For the full value to be realized by creditors, Seadrill, which has a substantial interest in Seadrill Partners’ rigs, has to “give up” its share. Fellow contributor Henrik Alex has several times aired the idea that the elegant solution for Seadrill and Seadrill Partners is to restructure at the same time (this would be the second restructuring for Seadrill), become a combined company again and start from scratch. It remains to be seen whether Seadrill is open for such a possibility (the stock price action this year suggests that such fears circulate in the marketplace).
The other solution for creditors is to kick the can down the road. Outside of operating expenses, the company has two major expenses – G&A and interest, with interest taking the lion’s share of the roughly $300 million burden. With 6 rigs at 85% utilization, Seadrill Partners will have 1,862 working rig days per year. To produce the desired $300 million, the company needs a margin of $161,000 per day per each of the six rigs. Assuming average floater expenses at $130,000 (this number differs based on geography and company; I’ve seen estimates as low as $110,000, but I don’t think it’s realistic to use the lowest number), Seadrill Partners needs dayrates closer to $300,000 for all six rigs to service its debt without cash bleed. Only the harsh-environment West Aquarius is almost guaranteed to surpass this mark. For drillships, the situation is less clear - recent Seadrill contracts marked a breakthrough, surpassing the $200,000 mark - it's a long road to $300,000.
It will be interesting to see what strategy will be chosen by creditors, who typically have no interest in owning equity and prefer to kick the can down the road as long as a company can service regular interest payments. Also, it remains to be seen what Seadrill plans to do with its stake in Seadrill Partners. If Seadrill Partners’ debt gets cut in any restructuring, Seadrill’s ownership in Seadrill Partners’ rigs will be jeopardized. Also, it is unlikely that Seadrill will provide some cash infusion into Seadrill Partners since it has its own problems due to big debt and insufficient speed of the offshore drilling market recovery.
At this point, there’s little reason to believe that Seadrill Partners’ units will return to NYSE. However, the story with creditor negotiations has not even begun yet, so I’ll continue to keep a close eye on it since it will have a material impact on the stock that remains on the Big Board – Seadrill.
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