Q1 2020 Seadrill Ltd Earnings Call

Welcome to de Seadrill Limited Q1, Twentytwenty results for the quarter ended 31 March 2020 conference call.

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Well, 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 uncertainties included on page two of the presentation is a comprehensive list.

Forward looking statements for additional information that's or do you are STC filings. Please visit our website at www Dot Seadrill Dot com.

I would now like to turn the conference over to and sounds good.

Chief Executive Officer. Please go ahead.

Thank you good morning, and welcome to Seadrills earnings call. According to 30 stores March Twentytwenty.

Thank you to those dialing in today to lessen American depicts the chief executive.

First take you through some of the highlights for the quarter provide an overview of market conditions and how we're meeting some of the challenges, including navigating the covert 19 pandemic.

Then handled but just to a Jackson our CFO to take you through all financial performance before we open up the lines for questions.

The Q and a session will also happening if Nelson Chief operating officer, and Mac line, Chief commercial officer available to answer questions.

During Q1, we have continued to deliver for custom as demonstrated our ability to adapt to the new reality imposed by covert 19.

Particularly would like to express deep gratitude to all about people, who have gone above and beyond to ensure operational continuity for seadrill and our customers this quarter.

Continue to be humbled by their dedication.

Turning now to the results of the cold up extremely well give you more detail on later.

Technical utilization for the quarter was a solid 95%.

Adjusted EBITDA of 55 million actually closed the quarter with 1.2 billion them in cash on hand.

Operationally Wal Mart monitoring and managing the impact of coated 19, and they affect this and the weaker oil price is having on our customers' behavior.

I'm missing piece challenge as we had a solid operational corridor and we continue to receive recognition from our customers during the quarter excellent operational delivery on both our own can manage greg's.

We remain laser focused on improving the efficiency, which we've run out business, which I'll come back to later.

On the commercial side, we added 77 million in backlog during first quarter and have added another 41 million post quarter end.

We ended the quarter with backlog position of $2.5 billion.

Subsequent to the corridor the optimal like joined the board of directors, replacing or get things that blocked out effective April 21st I'd like to personally. Thank you for her dedication and service to Seadrill. We wish you a good luck in our future endeavors and welcome to offer to the border.

Moving on to take a closer look at the market.

Seadrill and the industry have encountered significant challenges this border.

The impact of coping 19, and an adverse market environment as a result of both supply and demand side shops are events, whose effects are being felt no me by us, but also the entire industry.

Well the operators of customers cutting capex budgets were experiencing a reduction in exploration activity and delays in sanctioning up development programs.

These deep cost cutting measures will impact supply and demand dynamics, putting pressure on day rates and driving down utilization for all asset types in the coming quarters.

In response to the current environment, well, maintaining our cost competitive position by reducing costs, both on and off shore. A focus today is on preserving liquidity and adjusting our cost base in line with current and expected future market conditions.

In anticipation of an extended downturn when evaluating how we position ourselves most effectively for the future.

This includes appraising, the long term viability of our assets and taking the necessary steps toward a move uncompetitive rigs from the market.

Revaluating, our liabilities and enacting measures to streamline our capital structure, all of which do you up will expand upon later.

As noted in the previous slide covert 19 has walked an unprecedented impact not only on the global markets, but also on people.

We are treating this crisis as an ongoing operational incident.

Focusing on health and welfare about people, maintaining operational continuity and managing through the period in collaboration with our customers.

Our people are both our greatest asset and our greatest responsibility.

I cannot stress enough. They had ROIC efforts our people have gone to in particular, those whose time unfold rigs cannot be measured in terms of months not weeks to continue to deliver safe operations in the midst to covert 19 related border closures and travel restrictions.

We have adapted and more recently are seeing opportunities at times working together what appears to start to facilitate crew rotations why a charter flights in locations, where commercial air travel is not yet available.

Operationally, we continue to provide seamless business continuity.

Onshore teams have all adopted new ways of working through collaboration with our partners and supply as we have not yet faced a situation where we have stopped operations due to lack of spare parts are necessary supplies in any of our 28 worldwide operating locations.

Despite our contract backlog being relatively less affected than our peers. We've taken proactive measures to address the change market environment through the implementation of a companywide cash preservation and efficiency plan targeted to deliver more than $130 million in cash savings over the next 18 months.

Including we're choosing DNA head count by more than 15% and reducing target compensation for the senior management team and myself by 20% to 45%.

Finally, while our strong relationships enable us to focus on maintaining our operational delivery. These are challenging times across the industry, including for all customers.

Where needed having constructive discussions to manage contractual issues arising from covert 19 focused on mutually beneficial outcomes.

