Seadrill: Bankruptcy Looming – Seeking Alpha

Business Fundamentals

Seadrill Limited (NYSE:SDRL) is a company offering services in deep sea oil exploration, and its share price and business model has been seriously tested in the recent three years with low oil prices. As a result, Seadrill shares have dipped below $1.00 to $0.524 per share, 98.8% below its all-time high. In addition, the stock will be delisted from the NYSE unless it trades above $1.00 within 30 days. Unfortunately for Seadrill, the oil price situation is unlikely to improve soon, and investors should definitely stay away from Seadrill shares. For current Seadrill shareholders, the author recommends to sell shares even at the depressed valuation.

Summary of Company Information

Macro Headwinds: Revenue Decreasing, Contract Expiring

In general, Seadrill Limited needs around $65 to $75 in Brent crude for its services to be in demand. At the very least, Seadrill will need $65 to renew some of its existing contracts, and the company will require around $75 per barrel Brent to achieve decent day rates and full rig utilization.

Unfortunately for the company, oil prices are currently stalling at around $54 per barrel Brent, and Seadrill will have no way to renew its expiring contracts. To make matters worse, the company's revenues have decreased for each of its last four quarters - most recently dropping 10% to 667 million for the fourth quarter of 2016. Refer to the following chart for details on the company's revenue and operating income in 2016.

Unfortunately, this decreasing revenue trend is expected to continue and even accelerate into 2017 because more and more contracts are expiring in 2017. In fact, take a look at the chart below for a summary of its contract situation and decreasing day rates.

Number of Contracts

Contracts expiring in 2017

20

Longer term contracts

27

Expiring contracts total day rate

~$5.0M per day worth of contracts in total expiring within 6 months

Due to the expiring contracts, the company may start to face liquidity problems as a total of $450M per quarter of revenue will start to expire within 6 months. As a result of these contract expirations, Seadrill's operating revenues are expected to decrease steadily in the next 6 months. To understand the severity of a loss of $450M per quarter in income, note that the company's total cash pile is only $1.2B with almost no way for additional debt financing (debt over $10B) or equity financing (shares at $0.50). In conclusion, expiring contracts are about to push Seadrill into bankruptcy.

Bankruptcy and Liquidity Situation

As noted above, Seadrill may have liquidity troubles as early as 2018. To avoid this situation, Seadrill will need the price of oil to breakthrough to $65 to $75 range to help the company renew contracts and bring in new revenue. In order for that to happen, two of the three following items may have to materialize:

Conclusion

In conclusion, Seadrill's future is bleak even though oil prices have broken through to $54 per barrel. Contracts will continue expiring and the company's revenues will continue to suffer. As a result, investors should sell or stay away from Seadrill common shares even at its current depressed valuation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Seadrill: Bankruptcy Looming - Seeking Alpha