Seadrill Ltd

NYSE:SDRL

Earnings Call Transcript 2019-Q4

[Operator]

Good day, and welcome to the Seadrill Limited Fourth Quarter Earnings Conference call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Emma Li, Head of Investor Relations. Please go ahead.

[Emily Li, executive]

Thank you, and welcome to Seadrill Limited's Q4 2019 Quarterly Conference Call. Before we get started, I would like to remind everyone that much of the discussion today will not be based on historical facts, but rather consist of forward-looking statements that are subject to uncertainty. 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 will 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 outlook. And Stuart will then provide a review of financial performance of the quarter, and then we will open up the lines so you can take the questions from the entire team.

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

[Anton Dibowitz, executive]

Thanks, Emma, and welcome, everyone, to the call. Starting with the financial results for the quarter, which Stuart will give you more detail on later. Technical utilization was a solid 97%. The delta between this and economic utilization of 93% was mainly related to a 5-year classing on the West Neptune and seasonal waiting on weather time in harsh environment.

We had adjusted EBITDA of $39 million, which was primarily due to lower activity levels from rigs completing contracts in the quarter. And finally, we closed the quarter with $1.4 billion in cash on hand.

In terms of operations, we already have an extremely competitive cost position, and we continue to be laser-focused on improving the efficiency with which we run our business. This efficiency focus helps our cost base today but will also allow us to scale our business efficiently when required.

Secondly, we keenly recognize importance of sustainability and continue to progress with multiple initiatives related to environment, social and governance.

During the fourth quarter, we pioneered the use of hybrid power on the managed rig West Mira, reducing the run time of the diesel engines, increasing energy efficiency and lowering emissions. We see great promise in this technology to be expanded in the fleet.

We also received notification from the independently assessed Carbon Disclosure Project that we have now attained a B rating for our carbon management program. This has been a 7-year journey for us, aimed at reducing our overall impact on the environment of our carbon footprint.

And finally, with respect to operations, we continue to receive recognition from our customers during the quarter for excellent operational delivery. Within our own fleet, the West Jupiter working for Total was recognized for 2 years and the West Callisto working for Saudi Aramco for 5 years without a lost time incident, a great accomplishment for both rig teams.

Amongst our managed fleet, the West Auriga working for BP was rig of the quarter for the third time in 4 and the West Capella was recognized as floater of the year for Shell.

We're also seeing -- receiving recognition from the broader industry. Last quarter, I mentioned the targeted investments that we're making in technology that improve performance and safety across the industry.

Late last year, Seadrill and the folks who helped develop both our PLATO performance management and asset integrity platform and Vision IQ, our Red Zone management solution, were recognized for these efforts by being awarded the best offshore services and equipment company in 2019 by Petroleum Economist.

On the commercial side, we've been public about the need to exercise contracting discipline, focusing on pricing and not just utilization. And we're extremely pleased that against that backdrop, we added an industry leading $1 billion in backlog during the fourth quarter. We increased average day rates on new fixtures across the fleet, circa 45% year-over-year, and we continue to add industry-leading fixtures, which I'll talk about later.

As an update on discussion with our banks, we have met with all of them and are engaged in constructive dialogue, focusing on liquidity and giving us time to maintain flexibility.

We have a supportive bank group that we can work with to address our medium and longer-term capital structure requirements to ensure long-term sustainability. All of our stakeholders recognize not only the value in our underlying business but also that the best way to preserve that value is to maintain a flexible, premium fleet under best-in-class operational management, so that we can continue to deliver safely and efficiently for our customers.

And finally, as noted in our press release, Birgit Aagaard-Svendsen and Herman Flinder have joined our Board, replacing Gene Davis and Scott Vogel. Gene and Scott came to our Board as appointees in connection with our restructuring. I would like to personally thank them for their contributions to the Board and counsel to me since that time. Our new Board members, Birgit and Herman, are both industry veterans who bring with them a wealth of experience, and I look forward to working with them.

