Offshore & Marine - CIMB Research 2017-09-13: Chapter Closed For Seadrill, For Now

Offshore & Marine - CIMB Research 2017-09-13: Chapter Closed For Seadrill, For Now Seadrill filed chapter 11 SEMBCORP MARINE LTD S51.SI MERMAID MARITIME PUBLIC CO LTD DU4.SI

Offshore & Marine - Chapter Closed For Seadrill, For Now

  • Sembcorp Marine (SMM) and Mermaid Maritime (MMT) are exposed to Seadrill. 
  • Despite Seadrill’s chapter 11 filing, SMM’s standstill agreement with Seadrill’s unit is likely to be further extended.
  • MMT’s charter of its three jack-up rigs should continue until expiry in 2019, with risks from financing should they not be part of Seadrill’s restructuring plans, in our view.
  • Maintain Neutral. Our top sector pick is Yangzijiang for earnings growth and orders.

Time is up for Chapter 11

  • Seadrill has today filed prearranged chapter 11 cases in the Southern District of Texas together with the agreed restructuring plan.
  • The restructuring agreement is with more than 97% of its secured bank lenders, c.40% of its bondholders and a consortium of investors led by its largest shareholder, Hemen Holding Ltd. The agreement delivers US$1.06bn of new capital, comprising US$860m in secured notes and US$200m of equity.
  • Its secured lending banks have agreed to defer maturities of all secured credit facilities amounting to US$5.7bn by approximately five years, with no amortisation payments until 2020 and significant covenant relief.
  • Assuming unsecured creditors support the plan, Seadrill’s US$2.3bn of unsecured bonds and other unsecured claims will be converted into approximately 15% of the post-restructured equity with participation rights in both the new secured notes and equity, while holders of Seadrill common stock will receive approximately 2% of the post-restructured equity.

Sembcorp Marine and Mermaid Maritime are exposed

  • In Singapore, Sembcorp Marine (SMM SP, Add, Target Price: S$1.87) has an outstanding 6th generation semi-submersible drilling rig with Seadrill’s subsidiary, North Atlantic Drilling (NADL), that was awarded in 2012 at US$568m and completed in 2015. The unit is under an extended standstill agreement until 6 Jan 2018. There has been no news of drilling contract nor sale.
  • We believe the recent extension of the standstill contract has taken into consideration the chapter 11 as restructuring plans have been ongoing since 2016. There is a likelihood of a further extension in 2018 if there is no contract secured. Management is still actively marketing the unit and has received positive interest. We believe the most probable outcome for this would be to sell the unit outright instead of a joint ownership.
  • SMM has received 20-30% payment from NADL for the rig.
  • Mermaid Maritime (MMT SP, Reduce, Target Price: S$0.14) has three jack-up rigs held under its 33.76%-owned associate, Asia Offshore Drilling (AOD). The rigs are chartered to Saudi Aramco with expiry in 2019. Investments in associates were c.US$86.7m as at end-2Q17, c.25% of MMT’s equity; whilst earnings contributions are estimated at US$4.7m p.a. from the chartering, or c. 57% of MMT’s PBT.
  • Operationally, we believe that the contracts are likely to continue until expiry as the three rigs have historically enjoyed close to full average utilisation (at 2Q17 MMT reported an average utilisation of 100%). Hence, the operational risk is the renewal of contract in 2019.
  • Risks we foresee are largely related to AOD’s Senior Secured Credit Facility (SSCF) not falling within Seadrill’s restructuring agreement which covers 97% of its secured bank lenders, given that the SSCF is guaranteed by Seadrill, and has cross default clauses with Seadrill's other credit facilities loans. AOD carries US$219m of debt in its books, maturing in April 2018 with a balloon payment of US$180m. 
  • There is also impairment risk, should the ownership of Seadrill change hands, triggering a reassessment of the value of the rigs, in our view.

LIM Siew Khee CIMB Research | Cezzane SEE CIMB Research | http://research.itradecimb.com/ 2017-09-13
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.870 Same 1.870
REDUCE Maintain REDUCE 0.140 Same 0.140