Seadrill Limited — Form 6-K Summary
Reporting period: Unaudited US GAAP interim results for the six months ended June 30, 2022, furnished August 31, 2022. Seadrill emerged from Chapter 11 on February 22, 2022 and adopted Fresh Start accounting. Accordingly, results are presented as Predecessor through February 22 and Successor thereafter and are not directly comparable across the emergence date.
Business context
Seadrill is an offshore drilling contractor operating drillships, semi-submersible rigs and jackups. At June 30, 2022, it owned 21 rigs, leased two rigs from SFL and managed seven rigs for SeaMex and Sonadrill. The company reported improving offshore drilling demand, particularly for benign-environment floaters and jackups, while harsh-environment floater demand remained subdued.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Successor period Feb. 23–June 30, 2022 | Prior comparable data |
|---|---|---|---|
| Operating revenue | $284 million | $390 million | $219 million in Q2 2021; $452 million in six months ended June 30, 2021 |
| Operating profit/(loss) | $25 million | $27 million | $(228) million in Q2 2021; $(252) million in six months ended June 30, 2021 |
| Operating margin | Approximately 8.8% | Approximately 6.9% | Not directly comparable due to Fresh Start accounting |
| Net income/(loss) | $(36) million | $(32) million | $(294) million in Q2 2021; $(605) million in six months ended June 30, 2021 |
| Net margin | Approximately (12.7%) | Approximately (8.2%) | Not directly comparable |
| Operating cash flow | Not separately provided for the quarter | $18 million | $(64) million for six months ended June 30, 2021 |
| Investing cash flow | Not separately provided for the quarter | $(58) million | $(19) million for six months ended June 30, 2021 |
- Q2 revenue increased primarily from higher floater and jackup activity, commencement of the Sonadrill Quenguela contract and improved utilization. Floater economic utilization increased to 99% from 73% in Q2 2021, while jackup utilization increased to 100% from 92%.
- Q2 operating expenses were $259 million, down from $306 million in Q2 2021. The reduction reflected lower rig costs, lower depreciation and the absence of the prior-year expected credit loss charge relating to Northern Ocean.
- Q2 interest expense was $30 million, compared with $22 million in Q2 2021, reflecting post-emergence debt costs. Q2 included a $23 million net other expense, including an $11 million foreign exchange loss and $5 million of post-emergence restructuring advisory costs.
- The six-month Successor net loss of $32 million excludes the Predecessor period from January 1 through February 22, 2022, which reported $3.706 billion of net income largely from Chapter 11 reorganization gains. The combined first-half 2022 periods therefore should not be treated as a conventional comparable six-month earnings trend.
Balance sheet, liquidity and debt
| Item | June 30, 2022 | December 31, 2021 |
|---|---|---|
| Unrestricted cash | $336 million | $312 million |
| Restricted cash | $132 million | $223 million |
| Total cash, including restricted cash | $468 million | $604 million |
| Total assets | $2.923 billion | $3.879 billion |
| Total debt carrying value | $968 million | Not applicable after restructuring comparison |
| Total equity | $1.470 billion | $(3.716) billion deficit |
- The company had an undrawn $125 million revolving credit facility at June 30, 2022, resulting in stated liquidity of approximately $461 million when combined with unrestricted cash.
- Principal debt was $924 million, consisting of a $175 million term loan, $699 million second-lien facility and $50 million convertible note. Including exit fees and debt premium, carrying value was $968 million.
- The term loan and revolving facility mature in December 2026; the second-lien facility matures in June 2027; and the convertible note matures in August 2028.
- The second-lien facility bears cash and pay-if-you-can interest totaling 12.5% plus SOFR. During the quarter, $14 million of payment-in-kind interest was capitalized.
- Debt maturities include approximately $42 million annually in 2023–2025, $222 million in 2026, $566 million in 2027 and $50 million in 2028 and thereafter, based on the filing’s maturity table.
