Seadrill Ltd

NYSE:SDRL

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, and welcome to the Seadrill Limited Quarter 2 2019 Earnings Conference Call. [Operator Instructions]

Please note that this event is being recorded. I would now like to turn the conference over to Ms. Emma Li, Head of Investor Relations. Please go ahead.

[Emily Li, executive]

Thank you, and welcome to Seadrill Limited's Q2 2019 Quarterly Conference Call.

Before we get started, I'd like to remind everyone that much of the discussion today will not be based on historical fact, but rather consist of forward-looking statements that are subject to uncertainties. Included on Page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to view our SEC filings, please visit our website at www.seadrill.com.

So moving on to the agenda. With us in the room today are Anton Dibowitz, our CEO; Stuart Jackson, our CFO; Matt Lyne, our Chief Commercial Officer; and Leif Nelson, our Chief Operating Officer.

In our prepared remarks, you'll hear from Anton and Stuart. Anton will cover all the highlights for the quarter and provide you with all of our views on the market, and Stuart will then provide a review of the financial performance of the quarter. And then we'll open up the line so you can take some questions from the entire team.

And with that, I'd like to turn the call over to Anton.

[Anton Dibowitz, executive]

Thanks, Emma, and welcome, everyone, to our second quarter 2019 earnings call.

Before I begin, I'd like to take the opportunity to welcome our CFO, Stuart Jackson, to his first quarter call on the Seadrill team. Stuart brought with him deep experience with listed companies in the offshore and oilfield services space, and we're extremely pleased to have him onboard. He's quickly come up to speed in our business. Welcome to the team, Stuart.

[Stuart Jackson, executive]

Thank you.

[Anton Dibowitz, executive]

To start, I'd like to reiterate some key messages that you've heard from me in the past. While the market is presenting some challenges, I believe that the fundamentals of our business remain unwavering. In particular, the offshore barrel is important to meet market demand.

Oil prices remain well within the zone where offshore projects are profitable, and we expect this to translate into increasing amounts of capital being deployed into offshore exploration and development. And while this is not yet a healthy market, day rates in all segments are recovering, and we continue to see the leading indicators pointing in the right direction.

Today, our industry and the broader macro market are dealing with a setback similar to what we faced in the fourth quarter of last year. As always, we remain focused on managing the factors that we control and being as prepared as we can for the factors that we don't. You've seen us reduce our Senior Secured Notes with the tender offer, and we continue to be focused on taking up the rest of this funding that was put in place as part of our restructuring.

We've already taken a considerable amount of cost out of our business, and we remain laser-focused on continuing our work to run our business as efficiently as possible. We have been, and will continue to be, disciplined in our contracting strategy. We will not add supply to the market unless day rates justify doing so.

And finally, operations and safety underpin our license to operate. Excellent operations is in our DNA, and we're committed to providing the best service for our customers and the safest environment for our people. In this regard, we continue to build on our proprietary PLATO performance management system, which uses a combination of machine learning and AI driven by edge computing to drive our performance and manage the health of our assets.

Our BOP monitoring system, based on the PLATO technology, meets BSEE regulatory requirements and has already been adopted by a number of our customers in the Gulf of Mexico as it is proven more stable and accurate than the alternatives already on the market. And together with our technology partner, Marsden, we're making available to the market our homegrown Vision IQ system, which uses LiDAR technology to keep workers safer in Red Zones around the moving equipment. Our decision to share Vision IQ is based in our belief that technology that improves the safety of people should be shared because a safer industry is in all our interests.

Now turning to the results of the quarter. Economic utilization of 96% was an improvement relative to last quarter's results, and we're pleased to have returned to the levels that we expect to see. We continued our track record of project execution with 3 new boats in our managed fleet, 2 for Sonangol and 1 for Northern Drilling, delivered successfully during the quarter. And following on our success with the Sonadrill JV in Angola, which is progressing to plan, this quarter, we established another significant drilling joint venture together with GDI in Qatar. I'll provide further details on Gulfdrill in a few minutes.

And finally, we closed the quarter with $1.5 billion in cash on hand, the major movement being as a result of the completion of the tender offer for the Senior Secured Notes, on which Stuart will provide more details later in the call.

