Filing context and reporting period
Seadrill Limited furnished this Form 6-K in February 2023 to revise the presentation of its fiscal-year 2021 Form 20-F. The filing retrospectively reclassifies the Kingdom of Saudi Arabia jackup business as discontinued operations and its assets and liabilities as held for sale for all periods presented. It is not an amendment or restatement of the previously issued financial statements. Unless noted, amounts are in millions of U.S. dollars and continuing-operations figures are presented on an adjusted basis.
Seadrill provides offshore drilling services through harsh-environment, floater and jackup operations. At December 31, 2021, it owned 24 rigs, leased three and managed nine rigs for affiliates and joint ventures.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $907 | $961 | Down $54, or 6% |
| Operating loss | $(156) | $(4,481) | Improved primarily because 2020 included $4.1 billion of impairments |
| Loss from continuing operations | $(572) | $(4,430) | Improved |
| Loss from discontinued operations | $(15) | $(233) | Improved |
| Net loss | $(587) | $(4,663) | Improved by $4,076 |
| Basic and diluted loss per share | $(5.85) | $(46.43) | Improved |
| Net cash used in operating activities | $(154) | $(420) | Improved by $266 |
| Capital expenditures | $84 | $137 | Down $53 |
| Cash and restricted cash | $604 | $723 | Down $119 |
Revenue mix included $663 of contract revenue, $177 of management contract revenue, $35 of reimbursable revenue and $32 of other revenue. Contract revenue increased 10% year over year, but management contract revenue declined 39%, primarily because of terminated or reduced affiliate management activities.
Operating expenses decreased to $1,012 from $1,358. Vessel and rig operating expenses increased to $612 from $541, while depreciation declined to $127 from $318 and management contract expense declined to $174 from $390. The 2021 results included a $152 impairment of the West Hercules, partly offset by $47 of gains on rig disposals and $54 of other operating income.
Operating margin was approximately negative 17% in 2021 versus negative 466% in 2020; the comparison is heavily affected by the 2020 impairment charges. The filing does not provide a clear recurring EBITDA or adjusted EBITDA value.
Liquidity, debt and cash flow
- At December 31, 2021, unrestricted cash was $293 and restricted cash was $223, including $63 of non-current restricted cash. Continuing-operations cash and restricted cash totaled $516.
- Operating cash flow remained negative at $(154), reflecting insufficient customer receipts to cover operating costs, maintenance, restructuring costs and taxes.
- Investing activities provided $37, primarily from rig disposals, partly offset by $29 of additions to drilling units and equipment.
- Financing cash flow was nil in 2021. Cash declined by $119 during the year.
- At December 31, 2021, $5.545 billion of debt principal was classified as subject to compromise in connection with Chapter 11. The balance sheet also showed $6.235 billion of liabilities subject to compromise, including $5.662 billion of senior under-secured external debt and $503 of related-party liabilities.
- Seadrill emerged from Chapter 11 on February 22, 2022. Post-emergence debt totaled $908, comprising a $683 reinstated secured facility, $175 drawn under a new-money term loan and a $50 convertible note. The company also had $125 of undrawn revolving capacity and $355 of unrestricted cash at emergence.
Backlog, fleet and operating trends
- Contract backlog at December 31, 2021 was $2.268 billion, up from $1.857 billion in 2020. Continuing-operations backlog was $2.119 billion; $149 related to the seven Saudi Arabian jackups subsequently sold to ADES.
- Backlog was scheduled to unwind as follows: $684 in 2022, $580 in 2023, $433 in 2024 and $571 thereafter. Actual revenue may be lower because of downtime, lower applicable rates, maintenance, contract termination or customer liquidity issues.
- The owned fleet declined to 24 rigs from 31 in 2020, reflecting rig disposals. Average owned or leased rigs on contract declined to seven from eight.
- Harsh-environment economic utilization improved to 93% from 92%, while floater utilization declined to 84% from 88%. Jackup utilization was not applicable for 2021 under the continuing-operations presentation.
