Seadrill Limited (NYSE:SDRL) Q2 2019 Earnings Conference Call August 20, 2019 9:00 AM ET

Company Participants

Anton Dibowitz - President, Chief Executive Officer

Stuart Jackson - Chief Financial Officer

Matt Lyne - Chief Commercial Officer

Emma Li - Head of Investor Relations

Conference Call Participants

Lucas Daul - ABG

Constantine Chenerov - Acure Capital

Operator

Good morning and welcome to the Seadrill Limited Quarter Two 2019 Earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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.

Emma Li

Thank you and welcome to Seadrill Limited 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 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.

Moving onto 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 lines so you can take some questions from the entire team.

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

Anton Dibowitz

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 are extremely pleased to have him on board. He’s quickly come up to speed in our business. Welcome to the team, Stuart.

Stuart Jackson

Thank you.

Anton Dibowitz

To start, I’d like to reiterate some key messages that you’ve heard from me in the past. While the market is resenting some challenges, I believe that the fundamentals of our business remain unwavering; in particular, the offshore [indiscernible] 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. 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 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 a tender offer and we continue to be focused on taking out the rest of this funding that was put in place as part of our restructuring. We have 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.

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 [indiscernible] regulatory requirements and has already been adopted by a number of our customers in the Gulf of Mexico as it has proven more stable and accurate than the alternatives already on the market. Together with our technology partner, Marsden, we are making available to the market our home-grown Vision IQ system, which uses LIDAR technology to keep workers safer in red zones around moving equipment. Our decision to share Vision IQ is based on 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 three new builds in our managed fleet, two for Sonangol and one for Northern Drilling, delivered successfully during the quarter. Following on our success with the Sonangol 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.

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 Florida market. Rates for short term work remain extremely competitive, but the market has begun to clearly demonstrate higher rates for long term work in forward start-ups. The overall utilization per marketed unit remains above 80% and there are pockets of strength in the market for harsh environment and high end ultra deepwater drill ships, where market utilization is approaching 90%. The improvements in forward pricing and utilization are key leading indicators that recovery is progressing and we expect that [indiscernible] fixtures made in 2018 marked the low point in this cycle.

Similar, we see improving trends in the premium jack-up market with marketed utilization above 80% and rates trending toward 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 her SBF before returning to Angola in Q4 to perform a nine-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 in Angola and hope to expand our operational footprint here through our Sonadrill JV.

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

Continuing with our Florida fleet, the West Carina secured one more 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 performers for Saudi Aramco and these short term extensions will facilitate the productive discussions we are having about longer term opportunities for both units.

Finally, the West Callisto secured a six-well contract with 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 contact dovetails very nicely with our new Gulfdrill joint venture.

As I mentioned earlier, we are 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 seven rigs, or half of the Qatar jack-up market. Qatar is a top three 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 two jack-ups from its working fleet and a further three 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 contract 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 would provide approximately six years of work for each rig. The critical mass of rigs, at least five in the JV plus the seven that GDI is already operating, makes for an efficient operation. No up-front investment is required from us and we will see a 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

Thank you Anton. 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 three.

Moving to Slide No. 8 in terms of the revenue and EBITDA bridge, from an operations perspective we had 35 rigs, of which 17 were working at the quarter end. Eight of those are floaters and nine jack-ups, with an economic utilization through the quarter of 96%. From the contract revenue perspective, it’s broadly flat quarter on quarter. We have had some idle time between contracts but that’s been offset by high day rates on the Gemini, Phoenix, Hercules, and the Telesto. At a total revenue operating level, we are $19 million ahead of where we were in quarter one. This is as a consequence of the increase in reimbursable revenues, which is driven by the delivery and operations preparations for Northern Drilling and Sonangol. There is a corresponding reimbursement expense, so there’s a negative impact in terms of our overall margin at the EBITDA level.

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 spec units as they’ve moved locations. That’s offset the overdue receivable we had in Q1, which has obviously 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 three months ago, and that’s primarily due to timing difference on maintenance activities.

Moving then to the income statement and the items below EBITDA, there are lots of 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. On the interest expense line, you start to see the benefit of the secured notes repurchase we had, so lower interest costs coming through at $122 million compared to $132 million three months ago.

In terms of our share results from associated companies, this reflects a lower level of losses in the period, taking into account the unwind of basis differences arising from [indiscernible]. 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. In terms of the NSN repurchase, we have to reflect the premium payment we made for the NSNs and that $22 million charge is taken as a net loss on debt extinguishment during the quarter.

In terms of our marketable securities on Seadrill Partners and Archer, this reflects the change in their share price during the period with a charge of $14 million. The other financial items reflect the interest income and the foreign exchange gains and losses incurred during the period.

A 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 three 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 three months ago. Our investing activities reflect our ongoing capital expenditures on our drilling units which were partially offset by the proportion of West Capella 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. 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 to the notes, $22 million was paid in terms of the premium to the note holders and there’s a $9 million charge of accrued PIC and cash interest which was paid as part of the settlement as well, which is taken through operating cash flows in accordance with U.S. GAAP. Our net movement in cash over the period was a reduction of $433 million, 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 two elements of this. The first is cash which is predominantly used as cash collateral for bank guarantee facilities, and then during the period we’ve 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 low operating cash flows for the quarter which drive the changes. Our non-current assets are broadly unchanged at $7.9 billion, but our current liabilities, the major change here is obviously the reduction as a consequence of the senior secured notes being repaid, and also we have an increase in terms of the current liabilities, which is an $85 million increase attached to the scheduled amortization repayments on our secured bank debt, so simply moving that amount from the non-current liabilities into the current liabilities.

