which is yet to be confirmed by Transocean), another buyer showed up ready to buy jack-ups. As we've seen in fleet status reports during this earnings season, jack-ups start to attract contracts, although at low dayrates. Current oil prices around $50 per barrel seem to be sufficient enough to spur interest in jack-ups.

The deal was likely a necessity for Seadrill which needs to solidify its cash position ahead of final restructuring talks. While I stated above that $75 million per jack-up is a reasonable price in today's market environment, such valuations do not promise much for Seadrill shareholders given the company's debt level. Despite all the previous downside, Seadrill still has 340 million of market capitalization left, which clearly leaves room for more downside.

Speaking about the stock, previous news on North Atlantic Drilling contracts failed to provide support and cause a short squeeze for Seadrill shares. However, you never know for sure when Mr. Market decides to become optimistic in such cases, so Seadrill shares will be watched closely by all momentum traders looking to participate for a short squeeze. The technical setup is great for this, as Seadrill shares declined in a very tight channel and a break above $0.75 could create significant interest for a short-term long play in the stock.

Fundamentally, the company continues to prepare for restructuring. It is unclear at this point what exactly creditors want from Seadrill. In theory, they should try to preserve the value of their investments in the long term and selling assets at the bottom of the cycle does not exactly serve this goal. On the other hand, creditors always love to see real money, so getting some cash clearly does not hurt.

What is even more important is that the competition in the jack-up market intensifies. As shown by Shelf Drilling and Borr Drilling, different players are now willing to pick up assets and bet on ultimate jack-up market recovery. I find it interesting that rigs were not bought by John Fredriksen himself. It is possible that he saves his funds to deal with Seadrill newbuilds or that he is ready to commit some cash directly to the company. So far, all rumors regarding his involvement in the company's restructuring had no factual confirmation.

Bottom line

Seadrill decreases its debt and increases its cash position while continuing to prepare for restructuring. The transaction does not help current shareholders, who will most likely be heavily diluted [see Ocean Rig (NASDAQ:ORIG) case] or outright wiped out in the upcoming restructuring. I believe that long-term investors should watch the story from the sidelines, while short-term trades may try to play a short squeeze in the stock should it happen.