Seadrill Limited — Form 6-K Summary
Business context and reporting period
This Form 6-K reports unaudited U.S. GAAP results for Seadrill’s predecessor entity, Seadrill Limited, for the six months ended June 30, 2018. The company operated offshore drillships, semi-submersibles and jack-up rigs for oil and gas customers. The period was reported on a debtor-in-possession basis during Chapter 11 proceedings; Seadrill emerged from Chapter 11 on July 2, 2018. Historical results are not directly comparable with post-emergence results because fresh start accounting materially changed the asset and liability basis.
Financial performance and liquidity
| Metric | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|
| Operating revenue | $712 million | $1.146 billion |
| Operating loss | $613 million | $17 million |
| Net loss | $635 million | $101 million |
| Net loss attributable to parent | $477 million | $78 million |
| Basic and diluted loss per share | $0.95 | $0.16 |
| Cash flow from operations | $(132) million | $219 million |
| Cash flow from investing activities | $149 million | $287 million |
| Cash flow from financing activities | $(153) million | $(510) million |
- Revenue declined 38%, primarily because of additional idle rigs and new contracts at lower dayrates. Floater revenue declined 35% to $482 million; jack-up revenue declined 46% to $193 million.
- Operating expenses excluding impairment declined 9% to $918 million, but the company recorded a $414 million impairment charge on three rigs. The resulting operating margin was approximately negative 86% versus approximately negative 1% in the prior period.
- Net loss increased substantially, reflecting lower revenue, the impairment charge, $109 million of reorganization expense and $36 million of income tax expense. Share of results from associated companies contributed $149 million, including benefits related to Seadrill Partners’ West Leo litigation award.
- Cash and cash equivalents were $809 million at June 30, 2018, compared with $1.255 billion at December 31, 2017. Restricted cash increased to $409 million from $104 million, producing total cash and restricted cash of $1.218 billion.
- At June 30, 2018, total debt principal was $8.547 billion, including $7.600 billion classified as subject to compromise. Debt not subject to compromise was $947 million, including $856 million of long-term debt and $91 million due within one year.
- Post-emergence liquidity was reported as approximately $2.1 billion of cash and $7.6 billion of outstanding debt principal. Management stated that cash, liquid investments and expected operating receipts should fund debt service and working capital for the following twelve months.
Material changes versus the prior comparable period
- Fleet size at June 30, 2018 was 35 rigs: 19 floaters and 16 jack-ups. Eighteen rigs were operating and 17 were idle. Reported utilization was 95% for operating floaters, 98% for operating jack-ups and 96% overall, excluding planned maintenance downtime.
- Average contract revenue declined to $279,444 per day for floaters from $400,208 and to $130,845 for jack-ups from $147,414.
- Bad debt expense was $48 million in 2018 versus none in the prior comparable period, and the allowance for doubtful accounts increased to $83 million from $35 million.
- Interest expense reported in the income statement fell to $38 million from $195 million, largely because contractual interest on liabilities subject to compromise was not recognized as expense. Approximately $76 million of contractual interest for the period was not reflected in the income statement.
- The company sold its interest in the West Rigel proceeds for $126 million in May 2018, with no disposal gain or loss because proceeds approximated book value.
- Contract backlog was approximately $2.2 billion as of September 27, 2018, including $1.5 billion from jack-ups and $0.7 billion from floaters. Approximately $0.2 billion was expected to be realized during the remainder of 2018.
Restructuring, outlook, risks and unusual items
- The Chapter 11 plan equitized approximately $2.4 billion of unsecured bond obligations, more than $1.0 billion of contingent newbuild obligations and approximately $250 million of unsecured swap claims. It also extended debt maturities, removed near-term amortization requirements and provided more than $1.0 billion of new capital.
- On July 2, 2018, New Seadrill issued approximately 100 million new common shares and raised $880 million through 12% senior secured notes due 2025. The notes carry 4% cash interest and 8% payment-in-kind interest, subject to certain provisions permitting cash payment of the PIK component.
- Following emergence, minimum liquidity requirements applied, including $525 million through December 31, 2018 and $400 million thereafter. Most other financial covenants were suspended until the first quarter of 2021; leverage and debt-service coverage testing was scheduled to begin in 2022.
- Management expected offshore drilling demand to improve as oil prices stabilized and exploration spending increased, but acknowledged that higher contracting activity had not yet translated into improved dayrates. Dayrate and utilization assumptions remain important to asset values.
- The company purchased a $68 million interest-rate cap covering $4.5 billion of floating-rate debt, with a 2.87% three-month LIBOR cap through June 2023. Its fair value was $61 million at June 30, 2018.
- Eight Dalian jack-up newbuild contracts represented $1.683 billion of remaining commitments, all scheduled in 2018 in the disclosed maturity table. The company continued discussions with Dalian regarding delivery, and the contracts were held by limited-liability subsidiaries without a Seadrill Limited guarantee.
- Filed Chapter 11 claims totaled approximately $19.2 billion across 1,597 claims as of June 15, 2018. The ultimate number and amount of allowed claims and creditor recoveries remained uncertain.
- Other risks included offshore drilling supply and demand, low dayrates, idle rigs, customer credit and contract termination risk, debt and covenant compliance, interest-rate exposure, asset impairments, tax disputes, political and regulatory conditions, operational hazards and litigation.
- Brazilian tax assessments totaled approximately $161 million and Nigerian tax claims and assessments approximately $171 million; Seadrill contested both. The company also disclosed guarantees and other contingent exposures related to joint ventures, including Seabras Sapura.
Important facts for investors to verify
- Confirm the post-emergence capital structure, debt maturities, interest burden, minimum liquidity compliance and treatment of PIK interest.
- Reconcile the predecessor-period debt and equity balances with the successor company’s fresh start financial statements.
- Assess whether backlog converts into revenue at the assumed dayrates and utilization levels, particularly for idle rigs and lower-rate contracts.
- Review the valuation assumptions supporting the $414 million impairment and determine whether further impairments are possible.
- Track resolution of the $1.683 billion Dalian newbuild commitments and any related settlement, delivery or cancellation costs.
- Evaluate collectability of related-party receivables, including loans and balances with Seadrill Partners, SeaMex and Seabras Sapura.
- Monitor the Brazilian and Nigerian tax disputes, Seabras Sapura guarantee exposure, temporary Brazilian vessel-flag status and other contingent liabilities.
- Use caution when comparing these results with future periods because fresh start reporting is expected to materially alter asset values, liabilities, depreciation and reported earnings.