Seadrill(SDRL) - 2023 Q3 - Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Seadrill operates a fleet of 19 drilling rigs, with 16 operational and three cold stacked, and manages seven third-party rigs - As of September 30, 2023, Seadrill's owned fleet consists of 19 rigs: 16 are operating (including rigs leased to joint ventures) and 3 are cold stacked[10] - The company's operating fleet includes eleven floaters, two harsh environment units, and three jackups[10] - In addition to its owned fleet, Seadrill provides management services for seven third-party rigs[10] Significant Developments since January 1, 2023 Seadrill completed the Aquadrill acquisition, refinanced debt, disposed of non-core assets, and initiated a share repurchase program since January 2023 - Completed the acquisition of Aquadrill on April 3, 2023, adding four drillships, one semi-submersible, and three tender-assist units to its fleet[15] - Executed a major debt refinancing in July 2023 by issuing $575 million in Senior Secured Second Lien Notes due 2030, using the proceeds to prepay existing first and second lien facilities[17][81] - Disposed of three tender-assist units acquired from Aquadrill for an aggregate price of $84 million, completing the sale on July 28, 2023[16] - Authorized a share repurchase program of up to $250 million in August 2023, which was subsequently increased to a total of $500 million[18] - Announced a proposal to consolidate corporate offices in Houston and close the London office by March 31, 2024[20] Contract Backlog Seadrill's contract backlog totaled $2,306 million as of September 30, 2023, primarily from drilling contracts, with most revenues expected in 2024 Contract Backlog Comparison (in $ millions) | Category | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Drilling contracts | 1,832 | 1,925 | | Other | 474 | 390 | | Total contract backlog | 2,306 | 2,315 | Projected Backlog Realization as of Sep 30, 2023 (in $ millions) | Period | Drilling Contracts | Other | Total | | :--- | :--- | :--- | :--- | | Remainder of 2023 | 324 | 68 | 392 | | 2024 | 797 | 281 | 1,078 | | 2025 | 474 | 119 | 593 | | Thereafter | 237 | 6 | 243 | | Total | 1,832 | 474 | 2,306 | Market Overview and Trends The offshore drilling market continues to recover, with harsh environment floater utilization at 93% and benign environment drillship utilization above 90% Average Brent Oil Price ($/bbl) | Period | Dec-2020 | Dec-2021 | Dec-2022 | Sep-2023 | | :--- | :--- | :--- | :--- | | Average Price | 42 | 71 | 101 | 82 | Floater Marketed Utilization | Segment | Dec-2021 | Dec-2022 | Sep-2023 | | :--- | :--- | :--- | :--- | | Harsh environment floater | 77% | 82% | 93% | | Benign environment floater | 80% | 81% | 85% | - Marketed utilization in the harsh environment floater segment has improved considerably due to a slight increase in contracted rigs and a reduction in total supply from attrition[28] - Improved demand, particularly for drillships, has driven higher utilization in the benign-environment floater segment, with utilization in the US Gulf of Mexico and Brazil trending above 90% and 95%, respectively[29] Results of Operations Q3 2023 operating revenues increased to $414 million with a $117 million operating profit, driven by the Aquadrill acquisition, larger fleet, and higher dayrates Consolidated Results of Operations (in $ millions) | Metric | Q3 2023 (Successor) | Q3 2022 (Successor) | 9M 2023 (Successor) | | :--- | :--- | :--- | :--- | | Operating revenues | 414 | 269 | 1,094 | | Operating profit | 117 | 20 | 277 | | Net profit | 90 | (16) | 227 | - The acquisition of Aquadrill, completed on April 3, 2023, is a primary driver of the financial results; the merger was accounted for as a business combination, with Aquadrill's assets and liabilities recorded at fair value, using a convenience date of April 1, 2023[30] Operating revenues Q3 2023 operating revenues increased to $414 million from $269 million, driven by more rigs on contract (7 to 12) and a higher average dayrate of $290,000 Operating Revenues Breakdown (in $ millions) | Revenue Type | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Contract revenues | 324 | 187 | | Reimbursable revenues | 11 | 9 | | Management contract revenues | 68 | 63 | | Other revenues | 11 | 10 | | Total operating revenues | 414 | 269 | - The average number of rigs on contract increased from seven in Q3 2022 to 12 in Q3 2023, mainly due to fleet additions from the Aquadrill acquisition[40] - The