U.S. Markets open in 8 hrs 38 mins

Edited Transcript of SDRL earnings conference call or presentation 24-May-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Seadrill Ltd Earnings Call

HAMILTON May 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Seadrill Ltd earnings conference call or presentation Wednesday, May 24, 2017 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anton Dibowitz

SeaDrill Limited - Chief Commercial Officer of Seadrill Management Ltd and EVP of Seadrill Management Ltd

* John T. Roche

SeaDrill Limited - IR Director

* Mark Morris

SeaDrill Limited - CFO of Seadrill Management Ltd and SVP of Seadrill Management Ltd

* Per Winther Wullf

SeaDrill Limited - CEO of Seadrill Management Ltd, President of Seadrill Management Ltd and Director

================================================================================

Conference Call Participants

================================================================================

* Lukas Daul

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, and welcome to the Seadrill Limited First Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to John Roche, Vice President of Investor Relations. Please go ahead.

--------------------------------------------------------------------------------

John T. Roche, SeaDrill Limited - IR Director [2]

--------------------------------------------------------------------------------

Good afternoon, and welcome to Seadrill Limited's first quarter earnings call. With us today, we have Per Wulff, our CEO; Mark Morris, our CFO; and Anton Dibowitz, our Chief Commercial Officer.

Before we do get started, I'd like to remind everyone that much of the discussion today will not be based on historical fact but rather consist of forward-looking statements and are subject to uncertainty. We articulate some of the key items on Page 2 of the presentation, and for additional information and to view our SEC filings, please visit our website at seadrill.com.

To begin the discussion today, Per will take us through our first quarter highlights and some updates on progress thus far and key action items as we work through this market. Mark will then address our financial highlights and outlook, and Anton will provide some color on the overall market.

With that, I'd like to turn the call over to our CEO, Per Wulff. Per?

--------------------------------------------------------------------------------

Per Winther Wullf, SeaDrill Limited - CEO of Seadrill Management Ltd, President of Seadrill Management Ltd and Director [3]

--------------------------------------------------------------------------------

Yes, thank you, John. And good day and evening, everyone. Once again, we were able to deliver a strong, safe and efficient performance, achieving 98% utilization across our operating fleet to start the year. Another remarkable result, and I would like to thank our offshore and onshore crew for the continued excellence in this regard.

On the commercial side, our marketing department has been quite active, delivering a net backlog increase for Seadrill Limited of roughly $900 million, including quality consumption, reflecting increased drilling activity although competition remains fierce.

On the cost front, headcount quarter-over-quarter is roughly in line, with 760 onshore and 4,400 offshore employees, representing a 6% reduction from year-end 2015 levels, highlighting significant reductions on our rigs' operating costs. Operating costs for rigs in operation, including overhead of our floater fleet, have been reduced from $200,000 per day in 2014 to $145,000 per day currently, a 28% reduction.

Operating cost for rigs in operation, including overhead on our jack-ups fleet, have been reduced from $90,000 per day year-end '14 to $63,000 per day, a 29% reduction. And these 2 figures actually are both on deferrals and jack-ups that is including overhead.

On the newbuilding side, during the first quarter, we reached a settlement agreement with Hyundai in relation to the West Mira arbitration. A cash payment of $170 million was received in March as full settlement of the dispute. We remain in constructive discussion with the rest of our shipyards regarding reaching agreements to defer our remaining newbuild deliveries forward.

Now on to our first quarter operational highlights for Seadrill Limited. Our operational performance has delivered a strong 97% economic utilization on our floater fleet and 98% on our jack-up fleet, another impressive quarter driven by safe and efficient operations. Our group have successfully concluded 14 commercial arrangements since our last call, which Anton will provide some more color on later. And our order backlog currently stands at $3.4 billion for Seadrill Limited and $7.1 billion for the Seadrill Group.

And with that, I will now hand it over to Mark, who will cover our financial performance and restructuring updates.

--------------------------------------------------------------------------------

Mark Morris, SeaDrill Limited - CFO of Seadrill Management Ltd and SVP of Seadrill Management Ltd [4]

--------------------------------------------------------------------------------

Thank you, Per. Well, good afternoon and good evening to you all. I'll briefly point out the highlights for the first quarter, then provide an update on where we are with the restructuring plans, and then, finally, provide guidance for the second quarter.