With respect to our business, tendering activity continues to improve in the floater market. Rates for short-term work remain extremely competitive, but the market has begun to clearly demonstrate higher rates for long-term work and forward start-ups. The overall utilization for marketed units remains above 80%, and there are pockets of strength in the markets for harsh environment and high-end, ultra-deepwater drillships where marketed utilization is approaching 90%.

The improvements in forward pricing and utilization are key leading indicators that recovery is progressing, and we expect that floater fixtures made in 2018 marked the low point in this cycle.

Similarly, we see improving trends in the premium jack-up market, with marketed utilization above 80% and rates trending towards the $80,000 to $100,000 per day range, driven by increased activity in the Middle East. There remains a significant bifurcation between premium and standard jack-up units, and we expect the preference for premium units to continue and result in further attrition of standard jack-ups.

During the second quarter, we added approximately $160 million in backlog related to the following contracts: in Angola, we extended the West Gemini, keeping her busy into August. Following this extension, she will undertake our SPS before returning to Angola in Q4 to perform a 9-well contract with three options.

Total contract value for the firm portion of this contract is approximately $84 million. We have a great track record of operating Angola and hope to expand our operational footprints here through our Sonadrill JV.

Equinor exercised three options for the West Hercules in Norway, keeping her busy through Q1 2020. Following the options, Equinor have access to the West Hercules through a continuous optionality mechanism, which could keep her busy through 2020.

Continuing with our floater fleet, the West Carina secured a 1-well contract with Petronas in Brunei, which was in direct continuation of its contract with Petronas in Malaysia. Based on its performance and the outlook in Asia, we're confident to be able to secure additional work in the area.

During and after the quarter, we entered into short-term extensions with the West Callisto and AOD, both working with Saudi Aramco. These units are amongst the highest performance for Saudi Aramco, and these short-term extensions will facilitate the productive discussions we're having about longer-term opportunities for both units.

And finally, the West Callisto secured a 6-well contract with the two options in Malaysia, which commenced in June. This fixture is at the high-end of recent fixtures in Southeast Asia, evidencing continued signs of recovery in this market. And the duration of this contract dovetailed very nicely with our new Gulfdrill joint venture.

As I mentioned earlier, we're excited this quarter to have established a significant drilling joint venture together with GDI in Qatar. GDI is an important player in this market, with a 15-year track record and current operations of 7 rigs or half of the Qatar jack-up market. Qatar is a top-3 jack-up market in terms of utilization of premium jack-ups and a market that is expected to demonstrate continuous strength and stability over the next decade.

In the JV, Seadrill will provide 2 jack-ups from its working fleet and a further 3 jack-ups have been secured from a third-party shipyard. Given GDI's track record and critical mass in the market, they will manage the rigs with our support on the long-term contracts with Qatar Petroleum. Total contract value is around $650 million, with options that could add up to $700 million of additional contract value.

This is an attractive opportunity for us because Qatar is a sizeable and long-term market. Potential term if the options are exercised will provide approximately 6 years of work for each rig. The critical mass of rigs, at least 5 in the JV plus the 7 that GDI are already operating, makes for an efficient operation. No upfront investment is required from us, and we will see the run rate of approximately $20 million a year in margin for our bareboat charters. And we expect the JV to be in a position to distribute dividends 12 months from the time the last rig commences its contract.

With that, I'll hand it over to Stuart for the financial highlights.

[Stuart Jackson, executive]

Thank you, Anton. And I shall run through the financial highlights for the quarter, just highlighting some of the major movements, and then at the end look at the guidance for quarter 3.

Turning then to Slide #8 in terms of the revenue and EBITDA bridge. From operations perspective, we have 35 rigs, of which 17 were working at the quarter end, 8 of those are floaters and 9 jack-ups with an economic utilization through the quarter of 96%. From a contract revenue perspective, it's broadly flat quarter-on-quarter. We have had some idle time between contracts, but that's being offset by high day rates on the Gemini and Phoenix, Hercules and the Telesto.

And the total revenue on operating level, we are $19 million ahead of where we were in quarter 1. This is as a consequence of the increase in reimbursable revenues, which is driven by the delivery and operation preparations for Northern Drilling and Sonangol. So there is a corresponding reimbursement expense, so there's a negative impact in terms of our overall margins at an EBITDA level.

