Billionaire Fredriksen Sails Into Three-Year Rig Storm

Billionaire John Fredriksen has sailed through troubled waters before. This time, he plans to make the most of a brutal downturn in offshore drilling amid a slump in oil prices and a glut of new rigs.

Seadrill Ltd. said last month that the rig company 24 percent owned by Fredriksen is ready to acquire rivals or assets “when the time is right” and to emerge from the downturn stronger than before. In the meantime, the company must weather the storm as oil majors slash investments, Chief Executive Officer Per Wullf said in an interview.

“If it takes a couple of years or even three years, this is manageable,” he said at Seadrill’s London headquarters. “It won’t be the most attractive business in these years but it’s a matter of how you bridge to the upturn.”

Seadrill and other rig companies such as Transocean Ltd. and Ensco Plc have had contracts terminated and taken billions of dollars of writedowns over the past months as oil producers cut spending on drilling after crude prices plunged 50 percent since June. The decline in demand comes as more than 200 new rigs are being constructed, boosting oversupply after a decade of rising offshore investments.

Transocean, which has the biggest offshore-rig fleet, said last week it’s scrapping four floating rigs, bringing the total number of announced retirements to 30 units, according to a March 24 note from Pareto Securities AS. Charter rates for the most advanced vessels have dropped by more than 40 percent to $370,000 a day since the middle of 2013, Pareto said.

Ugly Cycle

Seadrill shares closed 0.6 percent higher at 77.60 kroner in Oslo after earlier falling as much as 3.6 percent. HSBC Holdings Plc started coverage of the stock Tuesday with a reduce recommendation.

“This cycle can get really ugly,” Janne Kvernland, an analyst at Nordea Markets who has a sell recommendation on the shares, said by phone Wednesday. “Seadrill is in many ways fine. But two to three years can be a long time for some players.”

Fredriksen, 70, who made his fortune in shipping, has seized opportunities in crises before: he arranged to lease vessels to the U.S. Army during the Vietnam War, made $40 million from tanker contracts acquired during the Yom Kippur War in 1973 and shipped oil from Iran to Syria in the 1980s.

The Norwegian-born Cypriot citizen founded Seadrill in 2005 with $200 million of equity and five rigs and made it the world’s most valuable offshore driller until the downturn saw its market capitalization drop almost 70 percent to $4.9 billion in the last nine months.

Shrinking Fortune

That’s contributed to Fredriksen’s total net worth falling $466 million to $11.2 billion this year, according to the Bloomberg Billionaire Index, which ranks him 105th. The Seadrill holding is now his second-biggest asset after his stake in salmon farmer Marine Harvest ASA.

After delaying delivery on one drillship and eight jack-up rigs, Seadrill is still negotiating with shipyards, Wullf said. The company is scheduled to take delivery of units this year from yards including Samsung Heavy Industries Co. Ltd. and Daewoo Shipbuilding and Marine Engineering Co. Ltd., according to the fleet status on its website.

Seadrill also expects to settle on contract adjustments with clients over the coming months, Wullf said.

“Our customers are asking for concessions,” he said. “We haven’t agreed with anyone yet on adjustments. The dialogue is ongoing.”

Dividend Decision

Seadrill suspended dividends in November and has since been followed by payout cuts at Transocean and Ensco.

“It was the right decision to make,” said Wullf, a Danish citizen who joined Seadrill in 2009 from AP Moeller Maersk A/S before becoming CEO in 2013. “That was a difficult decision for us. We spent a lot of time on it.”

Suspending the dividend will allow Seadrill to save $2 billion a year, the company said in November. That money can contribute to acquisitions of distressed competitors once valuations have fallen further and the market starts improving, Seadrill has said. The company then intends to “swipe the table,” Chief Financial Officer Rune Magnus Lundetrae said earlier this month.

“Things are still overpriced,” said Nordea’s Kvernland. “Seadrill will survive the cycle simply because they have assets that have a remaining lifetime of 25 years on average. They may not have to scrap a single rig during this cycle. But they could need to refinance.”

Norway’s biggest bank, DNB ASA, said last week it’s willing to consider helping driller clients through the current turmoil by deferring loan installments. Seadrill, which has said it has a $4.8 billion funding need through 2016, is not talking with any banks about delaying payments, Wullf said.

“We want to pay down our debt,” he said. “That’s extremely important to us.”

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