Earnings Call Transcript - SDRL Q1 2023

Simon Johnson, CEO

Welcome all to our Second Quarterly Earnings Call this calendar year and the first call of the 2023 Financial Period. On the line today, Grant and I are joined by Leif Nelson, our Chief Operating and Technology Officer; and Samir Ali, our Chief Commercial Officer. Grant and I will shortly take you through our prepared remarks before we open up for a Q&A session. For further information regarding today's presentation on the first quarter earnings, I invite you to read the full earnings release published to the market earlier today, which is accessible on the Seadrill website. On Slide 2, you'll find a disclaimer relating to today's presentation. This outlines important points around forward-looking statements made in the earnings report and to be discussed on this call, which are based on current expectations and are subject to certain risks and uncertainties. There are many factors that could cause actual performance and results to differ materially. For further information, please take the time after the call to read this disclaimer and refer to the full quarter earnings report as well as our other SEC filings. In addition, please note that we'll be referencing non-GAAP measures on our call and a reconciliation of operating income to adjusted EBITDA can be found in today's full earnings release. We've started this year strongly with adjusted EBITDA more than doubling on a quarter-on-quarter basis to $85 million. This represents a 32% EBITDA margin. The significant improvement in financial performance was mainly due to a full quarter of operations for our drillships operating in Brazil. As of today, Seadrill's backlog stands at approximately $2.6 billion, which is especially strong in the context of our fleet size. This backlog total includes a three month extension secured for the West Neptune, which added $39 million, reflecting our long-standing relationship with LLOG. We ended the quarter with an adjusted net cash position of $133 million. Going forward, free cash flow generated by the enterprise will be a key metric. Across our own fleet, we had good operational performance, with technical utilization coming in at 96%, while our economic utilization was 95%. As Seadrill stands today, we have a fleet of 22 units, including 13 ultra-deepwater floaters. We're delighted that most floaters are contracted, including all of our 10 high-specification drillships, primarily deployed across the Golden Triangle. Also in our fleet, our two harsh environment units continue operations on the NCS. We have three benign jackups operating through our Qatari joint venture and lastly, units operating in Thailand. Finally, we are proud to announce that we have received a B rating under the Carbon Disclosure Project framework, the eco highest rating amongst all offshore drillers, which reflects our commitments to minimizing our impact on the environment. I'll be covering ESG in a little more detail later in the presentation. Moving to Slide 4, I will touch on the market backdrop. Despite some volatility recently, the price of Brent has generally remained above the $70 mark and oil and gas market fundamentals continue to be supportive for offshore drilling. Many analysts expect oil demand year-on-year to increase by around 1.5 million to 2 million barrels per day in 2023, whilst on the supply side, OPEC announced further production cuts earlier this year. Coupled with the healthy economics of offshore projects, this demand-supply balance has a positive read across for our activity in the sector. Taking a closer look at offshore drilling in the benign ultra-deepwater floater segment, market utilization for drillships has remained around the 95% mark, while leading-edge dayrates continue to increase, with a recent fixture close to $500,000 per day. In our view, we expect to see a five handle fixture at the leading edge in the second half of the year as the market tightens further. Brazil continues to be the main driver of floater demand, with Petrobras in particular, moving to secure more capacity. In the near term, we anticipate additional requirements from Brazil and results from ongoing Petrobras tenders, leading to more rigs mobilizing to the region from different geographies. We also forecast incremental floater demand offshore Africa, with active requirements for Angola, Nigeria, Namibia, and Mozambique. To round off the Golden Triangle outlook, Gulf of Mexico demand visibility is typically limited with a lot of contracting activity undertaken via direct negotiations. However, this region is effectively sold out, and we remain positive about its utilization outlook. With that all said, although demand is very important, we continue to believe that supply side discipline amongst drillers is the most salient factor as to how this upcycle progresses. Turning to the harsh environment segment, we have one CJ70 jackup on long-term contract with ConocoPhillips and one floater at the West Phoenix operating with Vår Energi on the NCS that is currently estimated to roll off in the second half of 2024. On the supply front, we have seen a string of announcements about floaters exiting the North Sea for contracts outside the region, including notably Namibia and Australia, with more announcements to follow soon. On the demand side, anticipated requirements in 2024 and 2025 are beginning to materialize. Furthermore, we are seeing interest in the West Phoenix for harsh environment operations outside the North Sea. Altogether, we view these dynamics as supportive for our re-contracting prospects next year. Overall, we are very optimistic about market developments in offshore drilling and continue to believe that we're in the constructive early stages of a multiyear upcycle. I'll now hand over to Grant, who will outline our first quarter financials, then cover a few points on our capital structure and set out our guidance for the full year of 2023. Over to you, Grant.

