Business Context and Reporting Period
Seadrill Limited, an offshore drilling contractor, filed this Form 6-K on August 31, 2022, reporting results for the three months ended June 30, 2022. The company emerged from Chapter 11 on February 22, 2022 and applied Fresh Start accounting; therefore, successor and predecessor periods are not directly comparable. Where relevant, Seadrill presents non-GAAP combined results for the first quarter of 2022.
Key Financial Metrics
| Metric | 2Q22 | 1Q22 Combined | Change |
|---|---|---|---|
| Total operating revenue | $284 million | $293 million | Down 3% |
| Operating profit | $25 million | $42 million | Down 40% |
| Adjusted EBITDA | $75 million | $78 million | Down 4% |
| Adjusted EBITDA margin | 26.4% | 26.6% | Down 0.2 percentage points |
| Net loss | $36 million | $3.710 billion net profit | Unfavorable comparison, primarily due to prior-quarter reorganization and Fresh Start gains |
| Cash flow from operating activities | $(34) million | $(29) million | Higher outflow |
| Cash flow from investing activities | $(44) million | $(30) million | Higher outflow |
| Cash flow from financing activities | Nil | $65 million | Lower by $65 million |
Technical and economic utilization were both 98% across Seadrill’s owned fleet. The company had 13 owned rigs operating and 21 owned rigs in total at June 30, 2022. Managed or leased rigs totaled nine operating units with 99% technical utilization.
Cash and cash equivalents totaled $468 million at June 30, 2022, comprising $336 million of unrestricted cash and $132 million of restricted cash. Restricted cash included approximately $70 million collateral for a Brazilian tax case and $22 million in guarantee facilities. Total debt consisted of approximately $947 million of long-term debt and $21 million due within one year. Equity was $1.470 billion and total assets were $2.923 billion.
Order backlog was approximately $3.1 billion at June 30, 2022, after $940 million of additions and $240 million of consumption during the quarter. Backlog was reported at approximately $3.0 billion as of August 31, 2022.
Material Changes Versus the Prior Comparable Period
- Revenue declined $9 million sequentially, mainly because of shipyard time between contracts for West Saturn and the handover of West Bollsta, partly offset by higher dayrates for Sevan Louisiana and West Hercules.
- Operating expenses increased $6 million, reflecting higher amortization of emergence-related intangibles, increased severance payments and the absence of favorable fresh-start adjustments recognized in the first quarter.
- Interest expense increased as the company incurred a full quarter of interest on new post-emergence debt facilities; this was partly offset by lower interest on amended SFL finance leases.
- Cash declined by $85 million during the quarter, driven by capital additions, working capital movements, interest payments, investing outflows and foreign-exchange effects.
- Seadrill completed the sale of the Sevan Brasil and Sevan Driller semi-submersible rigs. Eleven long-term cold-stacked rigs had been sold through the disposal program.
- Three-year firm contracts were secured for West Ariel, West Cressida and West Leda, while AOD I, AOD III and West Callisto received three-year contract extensions with Saudi Aramco.
Guidance, Outlook, Risks and Unusual Items
Seadrill maintained unaudited full-year 2022 guidance of $1.050 billion to $1.125 billion of revenue, $240 million to $280 million of adjusted EBITDA and $320 million to $360 million of capital expenditures and long-term maintenance. Guidance excludes approximately $65 million of forecast mobilization revenue and approximately $95 million of forecast mobilization costs that are deferred and recognized over contract periods. Reactivation and upgrade projects spanning year-end could materially affect the timing of 2022 expenditure.
Management cited strong fleet performance and improving offshore drilling utilization and rates, particularly in benign ultra-deepwater floaters and jackups. Seadrill expects continued near-term challenges in the harsh-environment segment, with slower improvement anticipated until activity increases toward the end of 2023.
Subsequent events included a non-binding proposal to acquire the entities owning and operating seven jackups for expected consideration of approximately $645 million to $700 million, including reimbursement for reactivation, project and mobilization costs. No definitive agreement had been entered into and completion was not assured. West Gemini was novated to the Sonadrill joint venture on July 1, 2022. West Neptune obtained a six-month firm extension valued at approximately $73 million, plus a six-month optional period valued at approximately $78 million.
Important risks include offshore drilling market cyclicality, dayrates and utilization, contract awards and mobilization timing, rig reactivation and maintenance costs, customer payment or contract disputes, liquidity and financing access, debt covenants, oil-price volatility, inflation, supply-chain disruption, geopolitical conditions including the Ukraine conflict, tax and legal matters, climate and decarbonization regulation, cybersecurity, and the ability to satisfy exchange-listing requirements. The quarter also reflects significant post-Chapter 11 accounting effects, including reorganization and Fresh Start adjustments that make comparisons with predecessor periods difficult.
Investor Verification Points
- Verify the composition, maturity profile, interest terms and covenant requirements of the approximately $968 million of reported debt.
- Assess unrestricted cash separately from restricted cash, including the Brazilian tax collateral and guarantee-related balances.
- Reconcile adjusted EBITDA to GAAP operating profit and evaluate the effects of deferred mobilization revenue and costs.
- Monitor execution, spending and commencement dates for West Jupiter, West Carina, West Ariel, West Cressida and West Leda reactivation projects.
- Confirm whether the proposed seven-jackup transaction advances beyond the non-binding stage and determine its effect on backlog, liquidity and fleet capacity.
- Evaluate the sustainability of the $3.0 billion to $3.1 billion backlog, including contract duration, dayrates, options and exposure to customer or geographic concentration.
- Consider successor/predecessor reporting differences when comparing 2022 results with prior periods.