SEADRILL Ltd current report, Q4 FY2018

Seadrill Limited Form 6-K Summary

Filing date: November 27, 2018. The filing presents unaudited U.S. GAAP results in U.S. dollars for the Successor period from July 2 through September 30, 2018, the Predecessor period from January 1 through July 1, 2018, and the nine months ended September 30, 2017. Comparisons are limited because Seadrill emerged from Chapter 11 on July 2, 2018 and adopted fresh start accounting.

Business context and reporting period

Seadrill is an offshore drilling contractor operating drillships, semi-submersible rigs and jack-up rigs worldwide under primarily dayrate contracts. At September 30, 2018, it owned 19 floaters and 16 jack-up rigs, of which 16 rigs were operating and 19 were idle. Economic utilization was 98% for operating floaters, 97% for operating jack-ups and 97% for total operating rigs.

Seadrill emerged from Chapter 11 on July 2, 2018. The restructuring equitized approximately $2.4 billion of unsecured bond obligations, more than $1.0 billion of contingent newbuild obligations and approximately $250 million of unsecured derivative claims. Existing Predecessor equity was extinguished and 100 million Successor shares were issued.

Key financial metrics

Metric	Successor: Jul. 2–Sep. 30, 2018	Predecessor: Jan. 1–Jul. 1, 2018	Predecessor: Nine months ended Sep. 30, 2017
Operating revenue	$249 million	$712 million	$1.657 billion
Operating loss	$106 million	$613 million	$47 million
Interest expense	$131 million	$38 million	$265 million
Reorganization items	$5 million expense	$3.365 billion expense	$230 million expense
Loss before income taxes	$243 million	$3.855 billion	$404 million
Net loss	$245 million	$3.885 billion	$413 million
Operating cash flow	$59 million use	$213 million use	$135 million provided

Contract revenue was $217 million in the Successor period, with $11 million of reimbursable revenue and $21 million of other revenue. The filing does not provide a directly comparable quarterly margin; based on reported figures, the Successor operating margin was approximately negative 42.6% and net margin approximately negative 98.4%, but these ratios are affected by fresh start accounting and should not be compared directly with Predecessor periods.

Average contracted rigs during the Successor period were seven floaters at an average dayrate of $240,524 and nine jack-ups at an average dayrate of $98,904. Average economic utilization was 98% for floaters and 97% for jack-ups.

Cash, liquidity and debt

At September 30, 2018, cash and cash equivalents were $1.576 billion and restricted cash was $560 million, for total cash including restricted cash of $2.136 billion.
Cash including restricted cash decreased by $41 million during the Successor period. Investing activities provided $48 million, while financing activities used $29 million.
Total debt principal was $7.579 billion, including $7.265 billion of external debt and $314 million of related-party debt. Reported carrying value of total debt was $7.307 billion after fresh start discounts.
Debt due within one year was $200 million of principal, with $7.065 billion classified as long-term debt. Senior credit facility maturities generally extend from 2022 through 2024, and the $880 million senior secured notes mature in 2025.
The new secured notes bear 12% annual interest, consisting of 4% cash interest and 8% payment-in-kind interest. A $121 million principal redemption and $5 million accrued-interest payment was made on November 1, 2018 using West Rigel proceeds.
Post-emergence minimum liquidity requirements are $525 million through December 31, 2018 and $400 million thereafter. Most financial covenants are suspended until 2021, with additional leverage and debt-service covenants beginning in 2022.
Management stated that cash on hand, liquid investments, contract revenue and other revenue are expected to fund debt service and working capital for at least the next twelve months; the filing states that substantial doubt regarding going concern no longer exists.

