Seadrill Limited Form 6-K Summary
Business context and reporting period
Seadrill is a Bermuda-based offshore drilling contractor providing drillship, semi-submersible and jackup services worldwide on dayrate contracts, together with management services for affiliated entities. This Form 6-K reports unaudited US GAAP results for the nine months ended September 30, 2022, filed November 30, 2022.
Seadrill emerged from Chapter 11 on February 22, 2022 and applied Fresh Start accounting. Accordingly, periods before February 23, 2022 are presented as “Predecessor” and later periods as “Successor”; the periods are not directly comparable.
- At September 30, 2022, Seadrill owned 21 rigs, leased one rig from SFL and managed seven third-party rigs.
- Seven Saudi Arabian jackups were sold to ADES on October 18, 2022, reducing owned rigs to 14.
- Seadrill’s shares began trading on the NYSE on October 14, 2022 and moved to the main list of the Oslo Stock Exchange on November 17, 2022.
Financial performance and key metrics
| Metric | Three months ended September 30, 2022 | Comparable 2021 period | Successor period from February 23, 2022 |
|---|---|---|---|
| Operating revenue | $269 million | $222 million | $615 million |
| Operating profit/(loss) | $20 million | $(4) million | $45 million |
| Interest expense | $(33) million | $(18) million | $(73) million |
| Loss from continuing operations | $(18) million | $(55) million | $(50) million |
| Net loss | $(16) million | $(86) million | $(48) million |
| Loss per share | $(0.32) | $(0.86) | $(0.96) |
Third-quarter revenue increased 21% year over year, while operating profit improved to $20 million from a $4 million loss. The improvement reflected higher floater revenue, increased management contract revenue and lower harsh-environment rig operating costs. The quarter nevertheless produced a net loss because of $33 million of interest expense, foreign exchange losses and other non-operating items.
- Third-quarter contract revenue was $187 million, including $122 million from harsh-environment rigs and $65 million from floaters.
- Management contract revenue was $63 million, up from $42 million, primarily due to the Quenguela and West Gemini arrangements.
- Economic utilization was 96% for harsh-environment rigs and 95% for floaters in the third quarter.
- Third-quarter operating margin was approximately 7.4%; the filing does not present a non-GAAP adjusted margin.
- Contract backlog was $3.015 billion at September 30, 2022, compared with $2.567 billion at December 31, 2021. Continuing-operations backlog was $2.297 billion.
Cash flow, liquidity, debt and balance sheet
| Item | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Unrestricted cash | $224 million | $293 million |
| Restricted cash | $125 million | $223 million |
| Total cash and restricted cash | $357 million | $604 million |
| Principal debt | $938 million | Not applicable after restructuring presentation |
| Debt carrying value | $982 million | Not applicable after restructuring presentation |
| Total equity | $1.454 billion | $(3.716) billion |
- Cash used in operating activities during the Successor period was $12 million.
- Cash used in investing activities was $153 million, including $108 million for rig reactivations and upgrades and $30 million related to discontinued operations.
- Cash provided by financing activities was $16 million, primarily reflecting intercompany funding of discontinued operations.
- Seadrill had an undrawn $125 million revolving credit facility at September 30, 2022.
- Debt comprised a $175 million first-lien term loan, a $713 million second-lien facility and a $50 million unsecured convertible note. The first-lien facility matures in 2026, the second-lien facility in 2027 and the convertible note in 2028.
- The second-lien facility bears cash and pay-if-you-can interest totaling 12.5% plus SOFR and had $30 million of payment-in-kind interest capitalized through September 30, 2022.
- After the reporting date, Seadrill paid $204 million under the second-lien facility in October and $269 million in November, including $442 million of principal and $31 million of exit fees.
Material changes, outlook and unusual items
- The Chapter 11 restructuring reduced external credit-facility obligations from $5.662 billion to $683 million of reinstated debt, supplemented by new-money financing and a convertible note. Fresh Start accounting materially resets asset values, debt presentation and equity, limiting comparisons with 2021.
- The Saudi jackup disposal closed after quarter-end for stated consideration of $670 million, subject to adjustments. The accounting gain had not been determined at the reporting date and was expected to be recorded in the fourth quarter.
- Seadrill agreed to sell its remaining 35% interest in Paratus Energy Services. Completion was subject to customary conditions and was expected in the fourth quarter of 2022 or early 2023. Management did not expect a material accounting gain or loss.
- Seadrill completed or initiated reactivation of five cold-stacked rigs. West Carina began operations in November 2022 and West Jupiter was expected to begin operations in December 2022.
- Management cited improving offshore drilling demand, particularly for drillships and high-specification jackups, with utilization and dayrates expected to improve in certain segments. Harsh-environment floater demand remained comparatively muted.
- Management believed cash on hand, contract revenue and other revenue would provide sufficient cash flow for anticipated debt service and working-capital requirements for the next twelve months.
- Key risks include oil-price and offshore-market volatility, inflation and higher reactivation costs, customer credit and contract termination risk, high floating-rate debt, liquidity and covenant compliance, rig downtime, geopolitical events and sanctions, regulatory and tax disputes, environmental requirements, cybersecurity and potential asset impairments.
- Tax contingencies included assessments of approximately $124 million in Brazil, $17 million in Norway, $171 million in Nigeria, $12 million in Kuwait and $82 million in Mexico. Seadrill is contesting the assessments; an adverse outcome could materially affect results or liquidity.
- Performance guarantees issued on behalf of Sonadrill were capped at $1.1 billion, and guarantees on behalf of Northern Ocean were capped at $100 million. No liability was recorded because management did not consider a call probable.
Important facts for investors to verify
- Reconcile Successor and Predecessor results carefully because Fresh Start accounting makes the periods non-comparable.
- Verify the final fourth-quarter accounting gain, working-capital adjustments and escrow release associated with the ADES transaction.
- Confirm completion and proceeds of the Paratus Energy Services disposal.
- Assess post-quarter debt balances after the $473 million of second-lien payments and the effect of continuing high interest rates.
- Evaluate whether cash generation, the remaining revolver and operating backlog are sufficient to fund debt service, reactivations and working capital.
- Monitor rig reactivation costs, utilization, dayrates and commencement of the West Jupiter and other contracts.
- Review the status and potential exposure of the Brazil, Norway, Nigeria, Kuwait and Mexico tax assessments and the Sonadrill and Northern Ocean guarantees.