Grant Creed, CFO

Thank you, Simon, and welcome again to everybody joining us today. Before I jump into the figures, please note that our Q1 results do not include the effects of our Aquadrill acquisition that closed on April 3. The operating results and the assets and liabilities of Aquadrill will be consolidated from April 3 and presented as part of our next quarterly earnings. And our full year 2023 guidance, which I'll outline later in this presentation, includes the consolidation of Aquadrill for a period of nine months from the closing date to year-end. Now to the key quarterly figures. Q1 revenue was $266 million, an increase quarter-on-quarter, primarily due to a full period of operations in respect of our four drillships offshore Brazil. We also benefited from a higher dayrate on the West Neptune and from the Sevan Louisiana achieving higher economic utilization. That was slightly offset by no further revenue from West Hercules, which demobilized and was returned to the rig owner in Q4. Moving to OpEx, Q1 OpEx was $219 million, a reduction quarter-on-quarter, mainly driven by the demobilization and redelivery of the West Hercules to the rig owner, partly offset by a full period of operations for our drillships in Brazil. As a result of these movements, we recorded adjusted EBITDA of $85 million, which marked a substantial increase compared to Q4. Further, this translated to an adjusted EBITDA margin of approximately 32%, which screens well compared to our peer group. On the balance sheet, unrestricted cash decreased to $376 million at the end of the period. This was largely driven by the settlement of liabilities for accrued expenditures in relation to our recent rig start-ups in Brazil and voluntary prepayments made under our second lien debt facility of $150 million. This was partly offset by the receipt of $43 million in net proceeds in respect of our sale of Paratus Energy Services, which closed in February. Elsewhere on the balance sheet, the settlement of accrued expenditures and voluntary prepayments that I just outlined were the main drivers of the reduction in our current and noncurrent liabilities respectively. I'll now take a moment to focus a bit more on our leverage and capital structure more broadly. Over the last year, we've been proactive in respect of our debt profile by making several mandatory and voluntary prepayments under our second lien debt facility, including those in Q1 that I highlighted on the previous slide. This put us in an adjusted net cash position of $133 million at the end of March, as mentioned by Simon earlier. We are delighted that we have delevered our balance sheet, and in turn, reduced our interest expense in light of the prevailing economic climates. Nevertheless, as said in our prior earnings call, we are now focused on further optimizing and simplifying our capital structure, and we believe that we are well positioned following the closing of the Aquadrill acquisition. We are in active discussions with our Board and capital market advisers as to the form this may take. On Slide 7, you'll find our financial guidance for the full year of 2023, which includes the consolidation of Aquadrill into Seadrill from April 3. We anticipate total operating revenues to be between $1.435 billion and $1.485 billion. Our adjusted EBITDA range stands at $435 million to $485 million. And lastly, we expect CapEx and long-term maintenance to be between $210 million and $250 million. I'd like to draw your attention to a footnote in the earnings release, which essentially says our 2023 EBITDA guidance includes net $12 million of noncash costs related to the amortized mobilization revenues received and costs incurred prior to January 1, 2023. I'll now hand the line back to Simon.

