John Fredriksen's shipowning company SFL Corp faces a $187m accounting hit after Seadrill filed for Chapter 11 protection in the US.
The Oslo-listed drillship and rig group, also backed by Fredriksen, made the application in the Southern District of Texas as it tries to secure a viable long-term future in depressed oil and gas markets.
The move comes three days after it filed on behalf of five Asian subsidiaries in the same court and two months after spin-off Seadrill Partners took the same route to a reorganisation.
Seadrill emerged from a Chapter 11 restructuring in 2018. The company has reported debt of $7.4bn.
The latest process does not include Seadrill New Finance, Seabras Servicos de Petroleo or a number of other associated companies in the UK.
Rig being returned
SFL owns three rigs chartered to Seadrill.
The US-listed company said on Thursday it had come to an agreement with Seadrill that would ensure uninterrupted performance on the sub-charters of West Linus and West Hercules to oil majors.
Seadrill will be allowed to use these funds to pay a fixed level of operating and maintenance expenses.
In exchange, SFL will receive sround 75% of the lease hire.
"The agreed amounts are sufficient to cover the full debt service relating to these rigs," SFL said.
Any excess amounts will remain in Seadrill’s earnings accounts, pledged to SFL.
However, the lease for the rig West Taurus is expected to be rejected as part of Seadrill’s Chapter 11 proceedings, and redelivered to SFL.
This rig is debt free and has been held in lay-up by Seadrill for more than five years.
SFL is currently evaluating strategic alternatives for it, including potential recycling at a European Union-approved green-recycling facility.
"Consequently, SFL expects to record a net negative book adjustment of $187m in the fourth quarter of 2020, inclusive of a gain on the redemption of the bank debt," SFL said.
"SFL continues to have constructive dialogue with Seadrill and the relevant financing banks to find a long-term solution for the West Linus and West Hercules."
$650m in cash
Seadrill has asked the court to be allowed to pay key trade creditors and employee wages and benefits as usual.
The company said it has $650m in cash and does not require debtor-in -possession financing.
It is expected that the court process will lead to a significant swap of debt for stock, probably resulting in minimal or no recovery for current shareholders.
Seadrill will now submit an application to the Bermuda Supreme Court for the appointment of joint provisional liquidators to oversee the process.
Flexibility is the aim
Chief executive Stuart Jackson said the move marks the start of an effort to create a company that is financially sustainable for the long term.
"We are working closely with our stakeholders to ensure we achieve an outcome that gives us the flexibility to weather the low points in our industry cycles, whilst positioning us well for market recovery," he said.
The drilling contractor's largest shareholder is Fredriksen's Hemen Holding, which held a 27.2% stake at the time of Seadrill's last annual report.
