There's no way around it: Seadrill (NYSE: SDRL) is really in a bind. The long slog of low oil prices has left the company with little new work for its fleet of rigs, and a lot of its creditors are calling right now. This has led management to make a last-ditch effort to keep the company afloat.
With such a major event looming, management put on its best face to investors during its conference call, to show that there are some positives for the company and that these credit negotiations may not be the end of the road, just a major speed bump. Here are some selected quotes from the company's most recent conference call to give you an idea of where management's head is at.
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Part of the reason Seadrill finds itself in the current mess is that the company's massive expansion plans were simply too much to handle during this downturn in oil and gas prices. Sure, the company had a lot of debt at the beginning of the downturn, but that could have been manageable with the large cash flow it was churning out at the time. Trouble was, it had too many obligations toward capital spending, and new rigs under construction.
The company has been trying and trying to push back the delivery of several newbuilds as long as possible. And on the most recent call, CEO Per Wullf did highlight that there were a couple of rigs on which it has been able to delay delivery:
Whether the company actually finds a bindable contract that will make taking delivery of those rigs worthwhile -- think those long-term contracts that integrated oil and gas companies sign when they start a multiyear drilling and development plan -- remains to be seen. Based on the company's market outlook, that may be tough to achieve.
Speaking of the outlook
In terms of what is on the company's horizon, Anton Dibowitz, executive vice president, sees some small glimmers of hope, but prospects haven't materialized into anything significant to date:
A place where drilling could boom soon?
If there is one place that looks rather attractive for Seadrill right now, it's Mexico. Back in December, multiple blocks were made available in Mexico's first offshore auction in decades, and several big-name integrated oil and gas companies won areas. With some of the blocks having similar geology to the U.S. side of the Gulf, there are good chances that those integrated oil majors will commence exploration activity there relatively soon.
According to Wullf, this could play well into Seadrill's hands since the company already has extensive relationships in the country with the national oil company PEMEX, and experience in these waters:
The really bad news
All of that was probably the best news the company could give, becauseCFO Mark Morris had to explain to everyone that the company is in some hot water with its creditors:
From an investor standpoint, this is the only thing that matters right now. The next few weeks are going to be real nail-biters as the company hopes to renegotiate these debts. It seems that, based on the CFO's statements, the best-case scenario will be a renegotiation with significant shareholder dilution. The worst-case scenario is bankruptcy. The only factor offering investors hope that they won't get completely wiped out is that the chairman of the board -- John Fredriksen -- owns 24% of all shares outstanding. Chances are, he doesn't want his holding in the company he started to get wiped out, either.
Ill effects with customers?
There are knock-on effects when a company is in open negotiations with its creditors and is at risk of bankruptcy. One is that customers may be a little nervous about counterparty risk. When asked about these credit renegotiations and whether they have impacted negotiations with potential customers,Dibowitz was a little more upbeat than one might expect:
It's slightly encouraging that customers still want to use Seadrill's assets, because losing its customer base would be a double whammy that would permanently sink the company.
Ultimately, though, it all boils down to the kind of deal that can be hammered out in the next several weeks. It seems that the outcome is very much in the air right now, and hopefully the company can find enough of its creditors willing to do a debt-for-equity swap. There is also the option to sell some rigs, too, as one of Seadrill's competitors has signaled it is on the market to add some rigs to its fleet. Until then, we wait.
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