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Canaccord: Seadrill Still A Sell And 'In A Hole'

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Canaccord: Seadrill Still A Sell And 'In A Hole'
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In a report published Wednesday, Canaccord Genuity analyst Alex Brooks maintained a Sell rating and price target of NOK70 on Seadrill Ltd (NYSE: SDRL). The company today announced the sale of West Polaris to its subsidiary, Seadrill Partners LLC (NYSE: SDLP).

While the analyst believes that this sale could help Seadrill, it is unlikely to benefit the company too much or for too long.

"One important consequence of the transaction is that it means Seadrill's net financing need for the rest of this year is almost entirely met: based on deferring yard payments, we estimate that less than $500m still needs to be raised this year," the Canaccord Genuity report stated.

Although the sale might improve liquidity, the analyst expressed concerns regarding the sale of an asset that is expected to contribute EBITDA of more than $150 million during 2016 and 2017. In addition, while the stock is trading at a high multiple, the company is generating less cash than earlier, despite the improvement in near-term liquidity.

"When Seadrill cut its dividend to zero last year, the management claimed that part of the reason was to create surplus capital so as to be part of any future restructuring of the industry, and analysts bizarrely spent much of the 3Q call asking how much of the $500m quarterly saving should be considered surplus capital. We believe the answer was clear at the time and has become more so since: none," Brooks said.

Seadrill possess the highest quality and youngest fleet among the major players in the sector. Unlike most of its competition, the company has very few assets that need to be scrapped in the current cycle. In addition, the management continues to aim at shaping the future of the industry. However, given the current financial strategy, Seadrill itself could turn into a distressed asset.

"We believe the only realistic way out for Seadrill - as for others - is an equity capital raise, and that the current share price offers an attractive opportunity for the management to do so," according to the Canaccord Genuity report.

Latest Ratings for SDRL

DateFirmActionFromTo
Jul 2016Morgan StanleyDowngradesOverweightEqual-Weight
Jan 2016Morgan StanleyDowngradesOverweightEqual-Weight
Jan 2016Bank of AmericaDowngradesNeutralUnderperform

View More Analyst Ratings for SDRL
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