Turning now to the market and commercial activity. Overall market discipline, with respect to contracting, increased through 2019. There are some external factors that we can't control, such as the impact of COVID-19, trade disputes and geopolitical risk. However, the fundamentals remain, and we've seen a solid year-on-year improvement in the market across all sectors, albeit at a different price across segments.

In the benign environment, Florida market, we've seen spot rates improving, but the forward rate curve is flattening. The start of this year has been slower, and we've seen market discipline wane, partly impacted by the high number of units rolling off contract in 2020. That being said, tendering activity remains high, and we remain optimistic that the market will continue to improve, as we progress through the year.

The harsh environment sector remains the tightest market, particularly in Norway, where we continue to see strong day rates and marketed utilization trending towards 90%.

In the high-specification jack-up market, we continue to see improving utilization and strengthening fixtures, particularly in Southeast Asia and the Middle East. A strong demand outlook for premium assets may present the opportunity to add supply as the year progresses. We are well positioned for this.

With respect to commercial activity in Seadrill, as I mentioned previously, during the fourth quarter, we added more than $1 billion in backlog. Overall, in 2019, the $1.4 billion in added backlog was in excess of our consumption for the first time in 5 years and despite the continued roll off of legacy higher day rate contracts during the year.

I'd like to highlight just a few of the awards during the quarter. The West SeaMex secured a multiple well contract with Vår Energi in Norway, with total contract value of around $300 million. This was the highest fixture in Norway in the last 4 years and is in direct continuation of its next contract. Vår is the second largest E&P company on the Norwegian Continental Shelf, and we look forward to working with them.

With that addition, we now have rigs contracted with 4 of the 5 largest operators on the NCS. In our benign floater fleet, we secured additional work for both the West Tellus and West Carina adding $211 million in backlog. And on the jack-up side, we added 9 years of backlog on the AOD II, AOD III and West Callisto, adding circa $290 million in backlog.

These extensions are at the high end of the market, indicating the value of the leading operational performance of our rigs with Saudi Aramco. To keep all of our 4 rigs operating in Saudi is a key significance. Subsequent to the quarter, in fact just yesterday, Equinor exercised 5 wells for the West Hercules under the continuous optionality mechanism, thus keeping her busy through Q1 of 2021 and adding approximately $70 million in backlog. The West Hercules operates under a master frame agreements, and we're pleased to continue our long-standing relationship with Equinor.

Now I'll turn things over to Stuart to take you through the financials.

[Stuart Jackson, executive]

Thank you, Anton. So turning to Slide 6 in terms of revenue and EBITDA bridge for the quarter. This was a relatively quiet quarter from an operational perspective. We achieved economic utilization of 93% after technical utilization base of 97%. And as Anton has mentioned, during the quarter, the West Neptune was out of service for its planned 5-year classification.

In terms of total revenue of the quarter, we're at $398 million compared to $367 million in Q3. This increase reflects the rise in the reimbursable revenues from the Northern Drilling rig preparation and also higher management fees as the first summer Sonadrill unit moves from rig preparation into operations.

At an EBITDA level, we delivered $39 million of EBITDA compared to $85 million in Q3. The underlying EBITDA margin was 10% compared to 23% in Q3, predominantly because of the higher reimbursable activities.

As we go through the transition of rig preparation to rig operations, you will see some periodic impacts as we recorded in this quarter. This is because we generate the majority of our margin on these activities in the operating phase rather than in the preparation phase.

Whilst I'm dealing with EBITDA for the first quarter 2020 guidance, we expect adjusted EBITDA to be approximately $35 million. This reflects a full quarter of idle time on the West Jupiter and West Saturn and is partially offset by higher day rates on the West Neptune and a full quarter of operations on the West Gemini and the West Carina.

And then from the results of our associated companies. So these are our operating nonconsolidated entities, primarily Seadrill Partners, SeaMex, Archer and Seabras. And here, we're achieving relative good levels of utilization, perhaps with the exception of SeaMex. SeaMex, we've seen lower utilization of 91% because of top drive issues with the West Titania.

Additionally, at SeaMex, we are continuing to see a build-up of receivables from Pemex. This is seasonal, and it's in common with a number of suppliers at this time, but the resumption of payments has been longer than it has been the case in previous years.

