Seadrill Limited — FY 2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018; filed March 28, 2019. This is an annual report, not a standalone fourth-quarter filing, and the text does not provide clear Q4-only financial results. All amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Seadrill provides offshore contract drilling services worldwide, operating drillships, semi-submersible rigs and jack-ups. At year-end it owned and operated 35 rigs; 16 units were idle. The company emerged from Chapter 11 on July 2, 2018. It adopted fresh-start accounting, creating a new reporting entity and making post-emergence results and balance-sheet values not directly comparable with predecessor periods.
Financial performance and position
| Metric | July 2–December 31, 2018 (Successor) | January 1–July 1, 2018 (Predecessor) | FY 2017 (Predecessor) |
|---|---|---|---|
| Operating revenues | $541 million | $712 million | $2.088 billion |
| Operating loss | $175 million | $613 million | $728 million |
| Net loss | $605 million | $3.885 billion | $3.102 billion |
| Operating cash flow | $(26) million | $(213) million | $399 million |
| Capital expenditures | $98 million | $127 million | $150 million |
The two 2018 reporting periods together represent $1.253 billion of revenue, a $4.490 billion net loss and $239 million of operating cash outflow. These arithmetic totals span the fresh-start transition and should not be treated as fully comparable with prior-year results. The predecessor-period loss included $3.365 billion of reorganization items, including fresh-start valuation adjustments.
- Revenue and operating trends: Contract revenue was $469 million in the Successor period and $619 million in the Predecessor period. Contract revenue was pressured by fewer rigs on contract and lower dayrates. Average contractual dayrates in the Successor period were $231,000 per day for floaters and $106,000 for jack-ups, versus $279,000 and $131,000, respectively, in the Predecessor period.
- Liquidity: Year-end cash and cash equivalents were $1.542 billion, including $461 million of restricted cash; unrestricted cash was $1.542 billion. Management said available resources and expected cash flows should cover working capital and obligations for at least 12 months. The minimum liquidity covenant was $400 million from January 1, 2019.
- Debt: Principal debt was $7.086 billion, plus $314 million of related-party debt. The balance included $5.662 billion of secured credit facilities, $655 million of debt in consolidated variable-interest entities and $769 million of New Secured Notes. The notes carry 12% interest, with 4% payable in cash and 8% paid in kind, and mature in 2025. Credit-facility maturities fall between 2022 and 2024.
- Assets and equity: Total assets were $10.848 billion and total equity was $3.035 billion. Drilling units were carried at $6.659 billion following fresh-start remeasurement.
- Interest-rate exposure: A $68 million LIBOR cap covers $4.5 billion of debt through June 2023, with a 2.87% cap rate. Management estimated that a 1-percentage-point rate increase would add about $15 million of annual interest expense on senior credit facilities after the cap.
- Margins: The filing reports operating losses, but post-emergence and predecessor-period operating margins are not meaningfully comparable because of fresh-start accounting and classification changes.
Material changes versus prior periods
- Chapter 11 restructuring extinguished about $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 extended debt maturities, reduced near-term amortization and provided $1.08 billion of new capital.
- The reorganization replaced the predecessor’s share structure with 100 million new common shares outstanding at year-end. An employee incentive plan reserves shares equal to 10% of fully diluted equity.
- Average rigs on contract declined from 19 in 2017 to 15 in the Successor period. Fleet count was 35 at year-end 2018 versus 35 a year earlier; three jack-ups had been sold in 2017.
- Operating cash flow was negative in both 2018 reporting periods, compared with $399 million generated in 2017. Management attributed the 2018 outflows to customer receipts not covering operating costs, long-term maintenance, interest and taxes.
- Year-end restricted cash rose to $461 million from $104 million in 2017, including $328 million held in escrow or as collateral for the New Secured Notes.
Outlook, risks and unusual items
- Outlook: Management reported improved oil-market economics, increased customer tendering and a positive dayrate trend during 2018, and expected customer investment and these trends to continue in 2019. Brent averaged $71 per barrel in 2018 and was about $66 on February 28, 2019. The filing gives no numerical earnings or cash-flow guidance.
- Backlog and utilization: Contract backlog was approximately $1.927 billion as of February 28, 2019, down from $2.430 billion as of March 31, 2018. Seadrill cautioned that backlog is an estimate and may be reduced by downtime, lower applicable rates, customer liquidity problems or contract terminations. At February 28, 2019, 19 units were contracted or expected to be contracted and 16 were idle.
- Industry and customer risks: Offshore drilling remains cyclical and oversupplied, with dayrate and utilization pressure. The five largest customers represented about 81% of Successor-period revenue. Brazil accounted for 22% of revenue in FY 2018, and the filing highlights political, regulatory and tax uncertainty there.
- Debt and refinancing risks: Debt is secured by rigs and other assets and includes cross-default provisions and operating restrictions. Financial covenant testing begins in 2022; failure to meet specified 2021 tests can increase margins by up to 100 basis points in PIK interest. The company warned that inadequate cash flow, refinancing constraints or covenant breaches could materially affect operations.
- Newbuild dispute: Year-end commitments for two Dalian jack-up rigs totaled about $368 million. After Dalian entered restructuring, Seadrill terminated or disputed the relevant contracts and commenced UK arbitration in March 2019 seeking refunds, interest and damages. Claims by either side had not been quantified in the filing.
- Tax contingencies: Seadrill disclosed Brazilian tax assessments of about $161 million and Nigerian claims and assessments of about $171 million, which it is contesting. Approximately $70 million of collateral was expected to be required for certain Brazilian appeals. It also recorded $100 million of uncertain tax liabilities including interest and penalties; management said no cash payment was then expected for the identified U.S. tax issue.
- Other unusual items: Seadrill recovered $21 million of an overdue receivable in 2018 and a further $26 million in January 2019, expected to be recognized as 2019 operating income. The West Rigel sale proceeds triggered a $121 million principal redemption and $5 million interest payment on the New Secured Notes in November 2018. A tender offer for up to $311 million of those notes was launched in March 2019; it was expected to reduce third-party notes outstanding from $769 million to $458 million if completed as planned.
- Shareholder returns and controls: Seadrill had paid no dividends since 2014 and said it may pay little or none for the foreseeable future. Management and the auditor reported effective internal control over financial reporting as of December 31, 2018; the financial statements received an unqualified audit opinion.
Most important facts for investors to verify
- Reconcile the two 2018 reporting periods and assess performance on a fresh-start basis; do not rely on a simple comparison with predecessor periods.
- Confirm unrestricted versus restricted cash availability, debt principal and interest obligations, covenant headroom, and the status and outcome of the New Secured Notes tender offer.
- Track rig contract awards, expirations, dayrates, utilization and the realization of the $1.927 billion backlog, particularly given 16 idle units and customer concentration.
- Monitor the Dalian arbitration and recovery prospects for paid yard installments, as well as any resulting cash or liability effects.
- Assess outcomes and collateral requirements for Brazilian and Nigerian tax disputes and developments in the recorded uncertain tax positions.
- Verify whether the company’s improving market outlook translates into sustained operating cash generation sufficient to meet debt service and maintenance needs.