Seadrill Limited: Third Quarter 2023 Form 6-K Summary
Business context and reporting period
Seadrill, an offshore drilling contractor, furnished this Form 6-K on November 27, 2023, reporting unaudited third-quarter and nine-month 2023 results. The primary reporting period ended September 30, 2023. Seadrill operated an average of 12 rigs during the quarter at 93% economic utilization, compared with 13 rigs and 93% utilization in the second quarter.
Year-over-year comparisons are affected by the company’s successor/predecessor accounting presentation and the Aquadrill transaction.
Financial and operating metrics
| Metric | Q3 2023 | Q2 2023 | Change |
|---|---|---|---|
| Total operating revenue | $414 million | $414 million | Flat |
| Contract revenue | $324 million | $329 million | Down 2% |
| Operating profit | $117 million | $109 million | Up $8 million |
| Adjusted EBITDA | $151 million | $159 million | Down 5% |
| Adjusted EBITDA margin | 36.5% | 38.4% | Down 1.9 percentage points |
| Net profit | $90 million | Not provided | Not clearly stated |
| Diluted EPS | $1.10 | $1.16 | Down $0.06 |
| Cash flow from operations | $112 million | $20 million | Up $92 million |
Management attributed the decline in contract revenue primarily to planned out-of-service days on the West Phoenix and Sevan Louisiana. Management contract revenue was $68 million, and reimbursable and other revenue was $22 million. Operating expenses were $304 million, down 1% from the prior quarter, partly because the prior quarter included higher merger and integration costs.
Nine-month 2023 operating revenue was $1.094 billion, operating profit was $277 million, net profit was $227 million, and cash flow from operations was $147 million. Capital expenditures and long-term maintenance totaled $61 million in the third quarter, including $33 million of long-term maintenance and $28 million of capital upgrades.
At September 30, 2023, cash and cash equivalents were $837 million, with an additional $32 million of restricted cash. Gross principal debt was $625 million, comprising $575 million of senior secured second-lien notes and $50 million of senior unsecured convertible notes. The balance sheet reported $610 million of long-term debt and no debt due within one year.
Material changes versus comparable periods
- Q3 2023 total revenue of $414 million increased from $269 million in Q3 2022, although the filing cautions that successor/predecessor accounting and business changes affect comparability.
- Q3 2023 operating profit was $117 million versus $20 million in Q3 2022, and net profit was $90 million versus a $16 million net loss.
- Q3 2023 Adjusted EBITDA declined from $159 million in Q2 2023 to $151 million, while the margin decreased from 38.4% to 36.5%.
- Operating cash flow improved from $20 million in Q2 2023, which was adversely affected by one-time working-capital movements, to $112 million in Q3.
- Seadrill refinanced its secured debt with $575 million of 8.375% notes due 2030 and established a $225 million five-year revolving credit facility, expandable by up to $100 million.
- The company completed the sale of three tender-assist units for $84 million in July 2023.
- Order backlog was $2.3 billion at September 30 and $2.2 billion as of November 27, 2023.
Guidance, outlook, commentary and unusual items
- Updated 2023 guidance calls for total revenue of $1.495 billion to $1.515 billion and Adjusted EBITDA of $485 million to $505 million. The implied Adjusted EBITDA margin is approximately 32.4% to 33.3%.
- 2023 capital expenditures and long-term maintenance are expected to be $185 million to $205 million, below the previously communicated range.
- Management cited robust offshore drilling market fundamentals and maintained a positive view of the duration and durability of the market upcycle.
- Seadrill authorized an additional $250 million of share repurchases, increasing aggregate authorization to $500 million. As of November 24, it had repurchased approximately 5 million shares for $213 million, at an average price of $42.76 per share. The additional authorization has no fixed expiration and is discretionary.
- Seadrill secured an extension for the West Neptune with LLOG and a short-term West Vela campaign with QuarterNorth Energy. West Vela is expected to transition from its current third-party manager after completing its Beacon Offshore work in the first half of 2024.
- Q3 operating expenses included $2 million of merger and integration-related expenses; nine-month expenses included $21 million. Adjusted EBITDA also excluded primarily gains on sundry asset disposals.
- Principal risks include offshore drilling supply and demand, day rates, customer programs, contract cancellations, rig performance, maintenance and capital-project costs, financing and covenant compliance, liquidity, oil prices, interest rates, regulation, litigation and Aquadrill integration.
Most important facts for investors to verify
- Reconcile the non-GAAP Adjusted EBITDA guidance and quarterly Adjusted EBITDA to operating profit, including merger costs and disposal gains.
- Review the terms, collateral, covenants and effective cost of the new 8.375% notes and revolving credit facility.
- Assess whether the $2.2 billion backlog as of November 27 remains firm and determine its exposure to cancellations, mobilization timing and customer concentration.
- Monitor the financial impact and timing of the West Neptune extension and West Vela campaign, including the transition to Seadrill management.
- Evaluate cash usage from the expanded $500 million repurchase authorization against maintenance, upgrade and other capital requirements.
- Confirm the comparability of 2023 and 2022 results given successor/predecessor accounting, the Aquadrill acquisition and discontinued operations.