On the commercial front, we're pleased to report, adding $77 million to our backlog this quarter a respectable results given the uncertainty in the market today.

The backlog we've secured this quarter is the result of strong relationships, we hold with our customers leading to repeat business.

The majority about backlog secure it this quarter comes from a harsh environment segment.

For options exercised on the west Hercules contracted ethanol with whom we have amassed a frame agreements in Norway, adding $51 million taught backlog.

The continuous optionality mechanism in this contract could see it continues to be utilized by after nor until 2022.

In addition, we added $17 million top backlog cannot benign environment Ultra deepwater floater segment that is the Stephane, Louisiana received the one well extension in the Gulf of Mexico, with Walter oil and gas.

Finally, we saw $9 million that had to our backlog from up a nine in buying Jackup segment with single well extensions for the west Telesto in West Cressida.

During the quarter as a result of covert 19 related impact on our customers operations in Angola, we agreed to suspend the operations on the West Gemini the rig it's been moved in Namibia and is expected to restart operations in Angola in Q1 of 2021.

While we haven't had ever break terminated to date, we have received a notice of intent to terminate the west Phoenix due to a delay in the customers development drilling program.

The rate. It's currently operating in Norway with Neptune Energy. We have indicated operations are expected to conclude in July seven months earlier than anticipated.

The EBITDA impact over the long term is expected to be neutral.

Following the quarter end to what seven drillship was awarded a true well contract, adding $41 million affirmed backlog and two and a half years of continuous optionality thereafter.

This contract extends our longstanding productive relationship with Exxon continues our presence in the attractive Brazil market, where we have operated for over a decade.

We have 2.5 billion dollars' worth of backlog to deliver over the next few years and we're confident because pipeline of work combined with a premium customer base puts us in a solid position ahead of the eventual market recovery.

Continuing with commercial and operational developments Nonconsolidated entities has seen strong performance this quarter again, despite the challenging environment.

And then exemplifying the city Department has had an economic utilization of 99% for the quarter one of the strongest operational quotas in its history. Despite covert 19 disruptions.

Seadrill partners is currently in discussions to address its 2021 debt maturity with the aim of building a sustainable capital structure that supports its continued and safe operations.

See for US a 50 50, P. LSV JV with support it can China continues to deliver south solid operations with five vessels remaining on contract with Petrobras in Brazil, and the six the vessel operating in the spot market. Most recent being a short term assignments in Mexico.

In Gulf drove progress continues the JV as one rig operating a second expected to commence in July and the remaining three units on track to commence over the next 12 months.

Within the see you next JV in Mexico, We concluded a long dated negotiations with Pemex guarding contract day rates.

In summary, we granted day rate concessions six months with market index rates thereafter under the current contracts, while gaining a three year extension on all five rigs cementing our anchor position in this key jackup market until 2026.

Sorry control as with most operations in Angola has been impacted by operating decisions related to covert 19, we've agreed to suspend operations on the LIBOR goes through the remainder of Twentytwenty with expected we start in Q1 of 2021.

Now I'll hand, it over to Stuart will take you through the financials.

Thank you rental.

I'll start with slide nine which is the revenue and EBITDA bridge for the quarter.

Revenue for the quarter was 321 million compared to 398 million.

For 2019.

This 19% reduction was predominately a result was or have a reduction in all reimbursable revenue.

Her more automation and from some natural under the management contracts, we have for their ears.

We also saw adoption innovate operating days during the quarter.

EBITDA for the quarter was 55 million compared to 39 million fourth quarter of 2019.

But to a change in relation to the operating costs.

Well, we had lower repair and maintenance expenses and lower personnel costs as a result of the completion of contracts.

We're also starting to see some of the early benefits of yesterday reductions, which until mentioned.

Finally, our EBITDA margin for the quarter was a 17% which compares to 10% in the fourth quarter of 2090.

Turning then to the abbreviated income statement, so below adjusted EBITDA.

Our income statement is also the dominated by the American patents, we have taken during the quarter and I'll come back for those later.

Of the other Antero movement, <unk> depreciation and amortization is down as a result of the completion of favorable drilling contractors recognized on fresh start.

Our children and adults and associated comp companies predominantly relates to wash the loss in Seadrill partners.

Which is take a material impairments during the quarter.

From an investment perspective, it goes a written down the value of a seadrill partners holding to zero. That's we expect this entity will move into a comprehensive restructuring of its balance sheet and the come future.

Finally, with respect to investment and the ultra convertible bond.

We took an impairment the carrying value having reached an agreement without yet to reduce the face value the debt, but also to reduce conversion price of the ball.

And I hope that Tom that loss for the quarter was 1.565 billion.