Simon Johnson, CEO

Thanks, Grant. On screen, you'll see Seadrill's ultra-deepwater floater fleet. During the last year, we pivoted strategically to the segment through two transformative M&A transactions in the belief that this part of the rig market will produce outsized growth and value for our shareholders. Now taking a closer look at the fleet, all 13 floaters on screen are at least 10,000 foot capable in terms of water depth. We have 10 drillships that are ultra drill activity and seven that are of seventh generation design, which typically have better specifications, require less maintenance spend and deliver superior contract economics as a result. Lastly, on managed pressure drilling, Seadrill is the trailblazer in this adaptive drilling technology, and we continue to be among the market leaders on this equipment with six units currently outfitted across our fleet. We have contributed strongly to industry knowledge and technology in this important drilling approach, which will be increasingly vital for penetrating the deeper geologic horizons in our targeted ultra-deepwater markets. Moving to the next slide, I want to focus on our ESG strategy, which has delivered our leading position as part of the Carbon Disclosure Project. As a major offshore driller, we have a critical role to play in the global energy transition. Our aim at Seadrill is to deliver oil and gas wells to our customers responsibly and with the best carbon footprint possible. In our latest sustainability report, we published Seadrill's ESG framework with its contributions towards the United Nations sustainable development goals. I won't outline all of the elements here, but there are two of particular focus for us, which I'll explain in a little bit more detail. First, on the environmental front, we are committed to adopting greenhouse gas reducing technologies. In offshore drilling, Seadrill has developed the first methanol injection system for an offshore drilling rig, and we pioneered the introduction of mobile hybrid power technology. More recently, we installed a closed bus-tier system on the West Saturn working for Equinor in Brazil, enabling the rig to position itself dynamically with fewer engines running, which is a substantially more efficient operating mode, reducing fuel burn and emissions. We've also deployed the first version of NIV's Duals technology, which enables remote operation of the mud system, and we continue to advance automation of the drilling process. Second, I want to highlight our commitment to the development of our employees with the Seadrill Development Academy, which we rolled out earlier this year. The program uses an enhanced facility that is owned and managed by Seadrill complete with the state-of-the-art drilling simulator. Seadrill has a best-in-class workforce that is integral to the development of safe and efficient operations for our customers. And investments such as this one illustrate our commitment to operational excellence and also our employees' development and growth. Furthermore, on the expanding business environment, our ability to train our own people will be critical to service delivery quality and cost control. To wrap up, we are very pleased with our start to the year, with a nearly fully utilized fleet and the closing of our Aquadrill acquisition in April on an accelerated timeline. The offshore outlook is promising. And looking ahead into future quarters, we're focusing on further refining our fleet and enhancing our exposure to our core segments, including through organic transactions, if accretive, whilst optimizing our capital structure to enable the implementation of a sustainable shareholder returns policy. We have demonstrated during the past 12 months that our management team has a bias for action. And put simply, we fully intend to continue to deliver on what we promise. That brings an end to today's presentation. I'll now hand the line back to the operator, who will handle the Q&A session to answer any questions that you may have for the management team.

Operator, Operator

Our first question comes from Gregory Lewis from BTIG. Gregory, your line is now open. Please go ahead.

Greg Lewis, Analyst

Yeah, hi. Thank you and good afternoon, everybody. Simon, I realize the ink is barely dry on the Aquadrill acquisition, but all that being said, a lot of common questions thematic we continue to get from investors is around continued consolidation across the offshore drilling sector. Just kind of curious maybe how active the company is at this point, realizing we're still integrating Aquadrill? And really, as you think about a bigger picture, do we think that there's still opportunities, whether it’s Seadrill or others to help to continue to consolidate the market, realizing at this point, as I look at most publicly listed drillers, whether it was this year or last year or even over the last couple of years. Each one of you has kind of put a stake in the ground and done some M&A. Just kind of curious on your thoughts around that.

