Business Context and Reporting Period
Seadrill Limited is a Bermuda-based offshore drilling contractor providing worldwide drilling services through drillships, semi-submersible rigs and jack-up rigs. As of March 31, 2019, it owned and operated 35 rigs and managed or operated 18 additional rigs for Seadrill Partners, SeaMex and Northern Drilling.
This Form 6-K reports unaudited US GAAP results for the three months ended March 31, 2019, presented in US dollars. The 2019 period is the “Successor” period following Seadrill’s emergence from Chapter 11 on July 2, 2018; the March 31, 2018 comparison is a “Predecessor” period after fresh start accounting and is not fully comparable.
Key Financial Metrics
| US$ millions, except per-share data | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenues | 302 | 364 |
| Operating loss | (71) | (74) |
| Loss before income taxes | (278) | (171) |
| Net loss | (296) | (203) |
| Net loss attributable to parent | (295) | (181) |
| Basic and diluted loss per share | $(2.95) | $(0.36) |
| Cash flow from operating activities | (99) | 4 |
| Cash flow from investing activities | 2 | (2) |
| Cash flow from financing activities | (4) | (73) |
- Contract revenue was $255 million, including $174 million from floaters and $81 million from jack-ups. Reimbursable revenue was $26 million and other revenue was $21 million.
- Operating expenses were $399 million, comprising $199 million of vessel and rig operating costs, $108 million of depreciation, $35 million of intangible amortization, $26 million of reimbursable expenses and $31 million of general and administrative expenses.
- Q1 2019 included $26 million of other operating income from the collection of an overdue receivable that had been fully provided for before emergence from Chapter 11.
- Interest expense increased to $132 million from $19 million, including $120 million of cash and payment-in-kind interest and $12 million from the unwind of a debt discount.
- Other income and expense was a net expense of $75 million, including a $42 million loss from associated companies, a $27 million derivative loss and a $21 million loss on marketable securities.
- Cash and cash equivalents were $1.474 billion at March 31, 2019; restricted cash was $428 million, for total cash and restricted cash of $1.902 billion, down from $2.003 billion at December 31, 2018.
- Total debt principal was $7.082 billion, consisting of $5.662 billion of secured credit facilities, $769 million of New Secured Notes and $651 million of debt in consolidated variable-interest entities. Debt carrying value was $6.919 billion after discounts and fees.
- Net debt, calculated using total debt principal less cash and restricted cash, was approximately $5.180 billion. Contractual obligations totaled $7.452 billion, including $7.396 billion of debt repayments and related-party debt repayments.
- Operating margins were negative: operating loss represented approximately 23% of revenue and net loss represented approximately 98% of revenue. Cross-period margin comparisons are affected by fresh start accounting and classification changes.
Material Changes Versus the Prior Comparable Period
- Revenue declined $62 million, or approximately 17%, primarily because average contractual dayrates fell while the average number of rigs on contract remained 16 in both periods.
- Average floater dayrates declined to approximately $224,000 per day from $297,000, while jack-up dayrates declined to approximately $108,000 from $136,000.
- Economic utilization was 91% for floaters versus 90% and 97% for jack-ups in both periods. Floater utilization was affected by downtime on the Sevan Louisiana following subsea equipment malfunction.
- Operating loss improved modestly from $74 million to $71 million, but higher interest expense and other financial losses drove the net loss higher.
- Depreciation declined to $108 million from $196 million because fresh start accounting reduced the carrying values of drilling units. Q1 2019 also included $35 million of intangible amortization that was not reported as operating expense in the Predecessor period.
- General and administrative expense decreased to $31 million from $51 million, although certain support-function costs were reclassified to vessel and rig operating expenses after emergence.
- Capital expenditures declined to $23 million from $56 million.
- Contract backlog was $1.902 billion as of May 23, 2019, compared with $1.927 billion at February 28, 2019. Floater backlog decreased to $461 million from $565 million, while jack-up backlog increased to $1.441 billion from $1.362 billion.
Guidance, Outlook, Risks and Unusual Items
- Management reported stabilization in the oil and gas market, with Brent crude generally above $60 per barrel during 2019 and increased customer tendering activity. Management expects improving customer investment, dayrates and utilization trends to continue, but provided no formal financial guidance.
- The company formed Sonadrill, a 50:50 joint venture with Sonangol, to operate four drillships focused on Angolan opportunities. Seadrill will manage all four units and support delivery and mobilization of two Sonangol-owned drillships.
- In April 2019, Seadrill repurchased $311 million principal amount of New Secured Notes for $341 million, including accrued interest. The transaction used $296 million of restricted cash and $45 million of unrestricted cash.
- Seadrill remains highly leveraged and exposed to refinancing, liquidity, covenant, cross-default and interest-rate risks. A 1% increase in rates was estimated to increase annual interest expense by approximately $11 million after consideration of cash, restricted cash and hedging.
- The company believes available resources, cash and operating cash flows will meet working capital and other obligations for at least the next twelve months; however, Q1 operating cash flow was negative $99 million.
- The remaining two Dalian jack-up newbuild contracts, West Dione and West Mimas, were terminated in February and April 2019. Seadrill is pursuing arbitration and insolvency claims for installment repayments, interest and damages. Dalian has asserted unquantified damages claims; the contracts are with limited-liability subsidiaries and have no parent guarantees.
- Seadrill Louisiana repair costs were approximately $10 million, of which $9 million was recognized as recoverable under physical damage insurance. Additional second-quarter repair costs are expected, and the company expects loss-of-hire insurance proceeds for approximately 90 days of downtime, but no gain contingency was recognized at March 31.
- Brazilian tax authorities have issued assessments totaling approximately $161 million, including interest and penalties. Nigerian tax authorities have issued claims and assessments totaling approximately $171 million. Seadrill is contesting both matters. The company expects to post approximately $81 million of collateral by May 26, 2019 in connection with certain Brazilian appeals.
- The company has $122 million of liabilities for uncertain tax positions, including interest and penalties, at March 31, 2019.
- Customer, geographic and counterparty concentration, oil prices, offshore drilling supply and demand, dayrates, rig utilization, contract cancellations, operating downtime, political and regulatory matters, insurance recoveries and related-party exposures remain significant risks.
Most Important Facts for Investors to Verify
- Confirm the effect of the April 2019 New Secured Notes repurchase on unrestricted liquidity, restricted cash and future interest expense.
- Assess whether negative operating cash flow and the debt maturity schedule, including $416 million due within one year, are consistent with available liquidity and covenant requirements.
- Review the non-comparability of Successor and Predecessor results, particularly depreciation, intangible amortization, operating-cost classification, interest expense and per-share data.
- Track backlog conversion, contract commencements, dayrates and utilization, especially the decline in floater backlog and the concentration of jack-up backlog in 2022 and later periods.
- Monitor the Sevan Louisiana insurance recoveries, repair timing and loss-of-hire proceeds.
- Evaluate the potential financial impact of the Brazilian and Nigerian tax disputes and required collateral postings.
- Follow the Dalian arbitration and insolvency proceedings, including recoverability of yard installments and any damages claims.
- Verify the company’s ability to refinance or repay approximately $7.1 billion of debt while maintaining required liquidity and complying with cross-default provisions.