Q2 2019 Earnings Call
Good morning, and welcome to the Seadrill Limited quoted Kids 2019 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note that this event is being recorded.
I'd now like to turn the conference over to Ms., Emily head of Investor Relations. Please go ahead.
Thank you.
Welcome to Seadrill Limited Q2, 2019 quarterly conference call.
Included on page two of the presentation is a comprehensive list covering forward looking statement.
For additional information I think you were actually see filings. Please visit our website www Seadrill dot com.
Well that's in the room today, our outcomes good what our C O.
Sure Johnson our CFO .
Not like our Chief commercial officer, and lease Nelson, our Chief operating officer.
And I prepared remarks, you'll hear from I can answer it.
I'm from a couple of all the highlights for the quarter and provide you with all of our views on the market I'm sure. It will then provide a review of the financial performance of the quarter and then we'll open up the line you can take some questions going to the entire team.
And with that I'd like to turn the call over to on top.
Thanks, very much and welcome everyone to our second quarter 2019 aren't in school.
Before I begin I'd like to take the opportunity to welcome our CFO , Phil Jackson to his first quarter coal on the CBL team.
Do it brought with his deep experience with companies from the offshore oil field services space and we're extremely pleased to have him on board is quickly come up to speed on our business welcome to the teams could look like.
To start I'd like to reiterate some key messages that you've heard from me in the past well the market is presenting some challenges I believe in the fundamentals of our business remain unwavering.
Particular, the offshore power was important to meet market demand oil prices remain well within its own way offshore contract a profitable and we expect this could translate into increasing amounts of capital being deployed into offshore exploration and development.
And while this is not yet a healthy market day rates in all segments are recovering and we continue to see the leading indicators pointing in the right direction.
[noise] today, our industry and the broader macro market are dealing with the setback similar to what we faced in the fourth quarter of last year.
As always we remain focused on managing the doctors that we control and being as prepared as we can put the fact is that we don't.
You've seen us what you felt senior secured notes with the tender offer and we continue to be focused on taking out the rest of this funding that was put in place as part of our restructuring.
We have already taken a considerable amount of cost out of our business and we remain laser focused on continuing our work to run up business as efficiently as possible.
We have been and will continue to be disciplined in our contracting strategy, we will not add supply to the market unless dayrates justify doing so.
And finally operations and safety underpin our license to operate excellent operations is in our DNA. We are committed to providing the best service for our customers and the safest environment for our people.
In this regard we continue to build on our proprietary Plato performance management system, which uses a combination of machine learning and AI driven by its computing to drive outperformance and manage the health of our assets.
I'll be OK monitoring system based on the plate. So technology I mean, that's the regular trip regulatory requirements and has already been adopted by a number of our customers in the Gulf of Mexico as it has proven more stable inaccurate than the alternative is already on the market.
And together with our technology partner March then, we're making available to the market all home grown vision high Q system, which uses light all technology to keep workers safer and red zones around moving equipment.
Our decision to share a vision I Q is based on our belief that technology that improves the safety of people should be shared because it's safer industries in all our interests.
Now turning to the results of the quarter.
Economic utilization of 96% was an improvement relative to last quarter's results and we're pleased to have returned to the levels that we expect to see.
We continued our track record of project execution with three new builds in our managed fleet supersonic goal and one from old and drilling delivered successfully during the quarter.
And following on our success with a solid gold JV in Angola, which is progressing to plan. This quarter. We established another significant drilling joint venture together with GE I in Qatar I'll provide further details on Gulf drilled in a few minutes.
And finally, we closed the quarter with 1.5 billion in cash on hand, the major movement being as a result of the completion of the tender offer for the senior secured notes on which Stuart will provide more details later in the call.
[noise].
With respect to our business.
Tendering activity continues to improve in the floater market rates for short term work remain extremely competitive but the market has begun to clearly demonstrate higher rates for long term work and Ford startups.
The overall utilization come marketed unit remains above 80% and there are pockets of strength in the markets for harsh environment and high end ultra deepwater drillships were marketed utilization is approaching 90%.