Turning then to EBITDA. We have had idle time, so we've had lower costs as a consequence of that in our operating expenses. And we've had lower costs on our stacked units at these locations. And that's offset with the overdue receivable we had in Q1, which is starkly not repeated in Q2. In total terms, from an EBITDA perspective for the quarter, we're at $69 million, which is ahead of the $55 million guidance that was provided 3 months ago, but that's primarily due to timing difference on maintenance activities.

Turning then to the income statement and the items below EBITDA. There are also moving parts here, so I'll just highlight some of the major movements.

In terms of operating loss, we're at $73 million for the quarter. In the interest expense line, we start to see the benefit of the secured notes repurchase we had, so lower interest cost coming through at $122 million compared to $132 million 3 months ago.

In terms of our share results from associated companies, this reflects the lower level of losses in the period taking into account the unwind of basis differences arising from fresh start. And on the derivative side, we have reduced loss occurring during the period, which is what you would expect to see in terms of forward rates falling during that period.

And in terms of the NSN repurchase, we have to reflect the premium payment we made for the NSN. And that $22 million charge is taken as a net loss on debt extinguishment during the quarter. In terms of marketable securities on Seadrill Partners and Archer, this reflects the change in their share price during the period with a charge of $14 million. And the other financial items reflect the interest income and the foreign exchange gains and losses incurred during the period.

The large element of change comes through in terms of our tax position, where we have a credit for the quarter, which reflects the release of uncertain tax positions in relation to changes in U.S. tax legislation as well as a reduction in our deferred tax liabilities. This delivers a net loss for the period of $206 million compared to $296 million 3 months ago.

Turning then to the highlights. In terms of the cash flow, our net cash used in operating activities for the quarter was $85 million compared to $99 million 3 months ago. Our investing activities reflect our ongoing capital expenditures on our drilling units, which were partially offset by the proportion of West Vela day rate received from Seadrill Partners as contingent consideration.

In terms of our financing activities, significant movement here, which is the repurchase of the Senior Secured Notes. Just in terms -- there are a number of items in terms of Senior Secured Notes. Just to make sure we're clear, the $311 million, which was the principal repayment in relation for the notes, $22 million was paid in terms of the premium to the noteholders; and there's a $9 million charge of accrued PIK and cash interest, which was paid as part of the settlement as well, which is taken through operating cash flow in accordance with the U.S. GAAP.

Our net movement in cash over the period was a reduction of $433 million, and so cash at the end of the period was $1.5 billion. On the balance sheet, of our $1.5 billion of cash, we have $218 million, which is restricted cash. There are 2 elements to this: the first is cash, which is predominantly used as cash collateral for bank guarantee facilities; and then during the period, we had an $86 million increase in restricted cash, which is collateral cash that's been posted for our Brazilian tax defense, which is a pay-and-defend regime.

In terms of the other current liabilities, there are a number of items here. But predominantly, we have lower operating cash flows for the quarter, which drive the changes. Our noncurrent assets are broadly unchanged at $7.9 billion. But our current liabilities, a major change here, it's obviously, the reduction of the consequence of the Senior Secured Notes being repaid. And also, we had an increase in terms of the current liabilities, which is $85 million increase attached to the scheduled amortization repayments on our secured bank debt, so simply moving that amount from the noncurrent liabilities into the current liabilities.

Turning then to Slide 12, which covers nonconsolidated entities. In total, these 4 investments that we hold cover a backlog of $3.2 billion. They generate EBITDA of $213 million during the second quarter. And in terms of the carrying value on our balance sheet, we have a carrying value of $724 million at the end of the quarter, which excludes the seller's credit and other debt facilities we have with these investments. Lastly, our share of profits and the Seadrill share of results are reflected in our results from associated companies.

In terms of the operational highlights for these investments, Seadrill Partners had a lower loss during the quarter because it also benefited from the tax credits mentioned in relation to the U.S. tax change that we had in Seadrill, but it did have some impact from BOP-related downtime during the quarter.

