UK-based offshore drilling contractor Valaris has filed for bankruptcy protection in the United States, offering creditors to swap some $6.5 billion of its $7.8-billion debt pile for equity.
The company is the largest offshore rig owner in the world.
Valaris follows Diamond Offshore Drilling and Noble Corp in bankruptcy court as the offshore drilling segment suffers the hardest blow from the latest oil industry crisis.
The company has been in luck: about half of its bondholders have agreed to the proposed deal, which will allow the company to clear up most of its debt, quoting Valaris chief executive Tom Burke as saying the pandemic was likely to cause an extended downturn in the industry.
"The substantial downturn in the energy sector, exacerbated by the COVID-19 pandemic, requires that we take this step to create a stronger company able to adapt to the prolonged contraction in the industry, and to continue to enhance our position as overall market conditions improve," Burke said in a press release.
What is good news for the bondholders, however, is terrible news for the shareholders. Under Valaris's restructuring plan, current stock will be wiped out, and the best shareholders can hope for is warrants for future stock. The company is still in talks with its more stubborn bondholders on the agreement. Meanwhile, some of its more generous creditors have agreed to provide it with $500 million in cash to fund the restructuring.
Valaris was the result of a tie-up between Ensco and Rowan Companies that was only finalized last year. Its biggest shareholders are asset managers, including Luminus Management, BlackRock, and Vanguard Group.
The offshore drilling industry has been pummeled hard by the pandemic and the oil price crash. Many analysts see a lot more bankruptcies down the road as most companies in the field are heavily leveraged, and demand for offshore drilling is extremely tight as E&Ps go into survival mode, cutting or postponing all non-essential expenses, including costly offshore drilling.