The improvements in for pricing and utilization our key leading indicators that recovery is progressing and we expect that follow the fixtures made in 2018, Mark the low point in this cycle.
Similarly, we see improving trends in the premium jackup market with marketed utilization above 80% and rains rates trending towards the 80 to $100000 per day range driven by increased activity in the middle East.
There remains a significant bifurcation between premium and standard Jackup units and we expect the preference for premium units to continue and result in further attrition of standard Jackups.
During the second quarter, we added approximately $160 million in backlog related to the follow on contracts.
And in Golar, we extended the west Gemini keeping her busy into August . Following this extension she will undertake or Sps before returning to Angola in Q4 to perform a nine well contract with three options.
Total contract value for the firm portion of this contract is approximately $84 million.
We had a great track record of operating in Angola, and hope to expand our operational footprint year through our Sonic drill JV.
Excellent or exercised three options and the west Hercules in Norway, keeping our business through Q1 2020.
Following the options equity will have access to the west Hercules through a continuous optionality mechanism, which could keep a busy through 2020.
Continuing with our floater fleet, the west Kareena secured a one well contract with Petrobras in Brunei, which was in direct continuation of its contract with Petronas in Malaysia.
Based on this performance and the outlook in Asia, we're confident to be able to secure additional work in the area.
During and after the quarter, we entered into short term extensions with the West coast, though in Aonec, both working with Saudi Aramco.
These units are amongst the highest performance for Saudi Aramco and the short term extensions will facilitate the productive discussions we're having about longer term opportunities for both units.
And finally, the west Telesto secured a six well contract with two options in Malaysia, which commenced in June .
This fixture is at the high end of recent fixtures in Southeast Asia Evidencing continued signs of recovery in this market and the duration of this contract dovetails very nicely with our new Gulf drill joint venture.
Okay as I mentioned earlier, we're excited this quarter to have established a significant drilling joint venture together with GCI in Qatar.
GPI is an important player in this market with a 15 year track record in current operations of seven rigs or half of the Qatar Jackup market.
Qatar is a top three jackup market in terms of utilization of premium Jackups and a market that is expected to demonstrate continuous strength and stability over the next decade.
In the JV Seadrill will provide two jackups from its working fleets and a further three jackups have been secured from a third party shipyard.
Given GDR his track record and critical mass in the market. They will manage the rates with our support on the loan on the long term contracts with Qatar petroleum.
Total contract value is around $650 million with options that could add up to $700 million of additional contract value.
This is an attractive opportunity for us because for tolerances, excisable and long term market.
Potential term if the options are exercised will provide approximately six years of work for each rig.
The critical mass of rigs at least five and the JV plus the seven that GDP I already operating makes for an efficient operation.
No upfront investment is required from us and we will receive a run rate of approximately $20 million a year in margin for our bareboat charters and we expect the JV to be in a position to distribute dividends 12 months from the time the last rig commences its contract.
With that I'll hand, it over to Stewart for the financial highlights.
Thank you and Tom.
Sure run through the financial highlights for the quarter, just highlighting some of the major movements.
And then the and look at the guidance for quarter three.
Turning then to slide number eight in terms of the revenue and EBITDA bridge from an operations perspective, we had 35 rigs of which 17 were working at quarter end.
Eight of those are floaters, and jackups with an economic utilization through the quarter of 96%.
From a contract revenue perspective, it's broadly flat quarter on quarter, we have had some idle time between contracts, but that's been offset by higher day rates on the Gemini Phoenix Hercules and the Telestar.
At a total revenue operating level level. We are 90 million ahead of where we were in quarter one.
This is a consequence of the increase in remote Reimbursable revenues.
Which is driven by the delivery and operations preparations for northern drilling and southern goal.
So there is a corresponding reimbursable expense. So there is a negative impact in terms of our overall margins at an EBITDA level.
Turning then to EBITDA.
We have had idle time, so we've had lower costs as a consequence of that in our operating expenses.
And we've had lower cost on our stacked units as they move location.
And Thats offset what the overdue receivable, we had in Q1, which is obviously not repeated in Q2.
In total terms from an EBITDA perspective for the quarter.
