Seadrill News

• Seadrill Ltd's official committee of unsecured creditors said it has hired an investment banker and is looking into transactions made by the global offshore drilling contractor before it filed for U.S. Chapter 11 bankruptcy protection in Texas last month. "We are looking at numerous pre-petition transactions that were described at least in part" in Chapter 11 filings by Seadrill on Sept. 12, the committee's lawyer, Douglas Mannal, of Kramer Levin Naftalis & Frankel LLP said at a hearing in Houston on Tuesday. [link]
• Seadrill Shareholders Will Get a Day in Court to Object to Restructuring [WSJ]

Latest On Seadrill Restructuring

Here are some thoughts from Chris Hughes on the Seadrill restructuring:

The left-behind bondholders are a fragmented bunch of institutions and retail investors. While bigger by weight, they couldn't mobilize to the same effect.

The bankruptcy court can impose this plan on bondholders even if they vote it down. To be sure of a better deal, they need an alternative plan for injecting $1.1 billion in partnership with Fredriksen. But it's hard to see them dislodging Centerbridge.

Their most realistic bet may be to gum up the process in litigation. Seadrill would doubtless prefer their support and so may tweak the terms. A sweetener could come from giving the disgruntled bondholders more than just a nibble at the fundraising. The 2 percent of equity being kept for the existing shareholders is another source of top-up. Despite this possibility, the shares are currently worth $188 million, implying a ridiculous $10 billion valuation for the equity post restructuring, and demonstrating how unreliable the stock market can be in a bankruptcy.

The losing bondholders may as well fight. But they need to remember that the spoils of restructurings tend to go to those who start punching at the beginning, not the end.

The "losing" bondholders may be low energy, but they outnumber the plan-supporting bondholders 60-40.

"Seadrill Bondholders Are Said to Hire Stroock in Debt Plan Fight" $SDRL

"A group of Seadrill Ltd. bondholders has hired Stroock & Stroock & Lavan LLP as legal counsel to fight a restructuring plan that they argue leaves them with an unfairly low share of the offshore drilling company... The group’s goal is to accumulate one-third of the $2.3 billion in unsecured bonds, which would allow the investors to disrupt the plan presented last week by Seadrill... The group is close to reaching that portion of the unsecured debt, one of the people said."

Seadrill Announces Comprehensive Restructuring Plan

Interesting, their opening proposal is to violate absolute priority and throw equity a little bone.

Seadrill Limited ("Seadrill" or the "Company") has entered into a restructuring agreement with more than 97 percent of its secured bank lenders, approximately 40 percent of its bondholders and a consortium of investors led by its largest shareholder, Hemen Holding Ltd.

The agreement delivers $1.06 billion of new capital comprised of $860 million of secured notes and $200 million of equity. The Company's secured lending banks have agreed to defer maturities of all secured credit facilities, totaling $5.7 billion, by approximately five years with no amortization payments until 2020 and significant covenant relief. Additionally, assuming unsecured creditors support the plan, the Company's $2.3 billion of unsecured bonds and other unsecured claims will be converted into approximately 15% of the post-restructured equity with participation rights in both the new secured notes and equity, and holders of Seadrill common stock will receive approximately 2% of the post-restructured equity. The agreed plan comprehensively addresses Seadrill's liabilities, including funded debt and other obligations. For additional information please refer to the Company's Form 6K filed along with this announcement.

The unsecured debt appears to be trading at ~30 cents on the dollar. So that values $2.3 billion of unsecured debt at $690 million. (Which seems unrealistically high; I'm not sure that people really think there be a 30 cent recovery.) If that is going to become 15% of the reorg equity, then the reorg equity is worth $4.6 billion. (Seems crazy.) If that's true, and the current equity is getting 2% of reorg equity, then the current equity is worth $92 million.

Current market cap is $115 million.

Seadrill Bond Traded at 33 Cents

The Seadrill bond that's due in September traded at 33 cents today.

Comment from the earnings call this week:

"In April, we reached agreement with our bank group to extend the restructuring plan negotiating period until the 31st of July, reflecting significant progress made. We are currently in advance discussions with third parties and related party investors and our secured lenders on the terms of the comprehensive recapitalization.

