SDRL

SEADRILL Ltd. 10-Q Summary: Q1 2026

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2026. Seadrill Limited is an offshore drilling contractor providing worldwide services to the oil and gas industry. As of the reporting date, the company owned 15 drilling rigs and managed two additional 7th-generation drillships for the Sonadrill joint venture. The company is a large accelerated filer incorporated in Bermuda.

Key Financial Metrics

Margin Analysis: Operating margin improved to approximately 6.7% in Q1 2026 compared to 5.4% in Q1 2025. The reduction in net loss was driven by higher operating profit and improved financial/non-operating items, partially offset by increased income tax expense.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by $23 million (7%) year-over-year. Contract revenues rose $29 million, driven by a 12% increase in average contractual dayrates ($343k vs. $323k) and improved economic utilization (95% vs. 84%).
• Expense Increases: Total operating expenses rose $17 million. Depreciation and amortization increased by $16 million due to long-term maintenance projects and the full amortization of unfavorable contracts in the prior year. Vessel and rig operating expenses increased slightly by $2 million.
• Tax Impact: Income tax expense increased to $23 million from $15 million, reflecting changes in the mix of pre-tax income across jurisdictions and lower utilization of tax loss carryforwards.
• Financial Items: "Other financial and non-operating items" improved by $15 million, primarily due to a non-recurring provision for assets sold in Q1 2025.

Outlook, Risks, and Contingencies

Market Environment: Oil prices averaged $78/bbl in Q1 2026, up from $68/bbl in 2025, driven by conflicts in the Middle East (specifically Iran) and the closure of the Strait of Hormuz. Management anticipates a market recovery in 2027 as operators pivot back to deepwater exploration.

Capital Allocation: Seadrill maintains a target net leverage of less than 1.0x and a minimum cash-on-hand of $250 million. The company has a $500 million share repurchase program with $208 million remaining available as of March 31, 2026. No shares were repurchased in Q1 2026.

Legal and Contingencies:

• SFL Hercules Ltd. Claim: Seadrill is appealing a Norwegian court judgment ordering payment of approximately $37 million plus costs. A guarantee of ~$59 million has been issued to secure the judgment.
• Sonadrill Fees Claim: Following a UK High Court judgment, Seadrill paid a first tranche of $43 million. Total estimated liability is unlikely to exceed $61 million.
• Sete Brazil Claim: Petrobras has asserted delay penalties of approximately $213 million against Seadrill Brazil. Seadrill disputes liability, and mediation is expected to commence in Q3 2026. No accrual has been made.
• Brazil Tax Audit: Outstanding assessments for years 2009-2010 total approximately $83 million, with additional assessments for 2012, 2016, and 2017 totaling $89 million. Seadrill is actively litigating these matters.

Investor Verification Checklist

• Verify the status and potential outcome of the SFL Hercules appeal and the Sete Brazil mediation with Petrobras, as these represent significant contingent liabilities.
• Monitor the impact of oil price volatility and Middle East geopolitical conflicts on future contract awards and dayrates.
• Review the contract backlog realization schedule, noting that $1,021 million is expected in the remainder of 2026.
• Assess the company's ability to maintain its liquidity targets ($250 million cash) while funding capital expenditures and potential legal settlements.
• Track the resolution of the Brazil tax audits, which involve significant assessed amounts totaling over $170 million across multiple years.