So turning to the quarter. Revenues were down 15% due to the West Saturn becoming idle during the quarter, the West Epsilon and West Vigilant both having a full quarter of idle time and the West Hercules and West Epsilon termination fee recognition in the fourth quarter 2016 not being repeated in Q1. These revenue reductions were partially offset by the West Castor operating for the full quarter and the West Phoenix commencing operations. Out of our fleet of 38 rigs, 21 are currently operating on contract, of which 9 are floaters and 12 are jack-ups.

EBITDA for the quarter was $291 million. The 18% decrease reflects lower revenues, partly offset by lower costs mainly due to additional idle units and lower G&A relative to the fourth quarter. Rig and operating costs decreased by $22 million during the first quarter, and G&A decreased by $8 million. We continue to expect G&A, excluding restructuring costs, to be in the range of $220 million for the full year. Our EBITDA for the quarter was better than guidance, mainly due to improved operational uptime relative to forecast and lower stacking costs.

Moving on to our balance sheet. As always, there are a number of moving parts here, and I'm just going to draw out the main ones. So from the top, marketable security decreased $16 million, driven by the drop in the SDLC share price over the quarter. On the accounts receivable side, the movement here was primarily driven by the West Saturn coming off contracts with a corresponding reduction in billings and settlement of outstanding balances on the West Epsilon and West Elara.

Looking at the current portion of related party balances, the reduction reflects trade and loan balance settlements mainly for Seadrill Partners. Other current assets reduced by $210 million, primarily due to the settlement of the West Mira arbitration, as mentioned by Per.

Moving on to the liability side. During the quarter, our NOK 1.8 billion bond was reclassified from noncurrent to current liabilities. The other main movements is $137 million reduction in other current liabilities, driven by mark-to-market effects on our derivatives portfolio; a lower accrued interest expense balance, reflecting interest payments during the quarter; and a reduction in tax payable, reflecting cash taxes paid during the quarter.

Moving on to the restructuring updates. In April, we reached agreement with our bank group to extend the restructuring plan negotiating period until the 31st of July, reflecting significant progress made. We are currently in advanced discussions with third parties and related party investors and our secured lenders on the terms of the comprehensive recapitalization.

We've received a new money proposal from third-party and related party investors, which remains subject to further negotiation, final due diligence and documentation. We are also in discussions with certain bondholders who have recently become restricted again. I appreciate you're all interested to understand more details on the restructuring, but at this stage, it would be inappropriate for us to comment on specifics. As you're aware, this is a large and complex transaction with multiple parties involved.

While discussions with our secured lenders and certain investors have advanced significantly, a number of important terms continue to be negotiated. And until such time an agreement is reached, no assurances can be given.

We continue to believe that implementation of a comprehensive restructuring plan will likely involve schemes of arrangement for Chapter 11 proceedings. It is likely that the comprehensive restructuring plan will require substantial impairment or conversion of our bonds as well as impairment and losses for other stakeholders. As a result, we currently expect that shareholders are likely to receive minimal recovery for their existing shares. Our business operations remain unaffected by these restructuring efforts, and we expect to continue to reach our ongoing customer and business counterparty obligations.

And now, finally, turning to our guidance for the second quarter. EBITDA is expected to be lower at around $240 million, primarily reflecting 3 more units becoming idle during the quarter. With that, I will now hand over to Anton. Anton?

--------------------------------------------------------------------------------

Anton Dibowitz, SeaDrill Limited - Chief Commercial Officer of Seadrill Management Ltd and EVP of Seadrill Management Ltd [5]

--------------------------------------------------------------------------------

Thanks, Mark. Good morning and afternoon to everyone. The offshore drilling market remains challenging, and we expect this dynamic to continue in the short to medium term. Many oil companies remain focused on conserving cash and are reluctant to commit to significant new capital projects offshore until an increased consistency and upward trend in oil prices is demonstrated.

The significant rig supply overhang remains, and a faster return to a healthy market will require drilling contractors to remain disciplined in retiring older units.

Tendering activity has continued at increased levels, albeit from a lower base over the past few months, especially in the North Sea floater and Southeast Asia and Middle East jack-up segments. Market behavior points increasingly to the market having reached its bottom, including an increasing number of recent tenders released by oil companies seeking to contract at current bottom cycle day rates for increased durations and/or with multiple fixed period options.

