Seadrill: A Small But Nice Victory
Mar. 20, 2017 1:37 PM ET|
About: Seadrill Limited (SDRL)
Achilles Research
Achilles Research
Long/short equity, special situations
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Summary
Seadrill announced a settlement with Hyundai Samho Heavy Industries last week.
The settlement yields $170 million in cash for Seadrill related to the cancellation of the West Mira construction contract.
The settlement is a welcomed victory at a time of significant stress for the offshore drilling company.
I am not prepared to give up on Seadrill just yet. Billionaire investor and Seadrill shareholder Fredriksen may throw the struggling company a life line.
Offshore drilling contractor firm Seadrill Ltd. (NYSE:SDRL) reached a settlement with South Korean shipbuilder Hyundai Samho Heavy Industries Co. Ltd. last week that will lead to a cash infusion of $170 million this month, but will also force the company to take an impairment charge of $44 million related to the canceled construction contract for the West Mira.
Seadrill Ltd. so far has not informed shareholders that it has reached a mutually beneficial solution to its indebtedness problem with its creditors. The offshore drilling company, brought down to its knees by low crude oil prices and massive spending cuts in the offshore industry, has yet to work out a deal with lenders in order to reduce its leverage and transition to a more sustainable capital structure that would see the extension of existing debt maturities, covenant relief, as well as the infusion of new capital from existing or new investors.
However, Seadrill booked a victory on another front last week when the offshore drilling company said in a statement that it reached a settlement with Hyundai Samho Heavy Industries Co. Ltd., a shipbuilder that Seadrill contracted to build a new ultra-deepwater semi-submersible drilling rig in 2012, the West Mira, but ultimately exercised its right to terminate the construction contract as Hyundai failed to deliver the rig on time. Seadrill has now reached a settlement in an arbitration process, and is expected to receive $170 million in cash in March 2017. At the same time Seadrill will have to swallow a $44 million impairment loss (which is purely an accounting entry), reflecting the difference between the West Mira receivable value and the cash settlement.
The settlement leads to a nice cash infusion at a time when Seadrill continues to try to hammer out a deal with its lenders. As small as this victory may be, it is an important victory for a company that fights for its survival.
A Life Line From Billionaire Investor Fredriksen?
Fredriksen's asset holding company Seatankers purchased the West Mira semi-submersible rig for $365 million which was part of the settlement agreement between Seadrill and Hyundai Samho Heavy Industries Co. Ltd. Fredriksen is an enterprising business owner with a contrarian mindset and a good sense for investments that are out of favor. As a result, I wouldn't be at all surprised if Fredriksen provided some sort of bridge financing/loan/additional capital himself to help Seadrill out. The fact that Seatankers buys rigs at this stage of the growth cycle suggests that the billionaire shareholder has not given up on Seadrill and his offshore drilling business just yet either.
Your Takeaway
There is no question: Seadrill stands with its back to the wall and the company has so far not given investors an update as to where negotiations with its creditors stand. In other words: The company is likely deeply involved in negotiations at this time but they haven't yielded any meaningful results yet. However, I think Fredriksen has a long term view on the offshore drilling industry, and the purchase of the West Mira by Seatankers attests to just that. As far as I am concerned, Fredriksen may be a lender of last resort for Seadrill. It's not yet the time to throw in the towel.
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Disclosure: I am/we are long SDRL.
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