average contractual dayrate rose to $290,000 in Q3 2023 from $262,000 in Q3 2022, driven by higher rates on the acquired Aquadrill rigs and new contracts in Brazil[41] - Economic utilization for rigs on contract decreased slightly to 93% in Q3 2023 from 96% in Q3 2022, due to planned downtime on two rigs[42] Operating expenses Total operating expenses rose to $304 million in Q3 2023 from $250 million, primarily due to higher vessel and rig operating expenses from the Aquadrill acquisition Operating Expenses Breakdown (in $ millions) | Expense Type | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Vessel and rig operating expenses | (184) | (137) | | Depreciation and amortization | (39) | (38) | | Management contract expenses | (50) | (49) | | Selling, general and administrative | (20) | (18) | | Merger and integration related | (2) | — | | Total operating expenses | (304) | (250) | - The increase in vessel and rig operating expenses was driven by the additions from the Aquadrill acquisition and the reactivation of rigs in Brazil, partially offset by the return of two leased rigs[49] - Depreciation and amortization remained stable at $39 million, as a $24 million increase in depreciation from the Aquadrill rigs was offset by a $23 million change in amortization of intangible contract assets and liabilities[50][52] Interest expense Interest expense significantly decreased to $15 million in Q3 2023 from $33 million, a direct result of the July 2023 debt refinancing Interest Expense on Debt Facilities (in $ millions) | Debt Facility | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | $575 million bond in issue | (9) | — | | First-lien senior secured | (2) | (4) | | Second lien senior secured | (1) | (27) | | Unsecured convertible bond | (1) | (1) | | Total | (13) | (32) | - The decrease in interest expense is primarily due to the refinancing of the second lien facility, which carried a higher interest rate, with the new $575 million bond[59][60] Other income and expense Total other income and expense was a net income of $10 million in Q3 2023, driven by a $13 million gain from associated companies and higher interest income Other Income and Expense Breakdown (in $ millions) | Item | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Interest income | 10 | 4 | | Share in results from associated companies | 13 | (1) | | Reorganization items, net | — | (3) | | Other financial items | (13) | (3) | | Total other income and expense | 10 | (3) | - The gain from associated companies in Q3 2023 relates to profits from the Sonadrill and Gulfdrill joint ventures[64] - Other financial items in 2023 included a $10 million make-whole fee paid for the early repayment of the first lien debt facility[68] Liquidity and Capital Resources Liquidity strengthened to $1,094 million as of September 30, 2023, driven by cash flow, asset sales, and debt refinancing, including a new $225 million RCF - The company announced a new capital allocation framework prioritizing a conservative capital structure (net leverage target < 1.0x), focused fleet investment, and returning at least 50% of Free Cash Flow to shareholders via repurchases or dividends[70] Available Liquidity (in $ millions) | Component | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Unrestricted cash | 837 | 480 | | Restricted cash | 32 | 118 | | Cash and cash equivalents | 869 | 598 | | Undrawn revolving credit facility | 225 | 125 | | Total available liquidity | 1,094 | 723 | Cash Flow Summary - 9M 2023 (in $ millions) | Cash Flow Category | Amount | | :--- | :--- | | Cash flows provided by operating activities | 147 | | Cash flows provided by investing activities | 100 | | Cash flows provided by financing activities | 20 | Borrowing Activities In Q3 2023, Seadrill fully refinanced its secured debt with $575 million in new bonds and established a new undrawn $225 million revolving credit facility Debt Overview as of September 30, 2023 (in $ millions) | Debt Instrument | Principal Value | Carrying Value | Maturity Date | | :--- | :--- | :--- | :--- | | $575 million bond in issue | 575 | 560 | August 2030 | | $50 million senior convertible bond | 50 | 50 | August 2028 | | Total debt | 625 | 610 | | - Proceeds from the new notes were used to prepay the existing first lien facility ($187 million) and second lien facility ($123 million)[81][148] - A new $225 million, 5-year Senior Secured Revolving Credit Facility (RCF) was established, which remains undrawn[80][83] - The