Business Context and Reporting Period
Seadrill Limited is an offshore drilling contractor providing dayrate drilling and management services worldwide. This Form 6-K covers the unaudited three months ended March 31, 2023, prepared under U.S. GAAP in U.S. dollars.
As of March 31, 2023, Seadrill owned 14 rigs, of which 12 were operating and two were cold stacked. The April 3, 2023 acquisition of Aquadrill occurred after the reporting date and increased the fleet to 22 owned units, subject to final purchase accounting. Seadrill also managed seven third-party rigs.
Comparability with 2022 is limited because Seadrill emerged from Chapter 11 on February 22, 2022 and adopted Fresh Start accounting. The filing presents separate Successor and Predecessor periods that are not directly comparable.
Financial Metrics
| Metric | Three months ended March 31, 2023 | Prior reported periods |
|---|---|---|
| Operating revenues | $266 million | $93 million Successor period; $169 million Predecessor period |
| Operating profit | $51 million | $0 million Successor period; $37 million Predecessor period |
| Net profit | $43 million | $4 million Successor period; $3.706 billion Predecessor period |
| Operating margin | Approximately 19.2% | Not meaningfully comparable because of Fresh Start accounting |
| Net margin | Approximately 16.2% | Not meaningfully comparable |
| Operating cash flow | $15 million inflow | $51 million inflow in the 2022 Successor period; $56 million outflow in the Predecessor period |
| Investing cash flow | $36 million inflow | $13 million outflow in the 2022 Successor period |
| Financing cash flow | $160 million outflow | No flow in the 2022 Successor period |
| Capital expenditures | $11 million cash outflow; $21 million rig additions in the fixed-asset rollforward | Not clearly comparable |
| Economic utilization | 95% | 95% for the comparable 2022 periods disclosed |
| Average rigs on contract | 9 | 9 for the three months ended March 31, 2022 |
| Average contractual dayrate | $262,000 | $183,000 for the three months ended March 31, 2022 |
Revenue consisted of $186 million of contract revenue, $64 million of management contract revenue, $10 million of other revenue and $6 million of reimbursable revenue. Related-party revenue represented $74 million, or approximately 28% of total operating revenue.
Operating expenses were $219 million, including $115 million of vessel and rig operating costs, $45 million of management contract expenses, $36 million of depreciation and amortization, $14 million of selling, general and administrative expenses, $6 million of reimbursable expenses and $3 million of merger and integration costs. Other operating items included a $4 million gain on disposals.
At March 31, 2023, total assets were $2.611 billion, total liabilities were $866 million, and equity was $1.745 billion. Drilling units had a carrying value of $1.658 billion.
Liquidity, Debt and Cash Flow
- Total available liquidity was $616 million, consisting of $376 million of unrestricted cash, $115 million of restricted cash and $125 million of undrawn revolving credit capacity.
- Liquidity declined from $723 million at December 31, 2022, primarily reflecting debt repayments and exit fees.
- Total debt at carrying value was $358 million, comprising $175 million under the first-lien term loan, $124 million under the second-lien facility and $50 million of unsecured convertible debt. Principal debt was $343 million.
- During the quarter, Seadrill repaid $153 million of debt principal and paid $8 million of exit fees, including $150 million of voluntary second-lien principal prepayments and a $3 million scheduled amortization.
- The first-lien facility matures in December 2026, the second-lien facility in June 2027 and the convertible bond in August 2028. The second-lien facility bears a 12.5% margin plus SOFR, with a portion potentially payable in kind.
- Management stated that cash, available revolving credit capacity and expected contract and other revenue should be sufficient to fund anticipated debt service and working-capital requirements for the next 12 months.
Material Changes Versus Prior Periods
- Revenue increased relative to the combined 2022 Successor and Predecessor periods, supported by higher contractual dayrates, including improved rates for West Neptune and Sevan Louisiana, and the reactivation of West Jupiter and West Carina.
- The average contractual dayrate increased to $262,000 from $183,000 for the three months ended March 31, 2022, while economic utilization remained stable at 95%.
- Contract backlog declined to $2.170 billion at March 31, 2023 from $2.315 billion at December 31, 2022. The backlog excludes Aquadrill contracts acquired in April 2023.
- Seadrill completed the sale of its remaining 35% interest in Paratus Energy Services for $44 million on February 24, 2023. The proceeds were approximately equal to book value, resulting in no material gain.
- The Aquadrill merger closed on April 3, 2023. Seadrill issued approximately 29.9 million shares, representing approximately 37% of post-merger shares, and recorded the share consideration at an indicated fair value of approximately $1.2 billion. The purchase price allocation was not finalized as of the filing date.
- Following the Paratus disposal, Seadrill issued termination notices for the Paratus and SeaMex management agreements, expected to terminate on July 12, 2023 and September 10, 2023, respectively. Management does not expect a material financial impact.
- The Company now reports a single operating segment following the sale of the Saudi Arabian jackup business in October 2022.
Outlook, Risks, Contingencies and Unusual Items
Offshore drilling market conditions improved during the quarter. Global marketed utilization increased to 92% for harsh-environment floaters and 86% for benign-environment floaters in March 2023. Drillship utilization was reported above 93% in the global market. Brent averaged $81 per barrel during the quarter and was $81.32 per barrel on April 30, 2023.
Management noted continuing uncertainty from oil-price volatility, recession risk, inflation, operating-cost pressures, rig supply and demand, dayrates, contract timing, customer liquidity and potential contract termination. Actual backlog realization may be reduced by downtime, maintenance, mobilization, alternative dayrates, customer disputes or payment issues.
Material contingencies include a claim by SFL Hercules Ltd. for approximately NOK300 million, or approximately $28 million, relating to the December 2022 redelivery of West Hercules, and a separate approximately $72 million claim concerning an alleged Sonadrill arrangement fee. Seadrill disputes both claims and cannot currently estimate a possible loss.
Tax authorities have asserted assessments including approximately $124 million in Brazil, $20 million in Norway, $171 million in Nigeria, $12 million in Kuwait and $82 million in Mexico. Seadrill is contesting the assessments; an adverse outcome could materially affect financial condition, results or cash flows. Seadrill has also indemnified the purchaser of the Saudi Arabian jackup business for the Kuwait exposure.
Seadrill provided performance guarantees capped at $1.1 billion for Sonadrill and $100 million for Northern Ocean. No liability was recognized because management did not consider it probable that the guarantees would be called.
The Company remains exposed to floating-rate debt, foreign exchange, customer and related-party concentration, offshore operating hazards, geopolitical and sanctions risks, environmental and regulatory requirements, cybersecurity risks, listing requirements, and integration risks associated with Aquadrill. An interest-rate cap covering a stated notional amount of $346 million was scheduled to expire on June 15, 2023.
Important Facts for Investors to Verify
- Confirm the final Aquadrill purchase price allocation, acquired debt and liabilities, post-merger fleet economics, backlog and integration costs.
- Assess the sustainability of the $262,000 average dayrate, 95% economic utilization and $2.170 billion pre-Aquadrill backlog.
- Reconcile available liquidity after the Aquadrill closing, including cash usage, debt repayment, working capital and any acquisition-related obligations.
- Review second-lien cash and pay-if-you-can interest requirements, SOFR exposure, exit fees, covenants and scheduled maturities.
- Monitor the SFL Hercules and Sonadrill-related claims, tax assessments and the guarantees issued for Sonadrill and Northern Ocean.
- Evaluate the effect of terminating the Paratus and SeaMex management agreements on related-party revenue and cash generation.
- Consider the limited comparability of reported results because of Chapter 11 emergence, Fresh Start accounting and discontinued operations.