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If you look at some of the news from offshore rig companies, it would look as though things are starting to look up for the business. The one exception is looking at Seadrill (NYSE: SDRL) as of late. Shares of Seadrill declined an incredible 45.2% in January. Compare that to Ensco (NYSE: ESV) and Noble Corporation (NYSE: NE), which both saw double-digit gains. The big reason Seadrill's stock declined sharply while others made some modest gains is that the company announced it is struggling with refinancing with some of its creditors.
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Let's start with the good news in the offshore rig industry: Producers are starting to show an interest in hiring offshore rigs again. Noble announced on its most recent fleet status report that two of its jack-up rigs had their contracts extended until 2022. Granted, Noble took a slightly lower day rate in the negotiation, but the two will add to the company's backlog of contracted work. Also, Ensco picked up a contract for one of its jack-ups in the North Sea that will mobilize in the spring, although no price has yet been given for the contract. Overall, considering how many rigs have gone off contract as of late, this is a pretty welcoming sign for offshore rigs.
Seadrill, on the other hand, wasn't so fortunate. The company did announce in late December that it had received a three-year contract extension for one of its jack-up rigs, but that news has been overshadowed. The real big event in January was when Seadrill announced that it was in discussions with its creditors to restructure its debt. Accord to CEO Per Wullf, those negotiations have taken longer than expected. The company has been making as many capital preservation moves as possible lately, such as delaying delivery of new rigs under construction, but the rapid decline in contract work for its fleet is leaving it with little cash flow to spend on preserving its fleet or paying down debt.
It's ultimately going to come down to a large issuance of equity. Management has already warned investors that it thinks it needs to raise about $1 billion in debt, and that it may result in "significant shareholder dilution."
One important lesson investors should have learned during this market downturn is that balance sheets matter. Seadrill's balance sheet was in rough shape during this most recent downturn, while Noble and Ensco's financial statements looked much more respectable. So, as cash flows have dried up, Seadrill has perpetually been trying to pare down its expenses and its debt load to survive. With a need for $1 billion to keep things going, that's likely going to mean investors are going to get hurt, here, one way or another.
For investors looking at offshore rig stocks other than Seadrill, now may be an intriguing time to put them on your radar. Both Noble and Ensco are trading well below their tangible book values. It will likely be a long payback period, but there looks to be a lot of value in these shares for investors who have the patience.
For Seadrill, though, there is a little more uncertainty. Until the company announces the final results of its debt restructuring and how it impacts the equity in the company, it's probably best to stay away.
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