At Seabras Sapura, we're back to a full rig operation, with Diamante picking up some spot work in the early part of 2020. The new joint ventures of Sonadrill and Gulfdrill are establishing their operations. At Sonadrill, the Libongos became operational in Angola, triggering the commencement of management fee payments to Seadrill. In the Gulfdrill, the West Castor is currently mobilizing in Qatar and the first jack-up from the third-party shipyard is preparing for operations. At the net profit level, these entities are still showing losses because of amortization and finance costs.

Measuring those results then in terms of impact on the Seadrill results. The impact for Q4 results for Seadrill is -- share of losses fell from -- to $17 million from $33 million in Q3 of this year, predominantly in relation to our investment in Seadrill Partners, which had a tax credit in the quarter.

Outside of the operating activities, we impaired the carrying value of the convertible loan in Archer during the quarter.

Turning then to the abbreviated statements. Firstly, the income statement. There are 2 real items driving the change from Q3.

Firstly, obviously, you'll recall that we took a significant impairment on Seadrill Partners in Q3. And obviously, that's not been repeated. And secondly, the income tax expense, we've had a tax credit from deferred tax benefit associated with the completion of the West Jupiter contract.

From a cash flow perspective, we take the net loss of $199 million whilst adjusting for noncash items, working capital and maintenance. We've consumed $56 million cash from operations in Q4, reflecting the lower EBITDA.

On the investing activities, we paid $25 million working capital contribution to Sonadrill related to the commencement of the first unit in this joint venture. This was offset by repayments of shareholder loans by Seabras Sapura and a proportion of the West Tellus day rate received from Seadrill Partners.

On the financing activity side, payments related to the repayment of debt facilities to Ship Finance Limited. So in overall terms, we consumed cash of $88 million during the quarter.

Finally, turning to the balance sheet on Slide 10. Total cash at the end of the quarter was $1.4 billion. And of this, $242 million was restricted cash. Restricted cash is markedly higher as a result of loan payments received from Seabras Sapura, which remained within the collateral package of the senior secured notes.

On our other current assets, these decreased due to the reduction in accounts receivable, following the completion of certain contracts.

Our noncurrent assets decreased principally due to depreciation of our drilling units, net of any CapEx expenditure we've had during the period.

Our current liabilities increased and our noncurrent liabilities decreased, reflecting the change in classification of debt with 1 quarter's progression.

And finally, in relation to our overall capital structure. Whilst our first bank maturities do not fall due into Q2 of '22 -- 2022, we have engaged productive discussions with our banks, as Anton mentioned, during the quarter and also into 2020 to address the capital structure relative to the current trading conditions, and we expect to provide a full update at the appropriate time.

With that, I'll turn over to questions.

[Operator]

[Operator Instructions] First Question is from Patrick Fitzgerald from Baird.

[Patrick John Fitzgerald, analyst]

How much restricted cash is collateral for the secured notes at this point?

[Stuart Jackson, executive]

Well, the $242 million-some restricted cash we have, the largest element of that is actually bank guarantees. Then we have, which is about $130 million, we have Brazilian tax that we've had to pay on a pay in order to defend basis, which is $84 million, which is done in Q3. And then the remainder of it is predominantly the amount sitting in these collateral for those secured notes.

[Patrick John Fitzgerald, analyst]

Okay. So the -- basically, the cash at SeaMex went down because you're just not getting paid from the customer, it sounds like. I mean is that related to the contract renegotiations for the step-up in rates?

[Anton Dibowitz, executive]

This is Anton. No, it's not related. This is, I'll call it, an industry-wide challenge. Look, there is generally a period at the end of the year when this happens year-over-year. So it's not unusual. It has been longer and more protracted this year, and it is widespread in the industry. I think there's even been quite a bit of publicity about it in the press. But no, we don't believe it's related.

[Patrick John Fitzgerald, analyst]

Okay. And then on that front, says you're still -- in the fleet status reports, it says you're still negotiating with Pemex. I mean, what do you see as the likely outcome, probably not as high as they were -- it was scheduled to jump but above where you were currently getting paid in 2019?

