SDRL

SEADRILL Ltd. 10-Q Summary: Q1 2025

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2025. Seadrill Limited is an offshore drilling contractor providing worldwide services to the oil and gas industry. As of the reporting date, the company owned 15 drilling rigs, with 11 operating (including one leased to the Sonadrill joint venture) and four stacked. The company is a large accelerated filer incorporated in Bermuda.

Key Financial Metrics

Note: Available liquidity consists of $404 million in unrestricted cash and $225 million in undrawn revolving credit facility.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased by 9% ($32 million) year-over-year. This was driven by a 10% drop in contract revenues due to a lower average number of rigs on contract (9 in Q1 2025 vs. 10 in Q1 2024) and reduced economic utilization (84% vs. 97%).
• Profitability Compression: Operating profit fell 78% to $18 million. While average contractual dayrates increased to $323,000 (from $300,000), this was insufficient to offset the volume and utilization declines.
• Expense Increases: Depreciation and amortization rose 45% to $55 million, primarily due to capital projects on the West Auriga and West Polaris. Management contract expenses increased 18% due to higher repair and personnel costs.
• Cash Flow Shift: Operating cash flow swung from a $29 million inflow in Q1 2024 to a $27 million outflow in Q1 2025, largely due to disbursements for long-term maintenance and contract preparation costs.

Guidance, Outlook, and Risks

Outlook and Capital Allocation: Management maintains a target net leverage of less than 1.0x and a minimum cash-on-hand target of $250 million. The company intends to return at least 50% of Free Cash Flow to shareholders via repurchases or dividends when targets are met. As of March 31, 2025, $208 million remained available under the $500 million share repurchase program; no shares were repurchased in Q1 2025.

Market Environment: Global marketed utilization for benign environment floaters decreased to 81% in Q1 2025. Brent oil averaged $76/bbl, down from $80/bbl in the prior year, creating uncertainty regarding future capital expenditures and demand.

Material Risks and Contingencies:

• SFL Hercules Litigation: The Oslo District Court ordered Seadrill to pay approximately $37 million plus $11 million in legal costs. Seadrill has filed an appeal.
• Petrobras Sete Brazil Claim: Petrobras asserted delay penalties of approximately $213 million related to unfinished drillships. The parties have agreed to voluntary mediation, and Petrobras has committed to not exercising set-off rights pending the outcome.
• Brazil Tax Audit: An appellate court ruled against Seadrill on a tax audit for years 2009-2010, assessing approximately $70 million. Seadrill is appealing to higher courts. Additional open cases for other years involve an aggregate assessed amount of approximately $75 million.
• Sonadrill Fees Claim: A claim for approximately $72 million regarding fees for arranging the Sonadrill joint venture is pending judgment from the High Court of Justice in England.

Investor Verification Checklist

• Verify the status and potential financial impact of the Petrobras Sete Brazil mediation and the SFL Hercules appeal.
• Monitor the economic utilization rate of the fleet, which dropped significantly to 84% in Q1 2025.
• Review the contract backlog of $2.91 billion, noting that $922 million is expected to be realized in the remainder of 2025.
• Assess the impact of the Brazil tax litigation on future cash flows and the adequacy of the $70 million insurance bond.
• Confirm compliance with debt covenants, specifically the Interest Coverage Ratio (min 2.50x) and Net Leverage Ratio (max 3.00x), which were met as of March 31, 2025.