Description

Summary

• Special Situation – SDRL recently emerged from Chapter 11 bankruptcy.  Post restructuring the company has a significantly de-leveraged balance sheet and trades at a discount to peers (the company has only recently been relisted and the equity is not yet included in equity indices)
• Multi-year contract backlog provides visibility on future cash flow
• 60%+ upside
• Near term catalysts expected to collapse valuation gap versus peers

Background

Seadrill emerged from Chapter 11 bankruptcy in February 2022.  The Chapter 11 reorganization allowed the company to eliminate $5bn of debt (the company emerged with only $0.4bn of net debt vs. >$5bn pre restructuring).  The equity was re-listed on Euronext Expand in April 2022.  Under the terms of the reorganization the company is required to ‘uptier’ this listing to Oslo Bors and the NYSE and is in the process of doing so.  Once this is complete the company will be eligible for index inclusion and will benefit from demand from passive buyers of its stock (index funds).  

Company Overview

Asset portfolio – SDRL has arguably the highest quality fleet in the industry (based on age and specifications).  It’s assets span Ultra-Deep Water Floaters, Harsh Environment (Norway) and benign Jackups as well as a managed fleet of vessels (both in Joint Ventures and 3rd party arrangements)

The company also benefits from a large contract backlog providing cash flow visibility / certainty for the coming years.  

Fundamentals

The offshore market was oversupplied as a result of over-bullishness (and overbuilding) in the early part of last decade.  Since then industry health has gradually improved – there was a concerted scrapping of rigs (and several bankruptcies / restructurings) to bring the market toward balance (see charts below).  Recent geopolitical events and oil prices have improved the demand picture further than expected when scrapping was taking place.  Day-rates have improved materially and there are now concerns from some the market may be ‘short’ capacity.  Spot day-rates generate healthy profitability for the industry and longer-term contracts are now also been seen in the market.  The result of this is ‘locked-in’ profitability in contract backlogs across the industry (both contracted revenue and profitability in backlogs is increasing).

Valuation

SDRL’s earnings and cash flow will increase in 2022 and again in 2023.  This is because the 3 Floaters (Carina, Jupiter and Saturn) and 3 Jackups (Ariel, Cressida and Leda) will commence contracts from Q3’22 through Q2’23.  I expect EBITDA will be ~$270M in 2022 and $435M in 2023 (note: this increase is largely driven by contracted revenues based on the existing backlog).  

The company’ closest peers are: Valaris, Noble/Maersk drilling (currently merging) and Transocean.   Of these Valaris is the ‘cleanest’ comparable (Transocean has high debt as it has not restructured so its valuation is optically higher and Noble/Maersk are in the process of a merger).  2023 EBITDA multiples are: VAL/DRLCO/RIG 7.7x/7.3x/8.3x.  I believe these are the closest comparables based on size as well as comparability of fleet.  

Other peers include: Diamond Drilling (6.1x), Borr Drilling (10.3x), Odfjell Drilling (5.5x) and Shelf Drilling (5.6x).  While useful datapoints I’d differentiate each of these somewhat from SDRL (Shelf and Borr are Jackups only, Diamond is smaller and also has a rump of low quality assets and Odfjell is specialized in harsh environment vessels).  

Based on the above I see 60%+ upside vs. the current share price. 

Catalyst

Index inclusion