Simon Johnson, CEO

Yes, I appreciate your question, Greg. I don't believe the opportunity for consolidation has passed. However, as the community diminishes, it becomes increasingly challenging to engage in meaningful deals. We see significant market potential remaining, which is the key consideration. There is ample opportunity for improvement with leading-edge dayrates, and we think we are still in the early stages of the business cycle. As companies continue their refinancing initiatives, the restrictive covenants that currently inhibit consolidation may weaken, potentially serving as catalysts for additional partnerships in the sector. Most transactions will likely be stock-based since many of us don’t have sufficient cash available for outright cash deals. We have been focusing on consolidating our asset base, and there is a chance for some of our competitors to pursue similar strategies. While large-scale mergers and acquisitions may not be the primary focus, we see potential for significant transactions among some of the larger players. I do think we still have many opportunities ahead for companies to select how they want to engage in the market and to tailor their asset acquisitions and divestments accordingly.

Greg Lewis, Analyst

Thank you for your insights. I wanted to discuss a few other rigs, specifically the West Polaris, which is under the management of a third-party manager. September will be here before we know it, and summer will pass quickly. Can you provide some information about the outlook for that rig and how we should view the potential continuation or termination of that management contract?

Simon Johnson, CEO

Yes, you bet. Greg, well, let me start and then I'll throw it to Samir, and he can give you the market color. So I mean when we announced the Aquadrill transaction, you'll recall that we anticipated realizing all of the synergies within the first two years. So as a practical matter, transition of management is still some time off. And we've only really started the conversations with the existing rig managers and the customers who would be affected. So there's not much to report at this time other than to let you know that we had started those conversations. But Samir can probably put a little bit more granularity around that.

Samir Ali, CFO

Hey Greg. So I'd say we are in active dialogue with the current client that they have an open tender in the same region. So we think we're well-positioned. But in this business, it's not done until it's signed. So we are optimistic that we'll be able to keep her working where she is today. We are also looking at other opportunities for the rig, and we are bidding her around the world. But our working assumption right now is that she will stay in India and continue on with ONGC.

Greg Lewis, Analyst

I was curious about the current situation. Samir, even though most of the fleet is contracted out, as we look ahead over the next year, there are rigs that will start to come off their contracts. Can you provide any insights on how far in advance customers are looking to secure contracts? For example, since it’s May 2023, are there any indications of tenders for work in the upcoming summer, fall, or spring? I’d like to understand how far out this is going and gauge how eager some customers might be feeling.

Samir Ali, CFO

Sure. So at the sign of the market continuing to tighten, clients are looking for rigs further and further out. There's one data point where there's a client looking for a rig in '26. So that's probably the outermost part of where clients are right now, but I'd say you are seeing it elongate out. Clients are starting to come to us earlier and saying, hey, can we talk about options that aren't due for a while? Or can we talk about rigs in '24, '25? So you are seeing it as a reaction just to a tightening market. They're looking to secure supply, as they build out their drilling plans, we are seeing an elongation of the time before award and when customers are looking to secure rigs.

Greg Lewis, Analyst

Super helpful. Thank you all for the time.

Simon Johnson, CEO

Thanks, Greg.

Operator, Operator

Our next question comes from Fredrik Stene from Clarkson Securities. Fredrik, your line is now open. Please go ahead.

Fredrik Stene, Analyst

Hey, Simon and team. Hope you are well. And congratulations on the nice performance this quarter. I wanted to touch a bit more on the fleet here. You're mostly locked up for 2023 and a large part of '24 is also locked up. But then, of course, as we touched upon, I think, last quarter as well, you have your stacked assets. And first, since we spoke last time, have anything kind of changed in your approach to those assets? Simon, you talked about supply discipline. So I guess my question is, have you changed anything in your requirement to take those rigs back? Or have you since then noticed a difference from your clients in terms of more opportunities or more active discussions for those rigs?

Simon Johnson, CEO

Hi, Fredrik, and good to hear your voice. Look, firstly, I'd say that we consider those assets to be fungible. And where it is possible, we may even divest them. But in so far as reactivating is concerned, I think we've been pretty forceful in our views that we require a full recovery of the capital upfront from any potential customer. I'll pass to Samir to talk about the individual market opportunities, but nothing has changed in our position or in our approach in terms of what we require. And I think as we go further into this cycle, we're just going to be increasingly resolute in that stance. But Samir perhaps you'd care to add something to that.

