Seadrill Limited (SDRL) Q3 2019 Earnings Report, Transcript and Summary

Good day and welcome to the Seadrill Limited Q3 2019 Earnings Conference Call. All participants will be in listen-only mode. [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.

Thank you and welcome to Seadrill Limited Q3 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 in 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 our views on the market outlook, and Stuart will then provide a review of the financial performance of the quarter and then we’ll open up the lines so we can take some questions from the entire team. With that, I’d like to turn the call over to Anton.

Thanks Emma, and welcome everyone to our third quarter 2019 earnings call. Before we go into the quarterly results, I would like to open with some comments regarding recent Board changes, the overall state of the industry, the market, and some of the things we are doing here at Seadrill. As you’ve all seen, this morning we announced some Board changes with Glen Ole Rødland succeeding John Fredriksen as Chairman; and Gunnar Eliassen replacing Harald Thorstein. I would like to thank Harald for his dedicated service to Seadrill and welcome Gunnar to the Board. I would also like to thank John for his leadership of the Board to date. As his successor, Glen brings with him a wealth of experience. I already had a close dialog with Glen, and he is a welcome addition to the team. This is the best of both worlds, for us as a company and [indiscernible] personally. We’ve added a seasoned industry veteran as the Chairman of the Board that will continue to benefit from the insight and perspective of John going forward. John may no longer be Chairman, but our close working relationship continues. As an industry, the disconnect between improving fundamentals and falling security prices is highly apparent. We remain focused on the things that we can control, but we cannot turn a blind eye to what the market is telling us and the state of the industry more generally. The good news, which I will talk about in a moment, is that we continue to see signs of a recovery in the market. The bad news is that it is quite clear that this recovery is taking longer than anyone expected. After the worst downturn in 25 years, the recovery has not met the expectations of many, including ourselves. On top of this, the industry faces mounting debt maturities over the next five years that present significant challenges to us, our competitors, and our collective lending groups. At Seadrill, we are quite levered, but I disagree with the general sentiment that a company's debt should be measured solely by time and quantum. We have a supportive and homogenous bank group that we can work with to address medium and longer-term capital structure requirements. We are being proactive in this regard. Having met with each bank individually to ensure that he is clearly understood that early and transparent engagement is our preferred route to jointly ensure long-term sustainability. All of our stakeholders recognize the value in our underlying business and that the best way to preserve this value is to maintain a flexible premium fleet under best-in-class operational management, so that we can continue to deliver this safely and efficiently for our customers. With respect to the market, the FID trends are good, and we expect this to translate into improved industry activity in the future. We are also seeing increases in term durations for tenders, which should improve the utilization outlook as these contracts are awarded. Improving forward utilization underpins the 4-day [ph] rate curve that is in contango. In the spot market for high specification floaters, we broached the 200K per day level during the third quarter. More recently, we’ve secured contracts in this segment in the mid 200s. We expect this trend to continue for similar work commencing in 2020. It remains to be seen where rates will be for some of the term work being tendered now, but I expect rates for these longer-term programs commencing in 2021 to be above the spot rates in 2020. We took a strategic decision to focus on pricing versus utilization, and we're pleased to see that there is overall more discipline in the market today. It's not where it should be, but it's getting better and will continue to improve as improving demand opens up opportunities for industry consolidation facilitating further fleet rationalization, which will in turn assist in the supply demand balance. We remain focused on deploying capital wisely, whether it being reactivating idle units only when justified by contracting opportunities or spending on the fleet to increase operational and technical competitiveness. Capital and contracting discipline is what you have seen us preaching, and it's what you should continue to expect from us. It's also the basis upon which our stakeholders will ultimately derive value. Here at Seadrill, we continue to be focused on lowering costs and improving efficiency. After a massive growth phase, we’ve streamlined consolidating six operating regions into two. We continue to develop our shared services model, including over the past year consolidating worldwide technical services and supply chain, co-locating them in Houston, close to our major vendors. We