SEADRILL Ltd current report, Q3 FY2023

Seadrill Limited — Form 6-K Summary

Reporting period: Unaudited results for the three and nine months ended September 30, 2023, filed November 27, 2023. Financial statements are prepared under U.S. GAAP in U.S. dollars. Seadrill is an offshore drilling contractor operating drillships, semi-submersibles and jackups on dayrate contracts.

Business Context and Fleet

As of September 30, 2023, Seadrill owned 19 rigs: 16 operating and three cold stacked. The operating fleet included 11 floaters, two harsh-environment units and three jackups.
Seadrill completed the Aquadrill acquisition on April 3, 2023, issuing approximately 29.9 million shares and acquiring four drillships, one semi-submersible and three tender-assist units.
The three tender-assist units were sold on July 28, 2023 for approximately $84 million.
Total contract backlog was $2.306 billion at September 30, 2023, compared with $2.315 billion at December 31, 2022. Drilling contract backlog was $1.832 billion and other backlog was $474 million.

Financial Performance

Metric	Q3 2023	Q3 2022	Nine months 2023
Operating revenues	$414 million	$269 million	$1.094 billion
Operating profit	$117 million	$20 million	$277 million
Profit before tax	$112 million	$(16) million	$263 million
Net profit	$90 million	$(16) million	$227 million
Operating margin	28.3%	7.4%	25.3%
Net margin	21.7%	Negative	20.8%
Basic EPS	$1.13	$(0.32)	$3.24

Q3 revenue increased primarily because of the Aquadrill fleet addition, rig reactivations and new contracts. The average number of rigs on contract increased to 12 from seven, while average contractual dayrate increased to approximately $290,000 from $262,000. Economic utilization declined to 93% from 96% because of planned downtime on West Phoenix and Sevan Louisiana.

Nine-month 2023 operating expenses were $831 million, including $485 million of vessel and rig operating expenses, $112 million of depreciation and amortization, $142 million of management contract expenses, $48 million of selling, general and administrative expenses, and $21 million of merger and integration expenses.

Cash Flow, Liquidity and Debt

Cash flow from operating activities was $147 million for the nine months ended September 30, 2023.
Cash flow from investing activities was $100 million, including proceeds from the PES disposal, the Aquadrill acquisition, sale of tender-assist units and equipment disposals, partially offset by $53 million of capital expenditures.
Cash flow from financing activities was $20 million after new debt issuance, repayment of prior secured facilities, issuance costs and $46 million of share repurchases.
Cash and cash equivalents, including restricted cash, were $869 million at September 30, 2023, compared with $598 million at December 31, 2022.
Total available liquidity was $1.094 billion, consisting of $869 million of cash and $225 million of undrawn revolving credit capacity.
Total debt was $610 million carrying value, comprising $575 million of 8.375% senior secured second-lien notes due August 2030 and a $50 million unsecured senior convertible bond due August 2028, net of issuance costs and including premium.
In July and August 2023, Seadrill issued $575 million of senior secured second-lien notes and used the proceeds to repay its prior first-lien and second-lien facilities. The refinancing included a $10 million make-whole payment.
Seadrill entered into a new five-year, $225 million senior secured revolving credit facility, with an accordion feature of up to an additional $100 million subject to lender approval.
Seadrill was in compliance with its interest coverage and net leverage covenants at September 30, 2023 and expected to remain compliant for the following twelve months.

Material Changes Versus Prior Period

Revenue, operating profit and net profit improved substantially versus Q3 2022, reflecting the larger fleet and higher dayrates following the Aquadrill acquisition and other contract activity.
Interest expense declined to $15 million in Q3 2023 from $33 million, and to $44 million for the nine months from $73 million in the comparable Successor period, partly reflecting debt repayments and refinancing.
Related-party revenue was $73 million in Q3 2023 and $219 million for the nine months, including management, reimbursable and lease revenue from Sonadrill and Gulfdrill.
Seadrill sold its remaining 35% interest in Paratus Energy Services for $44 million on February 24, 2023 and terminated the related management service arrangements during 2023.
The Board authorized share repurchases initially up to $250 million and subsequently increased the aggregate authorization to $500 million. Approximately 1 million shares had been repurchased through September 2023 at a weighted average price of $46.58; approximately 4 million additional shares were repurchased by November 24, 2023 at a weighted average price of $41.63.
Comparisons with periods before February 23, 2022 are not meaningful because Seadrill emerged from Chapter 11 and adopted Fresh Start accounting. The filing also presents discontinued operations separately following the disposal of the KSA Business and PES interests.

Guidance, Outlook, Risks and Unusual Items

Management expects cash on hand, available revolver capacity and contract revenues to fund anticipated debt service and working-capital requirements for the next twelve months on a going-concern basis.
Seadrill’s capital allocation framework targets net leverage below 1.0x under current conditions, through-cycle net leverage below 2.0x, minimum cash of $250 million, and returning at least 50% of free cash flow through repurchases or dividends when conditions permit. These are goals, not guaranteed commitments.
Management continues to discuss a potential sale of the Qatar jackup fleet and related Gulfdrill interest, but cannot predict whether or when a transaction will occur.
The London office is expected to close by March 31, 2024 as part of a proposed consolidation in Houston.
Key industry risks include oil-price volatility, offshore drilling supply and demand, dayrates and utilization, inflation, customer credit and contract termination risk, downtime, geopolitical events, sanctions, regulatory and environmental requirements, cybersecurity, interest rates and foreign exchange.
Seadrill faces tax assessments, including approximately $160 million in Brazil, $20 million in Norway, $171 million in Nigeria, $12 million in Kuwait, $82 million in Mexico and $18 million in Ghana. The company is contesting the assessments; an adverse outcome could materially affect results or liquidity.
SFL Hercules Ltd. has claimed approximately $33 million to $35 million relating to the redelivery of West Hercules. Seadrill is defending the claim and cannot currently estimate a probable loss.
A separate claim seeks approximately $72 million for an alleged fee related to arranging the Sonadrill joint venture. Seadrill disputes the claim and cannot estimate a probable loss.
Seadrill has performance guarantees capped at $1.1 billion for Sonadrill and $100 million for Northern Ocean; no liability was recognized because management does not consider a call probable.

Investor Verification Points

Verify the final accounting and fair-value allocation for the Aquadrill acquisition, which remained subject to refinement within the permitted measurement period.
Monitor utilization, dayrates, downtime and the timing of backlog conversion, particularly for the acquired Aquadrill rigs.
Assess cash generation after capital expenditures, share repurchases and any fleet reactivation or maintenance spending.
Confirm compliance with revolving-credit covenants and the effect of floating-rate exposure under the revolver and convertible bond.
Track the potential Qatar fleet and Gulfdrill sale, including any proceeds and effect on future revenue and backlog.
Follow the tax assessments, SFL Hercules litigation, Sonadrill fee claim and performance guarantees for changes in expected exposure.
Reconcile subsequent share repurchases through November 24, 2023 with the expanded $500 million authorization.