Seadrill Limited — Form 6-K Summary
Business context and reporting period
Seadrill is a Bermuda-based offshore drilling contractor providing drilling services through drillships, semi-submersible rigs and jack-up rigs. As of June 30, 2020, it owned and operated 35 drilling units and managed an additional 20 units for related parties. The filing contains unaudited US GAAP interim financial statements for the six months ended June 30, 2020, with comparative information for 2019. Amounts are in US dollars and rounded to millions unless otherwise stated.
Key financial metrics
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Operating revenues | $598 million | $623 million | Down $25 million |
| Operating loss | $1,372 million | $144 million | Worsened by $1,228 million |
| Net loss | $1,748 million | $502 million | Worsened by $1,246 million |
| Net loss attributable to shareholders | $1,745 million | $498 million | Worsened by $1,247 million |
| Basic and diluted loss per share | $17.40 loss | $4.98 loss | Worsened by $12.42 |
| Cash flow from operating activities | $(278) million | $(184) million | More negative by $94 million |
| Interest expense | $200 million | $254 million | Down $54 million |
| Contract backlog | $2,335 million | $2,544 million at Dec. 31, 2019 | Down $209 million |
Revenue declined primarily because contract revenue fell to $392 million from $508 million, reflecting fewer rigs under contract and lower floater dayrates. Management contract revenue increased to $178 million from $95 million, driven by services for Northern Ocean and Sonadrill. Average rigs on contract declined to 13 from 16, while floater economic utilization decreased to 87% from 93%; jack-up economic utilization remained 98%.
The six-month operating loss included a $1,230 million impairment of drilling units and a $47 million impairment of Seadrill Partners investments. Management contract expenses also included $50 million of expected credit loss expense, and total expected credit loss allowances reached $206 million at June 30, 2020. The company recorded no additional drilling-unit impairment in the second quarter.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $849 million; restricted cash was $171 million, for total cash and restricted cash of $1,020 million, compared with $1,357 million at December 31, 2019.
- Third-party debt principal was $6,755 million, consisting primarily of $5,662 million of secured credit facilities, $495 million of senior secured notes and $598 million of debt within variable-interest entities. Reported debt carrying value was $6,635 million.
- Total assets declined to $7,291 million from $9,279 million, largely because of impairments. Drilling units were carried at $5,077 million, down from $6,401 million.
- Total equity was negative $98 million at June 30, 2020, compared with positive equity of $1,793 million at December 31, 2019. Shareholders’ equity was negative $236 million.
- Debt principal repayments were scheduled at $420 million through June 30, 2021, $2,516 million in 2022–2023, $3,517 million in 2024–2025 and $616 million thereafter. The company had elected to defer $248 million of scheduled amortization and had $252 million of remaining deferral capacity under its amortization conversion facility.
Material changes versus the prior comparable period
- Operating revenue decreased 4%, while contract revenue decreased 23. Management contract revenue increased 87%.
- Operating expenses decreased to $748 million from $796 million, mainly because of lower vessel and rig operating expenses, depreciation and selling, general and administrative costs; this was partly offset by higher management contract expenses and expected credit losses.
- Interest expense decreased 21% because of lower LIBOR and the reduction in senior secured note principal following the 2019 repurchase.
- Operating cash flow remained negative and worsened to $(278) million from $(184) million. Total cash and restricted cash declined by $337 million during the first six months.
- Contract backlog decreased to $2,335 million from $2,544 million at December 31, 2019, comprising $693 million for floaters and $1,642 million for jack-ups.
- Seadrill adopted the current expected credit loss standard on January 1, 2020, recording a $143 million reduction to opening retained earnings. Additional credit loss expense during the first half was $63 million.
- The company voluntarily delisted its common shares from the NYSE; the last NYSE trading day was June 19, 2020. Shares continued to trade on OTCQX and the Oslo Stock Exchange, which became the sole exchange listing.
Outlook, risks and unusual items
Management reported substantial doubt about Seadrill’s ability to continue as a going concern until its debt obligations are restructured. Negotiations with lenders over amendments and liquidity measures did not secure the required support, and the company retained financial and legal advisers to prepare for a comprehensive balance-sheet restructuring. Management stated that restructuring may require an in-court process and substantial conversion of debt to equity, which could substantially dilute existing shareholders or leave them with minimal or no recovery.
The company forecast that it would not meet its ongoing liquidity covenant within twelve months and expected difficulty meeting net leverage and debt-service coverage covenants when testing begins in the first quarter of 2021. Failure to obtain waivers or amendments could result in defaults, while cross-default and cross-acceleration provisions could make other debt immediately due. Management nevertheless stated that its $1.0 billion of cash and restricted cash provided sufficient liquidity to complete a restructuring process and that operations and current counterparty obligations remained unaffected.
COVID-19, the oil-price collapse and continued industry oversupply reduced customer capital spending and are expected to pressure utilization and dayrates. Brent oil reached $22 per barrel on March 30, 2020 and was $41 per barrel on June 30, 2020. Customers may seek contract terminations or renegotiations, potentially reducing backlog realization.
- Brazilian tax authorities have issued assessments totaling approximately $161 million, including interest and penalties; the company is contesting them.
- Nigerian tax authorities have issued claims and assessments totaling approximately $171 million; the company is contesting them.
- Seadrill provided guarantees related to Seabras Sapura debt totaling $139 million at June 30, 2020 and other guarantees for certain affiliates; no liability was recognized for the Seabras Sapura guarantees because management did not consider a call probable.
- Seadrill faces litigation and arbitration matters, including Dalian newbuild claims, Nigerian Cabotage Act litigation, Oro Negro claims and disputes concerning the Sapura Esmeralda’s Brazilian flag.
- The company recognized $29 million of impairment on the Archer convertible bond after its principal was reduced to $13 million, with maturity extended to April 2024.
- At June 30, 2020, Seadrill Partners direct investments had been written down to nil.
Investor verification points
- Confirm the status, structure and timing of the comprehensive debt restructuring, including any in-court process, debt-for-equity conversion, covenant waivers and shareholder dilution.
- Reconcile available unrestricted cash with restricted cash, minimum-liquidity requirements, near-term debt maturities and remaining amortization-deferral capacity.
- Assess whether the $2.335 billion contract backlog is realizable at stated dayrates, given potential customer terminations, renegotiations, downtime and lower utilization.
- Monitor further impairment risk for drilling units and investments, particularly under changes in oil prices, dayrates, utilization and stacking assumptions.
- Evaluate collection risk on related-party receivables, including the $206 million expected credit loss allowance and significant balances due from Northern Ocean, SeaMex and Seabras Sapura.
- Track Brazilian and Nigerian tax assessments, affiliate guarantees and other litigation or contingency exposures.
- Verify the effect of NYSE delisting on trading liquidity, listing covenants and access to future equity capital.