[Anton Dibowitz, executive]

Look, we've had ongoing -- I've been in Mexico a number of times, productive discussions with Pemex. We have fantastic rigs that are amongst the best performers in their fleet. I'm not going to get into the details of it on this call. But there's always a balance between long-term opportunity and having a long-term presence and where you are in the current day rate. We found a way to work with Pemex before, and we will continue to do that.

[Patrick John Fitzgerald, analyst]

Okay, great. In terms of the backlog at Seabras, how much -- how many vessels does that $1.3 billion cover? Did you guys sign up new contracts in the quarter?

[Anton Dibowitz, executive]

Yes. Currently, all of the vessels are operating. They're on different terms of contracts. So the vessels that rolled off contract during the year have secured some short-term work. So yes, that backlog includes all vessels.

[Patrick John Fitzgerald, analyst]

And what are the rates on that short-term work relative to the long-term work that you guys have been working on for quite a while?

[Anton Dibowitz, executive]

I'm not going to get into the rates on the particular vessels on the call here today. I will say, they have come off the bottom. And we're happy, and it's definitely better for them to be working, rather it's for them not to be working.

[Patrick John Fitzgerald, analyst]

Okay. And you said that you spoke with all of your lenders in the fourth quarter. I mean, is that -- is this essentially the exact same group that you went through the process with before? Or has there been a lot of the debt that's changed hands over the course of -- since you emerged?

[Stuart Jackson, executive]

There has been some that has changed hands. But in terms of aggregate, that's not a significant portion of the overall debt we have.

In relation to meeting the banks, obviously, I've been the CFO for 6, 7 months or so. So the early part of my job is getting around, seeing all the banks, and I achieved that through Q3 and Q4. I guess, as we came into Q4, we've then organized a bit around discussions, particularly with the lead banks about the opportunity for our capital structure going forward.

[Anton Dibowitz, executive]

Yes, I'll add to that. I mean, there has been a marginal amount of debt has traded. Our bank group has been with us since the start. We know them. They know us well. They're very supportive of what we need to do. And as I've said in my prepared remarks, I think, we're all -- the stakeholders are aligned that the best way to preserve value is to maintain flexibility, runway and keep operational management of a premium fleet.

[Operator]

[Operator Instructions] The next question is from Saro Bos from Imperial Capital.

[Saro Bos, analyst]

Patrick actually managed to ask all the questions, I was going to ask, so thank you very much.

[Operator]

The next question is from Piotr Ossowicz from Serone.

[Piotr Ossowicz;Serone Capital Management LLP;Analyst, analyst]

Just wanted to -- most of them have been answered, but I just wanted to follow-up on the -- on your comments regarding the subsidiaries.

So first, around the Pemex receivable, is that -- I mean, you've had a very slow movement in Q4 last year. But do you see these receivables still building into Q1 2020 or that has been paid or reduced since?

[Anton Dibowitz, executive]

No, they do continue to build into Q1 of 2020. As I said, this is -- we are not unique in this regard. We have a very close handle on it. We have a very close dialogue with Pemex, and this happens on an annual basis. So we're confident they will get it sorted, and we'll be back on track. Now question at this point, a question of timing.

[Piotr Ossowicz;Serone Capital Management LLP;Analyst, analyst]

Okay. And while you are negotiating the rate, is it fair to assume that in Q4 and now in Q1, the rigs continue to work on the reduced rate that we've seen in 2019?

[Anton Dibowitz, executive]

Let's see where we get to at the end of the discussions we're having with them, and we'll update you.

[Piotr Ossowicz;Serone Capital Management LLP;Analyst, analyst]

Right. My question is more about the Q4 that the number you have reported, this reflects the -- well, the discounted rates or the higher rates?

[Stuart Jackson, executive]

The rates that are in the -- the rates that we were working through the first 3 quarters of the year is what's reflected in the numbers.