continue to evaluate and pursue further efficiencies in our processes and organization that will improve our already competitive position. Last quarter, I mentioned targeted investments that we're making in technology that improved performance and safety, specifically our proprietary Plato performance management system, BOP monitoring system and Vision IQ, which uses LIDAR technology to keep people safe in the red zone. I’m very proud to see Seadrill and the folks who develop this technology being recognized for their efforts. These have included a recent feature article in the FT on Vision IQ, and just this week an award from the Petroleum Economist for our work and innovation. More recently, we pioneered the use of hybrid power on the West Mira, making her the first floater in the world to be awarded DNV's GL Battery Power class notation. By incorporating batteries onto the rig, we reduced the one-time of the diesel engines, thereby increasing efficiency whilst lowering emissions. This is part of our continued focus and commitments on ESG. We've been benchmarking ourselves as part of the carbon disclosure project for seven years now. Over that period, our progress has placed us in an industry-leading position. The reason I point out these efforts is not just to beat our own drum, but more so to make it clear that our focus on maintaining capital discipline and innovation are not mutually exclusive. We will continue to make targeted investments where they’ve a clear link to making us more competitive, improving performance we provide our customers while keeping our people safer. And with respect to safety, we will continue to share this technology with the industry. Turning now to the results of the quarter, the economic utilization of the fleet was 93%, mainly related to a 5-year classing on the West Linus. Excluding this, utilization was 95% in line with levels you expect to see. We added $123 million in backlog during the quarter, which I will talk about in a moment. Our joint venture Sonadrill secured a nine well contract for the Sonangol Libongos, adding $101 million of backlog into the joint venture and the rig commenced operations post quarter end. We recorded an impairment on our investment in Seadrill Partners, which Stuart will provide more details on later in the call. And finally, we closed the quarter with $1.4 billion in cash on hand. Turning now to recent contract wins. During the third quarter, we added approximately $123 million in backlog, primarily related to the following contracts. The West Neptune secured a 1-year contract with log in the U.S Gulf of Mexico, in direct continuation with its existing contract. This is a 30% year-on-year improvement in day rate and was the first rate to breach $200,000 a day in the Gulf of Mexico. An important signpost for what has been a very competitive market. AOD II and West Callisto were each awarded short-term extensions with Saudi Aramco. We’ve a long operating history with Saudi Aramco and have amongst the best operating rigs in their fleet. These short-term extensions should be viewed in the context of the AOD I for which we concluded a long-term extension in Q1, and the productive discussions that we continue to have with Aramco about extending the three remaining rigs we have working in the Kingdom. The third quarter was relatively quiet, which is not uncommon, but year-on-year there's been a material step up in the number of fixtures. And we’re optimistic about Q4 having already secured more than double the Q3 additions post quarter end. Already this quarter additional wells have been added on both the West Hercules and West Phoenix in Norway. Speaking to the solid operations on these rigs and the strength of the market in the NCS. Further to my previous comments regarding our operations and discussions in Saudi Arabia, the AOD II was awarded a further six-month extension. We secured a 2-year contract on the West Telesto with Petrobras in Brazil. Six months ago the price levels in this market, primarily driven by local players made it unattractive to us. Now that much of that supply has been taken up, opportunities have begun to emerge in this important high spec ultra deepwater basin. The Telesto extension is a good example of working collaboratively with our customers. This contract which begins in direct continuation allows us to avoid a protracted out of service time or having to switch customers between contracts. The required 5-year classing will be performed in-country with two short out of service periods during Q4 '19 and Q1 2020. Minimal upgrades required since it's the same customer and we will ensure continued good operations in the rig by maintaining the same crew going forward. And lastly, just yesterday, the West Carina was awarded a full well plus six optional well contract with PTTEP in Malaysia. The contract is expected to commence in Q1 2020, which fits nicely with a 5-year class in currently underway in Malaysia. The day rate demonstrate the continued strengthening of the high specification Florida market. In addition to the $250 million of backlog that I already described in Q4, we are in advanced discussions for additional work that we expect to close before year-end. With that, I will turn things over to Stuart to take you through the financials.

