Seadrill Limited — Form 6-K Summary
Business context and reporting period
Seadrill is a Bermuda-based offshore drilling contractor providing dayrate drilling services through drillships, semisubmersible rigs and jack-up rigs. At September 30, 2019, it owned and operated 35 rigs and managed 20 additional rigs for affiliates and partners. This Form 6-K reports unaudited U.S. GAAP results for the three and nine months ended September 30, 2019, in U.S. dollars.
Seadrill emerged from Chapter 11 on July 2, 2018 and applied fresh-start accounting. Consequently, 2019 Successor results are not fully comparable with the 2018 Predecessor results; the filing separately presents Successor and Predecessor periods.
Financial condition and key metrics
| Metric | Three months ended September 30, 2019 | Nine months ended September 30, 2019 |
|---|---|---|
| Operating revenue | $367 million | $990 million |
| Operating loss | $58 million | $202 million |
| Net loss | $521 million | $1.023 billion |
| Net loss attributable to shareholders | $522 million | $1.020 billion |
| Loss per share | $5.21 | $10.18 |
| Cash flow from operating activities | Not separately provided | $(200) million |
- Revenue comprised $774 million of contract revenue, $142 million of reimbursable revenue and $74 million of other revenue for the nine-month period.
- Operating expenses were $1.231 billion for the nine months, including $569 million of vessel and rig operating expenses, $318 million of depreciation, $110 million of intangible amortization and $94 million of selling, general and administrative expenses.
- Economic utilization for the nine months was 93% for floaters and 96% for jack-ups. Average contractual dayrates were approximately $245,000 for floaters and $108,000 for jack-ups.
- Contract backlog was $1.752 billion at September 30, 2019, down from $2.087 billion at December 31, 2018. The backlog consisted of $409 million for floaters and $1.343 billion for jack-ups.
- Cash and cash equivalents were $1.216 billion and restricted cash was $229 million at September 30, 2019, for total cash including restricted cash of $1.445 billion, compared with $2.003 billion at December 31, 2018.
- Net cash used in investing activities was $3 million and net cash used in financing activities was $355 million for the nine months.
- Debt principal totaled $6.771 billion, including $5.662 billion of secured credit facilities, $476 million of senior secured notes and $633 million of debt in consolidated variable-interest entities. Carrying-value debt was $6.626 billion after debt discount.
- Debt principal due within one year was $296 million. Total contractual obligations were $7.133 billion, including $7.085 billion of debt repayments, excluding interest.
- Net debt, calculated using total principal debt less cash and restricted cash, was approximately $5.326 billion. A theoretical one-percentage-point increase in rates would have an estimated annual net impact of $38 million after the interest-rate cap.
Material changes versus comparable periods
- Third-quarter revenue increased to $367 million from $249 million in the September 2018 Successor period, while operating loss improved from $106 million to $58 million. The periods are not fully comparable because of fresh-start accounting and classification changes.
- Nine-month contract revenue was $774 million versus $217 million in the September 2018 Successor period; the filing does not provide a comparable full-year nine-month Successor period.
- Operating utilization weakened from the September 2018 Successor period: floater utilization declined from 98% to 93% and jack-up utilization declined from 97% to 96% for the nine-month comparison shown.
- Seadrill repurchased $311 million of senior secured notes for $342 million in April 2019, including a 7% premium and accrued interest. A $22 million net loss on debt extinguishment was recognized for the nine months.
- Seadrill recorded a $302 million impairment of investments in Seadrill Partners after trading in Seadrill Partners common units was suspended by the NYSE. The related investment carrying value declined from $595 million at December 31, 2018 to $136 million after impairment.
- Cash declined by $558 million, including restricted cash, during the nine months, primarily reflecting negative operating cash flow, debt repayments and the senior secured note repurchase.
- Total equity fell from $3.035 billion at December 31, 2018 to $2.011 billion at September 30, 2019, primarily because of the period loss.
- Seadrill adopted the new lease standard on January 1, 2019, recognizing a $25 million lease liability and a $23 million right-of-use asset without an opening retained-earnings impact.
Guidance, outlook, commentary, risks and unusual items
- Management described the offshore drilling market as stabilizing in 2019, supported by Brent oil prices averaging approximately $65 per barrel through September and generally remaining near $60 per barrel. Tendering activity and dayrates showed positive trends.
- Management expects improving market conditions to continue if oil prices remain stable and customers sustain investment. It does not expect market economics to justify significant floater reactivations or newbuild rigs entering the market in 2020.
- The jack-up market showed improving utilization and dayrates, particularly for premium units. Older rigs may face accelerated scrapping as newer, higher-specification rigs enter the market.
- Management stated that available resources, cash and operating cash flows were expected to satisfy working-capital requirements and obligations for at least the next twelve months. However, the company remains highly leveraged and reported negative operating cash flow.
- On November 20, 2019, Seadrill elected to draw $63 million under its Amortization Conversion Election facility, deferring senior credit facility amortization otherwise due in March 2020. The deferred amount becomes payable with the applicable balloon payment.
- Seadrill formed or advanced several joint ventures, including Sonadrill with Sonangol and Gulfdrill with Gulf Drilling International. Sonadrill became operational in October 2019, and Seadrill contributed $50 million of equity with Sonangol.
- The remaining eight Dalian jack-up newbuild contracts were terminated. Seadrill is pursuing arbitration and insolvency claims for installment repayments, interest and damages; Dalian has asserted potential damages claims. The contracts are held by limited-liability subsidiaries without parent guarantees.
- Seadrill faces Brazilian tax assessments of approximately $161 million and Nigerian tax claims and assessments of approximately $171 million. The company is contesting these matters. Brazilian collateral of approximately $80 million was held as restricted cash at September 30, 2019.
- Other risks include debt refinancing and covenant compliance, customer credit and contract termination, oil-price and dayrate volatility, rig downtime, interest-rate exposure, related-party receivables, political and regulatory risks, litigation and environmental or operational incidents.
- A January 2019 subsea-equipment incident on the Sevan Louisiana generated $19 million of repair costs, of which $4 million had been recovered and $14 million was expected to be recoverable under physical-damage insurance. Seadrill also recognized $10 million of loss-of-hire insurance income.
Important facts for investors to verify
- Whether operating cash flow remains negative and whether the company can fund debt amortization, interest, maintenance and working capital without additional refinancing or asset monetizations.
- The maturity profile and refinancing requirements for the $6.771 billion of debt principal, including the $296 million due within one year and the ability to use the ACE facility.
- The status and terms of Seadrill Partners’ debt refinancing, including its $2.6 billion term loan reportedly due in February 2021, and the recoverability of Seadrill’s remaining related investments and receivables.
- Actual utilization, dayrates and backlog conversion, particularly the $914 million of jack-up backlog scheduled for 2022 and later.
- The outcome and potential cash impact of the Dalian arbitration and insolvency claims, Brazilian and Nigerian tax disputes, Nigerian cabotage litigation and other contingencies.
- Whether the Sonadrill and Gulfdrill joint ventures deliver the expected contracted activity, cash contributions and rig deployment economics.
- The effect of rig downtime, maintenance requirements, contract terminations and potential impairment of drilling units under changing offshore market conditions.