Then to the Slide 12, which covers non-consolidated entities. In total, these four investments we hold cover a backlog of $3.2 billion. They generated 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 sellers credit and other debt facilities we have with these investments. Obviously, our share of profits into the Seadrill 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 I mentioned in relation to 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 four of these non-consolidated entities are placement securities with the NSNs. We will be adding to the presentation we have here Gulfdrill now that we’ve formed that joint venture, but this is not part of the security package for the NSNs.

Turning then to capital structure and liquidity, obviously we start our position with the cash position at $1.5 billion. We do have bank debt of $5.7 billion for bank loans that 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 in relation to minimum cash, which we are comfortably above. We will have covenants later on and would expect to have net leverage and debt service cover ratio, these to commence in 2021 and will 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 the half a 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 on 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, though 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. Now I’ll hand back to Nancy to open up for questions.

Question-and-Answer Session

Operator

[Operator instructions]

Our first question comes from Lucas Daul from ABG. Please go ahead.

Lucas Daul

Thank you. Good afternoon gentlemen. I was wondering if we go through your drill ships, you’ve got five drill ships rolling off contract in Q4 or in the end of Q3. Could you talk a little bit about the roll-over opportunities for those, each one in particular?

Anton Dibowitz

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

Sure, hi Lucas. I’ll avoid talking about specific opportunities given the competitive nature of the market, but when you look at 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 those assets will remain in their current markets after taking a break to complete various SPS and maintenance and upgrades.

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 NPD and she’s outfitted with our third generation operation system, so we feel quite comfortable about her prospects in Asia.

Anton Dibowitz

If I just take it up a level, Lucas, what I will say is we’ve been very purposeful in 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.

Lucas Daul

Okay, that’s good color.

Anton Dibowitz

And I’d certainly rather being doing this today than six months ago or a year ago.

Lucas Daul

Sure. You talk about competitive spot market, but obviously we have seen 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 a future date commencement, so I was wondering in the tender pipeline that you are 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

Matt, do you want to start?

Matt Lyne

I think there’s a few opportunities that have longer term developments. I think Equinor has something down in Brazil where they’re looking at start-ups past 2020. West Africa also has a few 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 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 2019 for fixtures or commencements in 2020, and particularly into 2021, and the trend supports that.

Anton Dibowitz

Lucas, long term contracts are probably the most difficult for us to price, for drillers to price and to come to an agreement with operators in this market to make a long term forward commitment. I think there has been a function of the market where generally the number of five-plus term fixtures has decreased from where it was at the top of the last 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--you know, obviously you don’t want to be chopping and changing contracts all the time, but a year, 18 months, two 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.

Lucas Daul

Okay. I was mainly wondering if you see any sort of improvement going forward, or whether there was a risk that we stick in 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

I think there’s going to be--I think the contracts are going to be more fit for purpose. The fact that they’re more short term fixtures today, and I think they will be until we’re at a different point in the cycle, when there was a complete absence of supply and rigs were very tight, the discussion was if you want to take a rig for your exploration program, I need at least three years or five years - that’s a function of 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 work and longer term contracts and surety for those long term developments. I think having a mix of those is good for all of us.

What you do see is more exploration work happening than was happening six 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.

Lucas Daul

Okay. On a different note, could you just briefly update us on the status of the Sonangol drill ships, the drill ships in the JV, where they are and what is happening with them?

Anton Dibowitz

Well as I mentioned in my prepared remarks, we’ve taken delivery of both of the Sonangol drill ships. One is currently being prepared in [indiscernible] Bay, the other one’s in Singapore, so that was good progress on the JV. The JV is progressing as planned. I think our initial comments last quarter were that we were confident based on the strength of that market and the visible demand that we would have four--those initial four rigs fixed on contracts between now and the middle of next year. We are in advance discussions on at least the first two, and I think we’re pleased with the progress on the JV and will meet those timelines, or at least meet those timelines.

Lucas Daul

Okay, that’s good. Thank you very much.

Operator

Again if you have a question, please press star then one.

Our next question comes from Constantine Chenerov [ph] from Acure [ph] Capital. Please go ahead.

Constantine Chenerov

Hi guys. Thanks very much for taking my questions. I’ve got two questions, if I may. The first one is about Seabras. You’ve got two 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 Topasio [ph] is expiring in September ’19. If you could provide any comments on your plans for those assets, do you seek an opportunity to re-contract them with Petrobras or someone else, or what’s your plan on that?

Secondly, it was widely reported in the press that the creditors at Seadrill Partners level are organizing, so if you could comment to the extent you can on your plans for that asset and for the process. Thank you.

Anton Dibowitz

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 the cycle, 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 [indiscernible] cross-sold all the vessels in that fleet, when they roll of 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, I think this a tail of two sides of the coin. On the asset side, SDLP has 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. We know that we’re focused on it, and we’ll just have to see that play out.

Constantine Chenerov

Thanks.

Operator

Again if you have a question, please press star then one.

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.

Emma Li

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

Operator

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