Seadrill Ltd (SDRL: NYSE), the Norwegian offshore drilling company presented its FY15 results on 26 February, reporting a 13.2% YoY decline in revenue to USD 4.3bn due to prolonged downturn in the offshore drilling market, resulting in higher idle time and lower day rates for certain rigs. Adjusted EBITDA saw a 5.8% YoY drop to USD 2.5bn which was in line with the company’s guidance. Yet, thanks to the ongoing cost saving programme initiated by Seadrill in 2014, adjusted EBITDA margin improved to 55.9% versus 51.5% in FY14. Seadrill did extremely well on the cost preservation front by achieving USD 832m of cash saving, exceeding its target of USD 600m for FY15. However, the main concerns for Seadrill, is its USD 10.5bn debt load, of which 4.5bn is maturing by 2017, coupled with circa USD 3bn of capex requirement through 2017. As stated in its 4Q15 conference call, Seadrill has hired financial advisors to evaluate suitable options in-light with the current market conditions, which could help the company tackle its liquidity needs and is expected to communicate its plans sometime in 1H16.
Operating cash flow for FY15 was up 13.6% YoY to USD 1.8bn from USD 1.6bn in FY14 thanks to positive changes in operating assets and liabilities, which generated USD 82m cash versus USD 418m cash used in FY14. In addition, capex for the period plunged 67.5% to USD 935m vs USD 2.8bn in 2014, as Seadrill deferred delivery of vessels to 2016 and beyond. Following this, FY15 free cash flow turned positive to USD 828m from negative USD 1.4bn last year.
New built update: In January 2016, Seadrill successfully deferred delivery of two ultra-deepwater drillships, the West Aquila and West Libra, to 2Q18 and 1Q19, respectively, from 2Q16 previously. As a result, the company’s near-term liquidity has improved as the final yard instalment for both units of about USD 800m has also been deferred until the delivery dates. As per the 4Q15 call, Seadrill is in discussion with Dalian shipyard regarding deferral of the 8 jack-up drills, as it has mentioned that it does not plan to take delivery of any rigs during 2016. Further, Seadrill’s subsidiary, North Atlantic Drilling Ltd (NADL), signed a standstill agreement with Jurong Shipyard (Jurong) and deferred delivery of the West Rigel drill rig (scheduled in December 2015) until June 2016. However, if NADL fails to get the unit contracted until June 2016, it will form a joint asset holding company for joint ownership of the unit with Jurong holding 77% and NADL 23%. Consequently, Seadrill has removed West Rigel from its newbuilds and future capex, and is now classified as an asset held for sale. Seadrill’s another subsidiary, Sevan Drilling, exercised a six-month option for the first time to extend the deferral agreement with Cosco Shipyard to 15 April 2016 and amend the terms relating to instalment payments.
As of FY15, Seadrill had 38 rigs of which 29 were operational. Furthermore, the company has 13 rigs rolling off contract in 2016 and 11 rigs in 2017, which will substantially impact Seadrill’s future revenue and EBITDA generation. Moreover, it does not have any contracts for 13 rigs that are currently under construction. Despite sufficient headroom under its net leverage covenant, which stood at 3.58x in FY15 against a test of 6.00x, it may face problems in 2016 depending on how successfully it shields its EBITDA decline and efforts to defer its new-builds, as these factors could require Seadrill to take additional debt to finance those rigs. As at 24 February 2016, Seadrill had an order backlog of USD 5.1bn, comprising USD 3.9bn for its floater fleet and USD 1.2bn for its jack-up fleet, with average contract duration of 18 months and 13months, respectively. For FY16 the company has contracted revenue guidance of USD 2.3bn and 1Q16 adj. EBITDA is estimated to be around USD 450m. Considering, an average of the last 3 year adj. EBITDA margin of 53%, FY16 EBITDA could be around USD 1.2bn which may lead to a breach in net leverage covenant in FY16. Hence, the company may need to ask for an amendment to its covenants or a waiver in the coming quarters.
Covenant summary: In May 2015, the company amended its covenants under the senior secured credit facilities. Under the amended terms, the permitted net leverage ratio has been amended to the following:
- A test of 6.00x from 2Q15 to 3Q16
- A test of 5.50x for FY16
- A test of 4.50x from 1Q17 onwards.
The company also has an interest coverage ratio covenant of >2.50x for all periods tested quarterly and a minimum liquidity test of USD 150m amongst others.
In addition to the debt guarantees provided by Seadrill to its subsidiary North Atlantic Drilling Limited (NADL) in 2015, Seadrill has further agreed to provide new financing of up to USD 75m to its affiliate, Archer Limited, by 30 April 2016 if the latter does not have sufficient funds for repayment and cancellation of commitments under the multi-currency revolving facility agreement. The company has complex debt agreements with its subsidiaries along with a cross-default risk. On 1 March 2016, Moody’s downgraded the corporate rating of Seadrill Partners (SDPL), an affiliate of Seadrill, to Caa2 from B2, reflecting continued weakness in the offshore drilling industry and the company’s substantial funding requirements through 2017. Earlier in December 2015, S&P had also downgraded SDPL to B from BB- citing similar reasons.
In August 2015, Seadrill entered into a five-year USD 450m senior secured facility and repaid the remaining USD 21m outstanding under its USD 700m senior secured facility and USD 350m 6.5% unsecured bond, both due in October 2015. Additionally, the company repurchased USD 51.8m of its USD 1bn 6.125% senior unsecured bond due September 2017, reducing total debt to USD 10.5bn at end-FY15 from USD 12.5bn at end-FY14. As at 31 December 2015, the company had USD 1.2bn of cash and cash equivalents (including restricted cash), as opposed to short-term maturities of USD 1.5bn (debt maturity amount includes scheduled debt amortisation payments). Further, Seadrill could receive some support from its major shareholder, John Fredriksen, who has started buying the company’s corporate bonds in December, as stated in an interview with Norwegian business daily, Dagens Naeringsliv. However, his support would be limited by the fact that, he has invested his own money and formed a new entity Sandbox, aimed at buying new builds which are ready at shipyards, when offshore drillers are finding it difficult to fund their new builds.
In conclusion, with limited shareholder support and approximately USD 7.5bn of capex and debt maturities to tackle through 2017, it is likely that Seadrill would opts for debt restructuring in the next 10-12 months in order to postpone its bond maturities and reduce bank loan amortisations. However, considering the fact that Seadrill is one of the biggest clients among offshore drillers for banks with USD 8.2bn of bank debt outstanding as at FY15 (78% of total FY15 debt), it might get support from its lending banks, as most industry players are struggling.
Business profile: Seadrill Ltd is a Norwegian-Bermudan provider of offshore drilling services. The company owns and operates 56 offshore drilling units, consisting of 13 semi-submersible rigs, nine drill ships, 21 jack-up rigs and 13under-construction tender rigs. Seadrill operates under three business segments: Floaters (65.1% FY15 total revenue), jack-up rigs (29.4%) and others (3.4%). As at 31 December 2015, the company had 7,103 employees.