E - Seadrill: Likely To Benefit From Corporate Revamping

2023-04-07 12:35:54 ET

Summary

• Seadrill is a global offshore oil and gas contractor providing services to the global energy industry.
• Following a corporate reorganization, the company is rethinking its strategy, rebuilding its footprint and preparing itself for renewal in offshore development projects.
• Deleveraging, conservative financial stewardship and OPEC+ support for energy prices all likely help the firm navigate period of transformation.

Company Overview

Seadrill (SDRL) is a world class deepwater drilling contractor providing services in the oil and gas industry. The $3B company boasts a global footprint, with operations focused on major oil and gas hubs spanning the globe. Organized by asset class, the company's main offices are in Houston and Dubai with global headquarters in London.

The company offers a wide range of drilling services, including exploration drilling, production drilling, and well maintenance. Its clients range from multinational oil and gas companies to small independent operators.

It has been a mixed bag for offshore drilling contractors YTD with ( RIG ) leading the charge +48.95%, followed by ( SDRL ) +24%, ( NE ) +5.05%. Laggards have been ( HP ) -20% and ( PTEN ) -26.32%.

Undoubtedly, it has been a tough time for global offshore drilling contractors. An end to easy money, corporate leverage and a global health pandemic put paid to a sector that saw restructurings, divestments, and an industry-wide stacking of assets. We're cautiously optimistic about the fortunes of drilling contractors, with our standout preference being for Noble Corporation ( NE ). Given Seadrill's nascent revamping, it remains perhaps too early to forecast any immediate upside. Hold.

Current Fleet

Seadrill operates a fleet of 29 drilling rigs, including 12 UDW drill ships, four semisubmersibles, 10 jack-up rigs, and one semi-tender and two tender rigs. The company, resurrected from the depths of Chapter 11 bankruptcy following a pandemic-induced bust, has a sizable presence in several key geographies including in the US Gulf of Mexico, deepwater Brazil and Angola.

In the US, Seadrill has a long-established track record enabling it to forge a deep understanding of local operators such as Talos Energy (TALO), Eni (EIPAF) and LLOG Exploration. In deepwater Brazil, Seadrill is well positioned for re-contracting and extension work from Petrobras with an ability to leverage its existing footprint for future growth. In an increasingly dynamic day rate environment, the offshore drilling contractor continues to grow market share.

The Aquadrill Acquisition has helped the offshore drilling contractor beef up technical capability.

Brazilian pre-salt fields continue to be at the forefront of ultra deep water drilling rig activity. On the other side of the Atlantic, the offshore drilling venture has built a foothold in Angola through a lucrative strategic partnership with national operator, Sonangol and collaboration with French operator, Total Energies (TTE), and Italy's Eni.

Seadrill's fleet is one of the largest and most diverse in the offshore drilling industry and is recognized for providing some of the highest quality operations in some of the most challenging offshore environments. The fleet boasts ultra deep water drill ships capable of drilling to 35,000 ft, harsh environment winterized semisubmersibles certified for projects in Norway, UK, and Canada, along with a variety of high-specification jack-ups for shallow water activity. The company's diverse fleet has enabled it to grow its revenue and expand its customer base.

Seadrill FCF & EBITDA projections based on different day rate assumptions.

Period of Transformation

Debt restructuring and deleveraging have been strategic pillars for the offshore rig operator following its emergence from Chapter 11 bankruptcy protection in February 2022. Since then, the firm has raised funds through multiple listings on Euronext (April 22), the NYSE (Oct. 22), and through divestments of non-core assets.

In November 2022, the company listed on Oslo's stock exchange, prepaid $442M of outstanding credit, divested its Paratus stake (2023) and made an important strategic all-share acquisition of Aquadrill. The closing of the deal, implying a valuation of $958M provided the company with an enhanced fleet and scale, additional operating synergies (~$70M per year). Consequently, it has been a busy, transformational time for the firm.

The company traversed a volatile period not too long ago with a $7B debt burden essentially wiping out equity holders and forcing a profound structural reorganization.

During this period, the company rejigged debt for equity while managing to secure a $350 million loan from its major shareholders, including Norwegian shipping titan John Fredriksen, the company's largest shareholder. Since then, the Norwegian has opted to cash out with sales of as many as 24 million Seadrill shares dedicated to bolstering his fleet of new tanker ships .

Financials

It has been hard to draw any meaningful conclusions from Seadrill's recent performance as the entire industry progressively navigates out of a long-lasting downturn. The company posted FY22 EBITDA of $224M yet this remains somewhat obscured by unusual items linked to business divestments and corporate restructuring.

Interest expense on the firm's once gargantuan debt has been reduced by about 75% (~$91M) and the corporate restructuring has seen a continued moderating of leverage. It has been the standout feature of the entire industry - rapid growth in capital expenditure fuelled by an energy price boom, low interest rates and easy access to credit markets that culminated in a COVID-induced bust and a radical reorganization of the entire sector.

From a peer comp perspective, competitor Noble looks like the standout player with ~2x the operating income of competitors. A premium for operating performance does exist in relative valuations.

Seadrill presently has $480 million in cash on hand while continuing to work on reducing receivables ($210 FY20 v $197 FY21 v $164M FY22) to bolster liquidity and avoid past mistakes of over-leverage. Tighter monetary environments and more difficult access to credit also forced the offshore driller into a greater degree of financial conservatism.

Cash flow from operations weighed in at a paltry $9M FY22 but remains the first period of black ink since FY17 when the firm posted ~$400M. Most of the company's FY22 cash inflows were generated by strategic divestments (~$565M) while some funds were allocated to capital expenditure to re-organize the firm's capital equipment footprint. $225M of additional long-term debt was reissued while $624M was repaid allowing the firm to continue to improve its leverage profile.

Risk Profile

Offshore drilling contractors navigate an operating environment fraught with risk. It's a high fixed cost, ultra-competitive, and onerous industry heavily linked to energy prices and exploration and development projects in the oil and gas industry. In terms of risk, some positives remain - the entire industry is gradually exiting a period of industry-wide corporate restructuring and deleveraging likely to provide lessons learned regarding conservative financial stewardship.

Seadrill's deleveraging comes at a time when access to credit markets are increasingly difficult, allowing the firm to opportunistically bolster its balance sheet for the next wave of offshore projects. Offshore Pre-salt Brazilian projects are likely to attract the lion's share of new project sanctions so all eyes need to be peeled on Brazil's political front given the arrival of the Lula government and the volatility surrounding Jair Bolsonaro's exit.

OPEC+ members appear intent on supporting oil prices following the Biden administration's cautious reluctance in topping up the strategic petroleum reserve too quickly. Accordingly, we're likely to see a floor to equity prices that will be supportive not only of offshore drilling projects but also industry wide earnings.

Key Takeaways

Seadrill is a major player in the global offshore drilling industry, reborn from a painful corporate reorganization following multiple years of red ink, a global pandemic, and a consequent shuttering of the world economy.

Its perhaps provided lessons in leverage at the expense of creditors, while allowing the firm to capitalize on protection from creditors while rightsizing its fleet, optimizing its global footprint and shoring-up its finances for the next leg of global energy projects.

For further details see: