Business Context and Reporting Period
Seadrill Limited is an offshore drilling contractor operating drillships, semi-submersible rigs and jack-up rigs. As of June 30, 2019, it owned and operated 35 rigs and managed 20 additional rigs for affiliates and partners. This Form 6-K contains unaudited U.S. GAAP interim results for the six months ended June 30, 2019, presented in U.S. dollars.
Results for 2019 are reported as the “Successor” following emergence from Chapter 11 on July 2, 2018, while 2018 results are “Predecessor” results. Fresh start accounting and changed classifications mean the periods are not fully comparable.
Key Financial Metrics
| US$ millions, except per-share data | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|
| Operating revenue | 623 | 712 |
| Operating loss | (144) | (613) |
| Loss before taxes | (514) | (599) |
| Net loss | (502) | (635) |
| Net loss attributable to shareholders | (498) | (477) |
| Basic and diluted loss per share | (4.98) | (0.95) |
| Cash flow from operating activities | (184) | (132) |
| Cash flow from investing activities | (11) | 149 |
| Cash flow from financing activities | (343) | (153) |
Six-month revenue comprised contract revenue of $508 million, reimbursable revenue of $70 million and other revenue of $45 million. Contract revenue declined primarily because fewer floaters were under contract and average floater dayrates were lower. Economic utilization improved to 93% for floaters and 98% for jack-ups.
The reported six-month operating margin was approximately negative 23% and the net margin was approximately negative 81%; these ratios are affected by fresh start accounting, amortization, interest expense and other non-operating items.
At June 30, 2019, cash and cash equivalents were $1.251 billion and restricted cash was $218 million, for total cash including restricted cash of $1.469 billion. Total debt principal was $6.765 billion, with $6.611 billion of carrying value after discounts and fees. Net debt, using cash and restricted cash, was approximately $5.296 billion.
Debt maturities include $185 million due within one year, $1.297 billion due in 2021–2022, $3.007 billion due in 2023–2024 and $2.276 billion thereafter. Total contractual obligations were $7.131 billion, including debt, pension obligations and operating leases. Management stated that available resources, cash and expected operating cash flows should meet obligations for at least the next twelve months from the report date.
Material Changes Versus the Prior Comparable Period
- Revenue decreased $89 million, or approximately 12%, from $712 million to $623 million, although comparison is affected by successor/predecessor accounting.
- Operating loss improved from $613 million to $144 million, mainly because the prior-year period included a $414 million impairment charge. The 2019 period included no comparable impairment charge.
- Net loss improved from $635 million to $502 million, but interest expense increased substantially to $254 million from $38 million following the post-Chapter 11 capital structure and higher effective borrowing costs.
- Operating cash outflow increased to $184 million from $132 million. Management attributed the negative 2019 operating cash flow to customer receipts being insufficient to cover operating costs, long-term maintenance, interest and taxes.
- In April 2019, Seadrill repurchased $311 million of senior secured notes for $342 million, including a 7% premium and accrued interest. The transaction reduced principal debt but used $333 million of financing cash and generated a $22 million net debt-extinguishment loss, including related costs.
- Contract backlog declined to $1.909 billion at June 30, 2019 from $2.087 billion at December 31, 2018. Floaters represented $498 million and jack-ups $1.411 billion.
- Average rigs on contract declined to 16 from 17 for the six-month comparison, driven by one fewer floater; average jack-ups on contract remained eight.
- General and administrative expense declined to $61 million from $100 million, while depreciation declined to $212 million from $391 million because fresh start accounting reduced asset carrying values. These classifications and amounts are not directly comparable.
Guidance, Outlook, Commentary and Risks
Management described the offshore drilling market as stabilizing in 2019, with Brent oil averaging approximately $60 per barrel for the six months ended June 30, 2019. Increased tendering activity and improving dayrates were supported by stable oil prices and customer efficiency initiatives. Management expects improvement to continue if oil prices remain stable and customers continue investing.
Market risks remain significant. Benign-environment floater supply remains excessive, while harsh-environment and high-specification units have stronger demand. Newbuild deliveries, older-rig scrapping, cold-stacked rig reactivation costs and competitive pressure may affect utilization and dayrates.
- Seadrill remains highly leveraged, with $6.765 billion of debt principal and substantial scheduled maturities. Debt facilities include cross-default provisions and floating-rate exposure.
- A 1% increase in interest rates was estimated to increase net interest exposure by approximately $27 million after considering the interest-rate cap. The company’s $4.5 billion LIBOR cap expires in June 2023.
- Brazilian tax authorities have issued assessments totaling approximately $161 million, including interest and penalties. Seadrill posted $86 million of collateral in connection with its appeal.
- Nigerian tax authorities have issued claims and assessments totaling approximately $171 million. The company is contesting them.
- A Nigerian court decision could permit a 2% surcharge on certain Nigerian offshore drilling revenue and impose additional registration fees; Seadrill appealed and stated that a decision may take three to five years.
- All eight Dalian newbuild contracts had been terminated by June 30, 2019. Seadrill is pursuing repayment of installments, interest and damages through arbitration and Chinese insolvency proceedings, while Dalian has asserted unquantified damages claims.
- The Sevan Louisiana suffered subsea equipment damage in January 2019. Seadrill incurred $17 million of repair costs and expected $16 million to be recoverable under physical damage insurance. On August 1, 2019, it received a $15 million payment on account, including $11 million for loss of hire, to be recognized in the third quarter.
- Seadrill entered a 50:50 Sonadrill joint venture with Sonangol to operate four drillships in Angola. Subsequent to quarter-end, it announced the Gulfdrill joint venture with Gulf Drilling International, involving five Qatar jack-ups and expected contract value of $656 million, with options potentially adding approximately $700 million.
- Forward-looking results depend on oil prices, customer spending, rig utilization, dayrates, contract awards and terminations, financing access, debt covenant compliance, liquidity, customer credit quality, political and regulatory conditions, and operational or environmental incidents.
Important Facts for Investors to Verify
- Reconcile liquidity against near-term debt maturities, interest obligations, restricted cash and negative operating cash flow.
- Assess whether the company can improve utilization and dayrates sufficiently to support debt service and rig reactivation or maintenance requirements.
- Review the impact of fresh start accounting and successor/predecessor presentation before comparing earnings, margins, asset values or per-share results.
- Monitor contract backlog conversion, customer payment performance, contract options, mobilizations and potential cancellations.
- Track the outcomes and potential cash exposure of the Brazilian and Nigerian tax disputes, Nigerian cabotage litigation, Dalian arbitration and insolvency claims, and Oro Negro litigation.
- Verify the timing and value of insurance recoveries related to the Sevan Louisiana incident.
- Evaluate related-party exposure, including $686 million of related-party receivables, associated-company losses, guarantees and obligations involving Ship Finance, Seadrill Partners, SeaMex and Seabras Sapura.