Seadrill US $2.4 Billion Announcement Creates Gloom

Published at 12:15PM - 21/07/14

When Norwegian drilling rig contractor and oil field services company Seadrill announced it will spend up to US $2.4 billion to construct four new drilling ships over the next year, it may have expected applause. But the announcement resulted in a pulled bond issue in early July and concerns on the capital markets about the company’s prospects for growth. But on 18 July, Seadrill tried to make amends.

The new drilling ships, priced at about US $600 million each, will be built in South Korea; two will be built by Samsung and the others by Daewoo Shipbuilding & Marine Engineering.

These drilling ships are designed for water depths of 3,700 metres maximum. Their load capacity will be 1,250 tonnes, and they are suitable for working in major deepwater regions such as Brazil, the Gulf of Mexico and West and East Africa.

A high-specification blow-out preventer (BOP) stack with a seven ram specification will be fitted to them. The units will also have the handling capacity for a second BOP.

The ships will be delivered during 2015. Seadrill has an option for two more drilling ships to be delivered in the 2016.

These orders come on the back of a booming market in offshore drilling. Contractors worldwide have built about 261 new drilling units over the past nine years. There is a continuing demand for drilling units for ultra-deep waters – water depth greater than 5,000 metres – and rig utilization over the period has been 100 per cent.

The Seadrill order book now stands at 22 units. These include nine drilling ships, two semi-submersibles designed for harsh environments and 11 jack-up rigs with high specifications. The company also has options for two more ultra-deep drilling units.

But when the capital markets started to count up how Seadrill was going to finance its orders, the result was a failed bond issue.

On July 8, it announced a US $1 billion five-year convertible bond issue with a 2.0 to 2.5 per cent coupon payable in arrears semi-annually. It also announced a voluntary incentive payment to convert some or all of a 3.375 per cent coupon US $650 million convertible bond issue due in 2017.

The following day, Seadrill cancelled both the bond issue and conversion. It followed up this disaster by re-launching the voluntary conversion on July 18.

The reason for pulling the bond was a 6.5 per cent drop in the company’s share price when the issue was announced. Markets reacted badly to the prospect of Seadrill’s rising debt.

The company has a pending debt of US $5.4 billion for 19 new drilling rig deliveries. If it finances further new rigs with debt, this is likely to reach between US $18 and $20 billion over the next two to three years.

All this would be fine if the booming offshore drilling market could guarantee the sky-high rates of the past several years. But this may not be the case.

Market players became jittery at the thought of Seadrill withholding dividend payments.

It will have an operating cash flow this year of US $2.5 billion compared with a dividend outflow of between US $1.6 and US $1.8 billion. If the rates do not drop too dramatically, it should meet its obligations.

Last updated on 03:20PM - 22/07/14