Seadrill Limited: Q1 2024 Form 6-K Summary
Business context and reporting period
Seadrill is an offshore drilling contractor providing dayrate drilling and management services worldwide. This unaudited Form 6-K covers the three months ended March 31, 2024, with comparisons to the same period of 2023. The financial statements are prepared under U.S. GAAP in U.S. dollars.
- As of March 31, 2024, Seadrill owned 19 rigs: 13 operating, two in contract preparation, one undergoing a special periodic survey and three cold stacked.
- Seadrill also managed two rigs owned by Sonangol.
- The Aquadrill acquisition, completed in April 2023, added four drillships, one semi-submersible and three tender-assist units, the latter subsequently sold in July 2023.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|
| Operating revenue | $367 million | $266 million | +$101 million |
| Operating profit | $80 million | $51 million | +$29 million |
| Profit before income taxes | $70 million | $44 million | +$26 million |
| Net income | $60 million | $43 million | +$17 million |
| Basic EPS | $0.83 | $0.86 | Down |
| Diluted EPS | $0.81 | $0.83 | Down |
| Cash flow from operating activities | $29 million | $15 million | +$14 million |
| Capital expenditures | $23 million | $11 million | +$12 million |
- Revenue growth was driven primarily by higher contract revenue, which increased to $275 million from $186 million, reflecting more rigs on contract and higher dayrates.
- Average rigs on contract increased to 10 from nine, average contractual dayrate increased to approximately $300,000 from $262,000, and economic utilization improved to 97% from 95%.
- Operating margin was approximately 21.8%, compared with approximately 19.2% in Q1 2023. Net margin was approximately 16.3%, broadly comparable with approximately 16.2% in the prior-year period.
- Operating expenses increased to $303 million from $219 million, mainly because of additional rigs from Aquadrill, higher depreciation, increased onshore employee costs, London office closure costs and professional fees.
- Other operating income of $16 million reflected recovery of historical import duties through tax credits. Q1 2023 included $4 million of gains on disposals.
- Interest expense declined modestly to $15 million from $16 million. The debt profile changed materially following the 2023 refinancing, with interest in Q1 2024 primarily related to the $575 million secured bond.
- Income tax expense increased to $10 million from $1 million; the effective tax rate rose to 14.3% from 2.3%, reflecting increased activity, geographic income mix, import-duty tax credits and a partial Swiss valuation allowance release.
Balance sheet, debt and liquidity
| Metric | March 31, 2024 | December 31, 2023 |
|---|
| Cash and cash equivalents | $584 million | $697 million |
| Restricted cash | $28 million | $31 million |
| Total assets | $4.122 billion | $4.218 billion |
| Carrying value of debt | $609 million | $608 million |
| Shareholders’ equity | $2.927 billion | $2.983 billion |
- Total available liquidity was reported as $809 million, consisting of $612 million of cash and restricted cash and $225 million of undrawn revolving credit capacity. The revolving facility had not been drawn.
- Debt principal totaled $625 million: a $575 million 8.375% secured bond due August 2030 and a $50 million unsecured senior convertible bond due August 2028.
- Seadrill was in compliance with its revolving credit facility covenants at March 31, 2024: minimum interest coverage of 2.50x and maximum consolidated total net leverage of 3.00x.
- Management targets net leverage below 1.0x under current market conditions, through-cycle net leverage below 2.0x and minimum cash-on-hand of $250 million.
Cash flow, capital allocation and backlog
- Operating cash flow was $29 million. Investing cash flow was negative $23 million, primarily for fleet capital expenditures related to preparing West Auriga and West Polaris for Petrobras contracts in Brazil.
- Financing cash outflows of $119 million comprised share repurchases; Q1 2023 financing outflows of $160 million primarily reflected debt principal and exit-fee payments.
- Contract backlog declined to $2.822 billion at March 31, 2024 from $3.020 billion at December 31, 2023. Drilling backlog was $2.481 billion and other backlog was $341 million.
- Backlog scheduled for recognition was $954 million for the remainder of 2024, $1.016 billion in 2025, $501 million in 2026 and $351 million thereafter. Actual timing and amounts may differ because of downtime, maintenance, rate adjustments, customer liquidity or contract termination.
- From January 1 through May 10, 2024, Seadrill repurchased approximately 3.8 million shares at a weighted average price of $46.95. Including purchases through May 10, approximately $192 million had been spent under the additional $250 million authorization.
- Seadrill’s stated capital allocation framework seeks to return at least 50% of free cash flow through dividends or repurchases, subject to leverage, liquidity, covenant compliance and Board approval.
Outlook, risks and unusual items
- The filing does not provide a specific numerical revenue, EBITDA or earnings forecast. Management describes the offshore market as recovering and stabilizing, but highlights uncertainty from oil-price volatility, energy demand, inflation and global economic conditions.
- Benign-environment floater marketed utilization was 85% in March 2024, while harsh-environment floater utilization was 91%. Management expects harsh-environment utilization to remain stable or decline through the remainder of 2024 because of limited incremental demand and available supply.
- Two rigs, West Auriga and West Polaris, were preparing for Petrobras contracts expected to commence at the end of 2024. Sevan Louisiana was undergoing a special periodic survey.
- Seadrill applied to delist its common shares from the Oslo Stock Exchange on April 30, 2024; trading may cease in the second half of 2024, subject to OSE procedures.
- Material contingencies include the approximately $51 million SFL Hercules claim, the approximately $72 million Sonadrill fees claim, Nigerian Cabotage Act litigation involving an assessed amount of approximately $69 million, and Brazilian tax litigation involving approximately $66 million plus $10 million of interest for 2009–2010, with additional cases totaling approximately $87 million.
- Seadrill had not recognized liabilities for performance guarantees capped at $1.1 billion for Sonadrill and $100 million for Northern Ocean because management did not consider a payment probable.
- Key ongoing risks include contract cancellations, downtime and reactivation costs, customer credit exposure, concentration of revenue among major customers and jurisdictions, foreign-exchange losses, interest rates, litigation and tax assessments, regulatory and environmental requirements, cybersecurity incidents and the ability to maintain liquidity and covenant compliance.
Important facts for investors to verify
- Whether the $2.822 billion backlog converts into revenue as projected, particularly the Petrobras-related contracts expected to begin late in 2024.
- The effect of share repurchases on outstanding shares, liquidity and per-share results.
- Cash generation after maintenance, reactivation and contract-preparation expenditures.
- Compliance with leverage and interest-coverage covenants and maintenance of the $250 million minimum cash target.
- Developments in the SFL Hercules, Sonadrill fees, Nigerian Cabotage and Brazilian tax matters, including potential cash exposure.
- The timing and consequences of the proposed Oslo Stock Exchange delisting.
