Seadrill Deepens Cost Cuts to Ride Out CEO’s Worst Rig Slump

Photo credit: Seadrill

By Mikael Holter

(Bloomberg) — Seadrill Ltd., once the crown jewel among billionaire John Fredriksen’s oil and shipping holdings, is deepening planned cost reductions this year as it attempts to make it through the worst market slump its chief executive has ever seen.

Savings will exceed the $200 million target announced in November, adding to the more than $600 million in cost cuts put in place in 2015, CEO Per Wullf said in a phone interview from London. Almost 80 percent of the 2016 cuts are sustainable, he said.

The reductions are part of a multi-front struggle for Seadrill as it fights to stay afloat amid a plunge in oil prices over the past 18 months. Crude producers are cutting spending, collapsing demand for drilling at the same time as a glut of new rigs inflated supply.

For Seadrill, which has delayed the delivery of new rigs, renegotiated contracts and stopped paying dividends, the urgency of a failing market is accentuated by a debt burden that exceeds by far that of any rival, according to Nordea Bank AB.

“We’re likely to be at the end of 2017 before this starts being fun again,” Wullf said of the market for floating rigs, where rates are now close to cost break-even for shorter contract extensions. “I haven’t seen it in this way before, and I don’t think I’m the only one who has been surprised at the downturn.”

Seadrill fell as much as 4.9 percent in Oslo on Monday, trading 2.9 percent lower at 17.9 kroner a share as of 9:24 a.m. That extends losses to 41 percent this year, while 93 percent of the company’s value has been erased since a July 2014 high. Brent crude fell 2.1 percent to $35.2 a barrel in London.

Sinking Rates

As an illustration of the rapid market deterioration, Wullf, who has worked in the industry for more than 30 years, said he would accept a day rate of $300,000 for an idle floating rig on a contract for 12 months or more, compared with the $350,000 to $400,000 he was seeking a little more than three months ago. Rates peaked at as much as $650,000 in 2013, prompting a surge in the building of new rigs.

On very short-term deals, Seadrill could go as low as $160,000 if it helps the company keep a rig in operation between other contracts, he said.

The company, which has a $1 billion bond due in September 2017, has a funding gap of at least $2.5 billion through 2018, according to Nordea analyst Janne Kvernland. The company is likely to raise about $1 billion in new equity as it restructures its financing, she said in a note this week.

The ‘Challenge’

Seadrill’s management and board, led by Chairman Fredriksen, have started a process that will involve banks, bondholders and shareholders, Wullf said. The CEO meets with Fredriksen, who owns about 24 percent of the company, on a weekly basis to discuss these matters. Wullf declined to comment on the specifics of the plan, which he said he would like to see in place within 2016, though the real “challenge” isn’t before the fall of 2017.

“We’ll come through that one way or another,” he said. “The bond loan re-payment that is due September 2017 is one of the main priorities for the company.”

Although an industry total of more than 40 floating rigs have been permanently scrapped by companies like Transocean Ltd., Morgan Stanley still estimates that the 2016 supply of 272 rigs will by far exceed demand of 178, it said in a Jan. 27 note.

Competitors should scrap 60 to 70 more units, Wullf said. Seadrill has no plans to retire any of its units because it has the youngest fleet in the industry, he said.

When the market picks up, and as long as rivals have gotten rid of a sufficient amount of rigs, Seadrill still plans to act as a consolidator in the industry, where distressed assets are bound to “end up in seven or eight drillers’ pockets,” Wullf said.

“This market will come back again,” he said. “We still have the youngest fleet in the world, so that rebound, we are going to harvest on that.”

©2016 Bloomberg News