Seadrill Limited Form 6-K Summary
Business context and reporting period
Seadrill is an offshore drilling contractor operating drillships, semi-submersible rigs and jack-up rigs worldwide, and providing rig-management services to affiliates and joint ventures. This Form 6-K, filed August 20, 2021, presents unaudited US GAAP interim results for the six months ended June 30, 2021, in US dollars. Seadrill operated as a debtor-in-possession under Chapter 11 from February 10, 2021.
Key financial metrics
| US$ millions, except per-share data | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|
| Operating revenue | 452 | 598 |
| Operating loss | (252) | (1,372) |
| Loss before tax | (594) | (1,746) |
| Net loss | (605) | (1,748) |
| Basic and diluted loss per share | $(6.03) | $(17.40) |
| Cash flow from operating activities | (64) | (278) |
| Cash flow from investing activities | (19) | (13) |
| Cash flow from financing activities | — | (24) |
| Cash and restricted cash at period end | 644 | 1,020 |
Operating revenue declined 24% year over year. The implied operating margin improved to approximately (55.8)% from (229.4)%, while the net margin improved to approximately (133.8)% from (292.3)%; both periods remained deeply loss-making. The 2021 results include a $152 million impairment charge and $230 million of Chapter 11 reorganization items, compared with a $1.23 billion impairment charge in 2020.
Revenue comprised $335 million of contract revenue, $17 million of reimbursable revenue, $88 million of management contract revenue and $12 million of other revenue. Average rigs on contract declined to 10 from 13. Average contractual dayrates increased for harsh-environment rigs to $254,000 from $237,000 and floaters to $203,000 from $189,000, but declined for jack-ups to $78,000 from $81,000. Economic utilization was 94% for harsh-environment rigs, 76% for floaters and 93% for jack-ups.
At June 30, 2021, total assets were $3.657 billion and shareholders’ equity was a deficit of $3.740 billion. Drilling units had a net carrying value of $1.927 billion. Debt principal totaled $6.208 billion, including $5.662 billion of secured credit facilities classified as liabilities subject to compromise and $546 million of senior secured notes classified as current and in default.
Material changes versus the prior comparable period
- Revenue decreased by $146 million, primarily due to fewer rigs on contract and lower management activity. Management contract revenue fell to $88 million from $178 million.
- Operating expenses decreased to $566 million from $748 million, mainly due to lower management contract expenses and depreciation, partly offset by higher vessel and rig operating costs for the leased West Bollsta.
- Interest expense decreased to $112 million from $200 million, largely because interest on $5.662 billion of senior credit facilities was no longer recorded after the Chapter 11 filing. Contractual interest not recorded in the income statement totaled $128 million.
- Operating cash burn improved to $64 million from $278 million, but operating cash flow remained negative because customer receipts did not cover operating costs, maintenance, interest and taxes.
- Contract backlog increased to $2.126 billion at June 30, 2021 from $1.857 billion at December 31, 2020. Backlog included $355 million expected in 2021, $477 million in 2022, $374 million in 2023 and $920 million thereafter.
- The West Taurus lease was rejected in Chapter 11 and the rig was returned to SFL in April 2021. West Vigilant was sold for $7 million on June 30, 2021; West Freedom was sold for $5 million on July 2, 2021.
- Seadrill recognized a $152 million impairment of West Hercules. No comparable fleet-wide impairment was recorded in 2021, versus $1.230 billion in 2020.
Restructuring, liquidity, outlook and risks
On July 24, 2021, after the reporting date, Seadrill entered into a plan support agreement with lenders holding approximately 57.8% of its senior secured loans. The contemplated plan would provide $350 million of new financing, reduce liabilities by more than $4.9 billion, and include a $300 million backstopped first-lien exit facility. Senior secured lenders would exchange $5.6 billion of debt for $750 million of second-lien take-back debt and most of the new equity. Existing shareholders would receive only 0.25% of new equity, subject to dilution, if specified creditor classes approve the plan; otherwise they would receive no recovery.
Unrestricted cash was $428 million and restricted cash was $216 million at June 30, 2021. Management stated that liquidity-preservation measures were expected to support operations for 12 months from issuance of the financial statements, but the filing identifies substantial doubt about Seadrill’s ability to continue as a going concern. The financial statements were nevertheless prepared on a going-concern basis and do not reflect potential bankruptcy-related adjustments.
Seadrill New Finance Limited, which was outside the Chapter 11 filing, defaulted on cash interest payments under its 12% senior secured notes due 2025. On July 2, 2021, it reached a restructuring support agreement, and 80% of principal noteholders approved indenture amendments. The contemplated transaction would separate the issuer and its subsidiaries, including SeaMex and Seabras Sapura assets, from the consolidated Seadrill group.
Management described improving oil prices and offshore drilling demand during the first half of 2021, with Brent averaging $73 per barrel and reaching $77 at June 30. Floater and jack-up utilization showed signs of recovery, but management noted that sustained improvement requires consistent oil prices, additional demand and longer tender durations. No formal earnings or revenue guidance was provided.
Key risks include failure to confirm or consummate the restructuring, insufficient post-emergence financing, creditor claims exceeding recorded amounts, customer liquidity and contract termination risk, SeaMex’s provisional liquidation, related-party receivable collectability, additional rig impairments, offshore market volatility, COVID-19 effects, operational downtime, tax disputes and litigation. Brazilian and Nigerian tax claims totaled approximately $161 million and $171 million, respectively, before resolution of appeals.
Important facts for investors to verify
- Progress, court approval and final terms of the Chapter 11 plan, including the amount and priority of exit financing and the ultimate recovery for existing shareholders.
- The final treatment of the $5.662 billion of secured credit facilities and $546 million of senior secured notes, including accrued contractual interest and any allowed claims.
- Actual unrestricted liquidity, restricted-cash availability and cash burn, particularly after restructuring costs, rig disposals and resumed West Bollsta lease payments.
- Whether the West Hercules charter amendment results in disposal of the rig and the amount of any resulting gain, loss or additional impairment.
- Collectability and restructuring outcomes for SeaMex, Northern Ocean and Seabras Sapura related-party receivables, which carried significant expected-credit-loss allowances.
- The outcome of the Brazilian and Nigerian tax assessments, Dalian newbuild claims, Nigerian Cabotage litigation and other contingencies.
- Whether reported backlog converts into revenue at the stated dayrates, given downtime, standby rates, customer liquidity and possible contract terminations.