Thank you, Anton and I will draw your attention to Page 7. I will take you through the key drivers for our results for the third quarter. It's been a relatively quiet quarter from an operational perspective, economic utilization was 93%. As Anton has mentioned, that was slightly lower than we anticipated because of the West line has been out on the 5-year classification. The largest elements of change in relation to both the revenue and EBITDA is the reimbursable. These are costs that we incur on behalf of other parties and then recharge to those parties. We are incurring costs for Sonadrill and the northern drilling and preparing their rigs to go the market. From a revenue perspective, for the quarter, we're at $367 million compared to $320 million in Q2 as well as the [indiscernible] impacts, we’ve had higher operating days during the quarter, which has contributed the revenue. At an EBITDA level, we are at $85 million compared to $69 million in Q2, as well as having the higher operating days, we obviously had some higher associated costs attached to those, but we’ve also benefited in the quarter by a resolution of the Sevan Louisiana loss of higher insurance claim. In relation to the guidance for the fourth quarter, we expect our adjusted EBITDA to be approximately $40 million. This is showing a further completion of legacy contracts as well as the West Saturn coming off contract. Turning then to Slide 8, which is our results from associated companies. Our operating nonconsolidated entities, which are Seadrill Partners, SeaMex, Archer and Seabras are achieving good utilization levels as well as generating reasonable EBITDA. The two new joint ventures, Sonadrill and Gulfdrill are establishing their operations. And post quarter end, the Libongos became operational in Angola. However, net profit level, these entities are still showing losses because of amortization and finance costs predominantly associated with Seadrill Partners. From a serial perspective, our share of the loss in these entities increased from $22 million to $33 million, predominantly because of the completion of the Seabras [indiscernible] contract. However, we’ve signed a contract for Topazio to utilize that vessel through 2020. And also Seabras has returned $90 million to Seadrill in loans and distribution payments during the quarter. Outside of the operating activities, Seadrill Partners was suspended from the New York Stock Exchange. As a consequence, we’ve to consider an impairment of that asset. Turning then to Slide 9 and the income statement. So below the $85 million of EBITDA we have for the quarter, the two major movements here in addition to the associate companies I have already been through. From a Seadrill Partners perspective, the trigger event, forward-looking impairment was the suspension from trading from New York Stock Exchange. And we consider this as another contemporary change in this respect. As a consequence, we booked during the quarter $302 million as impairment of our investments in Seadrill Partners. The other major change in terms of the income statement is in relation to income tax. And you recall in Q2, we have the benefit of some changes in uncertain tax revisions arising from changes in U.S legislation, which was obviously not repeated in the third quarter. From a cash flow perspective, after taking our net loss of $521 million for the quarter after the write-down of Seadrill Partners. If we adjust the non-cash items, our working capital and our maintenance costs, we’ve consumed $60 million of cash from operations in Q3. This reflects improved EBITDA and payments in advance and Sonadrill compared to the $85 million consumed in Q2. From an investing perspective, we benefited from the Seabras payments received in the quarter. On the financing side, we had payments related to the debt facilities of Ship Finance Limited. And obviously in comparison to Q2, and Q2 we have the cash outflow associated with the NSN tender. And overall terms from a catch perspective, we consumed $24 million of cash during the quarter. And that's then reflected on our balance sheet on Slide 11. So our cash position at the end of the quarter was $1.445 billion, of which $229 million is in relation to restricted cash. In terms of other movements on the balance sheet, the current assets decreased due to the amortization of favorable contracts arising from fresh start accounting. The non-current assets decreased principally in relation to the Seadrill Partners write-off. And in terms of the current liabilities and non-current liabilities, there is a change here simply through the [indiscernible] with third quarter of debt amortization being classified. Finally in relation to the capital structure and our liquidity position. The cash at $1.445 billion together with $500 million of the amortization conversion election we hold really underpins our liquidity. We are in the process of utilizing the ACE for the first time and we will continue to use the ACE through 2020. So that we will have no amortization of our debt until 2021 and no maturities on our debt until 2022. This means we got time to manage our long-term capital structure, but we do believe in an early engagement with all of our stakeholders. And with respect to the banking facilities, that has already started as we’ve had a number of individual meetings with all of the banks over the past two months. In terms of capital structure, it remains our priority to focus on the continued pay down of the NSNs where feasible. That concludes the presentation we have today. And now I would like to hand over to questions from the audience.

