Seadrill

Seadrill Limited is an offshore deepwater drilling contractor. In plain English, the company owns and operates a fleet of massive, high-tech drilling rigs—like drillships and semi-submersibles—that it leases out to major oil and gas companies for exploring and producing oil in deep-sea environments. Founded and once chaired by the legendary Norwegian shipping magnate John Fredriksen, Seadrill aimed to become the world's premier driller by building the youngest, most advanced fleet. This aggressive, debt-fueled expansion made it a darling of the stock market during the oil boom of the early 2010s. However, the company's story is less about its rigs and more about its finances. When oil prices collapsed in 2014, Seadrill's mountain of debt became an anchor that dragged it into Chapter 11 bankruptcy not once, but twice (in 2018 and 2021). For investors, Seadrill is a powerful and painful case study on the perils of leverage in a brutally cyclical industry.

At its core, Seadrill's business is straightforward but incredibly volatile. It operates in a cyclical industry where fortunes are tied directly to the price of oil.

• High Tide (High Oil Prices): When oil is expensive, energy giants are motivated to spend billions on exploration and production. This creates a surge in demand for high-specification drilling rigs. Seadrill can then charge enormous rental fees, known as “dayrates,” which can exceed $600,000 per day for a single rig. During these boom times, profits and cash flow can be immense.
• Low Tide (Low Oil Prices): When oil prices crash, exploration budgets are slashed. Demand for rigs plummets, and dayrates collapse. Rigs can sit idle (“stacked”), earning nothing but still costing millions in maintenance and crew costs.

This dynamic creates massive operating leverage. The company has huge fixed costs (the rigs themselves). When revenue (dayrates) is high, it flows straight to the bottom line. When revenue disappears, the fixed costs rapidly burn through cash, leading to staggering losses.

Seadrill’s history offers a masterclass in what can go wrong when aggressive growth ambitions collide with the harsh realities of debt and market cycles.

Under Fredriksen's leadership, Seadrill took on billions in debt to finance its state-of-the-art fleet. The strategy was a bold bet that the oil boom would last forever. The modern fleet allowed Seadrill to command premium dayrates, and for a while, the gamble paid off handsomely. Investors were rewarded with huge dividends, and the stock soared. However, the company's balance sheet was extremely fragile. When the 2014 oil price shock hit, Seadrill's revenue evaporated, but its massive debt payments remained. The company was trapped in a classic debt spiral, unable to generate enough cash to service its obligations.

For shareholders, the end game was brutal.

1. First Bankruptcy (2018): After a prolonged downturn, Seadrill filed for Chapter 11 bankruptcy. In this process, the lenders (bondholders and banks) took control. They agreed to forgive some debt in exchange for ownership of the newly restructured company. The original shareholders saw their equity almost completely wiped out, with their stake diluted to virtually zero.
2. Second Bankruptcy (2021): The 2018 restructuring wasn't enough. The industry remained weak, and the COVID-19 pandemic delivered another blow to oil demand. Still burdened with too much debt, Seadrill was forced back into bankruptcy court. Once again, the existing shareholders were wiped out as the company restructured to shed billions in debt.

The Seadrill saga is a stark reminder of several core investment principles, many championed by Benjamin Graham.

• Beware of Debt: A strong balance sheet is an investor's best defense. Seadrill had world-class assets, but they were financed with a world-class amount of debt. In a cyclical downturn, leverage is what turns a poor situation into a catastrophic one.
• Understand Cyclicality: Never mistake a cyclical peak for a permanent new plateau. In commodity-linked industries, booms are inevitably followed by busts. Paying a high price for a company at the top of a cycle is a reliable way to lose money.
• Bankruptcy Means Game Over: For common stockholders, bankruptcy is not a fresh start. As the most junior claimants in a company's capital structure, shareholders are last in line to get paid, which usually means they get nothing. “Buying the dip” on a stock heading for Chapter 11 is not value investing; it's speculation of the highest order.