We've received a new money proposal from third-party and related party investors, which remains subject to further negotiation, final due diligence and documentation. We are also in discussions with certain bondholders who have recently become restricted again. I appreciate you're all interested to understand more details on the restructuring, but at this stage, it would be inappropriate for us to comment on specifics. As you're aware, this is a large and complex transaction with multiple parties involved.

While discussions with our secured lenders and certain investors have advanced significantly, a number of important terms continue to be negotiated. And until such time an agreement is reached, no assurances can be given.

We continue to believe that implementation of a comprehensive restructuring plan will likely involve schemes of arrangement for Chapter 11 proceedings. It is likely that the comprehensive restructuring plan will require substantial impairment or conversion of our bonds as well as impairment and losses for other stakeholders. As a result, we currently expect that shareholders are likely to receive minimal recovery for their existing shares."

Low Marginal Cost Onshore Shale - Bad For Seadrill!

Fortune article about Warwick Energy:

“In the Scoop and the Stack, we can break even $30 oil, and 20%-60% returns at between $40 and $50,” says Richard. Indeed, it’s the fast growth of such low-cost areas that’s counterbalancing the declines in expensive parts of areas such as the Bakken and Texas’s Eagle Ford, and igniting a resurgence in shale production. For example, the rig count for horizontal drilling in the Scoop and Stack has risen by 49% since July of 2014, when prices hovered around $90. It’s a similar story in the best portions of the Permian in Texas and New Mexico. In the Permian’s Midland and Delaware Basins—areas providing returns approaching those of the Scoop and Stack where Warwick is also an active buyer—17% more rigs are at work today than at the peak of 2014.

In April, U.S. shale production rose by an impressive 109,000 barrels per day over March. That bump lifted output to almost 5 million barrels, just 10% below the all-time high of 5.5 million. And if the trend continues, shale production could reach 6 million barrels by early 2018. Of course, that’s far from certain, especially given the recent slide in prices.

Still, Richard spotlights three trends that should keep U.S. shale thriving. First, the industry has become far more efficient. Producers have substantially lowered corporate overhead and obtained deep discounts on both new leases and rates paid to contractors who do everything from supply pipe to sinking the wells.

Second, low prices have produced a gusher of creativity. “Shale is really a play on oil patch ingenuity,” Richard says. “The downturn has been a boot camp for the industry.” Shale producers are relentlessly experimenting with new ways to extract more and more oil at lower cost. “They’re improving the use of sand and ceramics,” she says. “They’re designing different wells to fit different geologies more than ever before. And they’re finding ways to extend the length of the horizontal wells up to two miles to get more oil from the same well.”

How can offshore oil compete?? Seadrill has a big bond maturity coming up in September, and the bond is trading at 36 cents.

Seadrill Warnings $SDRL

From the new Form 20-F:

We are in ongoing comprehensive restructuring negotiations, which create significant uncertainty, which may result in impairment, losses or substantial dilution for stakeholders and which will likely involve schemes of arrangement in the United Kingdom or Bermuda or proceedings under Chapter 11 of Title 11 of the United States Code.

Over the past year we have been engaged in extensive discussions with our secured lenders and potential new money investors regarding the terms of a comprehensive restructuring. These discussions have also included an ad hoc committee of bondholders.

The key goals of our restructuring continue to be building a bridge to a recovery and achieving a sustainable capital structure. We currently believe that material additional amendments to the terms of our credit facilities will be necessary to effectuate a comprehensive restructuring. Feedback from certain stakeholders and potential new money providers also indicates that a comprehensive and consensual agreement will likely require a substantial impairment or conversion of our bonds to equity, as well as impairment, losses or substantial dilution for other stakeholders. As a result, we currently expect that shareholders are likely to receive minimal recovery for their existing shares.

We have agreed to amendments to our secured credit facilities as one component of the broader effort to effectuate a comprehensive restructuring of our indebtedness. On April 28, 2016, we entered into agreements with our banking group to amend the financial covenants on all of our secured credit facilities. The amendments also included a milestone to implement a comprehensive restructuring, which was originally April 30, 2017. On April 4, 2017, we reached an agreement to further extend the covenant amendments and waivers to our secured credit facilities and extend the milestone to implement a comprehensive restructuring plan from April 30, 2017 to July 31, 2017. Failure to meet or extend this milestone may result in events of default under our credit facilities and other funded debt. These amendments also involved corresponding extensions of the maturities on certain secured credit facilities.

