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Seadrill Ltd Shows Some Life


Seadrill has made a handful of concessions, but got extended contracts in return.

Seadrill is doing well with its delevering efforts, although financing challenges lie ahead.

Shares continue to be depressed, but that doesn't mean you should jump in.

It's been some ten months since Seadrill (NYSE:SDRL) cancelled its dividend and warned of a depressed offshore drilling market. Since then, Seadrill has delayed the completion of most of its ships currently under construction. The company has also given concessions to keep tendering activity going. Since November, Seadrill's main focus has been funding various pieces of debt as they come due, and reducing debt when possible. This article aims to take a look at how Seadrill's efforts have gone since last November, when the company it cancelled its dividend.

Back toward the beginning of the year, Seadrill noticed a dearth of tendering activity for new jobs. This was a big source of worry for all investors, because most offshore rig lessors still had a lot of ships under construction. While there is still a good number of new vessels on order being built in shipyards across the world, there has also been a spurt of tendering activity over the last quarter. This activity brings both good news and bad news: Good news in that there is at least some demand out there, and bad news in that, in Seadrill's case, each offer involved some concessions from Seadrill.

For example, in a deal with Pemex, Seadrill conceded $60 million for a two-year extension to a drillship in the Gulf of Mexico. With Italian oil company ENI, Seadrill made a $32 million concession for a rig off the coast of Africa, but in doing so extended its contract with ENI by another eighteen months. With Total, the French national oil company, Seadrill made a third concession for $16 million, but increased the contract by another six months, and added $46 million to its backlog. Finally, Seadrill made a concession to 'Customer A,' for $23 million, but extended the respective drillship contract for three years and added $113 million to its backlog.

Long-term problem

Here's the big problem Seadrill faces: Going dayrates are well below what Seadrill needs to break even and pay off debt at a reasonable clip. Management reported that existing floater dayrates are around only $275,000 per day; less than half of what it was just a year ago. Seadrill needs $350,000 per day to break even on a cash flow basis. The jackup market isn't any better: Seadrill requires $107,000 per day but sees only $95,000 per day.

Seadrill needs dayrates to increase, and that won't likely happen until a mass of ships are scrapped. Unfortunately, at the moment, it looks as if the number of ships likely to soon be scrapped are roughly equal in number to the ships currently under construction. There are over 70 floaters either under construction or in storage, and only 78 floaters are classed as likely candidates for scrapping. In other words, there are no catalysts that could bring dayrates higher.

So, is Seadrill in trouble? Perhaps not for awhile. Yes, going tender rates are low, but the company also has much of its fleet locked into contracts through 2016, and dayrates for contracts already locked in tend to be in the $500,000 range. For example, next year about three-quarters of Seadrill's drillship fleet is contracted. This gives Seadrill another year of substantial excess cash flow. Seadrill will probably apply that cash flow to outstanding debt, which remains above $11.5 billion. Over the last year Seadrill paid off $1.1 billion in debt and has added $760 million in cash to its balance sheet. In November of last year Seadrill cancelled its dividend and announced it would focus on paying down debt. It appears that effort has been successful so far.

Although Seadrill's balance sheet is getting markedly better, there are still funding challenges ahead in 2015 and 2016. This year alone, another $350 million bond is maturing, and the $450 million funding facility for West Mira is also coming due. If the course of this year is any indication, however, Seadrill shouldn't have much trouble obtaining funding.

Courtesy of Google Finance

Seadrill is certainly down a lot. Management's efforts to delever have also been pretty successful. Does that make Seadrill a 'buy?' Well, I'm only willing to say 'wait and see.' As of now there are no upward catalysts to Seadrill, and I think share prices are likely to remain low for awhile. There's a lot that could happen over the course of 2016, and so I think share prices are going to remain low for awhile. There's a lot of bad circumstances that could happen over the course of the next year, and I therefore see little reason to jump on Seadrill right now.

Here are a couple things I believe investors should watch for in the future: First, contract cancellations. The one thing that could give Seadrill a real headache is contracts ending early or dayrates being slashed mid-contract. Second, watch the number of scrappings within the industry. If companies lag in removing ships from the water, that will hold down dayrates for an extended period.