Material changes versus prior comparable periods

Revenue declined from $1.657 billion in the nine months ended September 30, 2017 to $961 million for the combined 2018 Predecessor and Successor periods, although the periods are not comparable because of the reporting-entity change.
Operating performance remained loss-making, with a $106 million Successor operating loss despite high utilization among operating rigs. Lower fleet activity and dayrates contributed to the decline from 2017.
The Predecessor period included a $414 million impairment charge on three drilling rigs and $3.365 billion of reorganization items, including a $6.142 billion fresh start valuation adjustment partly offset by a $2.958 billion gain on settlement of liabilities subject to compromise.
Fresh start accounting reduced the carrying value of drilling units from $13.216 billion at December 31, 2017 to $6.716 billion at September 30, 2018 and reduced investment carrying values. It also created $207 million of favorable-contract assets and $42 million of unfavorable-contract liabilities at September 30, 2018.
Operating cash flow changed from $135 million provided in the 2017 comparable period to a $59 million use in the Successor period. This reflects the short reporting period and restructuring-related effects, so it is not a clean year-over-year comparison.
Reported debt changed substantially in presentation and composition after restructuring: unsecured bonds were extinguished, senior facilities were reinstated or amended, and new secured notes were issued. Total principal declined from $9.015 billion at December 31, 2017 to $7.579 billion at September 30, 2018.

Backlog, outlook and management commentary

Contract backlog was approximately $2.1 billion as of November 27, 2018, comprising approximately $0.6 billion from semi-submersibles and drillships and $1.5 billion from jack-up units. Quarterly additions were approximately $0.2 billion, bringing 2018 additions to approximately $0.4 billion. Backlog does not include mobilization, demobilization, contract preparation or customer reimbursables and may be reduced by downtime, repairs, maintenance, weather and other factors.

Management observed improving offshore drilling activity from a low base, but dayrates remained low. The company expects activity to continue improving and believes scrapping and cold stacking could eventually balance the market.
Recent backlog additions included contracts and extensions with Equinor, Ophir, GDI, LLOG, ENI, Petronas and Walter Oil & Gas.
The company expects a significant portion of global floater and jack-up newbuild orders to be delayed or cancelled because current contracting activity does not justify delivery.
Eight Dalian jack-up newbuild commitments totaling approximately $1.683 billion remain outstanding. Seadrill has taken steps to protect termination rights and continues discussions with Dalian; neither party had invoked the contractual dispute-resolution mechanism as of the filing.

Risks, contingencies and unusual items

The offshore drilling market remains cyclical and exposed to oil and gas prices, customer spending, rig supply, utilization, dayrates and contract cancellations or renegotiations.
Interest-rate exposure remains material. Floating-rate debt totaled approximately $6.689 billion, partly offset by hedging instruments. A $68 million LIBOR cap covers $4.5 billion of principal through June 2023, but a theoretical 1% rate increase would still have an estimated $45 million impact on floating-rate debt before other effects.
Contractual obligations totaled approximately $9.315 billion, including $7.579 billion of debt repayments, $1.683 billion of newbuilding commitments, $30 million of operating leases and $23 million of pension obligations.
Brazilian tax authorities have issued assessments totaling approximately $161 million, including interest and penalties; Nigerian authorities have issued claims and assessments totaling approximately $171 million. Seadrill is contesting the matters, and an adverse outcome could materially affect financial position, results or cash flows.
The Sapura Esmeralda vessel operated under a temporary Brazilian flag expiring July 29, 2019. Failure to obtain permanent registration could affect operations, commercial agreements and related financing.
On October 31, 2018, sponsor guarantees relating to certain Seabras Sapura debt facilities were fully extinguished. The transaction involved cross-collateralization, a joint-venture prepayment, higher margins and a consent fee.
The company continues to defend patent-infringement litigation brought by Transocean. Management does not believe a material loss is probable, although it noted a possible business rationale for settlement.
Customer concentration is significant: during the Successor period, Total represented 29% of contract revenue, Saudi Aramco 18%, ConocoPhillips 14% and Petrobras 13%.

Most important facts for investors to verify

Whether backlog of approximately $2.1 billion converts into revenue at expected timing, dayrates and utilization.
Cash generation and compliance with minimum liquidity requirements while $7.6 billion of debt remains outstanding.
Progress on debt amortization beginning in 2020 and financial covenant testing beginning in 2022.
Resolution, timing and potential cash exposure from the Dalian newbuilding commitments totaling approximately $1.683 billion.
Outcomes of the Brazilian and Nigerian tax assessments and other litigation or regulatory matters.
The effect of fresh start accounting on future depreciation, contract amortization, asset values and comparability with historical results.
Whether improving market activity produces sustainable increases in offshore drilling dayrates rather than only higher utilization at low rates.