Seadrill Limited — Form 6-K Summary
Reporting period: Three months ended March 31, 2022. The filing covers unaudited US GAAP financial statements in U.S. dollars and was furnished in May 2022.
Business context and reporting period
Seadrill is an offshore drilling contractor that owns, leases, and manages drillships, semi-submersible rigs, and jack-up rigs serving international oil and gas customers. At March 31, 2022, the company owned 23 rigs, leased two, and managed seven for affiliates; two owned rigs were sold after the reporting date.
Seadrill emerged from Chapter 11 on February 22, 2022 and adopted Fresh Start accounting. Accordingly, results are presented as Predecessor for January 1–February 22, 2022 and Successor for February 23–March 31, 2022. These periods are not directly comparable with one another or with the prior-year quarter.
Financial performance and key metrics
| Metric | Successor Feb. 23–Mar. 31, 2022 | Predecessor Jan. 1–Feb. 22, 2022 | Q1 2021 Predecessor |
|---|---|---|---|
| Operating revenue | $106 million | $187 million | $233 million |
| Operating profit/(loss) | $2 million | $40 million | ($24 million) |
| Net income/(loss) | $4 million | $3,706 million | ($311 million) |
| Operating cash flow | $52 million | ($56 million) | ($39 million) |
| Capital expenditures | $14 million | $18 million | $4 million |
Successor operating revenue comprised $79 million of contract revenue, $21 million of management contract revenue, $4 million of reimbursable revenue, and $2 million of other revenue. The Successor operating margin was approximately 2%, while the Predecessor period margin was approximately 21%; these percentages are not meaningful as comparable trend measures because of the short periods and Fresh Start accounting effects.
Q1 2021 operating expenses were $260 million against $233 million of revenue, compared with $104 million of expenses against $106 million of revenue in the Successor period and $149 million against $187 million in the Predecessor period. Successor expenses included $3 million of amortization related to newly recognized contract intangibles.
Economic utilization improved versus Q1 2021: harsh-environment rigs were 96% in the Successor period and 94% in the Predecessor period, versus 91% in Q1 2021; floaters were 96% and 95%, versus 80%; and jack-ups were 100% and 99%, versus 99%.
Liquidity, debt, and capital resources
- Cash and restricted cash totaled $553 million at March 31, 2022, including $393 million unrestricted cash and $160 million restricted cash. Continuing-operations cash and restricted cash increased from $535 million at December 31, 2021.
- Successor operating cash flow was $52 million, investing cash outflow was $14 million, financing cash flow was nil, and cash increased by $44 million after a $6 million foreign-exchange effect.
- Principal debt was $911 million at March 31, 2022, consisting of $175 million of term debt, $686 million of second-lien debt, and a $50 million convertible note. Reported carrying value was $954 million, including debt premiums.
- The restructuring reduced external credit-facility obligations from $5.662 billion to $683 million of reinstated second-lien debt and added $175 million of term debt and a $50 million convertible note.
- The company had access to a $125 million undrawn revolving credit facility at emergence. The first-lien facility matures in December 2026, the second-lien facility in June 2027, and the convertible note in August 2028.
- Interest rates are largely floating: the first-lien facility bears a 7% margin plus SOFR, the second-lien facility bears a 12.5% margin plus SOFR, and the convertible note bears three-month U.S. LIBOR plus 6%. The second-lien facility includes 7.5% pay-if-you-can interest that may be capitalized.
Management stated that, following emergence and access to exit financing, cash on hand and expected contract and other revenues should be sufficient to fund anticipated debt service and working-capital requirements for at least the next twelve months. The filing therefore reports no longer having substantial doubt regarding going-concern status.
Material changes versus prior comparable periods
- Chapter 11 emergence materially reset the capital structure, eliminated or settled approximately $6.237 billion of liabilities subject to compromise, and resulted in $1.503 billion of Successor equity at March 31, 2022 versus a $3.716 billion Predecessor deficit at December 31, 2021.
- The company’s $3.706 billion Predecessor net income was primarily a nonrecurring $3.581 billion gain on settlement of liabilities subject to compromise, plus $242 million of Fresh Start valuation adjustments. It should not be treated as recurring earnings.
- Contract backlog declined to $2.425 billion at March 31, 2022 from $2.567 billion at December 31, 2021. Backlog was $736 million for harsh-environment units, $1.314 billion for floaters, $116 million for jack-ups, and $259 million from other activities.
- Average Brent oil prices increased to $98 per barrel in the first quarter of 2022 from $71 in 2021, supporting improved offshore drilling demand and utilization, particularly for drillships and benign-environment jack-ups.
- Seadrill sold the West Venture for $7 million in January 2022. It sold the Sevan Brasil and Sevan Driller for aggregate proceeds of $24 million on April 7, 2022; the related proceeds were subject to lender repayment arrangements.
- Seadrill’s interest in Paratus Energy Services was reduced to 35%, with the investment accounted for under the equity method. The company also modified or terminated several SFL lease arrangements and expects to return the West Hercules and West Linus during 2022.
- Seadrill began trading on the Euronext Expand market of the Oslo Stock Exchange on April 28, 2022 and stated that it intends to pursue an Oslo main-market uplisting and a New York Stock Exchange listing, subject to applicable requirements.
Outlook, commentary, risks, and unusual items
Management described improving offshore drilling market conditions after the COVID-19-related downturn. Drillship utilization exceeded 90% at March 31, 2022, while semi-submersible utilization was approximately 70%. Benign-environment jack-up utilization and dayrates were expected to improve, particularly due to anticipated Middle East awards. Harsh-environment floater utilization was expected to remain muted through 2022 and 2023 because of limited incremental demand and available supply.
Principal risks include oil-price and macroeconomic volatility, offshore rig supply and demand, dayrates and utilization, contract cancellations or renegotiations, downtime, customer credit risk, liquidity and debt-covenant compliance, floating interest rates, geopolitical developments and Ukraine-related sanctions, political and tax uncertainty, environmental and decarbonization regulation, cybersecurity, litigation, and the ability to maintain supplier, customer, employee, and financing relationships following Chapter 11.
Material contingencies include disputed tax assessments of approximately $124 million in Brazil, $171 million in Nigeria, $12 million in Kuwait, and $95 million in Mexico. The company is contesting these matters. It also provided performance guarantees totaling $550 million, principally $400 million related to Sonadrill and $150 million related to Northern Ocean; no liability was recognized because management did not consider a call on the guarantees probable.
Fresh Start valuation depends on assumptions concerning future dayrates, utilization, operating costs, capital expenditures, contract probabilities, discount rates, and rig market values. The company reported no impairment indicators for drilling units at March 31, 2022, but noted that changes in assumptions could result in future impairments.
Important facts for investors to verify
- Reconcile Successor and Predecessor results carefully; Fresh Start accounting makes direct period-to-period comparisons inappropriate.
- Separate the $3.581 billion Chapter 11 settlement gain and other reorganization items from recurring operating performance.
- Verify unrestricted versus restricted cash and the availability of the $125 million revolving credit facility.
- Monitor debt-service requirements, SOFR and LIBOR exposure, pay-if-you-can interest capitalization, exit fees, covenants, and maturity concentrations.
- Track backlog conversion, contract commencements, rig utilization, dayrates, downtime, and the expected return of the West Hercules and West Linus.
- Assess the outcome and potential cash impact of the Brazil, Nigeria, Kuwait, and Mexico tax disputes and the $550 million of performance guarantees.
- Confirm progress toward the intended Oslo main-market and NYSE listings and related conversion rights under the $50 million convertible note.