Samir Ali, CFO

Yes. We're definitely exploring opportunities for our stacked fleet, but we will remain disciplined. There are significant costs associated with reactivating these rigs, and due to supply chain constraints, those costs are increasing. For us, it's important to find the right job and opportunity to invest in the rig and bring it back online. We are actively seeking opportunities for our stacked fleet, but we will approach this carefully. We want to ensure that we achieve a return on our capital and won't add to our balance sheet without justification.

Fredrik Stene, Analyst

Thanks, and a follow-up to the comment about potential divestments there. If you were to divest some of those stacked assets to other players, would you be willing to divest it to competitors? Or would you try to channel them into local or non-internationally competitive markets or owners, if you were to do that?

Simon Johnson, CEO

I think we look at every opportunity on its merit. So I don't think necessarily we would be averse to selling to a competitor whatever shape and form that may take. So yes, no, I think it's whatever would generate the best return for us, Fredrik. So we have an open mind.

Fredrik Stene, Analyst

Okay, thanks. And specifically on the West Phoenix, just turning away from the stacked fleet, you've got an extension now until August, if I remember correctly. But you said that, that rig was also being bid outside Norway or outside the Andean. So do you have any thoughts or comments around your preference in terms of keeping that rig in Norway? I guess kind of in a way, you're right now, a bit subscale in that region. Would it be better if it actually worked elsewhere? Or do you think, based on your market view that the Andean has actually tightened quite significantly, '24 and '25, that you would like to keep it there still, even though you're exploring other opportunities?

Samir Ali, CFO

Hey, Fredrik, it's Samir. I'd say we prefer to keep the rig in Norway primarily for cash flow reasons. Establishing another base in a different location, unless it’s a region where we operate, poses challenges. Our goal is to maximize cash flow, and the numbers suggest that Norway is the best option. However, we are not strictly tied to keeping the rig there. Our focus is on enhancing our return and cash flow. If we can co-locate the rig, it would benefit us in the long term, but we are also open to opportunities outside of Norway. There are currently several options available for that rig. The harsh environment market is seeing some of our competitors withdraw rigs, and it appears that more rigs will likely leave that market, while the market in Norway is beginning to tighten. We anticipate a perfect storm in the Norwegian market in 2024 and 2025. Therefore, while we aim to maximize cash flow in Norway, we are willing to move the rig elsewhere if it makes sense.

Fredrik Stene, Analyst

Perfect. Thanks a bunch. Thank you so much all for the answers. I'll leave it at that. Have a good day.

Operator, Operator

Our next question comes from Hamed Khorsand from BWS. Hamed, your line is now open. Please go ahead.

Hamed Khorsand, Analyst

Hi. So the first question I had was about Aquadrill just given that you've only provided Q4 '22 numbers. Is there any operational enhancements or improvements since then? Or is that because they're fully operational rigs now that's going to be the operating kind of rate per quarter for them?

Grant Creed, CFO

So let me try to take it, Hamed. I'm not sure I fully understand the question. But the Q1 doesn't include any results from Aquadrill, right? So from a financial perspective, you don't see anything in there from Aquadrill. You'll start seeing that come through Q2. From a financial perspective, Q2 will of course, include Auriga, Vela and Polaris and some of Capella. Capella is just starting up now or has just recently started up, but you won't get a full quarter from Capella. From Q3 onwards, you'll get full run rate performance on the four Aquadrill drillships. I hope that answered your question from a financial perspective. But if you're looking for more of an operational sort of technical asset type of answer, I can hand over to Leif or Simon.

Hamed Khorsand, Analyst

No, that was exactly what I was looking for. Thank you. And then as far as your fleet is concerned, just given the lockup trends right now with your fleet, is there much to do as far as contracting goes? I mean you're talking about customers looking out for '24 and '25, but you're pretty much locked in. Is there any advantage to getting in those conversations now just given the trajectory of dayrates?