Both SeaMex and Seabras are performing very well, with 99% and 95% utilization, respectively. And the Archer investment saw increased activity during the second quarter. All 4 of these nonconsolidated entities are placed in the securities with the NSN. We will be adding to the presentation we have here Gulfdrill, now that we have formed that joint venture, but that is not part of the security package for the NSN.

Turning then to capital structure and liquidity. Also, we start our position with the cash position of $1.5 billion. We do have bank debt of $5.7 billion. The bank loans mature between 2022 and 2024. Amortization commences in 2020, but we do have an amortization conversion election for $500 million, which allows us to defer amortization payments. So effectively, amortization will start in 2021.

The only covenant running at present is relation to minimum cash, which we're comfortably above. We will have covenants later on and then expect to have net leverage and debt service cover ratio. This commence in 2021, and we'll only have a margin impact if there's any breach in that respect.

From a capital perspective -- position, we keep this under review. Obviously, we have $1.5 billion of cash. We have a $0.5 billion of ACE in terms of deferred amortization. And we are proactively managing our capital structure, of which the NSN repurchase is an example.

Finally, in relation to the guidance for Q3. Q3 will be broadly in line with where we finished for Q2, so we're providing guidance at an EBITDA level of $70 million to $75 million. The increased activity will be around the Sevan Louisiana returning to operations. And we also have additional operating days on the Hercules and the Phoenix. So these are partially offset by lower contract days on the West Carina and planned downtime on the West Linus for its SPS.

That concludes what we're going to run through in terms of formal presentation. And now I'll hand back to Nancy to open up for questions.

[Operator]

[Operator Instructions] And our first question comes from Lukas Daul from ABG.

[Lukas Daul, analyst]

I was wondering if we go through your drillships, you've got 5 drillships rolling off contract in Q4 or in the beginning -- in the end of Q3. Could you talk a little bit about the rollover opportunities for those, H1 in particular?

[Anton Dibowitz, executive]

Sure. I'll let Matt start with that, and maybe I'll cover off at the end if there's anything I need to...

[Matt Lyne, executive]

Sure. Hi, Lukas. So I mean, I'll avoid talking about specific opportunities given the competitive nature of the market. But when you look at it from a general perspective, if we take the Golden Triangle, we see an increase in demand when compared to 2018. And although, the pace is different for each specific area, I think we feel comfortable that enough opportunities will materialize where you can expect these -- those assets will remain in their current markets after taking a break to complete various SPS and maintenance and upgrades. Okay?

With respect to Asia, we also see a number of interesting opportunities that are attractive, both in term and commencement period. So when looking at the West Carina, a large number of those opportunities require MPD, and she's outfitted with our third-generation operating system. So we feel quite comfortable about her prospects in Asia.

[Anton Dibowitz, executive]

If I just take it up a level, Lukas, what I will say is, we've been very purposeful and not making long-term commitments on our prime assets at the bottom of the market. Obviously, one aspect or one consequence of that is we also need to roll those rigs as they move -- as they roll off their contracts. But given the performance that we've delivered for customers and the attractiveness of our assets, I think we feel comfortable rolling our available assets.

[Lukas Daul, analyst]

Okay. Good color. And then...

[Anton Dibowitz, executive]

And certainly we'd rather be doing it today than 6 months ago or a year ago.

[Lukas Daul, analyst]

Sure. And you talk about competitive spot market, but obviously we have seen sort of pricing come up to, I would say, more attractive levels for long-term work, but we haven't seen that much long-term fixtures with the future date commencement. So I was wondering, in the tender pipeline that you are sort of dealing with on a daily basis, do you see any change or any sort of delta in terms of more term work starting in 2021 arriving on the table?

[Anton Dibowitz, executive]

Matt, do you want to start?

[Matt Lyne, executive]

I think there's a few opportunities that have longer term developments. I think Equinor have something down in Brazil, where they're looking at start-ups past 2020. West Africa also have a few that are -- that exist in Nigeria. They're still in the tender process, so it's a little bit hard to kind of put your finger on where you think the day rate is going to marry up. But I know -- I do think we're comfortable that there's a marked improvement when you look at the 2018 bidding behaviors compared to what we're seeing in 29 (sic) [ 2019 ] for fixtures or commencements in 2020 and particularly into 2021. And the trend supports that.