Against this challenging backdrop, we have been pleased by our ability to continue to secure fixtures. These fixtures are due to the excellent service delivery in terms of safety and efficiency that the team continues to deliver as well as our ability to use innovative contracting models such as bundled services and market rate indexes to create mutually beneficial and balanced commercial deals and utilize our demonstrated in-house experience with NPD operations along with selective capital expenditures and NPD equipment to create competitive advantage.

We still believe in the long-term fundamentals of the offshore drilling industry, driven by yields of underinvestment in new fields and the competitiveness of offshore resources on a full cycle basis. We remain committed to keeping our units working in the short term but not precluding our most attractive assets from participating in the market upside when it comes. And an [entirely] focus on our customers' safe, efficient operations and disciplined approach to contract that will ensure that Seadrill is well placed to capitalize when the market recovers. Per?

--------------------------------------------------------------------------------

Per Winther Wullf, SeaDrill Limited - CEO of Seadrill Management Ltd, President of Seadrill Management Ltd and Director [6]

--------------------------------------------------------------------------------

Yes, thank you, Anton. Once again, safe and efficient operations continues to be our bread and butter and thanks to our dedicated and committed employees. This is the last time you'll hear me say bread and butter of a quarter. But having a safe and efficient operation and pleased customers is just so fundamental to our business.

As Anton mentioned, drilling activity continues to increase, especially in the North Sea, Southeast Asia and the Middle East segments. With our scale, young and modern fleet and highly skilled workforce, we are well positioned to capitalize when the market recovers. Our priority now is to implement our restructuring plan with the right structure and terms for our stakeholders.

And then just finally, you've probably seen the announcement today that Anton he'll be my successor, and he's going to be an excellent CEO going forward. I look forward to see his quarter calls sitting at the (inaudible). And with that, I will say thank you to all of you, and now we'll open up for questions.

--------------------------------------------------------------------------------

John T. Roche, SeaDrill Limited - IR Director [7]

--------------------------------------------------------------------------------

Thanks, Per. Operator, if you could open up for Q&A, It would be appreciated.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Lukas Daul of ABG.

--------------------------------------------------------------------------------

Lukas Daul, [2]

--------------------------------------------------------------------------------

I had a question on the disposal of your jack-ups. Can you walk us a little bit through what led you to it? And whether you see opportunities to repeat that final transaction?

--------------------------------------------------------------------------------

Anton Dibowitz, SeaDrill Limited - Chief Commercial Officer of Seadrill Management Ltd and EVP of Seadrill Management Ltd [3]

--------------------------------------------------------------------------------

I didn't catch the middle part, so let me know if you -- if I don't answer it. But we sold 3 jack-ups, and I think this should be viewed as representative of our strategy to retain a position as a premium operator in the market. The deal represents an opportunity to sell 3 units, 2 of them have been stacked for more than a year. We still see the premium jack-up business as an integral part of our service delivery, and we'll continue to do that. But part of keeping a fleet that way is being disciplined about making sure that we sell it all the way through the cycle. And if other attractive opportunities come, we'll take them, but I wouldn't take that as any sign that we don't see the jack-up business as part of our business.

--------------------------------------------------------------------------------

Lukas Daul, [4]

--------------------------------------------------------------------------------

Okay. And then on the -- you are seeing your -- you were saying you are seeing more tenders out there. When it comes to a longer-term jobs, is that kind of activity picking up as well?

--------------------------------------------------------------------------------

Anton Dibowitz, SeaDrill Limited - Chief Commercial Officer of Seadrill Management Ltd and EVP of Seadrill Management Ltd [5]

--------------------------------------------------------------------------------

Absolutely. I think the tenders are across the board. I would say we are talking about from where the base was, and there's definitely an increasing activity, especially on the jack-up side of the market. There are some longer-term tenders. There are some developments that are pushing forward that have been on the cards for a while that are coming back. And there's also some opportunism or desire at the bottom of the market to -- from oil companies to see if they can fix the current rates for the long term. But also, I think it's a little spread.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to John Roche for any closing remarks.

--------------------------------------------------------------------------------

John T. Roche, SeaDrill Limited - IR Director [7]

--------------------------------------------------------------------------------

Thanks. And thanks, everyone, for joining us this afternoon. This concludes Seadrill's first quarter conference call. Thank you.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

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