We expect the implementation of a comprehensive restructuring plan will likely involve schemes of arrangement in the United Kingdom or Bermuda or proceedings under Chapter 11 of Title 11 of the United States Code. We are preparing accordingly and have retained financial advisers and legal counsel. There is inherent uncertainty in the completion of this comprehensive restructuring process, and therefore we are also preparing various contingency plans in the event a consensual agreement is not reached. Commencement of schemes of arrangement or proceedings under Chapter 11 of Title 11 of the United States Code could result in defaults on the funded debt of entities in which we hold noncontrolling interests, including Seadrill Partners, Archer, Seabras Sapura, and SeaMex, which could impair the value of our investments in those entities.

The outcome of these comprehensive restructuring negotiations and contingency planning efforts is uncertain and could adversely effect our business and result in impairment, losses or substantial dilution for stakeholders, and may impair our ability to continue as a going concern.

We may not have sufficient liquidity to meet our obligations as they fall due or have the ability to raise new capital or refinance existing facilities on acceptable terms.

As at December 31, 2016, we had $9.9 billion in principal amount of interest-bearing debt (including related party debt of $0.3 billion), representing approximately 576% of our total market capitalization, of which $7.3 billion was secured by, among other things, liens on our drilling units. Our current indebtedness and future indebtedness that we may incur could affect our future operations, since a portion of our cash flow from operations will be dedicated to the payment of interest and principal on such debt and will not be available for other purposes. Covenants contained in our debt agreements require us to meet certain financial tests and non-financial tests, which may affect our flexibility in planning for, and reacting to, changes in our business or economic conditions, may limit our ability to dispose of assets or place restrictions on the use of proceeds from such dispositions, withstand current or future economic or industry downturns, and compete with others in our industry for strategic opportunities, and may limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes.

"Seadrill says shares to have little value after restructuring" $SDRL

The current shareholders of Seadrill should expect to lose almost all value of their stock as the company prepares for potential bankruptcy proceedings to restructure debt and liabilities of $14 billion, the rig firm said on Tuesday.

It also said that its banks and other lenders had agreed to extend ongoing restructuring talks by three months to July 31.

"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," Seadrill said in a statement.

"As a result, the company currently expects that shareholders are likely to receive minimal recovery for their existing shares ... We expect the implementation of a comprehensive restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings, and we are preparing accordingly," it added.

Previously in 2014.

Company has a note due September 2017 that was offered at 41 cents today, which is a yield to maturity of >300%. The September 2020 note also trades at about 40, so the yield curve is totally inverted (i.e. the bonds are trading at an estimated recovery value not on a yield basis).

Offshore Drilling Crash?

Check out this chart from StockCharts.com for SDRL

What an ugly chart!

SeaDrill is just an example; an offshore drilling services provider with 15 semi-submersible rigs, 7 drillships, 20 jack-up rigs, 3 tender rigs, and 24 units under construction. Here is one perspective on what's happening in offshore drilling:

"[T]he industry is suffering from falling oil demand and the sudden influx of new vessels is increasing capacity beyond optimal levels, leading to overcapacity. The vessel influx happened because orders for vessels were placed during the industry boom, but are being delivered now.

There are still pending orders for new ultra-deepwater rigs, equal to half of the quantity of the existing fleet. Analysts estimate that a third of these new rigs will be delivered over the next three to four years, and they will not have orders for oil drilling.

In addition to these factors, rig rates have also fallen substantially in the last 18 months, because oil and gas companies are cutting capital expenditures and are increasing cash reserves to pay higher dividends."

One thing noteworthy is that Conrad's prospects are closely tied to offshore oil and gas. So far, there has been no big decline in Conrad, but in May it broke decisively below its longstanding ascending trendline and below its 50-day moving average. In August, it fell below the 200-day moving average and the 50-day crossed below the 200. I've closed out of Conrad - I hope it goes back to the $20s.

Also, these company managements can't seem to stop themselves from being procyclical and making bad bets. Same thing that happened with Walter.