[Anton Dibowitz, executive]

Well, Lukas, long-term contracts are probably the most difficult for us to price and drillers to price and to come to an agreement with operators in this market to make a long-term forward commitment. So I think there has been a function of the market where, generally, the number of 5-plus term fixtures decreased from where it was at the top of the life cycle. And given where we are in the cycle, where rates are increasing, where the forward curve is increasing, we're comfortable with that. What we'd like to see is, obviously, you don't want to be chopping and changing contracts all the time. But a year, 18 months, 2-year fixtures at this point into a rising market is a comfortable market for us to be in and to be able to have a productive discussion with our customers, where we can actually achieve a mutually agreeable price.

[Lukas Daul, analyst]

Okay. I was mainly sort of wondering if you see any sort of improvement going forward, or whether there is a risk that we are kind of sticking this spot nature environment for a few more years, which basically puts a lot of pressure on utilization and eventually the cash you're able to generate?

[Anton Dibowitz, executive]

I think there is going to be -- I think the contracts are going to be more fit-for-purpose. So the fact that they're more short-term fixtures even today, and I think they will be until we're at a different point in the cycle. When there was a complete absence in supply of rigs and the deals were very tight, the discussion was, well, if you want to take a rig for your exploration program, I need at least 3 years or 5 years. That's the function on the top of the market. What I think you'll see going forward is more tailored contracts based on what the operator is doing, shorter-term contracts for exploration work or remedial and longer-term contract and assurity for those long-term developments.

And I think having a mix of those is good for all of us. What you do see is more exploration work happening than what's happening 6 months ago or a year ago. And the advent of exploration actually coming back into the market is another good sign for us, for the market, because exploration today leads to development tomorrow.

[Lukas Daul, analyst]

Okay. And on a different note, could you just briefly update us on the status of the Sonangol drillships -- on the drillships in the JV? Where they are and what is happening with them?

[Anton Dibowitz, executive]

Well, as I mentioned in my prepared remarks, we've taken delivery of both of the Sonangol drillships. One is currently being prepared in Walvis Bay, the other one is in Singapore. So that was a good progress on the JV. The JV is progressing as planned. I think our initial comments when -- last quarter was that we were confident based on the strength of that market and the visible demand that we would have for those initial 4 rigs fixed on contracts between now and the middle of next year. We're in advanced discussions on at least the first 2, and I think we're pleased with the progress on the JV. And we'll meet those timelines, or at least meet those timelines.

[Operator]

[Operator Instructions] Our next question comes from Konstantin Chinarov from Aptior Capital.

[Konstantin Chinarov, analyst]

I've got 2 questions, if I may. The first one is about Seabras. So you've got 2 POC contracts there that are expiring this year. So one is Diamante that I think is expiring in June '19, or expired in June '19, and then Topazio is expiring in September '19. So if you could sort of provide any comments on the plan -- on your plans for those assets. Do you seek an opportunity to recontract them with Petrobras or someone else? Or what's your plan on that? And secondly, sort of it was widely reported in the press that sort of the creditors at Seadrill Partners level are organizing. So if you could sort of comment, to the extent you can, on your plans for that asset and for the process?

[Anton Dibowitz, executive]

Sure. Let's take the Seabras one first. Seabras is a great business. We see significant value in it. The Brazil market was probably the first to fall back during this cycle, and -- but with the advent of the IOCs coming in, we see a recovery there. I think it's important to note in the Seabras business that, essentially, although the debt is across all the vessels in that fleet, when they roll off their contracts, they're essentially debt-free. We do see further opportunity and the Seabras JV sees further opportunities. But these are attractive high-specification units, and we'll just have to see how that process plays out.

As far as SDLP, Seadrill Partners, look, I think this is called a tale of two sides of the coin. On the asset side, SDLP had some great assets. We've been managing them for a number of years. It's an integral part of the Seadrill brand, of our global presence, great customer relationships. But of course, on the other side, there is a liability issue that needs to be handled there. And we know that we're focused on it, and we'll just have to see that play out.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would now like to turn the conference back over to Ms. Emma Li for any closing remarks.

[Emily Li, executive]

Thank you, Nancy. Thanks, everyone, for joining us today. This concludes our second quarter conference call.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect, and enjoy the rest of your day.