$69 million, which is ahead of the 55 million guidance was provided three months ago.
But thats, primarily due to timing difference on maintenance activities.
Turning then to the income statement and the items below EBITDA.
Lots of moving parts here, so I'll just highlight some of the major movements.
In terms of operating loss were 73 million for the quarter.
Non interest expense line, you start to see the benefit of the secured.
Notes repurchase we had so lower interest costs coming through a 122 compared hundred 30 to three months ago.
In terms of our share of results from associated companies. This reflects a lower level of losses in the period.
Taking taking into account the unwind of basis differences arising from fresh though.
Yes on the derivatives side, we have reduced loss occurring during the period, which is what you would expect to see in terms of forward rates falling during that period.
In terms of the NSN repurchase we have to reflect the premium payment we made for the NSN and at 22 million charges taken as a net loss on debt extinguishment did a debt extinguishment during the quarter.
In terms of marketable securities on Seadrill partners and Archer.
This reflects the change in our share price during during the period.
Well the charge of $14 million.
And the other financial items reflect the interest income and the foreign exchange gains and losses occur incur during the period.
Large element of change comes through in terms of our tax position.
Where we have a credit for the quarter, which reflects the release of uncertain tax positions in relation to changes in us tax legislation.
As well as a reduction in our deferred tax liabilities.
Let's deliver certain net loss for the period of 206 million compared to 296 million.
Three months ago.
Turning then to the highlights in terms of the cash flow.
Our net cash used in operating activities for the quarter was 85 million compared to 99 three months ago.
Our investing activities reflect our ongoing capital expenditures on our drilling units.
We should pass partially offset by the proportion of West Stella day rate received from Seadrill partners as contingent consideration.
In terms of our financing activities significant movement here, which is the repurchase of the senior secured notes.
Just in terms of there are a number of items in terms of senior secured notes just to make sure. We're clear the 311 million, which was the principal repayment in relation to the notes.
22 million was paid in terms of the premium.
To the noteholders, and there's a 9 billion charge of accrued Pik and cash interest, which was paid as part of the settings as well, which is take taken through operating cash flows in accordance with us GAAP.
Our net movement in cash over the period was a reduction of 433 million.
And so cash at the end of the period, which was a 1.5 billion.
On the balance sheet of our 1.5 billion of cash we have 218 million, which is restricted cash there are two elements to this the first is cash which is predominately used as cash collateral for bank guarantee facilities.
And then during the period, we had 96 million increase in restricted cash which is collateral crashed this being posted for our Brazilian tax defense, which is a pay and defend regime.
In terms of the other current liabilities there are a number of items here, but predominantly we have lower operating cash flows for the quarter, which drives the changes.
I'm not non current assets broadly unchanged at 7.9 billion.
So our current liabilities.
A major change here, it's off see the reduction as a consequence of the senior unsecured notes being repaid.
And also we have an increase in terms of the current liabilities.
Which is EUR 85 million increase attached to the scheduled amortization payments on our secured bank debt.
So simply moving that about from the non current liabilities into the current liabilities.
Turning then to slide 12, which covers a nonconsolidated the entities.
In total these for a investment so that you hold a cover a backlog of 3.2 billion.
They generate EBITDAR of 213 billion during the second quarter.
And in terms of the carrying value on our balance sheet. So we can have a carrying value.
Our 724 million at the end of the quarter, which excludes the seller's credit and other debt facilities, we have with these investments.
I'll see all share profits into the seizure show results are reflected in our results from associated companies.
In terms of the operational highlights for these investments.
Seadrill partners had 11 loss during the quarter because it also benefited from the tax credits I mentioned in relation to the U.S. tax change that we have the seadrill.
But they did have some impact from VIP related downtime during the quarter.
Okay feedback from the sea brass are performing very well with 99% to 95% Besides station respectively.
And the Austrian investment saw increased activity during the second quarter.
All four of these nonconsolidated entities outpaced the securities with the NSN.
We will be adding to the presentation. We have here at Gulf drill now do we formed that joint venture.
But that is not part of the security package for the NSN.