[Piotr Ossowicz;Serone Capital Management LLP;Analyst, analyst]

Okay, understood. And on Seabras, there also seem to be a -- there have been a similar move with respect to cash flows. Are you seeing any receivables building in Seabras as well?

[Stuart Jackson, executive]

No, no.

[Piotr Ossowicz;Serone Capital Management LLP;Analyst, analyst]

So I mean, has there been any other distribution to Seadrill then? Because when I look at the move in the net debt, I mean, it seems to be smaller than what would have been indicated by the EBITDA. So has there been any other working capital build-up, any other cash -- unusual cash outflow from Seabras?

[Stuart Jackson, executive]

Well, we and Sapura would have received the loan payments I referred to as part of the Q4 process.

[Operator]

The next question comes from Florian Struben from Citi.

[Florian Struben;Citigroup;Analyst, analyst]

All my questions have been answered already.

[Operator]

The next question is from Michael Alsford from Citi.

[Michael Alsford, analyst]

I just got a quick question. I was just wondering whether you could sort of triangulate between your view on the market outlook for rates and the recovery to when you might expect yourselves to be cash neutral within the business at a group level.

[Stuart Jackson, executive]

Well, I don't think -- I'm generally not in the business of making predictions. And anybody who is, is generally turns -- made to be a liar. What I can say is the market has improved significantly year-over-year from last year. There are a lot of external factors that we have to look at. I mentioned COVID-19 and what that impact's going to be on GDP and demand and supply on both sides. But what we do know is that the fundamentals are solid, and we see it improving. So I think it's difficult and quite frankly maybe wrong to say that we can peg a date. I'll leave it at that, but it is...

[Michael Alsford, analyst]

Okay. I understand. And then just when it comes to tendering, what are the kind of the key kind of focus points from a customer's perspective? Is it simply -- your clean safety is very important clearly, but I'm just thinking, is it sort of next just really about rates or is it about capability? Can you maybe talk a little bit about how that tendering process is going and whether the needs of customers are changing as the market does start to recover somewhat?

[Stuart Jackson, executive]

I'll let Matt, Chief Commercial Officer, start, and maybe I'll come back afterwards. Matt?

[Matt Lyne, executive]

So I think in the market today, the customers obviously have varied demands depending on the technical specification of either the exploration and development program they're looking for.

Seadrill -- without being too general, Seadrill, we benefit from an extremely modern and diverse fleet that sits in the high-specification ranking against our competitors. So the technical side, we meet all the requirements in most international tenders globally. There are main factors. Of course, as you pointed out, safety is absolute paramount to anything we do and anything they do.

And that's why we've built long-established relationships with the major customers around the world. Timing is extremely important. So where you see that supply has increased at the end of 2020 with rigs rolling off, it's still crucial, given how tight that operators are running their budget, that they have the rig when they want it for either exploration or development to meet their targets. So I think timing is probably one of the more important elements associated with it.

So if you've already completed upgrades, if you have MPD's certain specifications, you move to the head of the line because you have an opportunity to start when they need you to start.

[Stuart Jackson, executive]

All right, yes. Thanks for covering, Matt.

[Operator]

The next question is from Raghav Nanda from HSBC.

[Raghav Nanda;HSBC;Analyst, analyst]

I have a few questions. First, on the semi-subs, you've mentioned harsh environment, market remained strong. So do you see any activations for the harsh environment assets. I'm talking about West Eminence and possibly West Venture. And finally, on the benign environment side, you have Sevan Louisiana, which is operating at the moment. How do you see opportunities for this rig going forward?

[Anton Dibowitz, executive]

Let me -- look, on the harsh environment side, we have been quite public that we're going to be extremely disciplined. We've been disciplined from a capital expenditure side, as we have been on the contracting side. The harsh environment market, especially in Norway is the one that has strengthened the most. There are opportunities, but for us, it's an evaluation of the cost of reactivation and considering adding supply back into that market versus where the day rates are. So we'll take that on a case-by-case basis.

