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Seadrill (SDRL) Lost 45% in a Month: What's Pushing It Down?

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Shares of international offshore drilling company SeaDrill Limited (SDRL - Free Report) lost around 45% of their value in the last one month and 92% over the last one year. It touched a record all-time low of 18 cents on Aug 24 when shares plummeted more than 33% on the day despite reporting better-than-expected figures in second-quarter 2017.

Notably, the company has been going through a rough patch of late owing to increased debt and bankruptcy threats. The second-quarter results were affected by constant threats of the company going bankrupt and delay in the restructuring plans along with the weak guidance issued by the company.

Fear of Bankruptcy Looms

Due to the plunge in oil prices since 2014, energy companies reduced their spending and slashed rig hires. Demand for drilling reduced further as the rigs ordered during the boom period led to oversupply. This in turn led to reduced activities and diminishing contracts for Seadrill which negatively impacted the company’s revenues, earnings and cash flows.

SeaDrill, being one of the worst sufferers of the downturn, carries the heaviest debt burden in the oil rig industry, battling with a $15 billion debts and liabilities. The company has been contemplating restructuring under bankruptcy for quite some time now but has been deferring the release of its restructuring plan.

In April, the company said “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 stakeholder. The company currently expects that shareholders are likely to receive minimal recovery for their existing shares.”

On Aug 15, SeaDrill announced the completion of the amendment of three credit facilities to protect its subsidiary Seadrill Partners LLC from going bankrupt. With the amendment, the partnership sets itself free from the possibility of default by the restructuring process.

However, the future of SeaDrill still remains bleak as the company hasn’t been able to secure a restructuring deal for itself yet. Though it did report that it is in advanced discussions with lenders regarding the restructuring of debts, investors should be wary unless specific details are available. Further, it again cautioned shareholders a few days of severe losses.

The company is likely to file for Chapter 11 by Sep 12. If SeaDrill does not manage to get the restructuring right within the aforesaid time frame, the company will possibly default and the investors may face steep losses as the shares may lose all its value.

Sharply Deteriorating Results and Soft Guidance

The company’s earnings have been declining over the last five quarters. The company is also facing pressure in its top line owing to idle rigs and lower day rates. In the second quarter, revenues declined year over year 34% to $577 million. EBITDA in the reported quarter was $264 million, as compared with $557 million in the year-ago quarter due to higher costs associated with restructuring process.

The company projects second-quarter EBITDA to decrease to $175 million due to a couple of drilling rigs which are expected to become idle including West Tucana and Sevan Louisiana. Lower day rates and higher restructuring costs are also likely to adversely impact the EBITDA.

Earnings Estimates Moving in the Wrong Direction

SeaDrill currently carries a Zacks Rank #3 (Hold). However, earnings estimates for Seadrill declined over the last 30 days. Over the said time frame, the Zacks Consensus Estimate of a loss of 2 cents widened to a loss of 7 cents for the third quarter.

Further, Zacks Consensus Estimate of loss for 2017 and 2018 have also widened by 17 and 13 cents respectively. The negative estimate revisions, might push this stock to a Zacks Rank #4 (Sell) or 5 (Strong Sell).

Key Picks

The Oil-Gas Drilling industry which has been one of the worst sufferers of the downturn currently ranksin the bottom 25% of the Zacks classified industries (198 out of 256). Given the bearish numbers, it shouldn't come as a surprise that most of the companies from this space are set to underperform in the near term.

But if you are still looking to stay in this industry for some near term plays TransCanada Corp. (TRP - Free Report) , Lonestar Resources US, Inc. (LONE - Free Report) and Range Resources Corp. (RRC - Free Report) , may be good selections. All the three companies sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

TransCanada delivered an average positive earnings surprise of 4.06% in the trailing four quarters.

Lonestar Resources delivered an average positive earnings surprise of 39.71% in the trailing four quarters.

Range Resources delivered an average positive earnings surprise of 51.82% in the trailing four quarters.

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