Turning then to capital structure and liquidity I'll see we saw that position with a cash position that 1.5 billion.
We do have bank debt of 5.7 billion.
Bank loans that mature between 2022 and 2024.
Amortization commences in 2020 , but we do have an amortization conversion election.
For 500 million, which allows us to defer amortization payments, so effectively amortization will start in 2021.
Yeah, any covenant running at present, its relation to minimum cash cash, which we are comfortably above.
We will have covenants later on or expect to have net leverage and debt service.
Debt service coverage ratio.
These comments in 2021, Andas I'd have a margin impact.
If there's any breach in that respect.
From a capital perspective.
Position.
We take this under review I see we have 1.5 billion of cash we have a half a billion of ace in terms of deferred amortization.
And we are proactively managing our capital structure of which the NSN repurchase. This example.
And in relation to the guidance for Q3.
A key fee will be broadly in line with where we finished for Q2. So we're providing guidance at an EBITDA level of $70 million to $75 million.
Increase activity will be around the seven of the ways, Louisiana returning to operations and we also have additional operating days on the Hercules and the Phoenix. So these are partially offset by lower contract days on the west Carina.
Unplanned downtime on the west Linus for its Sps.
That concludes what they're going to run through intensive for presentation and now all the hand back the Nancy to open up for questions.
Thank you.
Well now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
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Star <unk>.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Lukas Daul from <unk>.
Please go ahead.
Thank you and good afternoon gentlemen.
I was wondering if.
If we go through your own Drillships, Oh, you've got.
Five drillships rolling off contract in Q4 or.
Into beginning the end of Q3 and could you talk a little bit about the rollover opportunities for those h. one in particular.
Sure I'll, let Matt maxed out with that maybe I'll cover off at the end Im sure if anything I think that hi, Lucas. So I mean, I'll avoid talking about specific opportunities given the competitive nature of the market.
When you look at from a general perspective, we take the Golden Triangle, we see an increase in demand when compared to 2018 and although the pace is different for each specific area. I think we feel comfortable that enough opportunities will materialize way you can expect the those assets will remain in their current markets. After taking a break complete various S.P. I said maintenance and upgrades okay.
With respect to Asia.
We also see a number of interesting opportunities that are attractive both in term and commencement period.
So when looking at the West Carina.
A large number of those opportunities require NPD and she's outfitted with our third generation operating system. So we feel quite comfortable about her prospects in Asia.
HM Okay. If I just take it up a upper level Lucas well, what I will say, we've been very purposeful and not making long term commitments on our prime assets at the bottom of the market. Obviously, one you know one aspect or one consequence of that is we also need to roll those rigs as they as they move as they roll off their contracts, but given the performance that we've delivered for customers and the attractiveness of our assets.
I think we feel we feel comfortable rolling now available assets.
Okay. Good color and then I'll, certainly rather be I'd, certainly rather be doing that today than six months ago or a year ago.
[laughter].
Sure and you talk about you know a competitive sport mark yet, but obviously, we have seen sort of pricing come up to a I would say I'm more attractive levels for longer term work, but we haven't seen that much longer term fixtures with a future date commencement. So I was wondering a in the tender pipeline I'm that you are sort of dealing with them on daily basis, do you see any change or any sort of delta in terms of a more term work starting and 2021, arriving on the table.
Matt you and Scott I mean, I think there's a few opportunities that have longer term developments I think akron, nor have something down in Brazil, where they're looking at startups past 2020 .
West Africa also have a few that are Ah that exist in Nigeria, they're still in the tender process. So it's a little bit hard to kind of put your finger on where you think the day rate is going to going to marry up but I know I do think we're comfortable that you know there's a marked improvement when you look at the 2018, beating behaviors compared to what we're seeing in 29 for fixtures are commencements in 2020 in particularly into 2020 , one and the trend supports that.
