Business Context and Reporting Period
Seadrill Limited, a Bermuda-based offshore drilling contractor, filed this Form 6-K on June 2, 2020, covering unaudited results for the three months ended March 31, 2020. The company owned and operated 35 offshore drilling units and also provided management services to related parties. Financial statements were prepared under U.S. GAAP in U.S. dollars.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $321 million | $302 million |
| Operating loss | $1,284 million | $71 million |
| Net loss | $1,565 million | $296 million |
| Loss per share | $15.59 | $2.95 |
| Cash flow from operating activities | $(116) million | $(99) million |
| Cash flow from investing activities | $(5) million | $2 million |
| Cash flow from financing activities | $(20) million | $(4) million |
| Cash and restricted cash | $1,198 million | $1,902 million |
| Total debt principal | $6,758 million | $6,759 million |
| Contract backlog | $2,455 million | $2,544 million at December 31, 2019 |
Revenue increased 6% year over year, but contract revenue declined to $203 million from $255 million, primarily reflecting fewer floaters under contract and lower floater dayrates. Management contract revenue increased to $105 million from $37 million, driven by Northern Ocean and Sonadrill mobilizations and management arrangements.
The reported operating margin was approximately negative 400% and the net margin approximately negative 488%, both heavily affected by non-cash impairment charges. Operating expenses were $383 million, compared with $399 million in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Seadrill recorded a $1,230 million impairment of drilling units, reducing the carrying value of drilling units from $6,401 million at December 31, 2019 to $5,106 million at March 31, 2020.
- The company recorded a $47 million impairment of its remaining direct investments in Seadrill Partners, reducing their carrying value to nil.
- Shareholders’ equity declined from $1,642 million at year-end 2019 to negative $53 million at March 31, 2020; total equity declined to $86 million after non-controlling interests.
- Seadrill adopted the current expected credit loss standard, recording a $143 million opening reduction to retained earnings and increasing the allowance for credit losses to $163 million at March 31, 2020.
- Average rigs on contract declined from 16 to 15, with floaters declining from eight to six and jack-ups increasing from eight to nine. Floater average contractual dayrates decreased to $206,000 from $224,000; jack-up dayrates remained $108,000.
- Contract backlog declined to $2.455 billion from $2.544 billion at December 31, 2019, with floater backlog of $793 million and jack-up backlog of $1.662 billion.
- Cash and restricted cash declined by $159 million during the quarter, while operating cash flow remained negative.
Debt, Liquidity, Outlook and Risks
Seadrill reported $6.8 billion of external debt and stated that it remained highly leveraged. Debt principal included $5.662 billion of secured credit facilities, $495 million of senior secured notes and $601 million of debt in consolidated variable-interest entities. Contractual obligations totaled $7.112 billion, including $7.072 billion of debt repayments.
The company had elected to defer $137 million of scheduled amortization payments and reported up to $363 million of remaining amortization deferral capacity under its agreements. However, management forecast that it would not meet its ongoing liquidity covenant within the following twelve months and might not meet net leverage and debt service coverage covenants when testing begins in 2021.
Negotiations with secured lenders did not produce the required approvals. Seadrill discontinued the proposed bank consent process and retained financial and legal advisers to prepare for a comprehensive balance-sheet restructuring, which may require a substantial conversion of debt to equity. Management stated that substantial doubt remained regarding the company’s ability to continue as a going concern, although it believed $1.2 billion of cash on hand provided sufficient liquidity to complete a restructuring process.
Management expected continued pressure from COVID-19, the oil-price collapse and reduced customer capital spending. Brent crude declined from $66 per barrel at December 31, 2019 to $23 at March 31, 2020, and reached a low of $22 on March 30. The company expected lower utilization and dayrates, possible contract terminations or renegotiations, and difficulty realizing reported backlog.
Seadrill announced its intention to voluntarily delist its common shares from the NYSE. It expected to file Form 25 around June 11, 2020, with the last NYSE trading day anticipated around June 19, 2020. The shares were expected to remain listed on the Oslo Børs and might trade over the counter, but no OTC market was assured. The company warned that delisting could reduce liquidity, impair access to equity financing and potentially create debt covenant issues if permitted exchange listings were not maintained.
Other significant exposures included a $161 million Brazilian tax assessment, $171 million of Nigerian tax claims and a $139 million guarantee related to Seabras Sapura debt. The filing states that outcomes remain uncertain and that adverse decisions could materially affect financial condition or cash flow.
Most Important Facts for Investors to Verify
- Whether Seadrill reached a comprehensive restructuring agreement, obtained covenant waivers or entered another insolvency or restructuring process after the filing date.
- Actual debt maturities, amortization deferrals, lender consents and any cross-default or acceleration events.
- Availability and restrictions on the reported $1.198 billion of cash and restricted cash.
- Whether the planned NYSE delisting occurred and the subsequent liquidity and trading conditions for the shares.
- Changes in rig utilization, dayrates, contract backlog, customer terminations and the recoverability of backlog after March 31, 2020.
- Potential additional impairments to drilling units, related-party receivables, investments or other assets as market assumptions change.
- Resolution of Brazilian and Nigerian tax disputes, Seabras Sapura litigation, Dalian newbuild claims and other guarantees or contingencies.