[noise] large settlement that is obviously the impairments we've taken so tell me events. They have the rig assets, let's hear a change in the oil price and counted in the first quarter Twentytwenty was a trick or to reevaluate the carrying value of our assets.

In this respect we've looked at the expected duration of assets being cold stacked, which we now expect to be longer.

The reactivation costs associated with those assets, which we now expect to be higher because of longer durations and cold stacking.

And the return there can be achieved from the reactivation investment, which we now expect to be love it because of cost increases and the lower oil price expectations.

On that basis, the probability of scrapping assets, particularly somebody said most of the lessons has increased only therefore taken a 1.2 billion impairment charge during the quarter.

With respect to retiring assets that are up to 10 rigs, which maybe scraps and over the coming months, we would be looking to prioritize these activities.

Okay, that's a cash right.

Cash type perspective, we had a net cash outflow of $159 million during the quarter.

The main drivers for this for an increase in the changes in operating assets in life Sciences.

As as work performed for Sonic drill and no relation is still to be reimbursed under our management contracts.

Our investing activities reflected the purchase of a non controlling interest in has holding in Nigeria.

Oh financing activities, so a higher out so that's the ship finance variable interest entity made nextel debt prepayment during the quarter.

Finally from FX perspective, the change in the Brazilian right now so cash held and attacks pay and defend regime resulted in a revaluation when measured in dollars hubs.

Turning them from the balance sheet at the end of the quota total cash because it's a 1.2 billion.

Which 167 million was in restricted cash.

Other movements on the assets our current assets went down from changes in the management contract receivables.

The application that the new accounting standards on credit loss allowances.

I don't know Noncurrent assets, that's reflected the 1.2 billion impairment charge as well as innovation rice abuse and lease liabilities no related to health drilled a joint venture.

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On the liability side the major change of notes is the debt repayment in respect of ship philosophy I.

Oh equity and redeemable non controlling interests at the end of the go to walk on the 116 million.

Which reflects the losses, we booked during the first quarter Twentytwenty.

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Turning on to the capital structure that a number of changes arising in the quarter, which impact our capital structure in different ways.

Let's say we were notified in March, but the New York Stock Exchange 30 day average share price dropped below $1 a share.

As a consequence, we need to either cure or do you list for New York Stock Exchange and we've taken the decision to do list from the NYSE NYSE and focus our activities on the also this thing going forward.

We will support arrangements the U.S. held shares the trade and the over the counter market.

I will also be taking this opportunity to move to haul feels reporting commencing in the second quarter of Twentytwenty.

With respect to the balance sheet, they've been a case with all senior credit as a since late 2019 and discussions around an interim solution before moving to a more comprehensive restructuring.

But the market changes based on an oil price Anna Kendrick 19 perspective, a rising in the last three months, we've decided not to progress with the interim solution.

To move directly to a comprehensive restructuring.

As a consequence within the process of confirming appointments for both financial and legal advisors at this time.

Our expectation is that a comprehensive restructuring will encompass substantial conversion of indebtedness into equity.

[noise] finally in relation to the balance sheet I would say on the restructuring I would say that we have 1.2 billion cash on hand, I always believe this is sufficient liquidity to match the ongoing operating activities as well as to manage the restructuring process.

Finally, I'd heard as mentioned the focus on cash preservation <unk> in this regard we've taken a number of actions, which relate to 130 million of cost reductions over the coming 18 month.

The 15% reduction in onshore G.A. costs.

I'd also sarasota reduced activity levels.

Well said they have adoption it all total onshore and offshore headcount reducing from 4500 to 3100.

And with a a whole lot prospect for questions.

I would open the lines for questions.

We will now begin the question and answer session, who asked the question. The press Star then one on your telephone keypad.

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The first question comes from Lukas Daul EG.

Please go ahead.

Thank you.

Good afternoon, Oh gosh.

I look as Mike.

Talking a little bit about a your decision to sort of Oh go ahead, but scrapping the assets and in particular to semi.

Can you sort of but a bit more color on that in terms of how much of the decision was influenced by D.

Capex that would be necessary to bring them back to service and a how much you sort of influence by your view on on the demand for these assets going forward.

Oh I'll start with I'd say Stewart has something that after it's I mean, I think Lucas they both of those out significant components. So that's I mean, we continue to continually assess the viability and competitiveness suffice it to the market.

You know one part of it is how much capex is required to reactivate it and obviously longer a rig is stocks or and hasn't been a hasn't been in the market. The most significant is going to be the capex that's required to bring it back into market and then the next thing is as you know what the fee.

