Investors may want to be cautious before buying stock in Seadrill Limited (SDRL). Although shares are trading at rock-bottom prices as of June 2018, there is a great deal of risk for Seadrill and the drilling sector as a whole. Seadrill’s stock price is closely correlated with the price of crude oil, which has grown this year. In 2017, Seadrill filed for bankruptcy in order to shrink the debt burden. The secured agreement supported a plan to inject $1 billion in new capital as well as wiping out existing shareholders.
Lower Rig Demand
Seadrill is an offshore drilling company, providing rigs for drilling in shallow, deepwater and ultra-deepwater environments. It has the second largest and youngest fleet of drilling rigs in the world. The company had a market capitalization of $147.8 million as of June 2018.
Demand for its oil rigs suffered in recent years as oil producers have cut production due to the fall of oil prices. Analysts state that Seadrill’s ultra-deepwater rigs get the highest day rates and drive a lot of the company’s revenue. Costs of production in deepwater environments are much higher than for onshore production. Thus, it does not make sense for oil producers to drill when oil prices are low. Still, the price of oil went back up, so it might be the perfect time to buy shares at bargain prices.
Suspension of Dividends
During the third quarter of 2014, Seadrill announced it was suspending its dividend payments. This caught investors off guard. Many bought shares in the company because of the company’s commitment to strong dividend growth. Between the first quarter of 2008 up until the dividend was suspended, there was a 66% growth in the dividend yield. Seadrill said the dividend cuts were to help get the company’s balance sheet in better shape moving forward and create surplus capital so it could participate in any future restructuring in the industry. In 2017, Seadrill did not restore its dividend. It is instead preparing for a strong long-term future and a position in which to restore dividends. This will happen when debt management is under control and high oil prices start to support stock prices.
Seadrill Share Price
Shares were trading at around less than 40 cents in June of 2018, however, these shares increased to $25 on July 3. This does not necessarily mean the price cannot fall further or will increase more. A recovery price is dependent on higher oil prices, which have been gradually increasing. On July 2, Seadrill announced that the company has completed the "Chapter 11" part of their reorganization plan, which includes receiving approval to list new common shares on the NYSE under the ticker "SDRL".
Substantial Debt Load
Seadrill’s debt-to-equity (D/E) ratio was an industry high 1.35 in July 2015. This was the highest number in the sector, with the industry average around 0.7. The company had over $13 billion in long-term debt at the end of 2014. It cost the company around $437 million a year just to service this debt, accounting for around 8% of total revenues. However, Seadrill took action to reduce its debt obligations. In June of 2015, the company announced it was selling its West Polaris rig for $204 million in cash and debt assumption of $336 million. They also filed for bankruptcy last year which helped relieve some of the debt burdens. On July 2, the company emerged from bankruptcy after a completed restructuring.