Simon Johnson, CEO

Hamed, one of the reasons for the Aquadrill transaction was to gain more exposure to the spot market. We have had some opportunities with the Polaris, and one is solidifying for the Capella in the near term. Relative to Samir's comments about market opportunities and their expansion, we believe that what you highlighted as a weakness in our story a few months ago is becoming less significant as we see the market evolve and as the availability of units rolling off contracts over the next couple of years increases. Samir, do you have anything to add?

Samir Ali, CFO

No, I think that's right. And I think as clients are starting to look further out, that's where we're spending our time and starting to layer in contracts and build a layered approach to our contract with some short-term duration and some long-term duration. I think that's what we're focused on kind of going forward for '25.

Hamed Khorsand, Analyst

Got it. And my last question was, are you seeing any customer conversations talking about bringing those cold stacked or warm stacked fleets online?

Samir Ali, CFO

There's some discussion about that. We have seen a few stranded assets re-entering the market, but the costs associated with bringing them back are rising. We are in discussions with clients regarding our stacked fleet, but we have not reached a stage where we can announce a contract or feel confident in bringing a rig back. We are making progress in these discussions, but in our view, the market isn't ready yet, as we cannot achieve the return profile we need. However, if the market continues on its current trajectory, we expect some of these conversations to materialize later this year or next year.

Konstantin Chinarov, Analyst

Hi, guys. Thanks so much for taking my questions. When I think about adjusted EBITDA guidance, so that range of $435 million to $485 million, could you please talk a bit more about what's behind that guidance? Is it basically just saying that you're going to execute the backlog that you've locked in for this year? Or there are some other assumptions behind that? And also curious if that guidance includes any synergies from the Aquadrill acquisition? That's my first question.

Grant Creed, CFO

Thank you, Konstantin. I will start by discussing the old Seadrill legacy fleet, as it is quite clear. The first quarter results for that fleet provide a solid indication of what to expect from Seadrill for the remainder of this year, and it was a relatively good quarter. We anticipate the legacy fleet will perform in the 80 to 85 range for the rest of the quarter. Regarding the Aquadrill fleet, all of it, including Auriga and Vela, contributes to the 2023 results from April 3. Auriga and Vela are contracted for the entire year, so we will benefit from that. As I mentioned earlier to Hamed, Capella has recently started operations, and Polaris is another variable to consider, as its contract ends at the end of August. For the fourth quarter, we need to consider the recontracting assumptions, which involve a variety of possibilities and outcomes that have been factored into our guided range. As for your last question about synergies, the answer is no for now. We mentioned at the time of the acquisition announcement that it would take some time, specifically up to two years, to realize those synergies. We just have to wait for the Aquadrill rigs to finish their current contracts.

Simon Johnson, CEO

In response to your question, Konstantin, I want to clarify that this pertains to the key synergy area of the MSAs. We expect to realize fewer synergies related to overhead costs, which we estimated at $10 million annually. We anticipate beginning to see these synergies in late Q3 or Q4. While there will be a small impact from this, it will take some time to fully realize those benefits.

Konstantin Chinarov, Analyst

Got it. And you're still looking to get $70 million of run rate synergies out of the Aquadrill transaction?

Grant Creed, CFO

That's right. On a recurring basis, yes, once the rig rolls.

Konstantin Chinarov, Analyst

Got it. Makes sense. And finally, on the asset base, are there any assets that you're planning to retire anytime soon? Or are there any sort of noncore assets that you might consider selling, let's say, jackups or certain drillships, anything like that on the horizon?

Simon Johnson, CEO

Yes, sure. I think we've been pretty open, and there's some things that we've communicated in our 20-F. We're actively considering options to dispose noncore assets. We can't provide any specific comments at this time. We'll come back to you if we have any news in that regard. But I think, generally speaking, we want to be an important player in a smaller number of asset segments so that we can be more efficient and harness economies of scale across the cost base. So we're focusing our asset base through time. So you should expect to see movement from us as we continually refocus and refine other parts of the market that we want to play in.

Operator, Operator

We currently have no further questions. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.