In the benign floater market, today, given where the supply demand balance is, drillships still are favored over semisubmersibles but we have the Louisiana as well as managed rig semi in the Gulf of Mexico. It's more of a spot market right now. But we continue to add programs to both those rigs, as we go forward. But today, I would not see us reactivating additional benign environment semisubmersibles to take back into the market. And I don't think the market is going to be there for a little while, at least. Matt, anything?

[Matt Lyne, executive]

No, I think that's -- I think we're -- on the Sevan Louisiana specifically, we've -- the technical organization operations group have done a fantastic job. I think we mentioned this a few quarters ago about created -- creating a more flexible rig by being able to work in shallower water depths than your traditional dynamically positioned unit, but without the assistance of mooring. So that's broadened its ability to work in some of the mid-water opportunities in the Gulf of Mexico. Although the rates haven't materialized as quickly as we'd like, keeping that rig active for companies that we cherish relationships with, like Walter Oil & Gas, is really important for us. So they've got a strong backlog of opportunity, and we continue to talk to other customers.

[Raghav Nanda;HSBC;Analyst, analyst]

Right. And just the last question on harsh environment jack-up rates. I see there are a couple of rigs, which are working on a market index rates. So would you be able to give some idea of what sort of day rate would that be in the present context?

[Matt Lyne, executive]

I'm not able to disclose any rate elements associated with the market index rates. But as you would expect, it tracks the market specific to its competitive group and cycles on a periodic basis. But that's about all I can tell you.

[Raghav Nanda;HSBC;Analyst, analyst]

So would you be able to give idea of where this rate would be for the competitive group that you have in the market?

[Stuart Jackson, executive]

I don't think we're going to get into the mechanism of the competitive group and where we feel we are right now.

[Operator]

The next question is from Sunny Chhabra from Ironshield Capital.

[Sunny Chhabra;Ironshield Capital Management;Analyst, analyst]

Just a couple of questions on the Seabras subsidiary. You mentioned in the presentation that you've received some spot work for the Sapura Diamante until June 2020. Are you able to share any color on the rate you're getting? And is it with Petrobras?

[Anton Dibowitz, executive]

It's not with Petrobras, and it's at a decent rate, better than where the rates were a year ago. Well, an absence of opportunities a year ago, but we're not going to get into the details of where the rates are. It is EBITDA positive though. And we see the rates continuing to improve and the market tightening there as we go forward. I think that '19 was a low point for that market. But when we can see the developments and the need for those type of assets as Brazil ramps up its activity, much like the rest of the market, and especially in Brazil, we see the opportunities growing in that market going forward.

[Sunny Chhabra;Ironshield Capital Management;Analyst, analyst]

And if you could just -- the follow-up was actually extended on the same question, and you answered it partly. If you can just expand on it because you received the extension on Topazio as well and now you've received a contract on Diamante with some other contractor. If you could just share a little bit more color on the opportunity you see there. You have Onex coming off as well later this year. If you could just share some color on how do you see that market developing and which other players you could lease these ships to.

[Anton Dibowitz, executive]

Well, look, I think, we're not going to get too much into the details of the opportunities we're looking at. I point to my last comment about an improving market and an increasing need for those type of assets. We have a long operating track record through the JV in Brazil. The vessels there have received awards for being the best performer in the Petrobras fleet by their metrics. And operational track record is a really important indicator and gives you a great competitive position for future work both with Petrobras and with the IOCs that are going to be coming down there. So we're very optimistic that as the market continues to strengthen and improve in Brazil, that we will get at least or more than our fair share of opportunities down there.

[Sunny Chhabra;Ironshield Capital Management;Analyst, analyst]

Got it. And just one more regarding Seabras, and that's with respect to the capital structure. There was around $14 million of payments made on the loan that was due to Ensco. Was that related to the Topazio and Diamante loan? And has that been exhausted now?

[Matt Lyne, executive]

I don't have the detail on that. So I'd have to get back to you on it, Sunny.

[Operator]

This concludes our answer -- our question-and-answer session. I'd like to turn the conference back over to Anton Dibowitz for any closing remarks.

[Anton Dibowitz, executive]

Just say, thank you very much for your interest and participation in the call, and we look forward to talking to you next quarter.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.