International offshore drilling company SeaDrill Limited (SDRL - Free Report) filed for Chapter 11 bankruptcy protection on Sep 12 to restructure its balance sheet amid volatile oil prices. Following the development, shares of the company rose more than 20% to eventually close at 23 cents on Sep 12. The stock scaled up further more than 21% yesterday. The rise reflects investors’ optimism as the company finally managed to secure a restructuring agreement after 18 months of negotiations. The agreement will provide the company with more than $1 billion of capital to restructure its highly leveraged financials.
What Triggered This?
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. Increased costs, idle rigs and low dayrates led to high operating losses and affected the market capitalization of the company adversely. SeaDrill, being one of the worst sufferers of the downturn has been battling with around $14 billion debts and liabilities.
Shares of the company lost around 87% over the last year. It touched a record all-time low of 18 cents on Aug 24 when shares plummeted more than 33%. The company has been going through a rough patch of late owing to increased debt, bankruptcy threats and soft guidance issued by the company.
SeaDrill’s Chapter 11 filing is another disruption in the offshore drilling industry. Many offshore drilling companies like Ocean Rig UDW LLC., Paragon Offshore, Hercules Offshore, Inc. and Vantage Drilling Company have also filed for bankruptcy protection amid declining oil prices.
SeaDrill which had been contemplating restructuring under bankruptcy for quite some time finally reached a deal just three days before the maturity of its $843 million worth bonds. The restructuring agreement has the support of 97% secured bank lenders, 40% of bondholders and leading shareholders.
Details of the Restructuring Deal
The restructuring agreement will see fresh capital injection of $1.06 billion which would comprise $860 million of secured loans and $200 million of equity. Under the restructuring plan, banks will defer the maturities of all secured credit facilities worth $5.7 billion by five years with no amortization payments till 2020 along with significant covenant relief. The plan will also see the conversion of $2.3 billion worth unsecured bonds into 15% of equity in the restructured company. However, shareholders will be receiving a minimal recovery from their existing shares. Existing shareholders will receive up to 2% stake in the post restructuring equity.
The company expects to emerge from Chapter 11 in six to nine months. The restructuring deal will not affect the day-to-day business operations of SeaDrill as the company expects to pay employees, suppliers and vendors as usual. The company which has more than $1 billion in cash will not require debtor-in-possession financing.
The restructuring agreement will improve the liquidity position of the company and will provide growth opportunities after the market recovers. SeaDrill which has one of the youngest and most advanced drilling fleets will be poised to secure more contracts post the restructuring which will help the company to stabilize revenues.
Zacks Rank and Key Picks
SeaDrill currently carries a Zacks Rank #3 (Hold).
The Zacks Oil Drilling industry which has been one of the worst sufferers of the downturn, currently ranks in the bottom 29% of the Zacks classified industries (181 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.
Some better-ranked players from the broader energy space are TransCanada Corporation (TRP - Free Report) , Lonestar Resources US, Inc. (LONE - Free Report) and Range Resources Corporation (RRC - Free Report) . 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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