SeaDrill (SDRL) Inks Debt-to-Equity Exchange Agreement

Hamilton, Bermuda-based offshore drilling firm SeaDrill Limited (NYSE:SDRL) has agreed to exchange around $55 million convertible senior notes with a total of 8.18 million new shares of its common stock. This exchange is expected to enhance the company’s liquidity position, reduce its debt and help it reach more favorable terms with creditors.

This exchange of 5.625% convertible senior notes, due on 2017, with common stock is in sync with the terms and conditions contained in the senior notes. The settlement is scheduled for May 20, 2016. Thereafter, the company will have a total of 500,944,280 shares of its common stock issued and outstanding.

Although this exchange will aid the company’s liquidity position, its dilution effects cannot be denied.The deal will dilute shareholder value by about 1.5% and will reduce debt by only about 0.5%. If the company uses a significant amount of equity to pay down more of its long-term debt at these prices, the stock will most likely experience a large decline in value for its existing shareholders.

SeaDrill is already in hot water as the company is heavily indebted, has a number of obligations for new vessels, and a shrinking backlog of contracted business.The fall in commodity prices has forced the leading upstream players to curtail drilling, thereby reducing demand for the requisite equipments. This, in turn, has adversely affected the bookings for drillers like Seadrill, thereby resulting in less work. Hence, the offshore drillers are struggling to repay debt as competition and reduced spending by oil companies hurt profits.

The company is expected to release first-quarter 2016 results on May 26. It beat the Zacks Consensus Estimate in the last quarter and for the last four quarters its positive average surprise is 8.97%.

SeaDrill currently carries a Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Some better-ranked players in the energy sector are McDermott International Inc. (NYSE:MDR) , Braskem S.A. (NYSE:BAK) and Pembina Pipeline Corporation (NYSE:PBA) . All these stocks sport a Zacks Rank #1 (Strong Buy).