Seadrill Limited Form 6-K Summary
Business context and reporting period
Seadrill is an offshore drilling contractor that owns and operates drillships, semi-submersible rigs and jackup rigs for oil and gas customers worldwide. This unaudited report covers the six months ended June 30, 2023 and was filed August 15, 2023. Financial statements are presented in U.S. dollars under U.S. GAAP.
As of June 30, 2023, Seadrill owned 22 drilling rigs, including 17 operating units and five cold-stacked units. Three tender-assist units and three jackups leased to the Gulfdrill joint venture were classified as held for sale. The April 3, 2023 acquisition of Aquadrill added four drillships, one semi-submersible and three tender-assist units.
Comparisons with periods before February 22, 2022 are not meaningful because Seadrill emerged from Chapter 11 on that date and applied fresh-start accounting. The filing also presents discontinued operations separately following the sale of the KSA Business and the disposal of Paratus Energy Services interests.
Key financial metrics
| Metric | Six months ended June 30, 2023 | Comparable reported period |
|---|---|---|
| Operating revenues | $680 million | $346 million, Successor period from February 23 to June 30, 2022 |
| Operating profit | $160 million | $25 million, Successor period |
| Operating margin | 23.5% | 7.2%, based on reported Successor-period figures |
| Profit from continuing operations | $137 million | $(32) million, Successor period |
| Net profit | $137 million | $(32) million, Successor period |
| Basic EPS from continuing operations | $2.11 | $(0.64), Successor period |
| Cash flow from operating activities | $35 million | $20 million, Successor period |
| Capital expenditures | $25 million | $50 million, Successor period |
| Cash flow from investing activities | $66 million | $(60) million, Successor period |
| Cash flow from financing activities | $(167) million | No financing cash flow reported for the Successor period |
Second-quarter 2023 revenue was $414 million, up from $253 million in the second quarter of 2022. Second-quarter operating profit was $109 million versus $25 million, and net profit was $94 million versus a $36 million loss. Second-quarter operating margin was approximately 26.3% versus 9.9% in the comparable period.
Six-month revenue consisted of $515 million of contract revenue, $130 million of management contract revenue, $15 million of reimbursable revenue and $20 million of other revenue. Six-month operating expenses were $527 million, including $19 million of merger and integration expenses. Interest expense was $29 million and income tax expense was $14 million.
Liquidity, debt and balance sheet
- Available liquidity at June 30, 2023 was $664 million, comprising $412 million of unrestricted cash, $127 million of restricted cash and $125 million of undrawn revolving credit capacity.
- Total debt carrying value was $355 million, comprising $175 million under the term loan, $115 million under the second lien facility, $50 million of unsecured convertible debt and $15 million of recognized exit fees.
- Total principal debt declined to $340 million from $496 million at December 31, 2022. Seadrill made $163 million of second-lien prepayments and scheduled amortization payments during the six months.
- Total assets were $4.037 billion and total equity was $3.079 billion at June 30, 2023. Drilling units had a carrying value of $2.678 billion.
- Contract backlog increased to $2.585 billion from $2.315 billion at December 31, 2022, including $2.068 billion of drilling-contract backlog and $517 million of other backlog.
Material changes versus the prior comparable period
- Revenue and operating profit increased substantially, primarily because of additional rigs and contracts acquired through Aquadrill, rig reactivations and higher average dayrates.
- The average number of rigs on contract increased to 13 in the second quarter of 2023 from eight in the second quarter of 2022. Average contractual dayrate increased to approximately $276,000 from $224,000.
- Economic utilization declined to 93% from 97%, reflecting blowout-preventer reliability issues, weather-related impacts and other operational downtime.
- Operating expenses increased to $527 million for the six months, including costs associated with the additional Aquadrill fleet and $19 million of merger and integration expenses.
- Interest expense declined to $29 million from $40 million in the comparable Successor period, reflecting lower debt balances and reduced interest costs.
- The Aquadrill transaction resulted in the issuance of approximately 29.9 million Seadrill shares, representing approximately 37% of post-merger shares, and increased the issued share count to 79.9 million.
- Seadrill completed the sale of its remaining 35% interest in Paratus Energy Services for $44 million on February 24, 2023, with proceeds approximating book value.
Outlook, commentary, risks and unusual items
- Management stated that cash on hand, available revolving credit capacity and expected contract and other revenues should provide sufficient cash flow for anticipated debt service and working capital needs over the next twelve months. The filing uses going-concern accounting.
- Industry conditions continued to improve, with average Brent crude oil at approximately $80 per barrel for the six months ended June 30, 2023. Global marketed utilization in June 2023 was 93% for harsh-environment floaters and 86% for benign-environment floaters.
- Management identified continuing uncertainty from oil-price volatility, global economic conditions, inflation, energy-security concerns, rig supply and demand, dayrates, customer credit risk and operational downtime.
- In July 2023, Seadrill issued $500 million of 8.375% senior secured second-lien notes due 2030 and issued an additional $75 million in August 2023. The proceeds were used to repay the existing secured facilities. A new $225 million revolving credit facility was established and was undrawn as of the filing date.
- On July 28, 2023, Seadrill sold the three tender-assist units for approximately $85 million.
- On August 14, 2023, the Board authorized a share repurchase program of up to $250 million. The program is discretionary and may be modified, suspended or discontinued.
- Seadrill has material tax assessments under dispute, including approximately $124 million in Brazil, $20 million in Norway, $171 million in Nigeria, $12 million in Kuwait, $82 million in Mexico and $18 million in Ghana. Management believes the relevant entities have strong defenses, but an adverse outcome could materially affect results.
- Pending claims include an approximately $28 million claim by SFL relating to the redelivery of West Hercules and an approximately $72 million claim concerning alleged fees related to the Sonadrill joint venture. The filing states that potential losses cannot currently be estimated.
- Performance guarantees issued on behalf of Sonadrill were capped at $1.1 billion, and guarantees on behalf of Northern Ocean were capped at $100 million. No liability was recognized because management did not consider a call on the guarantees probable.
Important facts for investors to verify
- Confirm the final accounting for the Aquadrill acquisition, including the preliminary fair-value allocation and any subsequent measurement-period adjustments.
- Monitor the realized proceeds and accounting impact from the sale of the three tender-assist units and any disposition of the Gulfdrill jackup fleet.
- Assess whether backlog converts to revenue as projected, considering downtime, alternative dayrates, contract suspensions, customer liquidity and potential terminations.
- Verify the post-refinancing debt structure, fixed-rate interest burden, covenant requirements, liquidity and availability under the new revolving credit facility.
- Evaluate the sustainability of operating cash flow and the ability to meet the stated capital allocation objective of returning at least 50% of free cash flow to shareholders.
- Review the disputed tax assessments, litigation claims, performance guarantees and other contingencies for potential cash exposure.
- Adjust period-over-period analysis for fresh-start accounting, discontinued operations, the Aquadrill acquisition and the resulting share dilution.