But outlook for the market looks like and that's good said factoring you know what sort of return when you look at those together combination of the markets and investment required whether whether it justifies the long term viability of the assets we've always been.

I would say quite financially disciplined with a with how we spend our capex and not bringing rigs back into a market that can support it but this is up this is an ongoing process and obviously the changes that we've seen in the market for the last six months have moved some of those factors that go into into that.

It's a into that calculus, and and Ah henceforth where we've come to this you know.

These decisions to to take these impairments.

Hey, if I'd just add to that nothing Entellus mentioned 10 is quite that yet the industry is beset with too many assets and too much debt I'm said, while sweeping having discussions with all banks surrounded interim solution that moving to comprehensive.

Restructuring.

Which is addressing the liability side or the asset. It's also incumbent on us to address the asset side of the balance sheet.

And in that respect we have we've made sure we introduce investment return measures associated with the future investment for US. It's what's your current accounts that another investment is based upon recovering the cold stacking costs and the reactivation costs Oh.

Well said some oil prices have declined in demand as that's gone down we expect assets to be and cold stack for longer and therefore, making a return becomes more difficult.

Mm Hmm I understand a and I think sort of its although it's a difficult decision. It's a it's it's probably a the right thing to do but Oh on that note Oh I think it will be equally important to sort of on there's a in the industry follow through on that.

And we have seen some of your publicly listed peers are doing it similar thing when I was wondering whether you have an opinion on a well, though a smaller private companies might do a into like the downturn.

I can't obviously I can't speculate so no what seemed folks mines I would say over all the way we view it let's just talk about the Oh.

Hi Tech flow decide.

You know where wed like to see and and we are our as Stuart said are going to do our part but would probably like to see a around 50 rigs taken out of the market.

Okay. That's I'm not sure. Thank you very much.

Right.

Thank you again, if you'd have a question.

Please press Star then one I touched on phone.

The next question comes from Patrick Fitzgerald with Baird. Please go.

[noise] well guys. Thanks, Thanks for taking my questions are you.

Did the larger Stephen will get paid by add that you Max when the contract was successfully renegotiated.

Oh I'm sorry, your question about the Cmax receivables.

Yeah.

We have we have received payments from pmax during the first quarter.

You know that the the challenges with payments from contractors and subcontractors are or are not just about outside of course, I think having concluded the negotiations and having a clear path forward with them. We believe a well will help that like we did receive some money during the quarter right.

And did you close we expect to continue to collect.

Okay, but you still have you know like net debt to third parties went up despite you generating you know a decent amount of EBITDA in the quarter. So I you know like you, we don't get to see a full balance sheet to that entity, but.

You know it seems to me reasonable to assume that don't receivable balance is still very high relative to historical levels there right.

It is the receivable balances high then we would like it to be but you know and I think as you rightly put Oh you know these long dated negotiations that we were having while certainly not the only factor on or you know played into it partly and haven't concluded those you know fairly recently.

I believe that we'll we'll work through that.

Okay. Thank you and just a question about how the market index the rate works.

[music].

For example, like what what type of day rate can we expect for the second quarter of this year.

Let me, let Matt answer that maybe I'll come back up so look I don't I want to get into specifics, but but with respect to that the mechanism.

It does have a floor to ceiling.

So.

Various potential for upside Oh, I I think before protects us from where are we saying or the market will go in the near term.

And you can probably take a read from the first six months worth of fixed rate. It you'll see the status as an indicator of where that sets. So you know where it's kind of going six to 12 months time, I think there will be some downward rate pressure or given the drop in the drop in the number of tenders and activity in them.

Market compared to what we'll see in Q4 and the first half acute why.

Before koby, but.

Okay. Thank you that's helpful.

And what is the.

Sorry, you know, but but this is simple question, but I actually don't know the answer what is their rates.

And the maturity of the debt.

At the third party debt at Cmax and Steve Ross.

So in terms of a C. Max the maturity date is I'm not sure if 2021.

But we don't expect all that that will be repaid at that time is being amortized stuff as we go ahead.

But the contracts go beyond that point at which we do anticipate it's everything over that.

And to see Brasileira different maturities from about 2025.

The maturities there and the third party stick that staggered 2025.

Mature, but 2025.

On the log cabin at the secret.

Okay, and what are the what are the blended rates it does do entities.

Blended interest rates yeah.

Based on the top I, if we can provide you that Uh huh.

Alright, Thanks, all I'll jump back in queue. Thank you.

Okay.

This concludes our question and answer session I would like to turn the conference back over to end sounds it but its any closing remarks.

It's like the thanks, everybody for your interest in calling in today and we look forward to talking to you again next quarter. Thanks, a lot and have a great day [noise].

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

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