[Operator Instructions] Our first question comes from Patrick Fitzgerald with Baird. Please go ahead.

Hi, guys. What's going to happen with the $416 million sellers note that’s due to you guys in December of this year from SeaMex -- at SeaMex, I should say.

Yes. The SeaMex sellers credit, although coming to you at the end of the year is subordinated behind the bank debt.

Okay. So, I guess you just extend it?

Correct. It's automatically extended, and we will continue and then ultimately sits behind the bank debt.

Okay. Is there -- you had highlighted earlier this year that you had -- were seeking to try to monetize the assets that you could in terms of SeaMex and Seabras Sapuras. Is there just no market out there to refinance some of the debt on those entities despite the fact that they’re performing very well from a cash flow perspective or what’s the situation there?

So, I'm not sure I would characterize it that way. I mean, we have a number of levers available, and that is one of them. SeaMex sellers credit obviously and Sapura, the JV. It's about the right time and the right place to get value for it, so we continue to look at options in that regard, and I don't think we are going to get into more details on that on the call.

Okay. Footnote 8 of the fleet status report talks about the potential discount in day rates at SeaMex. Could you discuss what that means?

Yes. I mean, we’ve had a long operating history with Pemex throughout SeaMex joint venture. It's a solid market with long-term contracts. We have had these discussions from time-to-time on an ongoing basis, and we will continue to. Right now, the contractual right is for the rates to take a step up, but we're currently engaged in a discussion with Pemex about the go forward on these contracts. We’ve had a number of discussions. They’re very productive, but nothing is concluded yet, so I think we will just have to see how those play out. We do have quite a good history of finding mutually beneficial agreements with our customers whether they be blending extend or working with our customers. So, we just cannot see how that plays out.

Great. Thanks for the color. And the -- on the new contract for the Topazio, is that at a day rate near where those have been contracted before, or -- any color on that would be helpful.

I think it's fair to say that the market is in a different place to 5, 6 years ago when pretty much any vessel or rig was originally contracted, but I will say it's a solid contract and it's a good contract for that vessel to have.

All right. Thanks a lot. I will jump back in queue.

Thanks.

[Operator Instructions] Our next question comes from Lukas Daul with ABG. Please go ahead.

Thank you. Good afternoon, gentlemen.

Hi, Lukas.

Looking at your floaters that are available in 2020, Jupiter, Saturn, and Louisiana and Carina becoming available, can you just quickly talk about the marketing opportunities you see for those rigs as we speak?

Sure. So, hi, Lukas. So, we will start with Saturn. She is currently located in Trinidad and completing her current 5-year survey. We are in discussions. I will call them advanced with the potential opportunity that should commence in mid 2020. We will look for some short-term work in the event she is ready to go before hand. And I hope I can give you guys some more color on that in the near future. With respect to the Jupiter, that rig is still working in Nigeria. We expect it soon to conclude its program with Total. We are marketing it internationally. There are some attractive opportunities in West Africa that would obviously be a perfect fit. It's a balance between term and timing. So, there may be some gap there that we need to fill with some short-term opportunities. Finally, for the Capricorn, which is Seadrill Partners, we will probably leave that one to discuss for them on their call. But for the Louisiana, we are continuing to dialogue with a number of the customers that we've worked with. There is an interest given that rig’s unique capability to work in shallow water, in DP mode, which provides some cost savings for the operator, and we're confident we'll see continued interest through 2020. I wouldn't signal that it's going to be a long-term contract, but there will be some future spot work for that rig.

I will say, overall, Lukas, I mean we always try to balance. One of the benefits of scale and having size is managing the benefits of short-term versus long-term opportunities and that’s something we always have to weigh up against each other. What we don’t want to do is take a short-term opportunity that puts us out of the running timing wise for a longer term, more attractive opportunity in another market. So, I think what you will see is a focus for some of these rigs on longer term opportunities. And as Matt said, we need to fill in on the front-end to fill the gap, but we do expect to see some additional fixtures in the fourth quarter.

Okay. So with that kind of outlook, let's say being in discussions on all of those rigs, what would be the next two rigs, one or two rigs that you would be looking to reactivate because you don't really have that much near-term availability besides those four?

I think I’ve been public before. I think that the -- probably the first candidates you'll see for reactivation, may be some of our high specification jack ups as we move into 2020. We -- as I said in my opening comments, the good news side of the story is the recovered market and we can clearly see the trends in the contango in the benign deepwater market. But the costs involved in reactivating deepwater rigs, especially when you consider that most of these rigs both need a reactivation process as well as an SPS to be performed. I don't think as an industry the rates are at a level quite yet where it's a sensible capital decision. I think we’re heading that direction. But we are not quite there yet, but let's just see how the market plays out in the next little while.

Okay. Thanks for the color.

Our next question comes from Ben Fader-Rattner with Canyon Capital. Please go ahead.

Hi. Could you disclose what the clean day rate would be on the West Carina?

Hey, Ben. Look, we are working with our customers to get them on board with disclosing day rates on our fleet status. I think you'll notice that it's more populated than it's been before. But there is a sensitivity around it for each and every reason that an operator has and everybody is different. So at this time, that's not something I can comment on. But I will say, if you look at the -- some of the banks and the brokers and the analysts reports that have come out regarding the day rates, you can probably triangulate from there. Those folks are pretty smart when it comes to those numbers. So I think the numbers that are out there are fairly accurate.

Great. That’s all I had. Thanks.

Thanks.

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

Thanks everyone for joining and that concludes our Q3 conference call.

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