company received corporate credit ratings of B1 (Moody's), B+ (S&P), and B+ (Fitch), all with a stable outlook[82] Interim Financial Statements (unaudited) Consolidated Statements of Operations Q3 2023 unaudited consolidated operations show $414 million in revenues and $90 million net profit, with diluted EPS of $1.10 Key Financial Metrics (in $ millions, except per share data) | Metric | Three months ended Sep 30, 2023 | Nine months ended Sep 30, 2023 | | :--- | :--- | :--- | | Total operating revenues | 414 | 1,094 | | Operating profit | 117 | 277 | | Net profit | 90 | 227 | | Diluted EPS ($) | 1.10 | 3.16 | Consolidated Balance Sheets Balance sheet strengthened with total assets at $4,331 million and equity at $3,115 million as of September 30, 2023, reflecting the Aquadrill acquisition and debt refinancing Balance Sheet Summary (in $ millions) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | 837 | 480 | | Drilling units | 2,822 | 1,668 | | Total assets | 4,331 | 2,801 | | Total current liabilities | 358 | 404 | | Long-term debt | 610 | 496 | | Total liabilities | 1,216 | 1,099 | | Total equity | 3,115 | 1,702 | Consolidated Statements of Cash Flows For 9M 2023, Seadrill generated $147 million from operations, $100 million from investing, and $20 million from financing, resulting in a $271 million cash increase Cash Flow Summary - Nine Months Ended Sep 30, 2023 (in $ millions) | Cash Flow Category | Amount | | :--- | :--- | | Net cash provided by operating activities | 147 | | Net cash provided by investing activities | 100 | | Net cash provided by financing activities | 20 | | Net increase in cash and cash equivalents | 271 | Notes to the Unaudited Consolidated Financial Statements Notes detail the Aquadrill acquisition, revenue concentration, tax disputes, debt refinancing, and the expanded share repurchase program Note 19 - Business Combinations (Aquadrill Acquisition) Aquadrill acquisition completed April 3, 2023, for $1,274 million (29.9 million shares), with $1,255 million in drilling units acquired at fair value - The acquisition of Aquadrill was completed on April 3, 2023, with Aquadrill surviving as a wholly-owned subsidiary of Seadrill[203] Total Consideration Transferred (in $ millions) | Component | Value | | :--- | :--- | | Consideration issued in Seadrill shares | 1,243 | | Consideration settled by tax withholding | 30 | | Consideration settled in cash | 1 | | Total consideration transferred | 1,274 | Preliminary Purchase Price Allocation (in $ millions) | Category | Value | | :--- | :--- | | Assets acquired: | | | Drilling units | 1,255 | | Total current assets | 152 | | Other non-current assets | 25 | | Total assets acquired | 1,432 | | Liabilities assumed: | | | Total current liabilities | 80 | | Total non-current liabilities | 78 | | Total liabilities assumed | 158 | | Net asset acquired | 1,274 | Note 11 – Debt In Q3 2023, Seadrill issued $575 million in new bonds to repay existing debt and established a new undrawn $225 million revolving credit facility - In July and August 2023, Seadrill issued a total of $575 million in 8.375% Senior Secured Second Lien Notes due 2030[148] - The proceeds were used to prepay the first lien facility ($187 million) and the second lien facility ($123 million), with a $10 million make-whole premium paid on the first lien facility repayment[148][149] - A new $225 million, 5-year first lien revolving credit facility was established in July 2023 and remains undrawn[152] Note 13 – Common shares Total shares increased to 79.9 million after 29.9 million for Aquadrill; a $250 million share repurchase program was authorized, with 1 million shares repurchased - Issued approximately 29.9 million shares to Aquadrill unitholders and equity award holders as part of the merger[164] - A share repurchase program of up to $250 million was authorized on August 14, 2023[164] - By September 2023, approximately 1 million shares were repurchased at a weighted average price of $46.58[164] Note 20 – Subsequent events Post-quarter, the Board increased the share repurchase authorization by $250 million to $500 million total, with an additional 4 million shares repurchased by November 24, 2023 - The Board of Directors increased the total share repurchase authorization to $500 million, adding another $250 million to the program[218] - As of November 24, 2023, Seadrill had repurchased approximately 4 million additional shares at a weighted average price of $41.63 since the end of Q3[218]