written by reader Travis, what is your take on Seadrill. Do you see any hope for this company. They were once

By backoffice, May 16, 2017

the best in their sector, do you see any improvement in their standing or is it a lost cause a victim of the oil glut with alternative energies?

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Travis Johnson, Stock Gumshoe
May 16, 2017 12:59 pm

I have not looked at Seadrill in detail recently, but the shale revolution and the drop in oil prices effectively scuttled their highly levered business plan. They had (and have) a great fleet of deepwater rigs, and they were dramatically more aggressive than their competitors (Diamond Offshore, Transocean, etc.) in building up that rig fleet when oil prices were low and demand was not that high for offshore equipment a decade or more ago, so they were ready for the huge boom in offshore drilling that came when oil soared and a lot of big offshore discoveries, from the Gulf of Mexico to offshore Africa to the South China Sea, got explorers excited about looking for big offshore reservoirs again.

Unfortunately, Seadrill is run by a swashbuckling team and, like many shipholding firms, they borrowed like crazy to pay for their incredibly expensive newbuilding programs. That worked great for a long time because they leverage kept rolling nicely and the long-term nature of the contracts they sign with oil companies gave a lot of certainty about future cash flow. And having newbuilding rigs that weren’t yet under contract was a huge boost to results, because bids kept rising for those rigs… until 2014, when the bottom started to fall out of the oil market because of the supply glut. That led to the unthinkable happening in 2015, with oil companies canceling contracts (“it will never happen” was the refrain before that, because oil companies were supposedly so committed to their long-term exploration and development programs), and the offshore rig owners have been falling over themselves to see who can fall the most since then — but Seadrill has probably been the worst, because that same leverage that made them the best a decade ago came back to bite them.

I don’t know if they’ll survive, I haven’t looked at the financials since I finally closed out the rest of my position about 2-1/2 years ago, but I certainly don’t like the potential for the offshore drilling market nearly as much today as I did even four years ago, when shale production was far more expensive and Brazil and several African countries were dead-set on drilling offshore at almost any cost because of the strategic imperative to find more oil. There’s so much oil supply now in the US that will restart production if oil gets going to the $60s and 70s again, which seem to be the prices that offshore exploration demands, and offshore drilling costs seemingly can’t come down as dramatically as the shale costs have (unless there’s major regulation of fracking because of some environmental calamity or there’s some other “black swan” event for the oil markets, of course).

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