Seadrill Ltd., the offshore driller battered by the collapse in crude prices, is approaching a “debt wall” that may force it to sell new shares and renegotiate terms with bond investors and banks by the end of the year, according to Nordea Bank AB.
Hamilton, Bermuda-based Seadrill, controlled by billionaire John Fredriksen, is facing a funding gap of at least $2.5 billion through 2018, Janne Kvernland, an Oslo-based analyst at Nordea, said in a report. The company’s refinancing will probably include an equity issue of about $1 billion, she said. That’s equal to its current market value.
Seadrill and rivals such as Transocean Ltd. and Noble Corp. have been roiled by the collapse in oil prices over the past 18 months that has led explorers and producers to drastically reduce spending on drilling and other services. While current contracts are still allowing Seadrill to make credit payments, the company has a bigger debt burden than any of its competitors just as the offshore market is rapidly deteriorating, Nordea said.
“Seadrill’s debt structure has been based on the assumption that the bull market would last,” Kvernland said. “Its existence is now being threatened by an approaching iceberg of debt” and an “abysmal” outlook for offshore drillers, she said.
The repayment of a bond due in Sept., 2017 is “one of the main priorities for the company,” Chief Executive Officer Per Wullf said in an e-mail.
“We started work on this last year and are working closely with our board, our banks and our other stakeholders to come to the right solution,” he said.
Seadrill should be able to cover interest and amortization payments from operations, but not the repayment of the $948 million principal on a senior, unsecured bond and bank loans of $1.2 billion in 2017, Kvernland said. On top of selling new shares, the company will likely need to extend maturities and reduce amortization on its debt as well as defer all its rigs being built.
“Banks are likely to be cooperative,” Kvernland said.
The stock has dropped 93 percent in Oslo trading from the high it reached in July 2014. It could still drop further, Nordea said, lowering its target price to 5 kroner from 45 kroner.
The stock rose 12.6 percent to 18.6 kroner on Thursday in Oslo, following a rally in oil prices on Wednesday. The company’s 5.625 percent bond maturing next year is trading at about 32 cents on the dollar.
“Seadrill continues to offer great downside,” Kvernland said. “In reality, the stock has become an option and its fate lies in the hands of the creditors.”