Well look as you know long term contracts are probably the most difficult for for a for us to price drillers to price and to come to an agreement with with with operators in this market maybe go to make a long term Ford coming in so I think there there has been a you know a function of the market generally you know the number of five plus term fixtures is a decrease from where it was at the top of the last cycle and given where we are in the cycle, where where rates are increasing with the forward curve is increasing more comfortable with that you know what we'd like to to to see though is you know obviously, you don't want to be chopping and changing contracts. All the time, but you know a year 18 months two years, you know fixtures at this point into a rising market is a comfortable market for us to to to be in and to be able to have a productive discussion with our customers, where we can actually Ah you know choose a mutually agreeable price.
Okay. Okay. I was maybe just sort of wondering if you see on and sort of improvement going forward or whether there is a risk that you kind of stick in this spot nature and warm and for a few more years, which basically you know puts a lot of pressure on utilization and eventually the cash you are able to generate.
Okay, I think there's going to be I think that the contracts are going to be more fit for purpose or the fact that they're more short term fixtures you'd need today and I think they will be until we're at a different point in the cycle you know when there wasn't complete absence in supply of rigs in the deal were very tight you know they the the discussion was well if you want to take a a rig for your exploration program I need at least three years or five years, that's a function of the top of the market. What I think you'll see going forward is more tailored tailored or contracts based on what the operators doing shorter term contracts for four exploration work or remedial work in longer term contracts and the surety for those for those long term developments and I think having a mix of those is is it is good for all of US would you do see is more exploration work happening and what's happening six months ago or a year ago and the advent of.
Exploration actually coming back into the market is another good sign for us or the market 'cause exploration today leads to development tomorrow.
Okay and on a different month could you just briefly update us on and the Oh stages of the Sumangal a drill ships on the drillships in the JV or where they are and what is happening with them.
Well as I mentioned in my in my prepared remarks, we've taken delivery of both of these long ago Drillships ones are currently being prepared in a in wealth assai the other ones in Singapore.
So that was a good progress from the JV. The JV is progressing as planned I think our initial comments when I last quarter was that we were confident based on the strength of that market and the visible demand that we would have for those initial four rigs.
Fixed on contracts between now and the middle of next year. We are in advanced discussions I'm on at least the first two and I think where we're pleased with the progress along on the JV and ER and we'll meet those timelines what at least meet those time lines.
Okay. That's good thank you very much.
Hi.
Again.
He had a question. Please press Star then one.
Our next question comes from Constantine Narrows that from your capital. Please go ahead.
Hi, guys. Thanks, so much for taking my questions I've got two questions if I may.
The first one is about sea brass so you've got to Peel, a Sikh contracts. There. That's expiring. This year. So one is time on today that I think is expiring in June 19, which expires in June 19, and then I suppose there is expiring in September 19, if you could sort of provide any comments on the plan on your plans for those for those assets [laughter] <unk> do you see kind of a change to re contract them with Petrobras or someone else or what's what's your what's your plan on that and secondly, sort of it was widely reported in the press that sort of the creditors at Oh Seadrill partners level.
Organizing so if you could sort of comment to the extent you can on the on your plans.
[laughter] for that asset I have and and for the process. Thank you.
Sure, let's take the sea brass one first.
No see brass is a is a is a great business, we see significant value in it you know the Brazil market was probably the first 222 full back during the cycle and Ah, but with the advent of the IOTV coming in we see a recovery there I think it's important to note in the in the sea brass business that essentially although although the deck is that across all the all the the the vessels in the fleet when they roll off their contracts. They were essentially debt free you know, we do see further opportunities and sea brass JBC proposal opportunities, but these are really attractive high specification units and we'll just have to see how how how is that process plays out.
As far as SDLP.
Seadrill partners look I think this is a quarter or a tale of two sides of the coin on on on the asset side at the LP had some some great assets weve been managing them for a number years, it's an integral part of the CE Pro brand of our global Verizon great customer relationships, but of course on the on the other side. There is a a liability liability issue that needs to be handled well and we know that you know we're focused on it and we'll just have to to to see that play out.
Thanks.
Again.
Have you had a question. Please press Star then one.
This concludes our question and answer session.
I would now like to turn the conference back over to Ms. and the Lee for any closing remarks.
Thank you Nancy and thanks, everyone for joining US today. This concludes our second quarter conference call.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect and enjoy the rest of your day.