- Average contractual dayrates increased to $263,000 for harsh-environment rigs and $199,000 for floaters, compared with $242,000 and $196,000, respectively, in 2020.
Material changes and unusual items
- Saudi Arabian jackup sale: Seadrill sold seven jackups to ADES on October 18, 2022 for consideration of $670, subject to post-closing adjustments. The company recorded an estimated accounting gain of $276, subject to final adjustments. The transaction caused retrospective discontinued-operations presentation.
- Paratus Energy Services: Seadrill sold 65% of its interest in NSNCo, now Paratus Energy Services, on January 20, 2022 and retained 35%. The retained interest was subsequently sold under an agreement that closed on February 24, 2023.
- Chapter 11 emergence: The restructuring reduced external credit-facility obligations from approximately $5.662 billion to $683 and raised $350 of additional liquidity. Existing shareholders received only 0.25% of post-emergence equity before dilution from the convertible bond.
- Rig disposals and leases: Seadrill sold seven rigs during 2021 and subsequently sold the West Venture, Sevan Driller and Sevan Brasil. The West Taurus lease was rejected, while the West Hercules and West Linus arrangements were amended or transitioned for return to SFL.
- SeaMex: NSNCo acquired the remaining 50% interest in SeaMex in November 2021 through a credit bid. SeaMex was subsequently included in discontinued operations.
- Accounting presentation: The company applied fresh-start reporting upon emergence from bankruptcy. The 2021 filing therefore contains predecessor-period financial information and later successor capital-structure information that are not directly comparable in all respects.
Guidance, outlook and risks
Management stated that the offshore drilling market showed recovery in 2021, supported by higher oil prices, improving demand and postponed drilling programs returning. Drillship utilization was recovering faster than semi-submersible utilization, while jackup dayrate improvement remained limited. Management expected discipline in industry capacity additions and continued market recovery to be important.
Following emergence from Chapter 11, management concluded that cash on hand, contract revenue and other revenue should be sufficient to fund anticipated debt service and working-capital needs for at least the next twelve months. The filing does not provide formal revenue, earnings or utilization guidance.
- Key risks include volatile oil and gas prices, offshore drilling supply and demand, dayrates, utilization, customer contract cancellations or renegotiations and customer credit risk.
- Liquidity remains dependent on backlog conversion, operating cash flow, restricted cash availability, debt covenants and access to financing. Debt bears floating-rate exposure, and the facilities include restrictive covenants and cross-default provisions.
- Material contingencies include disputed tax assessments of approximately $124 in Brazil, $171 in Nigeria, $12 in Kuwait and $95 in Mexico. The company also reported $83 of unrecognized tax benefits, excluding interest and penalties.
- Performance guarantees totaled $550 at December 31, 2021, primarily $150 for Northern Ocean and $400 for Sonadrill. No liability was recognized because management did not consider a call probable.
- Other risks include impairment of rig assets, legal proceedings, political and regulatory uncertainty, environmental and climate-related regulation, cybersecurity, operational hazards and foreign-exchange and interest-rate movements.
Investor verification points
- Verify the final accounting and cash proceeds from the ADES jackup sale, including working-capital, project-cost and escrow adjustments.
- Reconcile the predecessor 2021 financial statements with the post-emergence capital structure, fresh-start accounting and the $908 post-emergence debt balance.
- Assess whether negative operating cash flow can improve sufficiently to service floating-rate debt and meet maintenance and reactivation requirements.
- Review backlog quality, contract dayrates, utilization, termination rights and customer concentration, particularly exposure to ConocoPhillips, Equinor and Lundin.
- Monitor the disputed tax assessments, guarantees, litigation and any additional rig impairments.
- Evaluate the effect of the February 2023 Paratus disposal and the proposed all-stock acquisition of Aquadrill, which was expected to close in mid-2023 subject to approvals.