Material changes and unusual items
- Seadrill completed its comprehensive Chapter 11 restructuring on February 22, 2022. External credit facility obligations were reduced from approximately $5.662 billion to $683 million of reinstated debt, and the company raised $350 million of additional liquidity.
- Fresh Start accounting established a new financial reporting entity and reset asset and liability values. The company valued its enterprise at approximately $2.095 billion and recorded successor equity of $1.499 billion at emergence.
- Three cold-stacked rigs were sold in 2022: West Venture for $7 million, Sevan Driller for $18 million and Sevan Brasil for $6 million. Five rig reactivation projects were in progress, including West Carina, West Jupiter, West Ariel, West Leda and West Cressida.
- Contract backlog increased to $3.118 billion at June 30, 2022 from $2.567 billion at December 31, 2021. Backlog included $637 million for harsh-environment units, $1.381 billion for floaters, $752 million for jackups and $348 million of other revenues.
- Approximately $518 million of backlog was expected to be realized during the remainder of 2022, $1.063 billion in 2023 and $736 million in 2024. Actual revenue may be lower or delayed because of downtime, maintenance, contract termination, customer liquidity and alternative dayrates.
- On July 1, 2022, Seadrill novated the remaining West Gemini contract with TotalEnergies to Sonadrill while retaining management responsibilities.
- On August 31, 2022, Seadrill received a non-binding proposal to sell seven jackup rigs for total consideration of approximately $645 million to $700 million, including reimbursement for net reactivation, project and mobilization costs. No definitive agreement had been signed.
Outlook, risks and contingencies
- Management reported improving demand, utilization and expected dayrates for benign-environment floaters and high-specification jackups. Harsh-environment floater utilization was expected to remain muted through 2022 and 2023.
- Key risks include offshore drilling market volatility, oil and gas prices, rig supply and demand, dayrates, utilization, customer credit, contract termination or renegotiation, operational downtime, rig reactivation costs and compliance with debt covenants.
- Substantially all debt bears floating-rate exposure through SOFR or LIBOR. An interest-rate cap covered $834 million of notional debt at June 30, 2022, representing approximately 91% of debt, and was scheduled to expire in June 2023.
- Tax authorities have issued assessments of approximately $124 million in Brazil, $17 million in Norway, $171 million in Nigeria, $12 million in Kuwait and $82 million in Mexico, including interest and penalties. Seadrill is contesting the assessments; an adverse outcome could materially affect financial condition, results or cash flows.
- The company provided performance guarantees of up to $500 million, including $400 million for Sonadrill. Management had not recognized liabilities because it did not consider calls on the guarantees probable.
- Other risks include geopolitical events and Ukraine-related sanctions, cybersecurity incidents, environmental and decarbonization regulation, litigation, currency movements, customer and related-party receivables, and potential additional asset impairments.
- Management stated that, following emergence from Chapter 11 and access to exit financing, cash on hand and expected contract and other revenues should provide sufficient funds for anticipated debt service and working-capital requirements for at least the next twelve months.
Investor verification points
- Verify the company’s ability to convert the $3.118 billion backlog into cash, particularly the timing and economics of the proposed jackup sale and ongoing reactivation projects.
- Assess liquidity after capital expenditures, reactivation spending, interest payments and the scheduled return of the West Hercules and West Linus rigs to SFL.
- Review compliance with minimum liquidity, leverage and other debt covenants, including the effects of capitalized pay-if-you-can interest.
- Distinguish Predecessor and Successor results when evaluating earnings, margins, asset values and leverage; the filing expressly states that the periods are not comparable.
- Monitor the Brazilian, Norwegian, Nigerian, Kuwaiti and Mexican tax assessments, customer and related-party receivable collections, and the $500 million of outstanding performance guarantees.
- Confirm whether the proposed $645 million–$700 million jackup transaction advances beyond the non-binding proposal and how proceeds would be allocated under the debt agreements.