Seadrill Limited (NYSE:SDRL) Q4 2023 Earnings Call Transcript
Seadrill Limited (NYSE:SDRL) Q4 2023 Earnings Call Transcript February 29, 2024
Seadrill Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Seadrill Fourth Quarter 2023 Earnings Release Call [Operator Instructions]. I would now like to turn the call over to Lydia Mabry, Director of Investor Relations. Please go ahead.
Lydia Mabry: Thank you, operator. Welcome to Seadrill's fourth quarter and full year 2023 earnings call. With me for the call today are Simon Johnson, our President and Chief Executive Officer; Grant Creed, Executive Vice President and Chief Financial Officer; Samir Ali, Executive Vice President and Chief Commercial Officer; and Marcel Wieggers, Senior Vice President of Operations. Today's call may include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year, and we assume no obligation to update them. Our latest Forms 20-F and 6-K filed with the US Securities and Exchange Commission, provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business.
During today's call, we may also refer to non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in the earnings release filed with the SEC and available on our Web site, seadrill.com/investors. Our use of the term EBITDA corresponds with the term adjusted EBITDA as defined in our earnings release. Now let me turn the call over to Simon.
Simon Johnson: Thank you. Today, I will address our recent accomplishments, near term positioning and future potential. Samir will then discuss our commercial activity and outlook. And Grant will review our financial results and 2024 guidance. Then we will open the call to questions. Seadrill is a leading offshore driller. We consistently execute on our stated strategy, achieving financial and operational results that allow us to deliver industry leading total shareholder returns relative to our offshore floater peers. We were the best performing equity in the peer group in the 2023 calendar year. And we've bought back over $340 million worth of Seadrill shares through our ongoing repurchase program. Throughout the year, we continued our efforts to simplify and strengthen our business.
We operated a modern floater focused fleet concentrated primarily in the golden triangle. We achieved minimum efficient scale through our Aquadrill acquisition adding four drillships with near term contracting exposure. We secured leading edge contracts for term work and are announcing two major Brazil awards, representing $1.1 billion in firm revenue at rates our peers would envy, and we followed that with another announcement of a benchmark rate in late January for the US Gulf of Mexico. We have long telegraphed and prepared for headwinds in 2024, first calling attention to them on our second quarter 2023 earnings call. Our trade rivals seem to be recognizing varying degrees of emerging white space supply chain pressures and inflationary capital expenditure and OpEx trends in 2024.
At Seadrill, we continue to manage and mitigate the impact these trends may have on our operational and financial results. We aim to secure the right contracts for the right rigs in the right place at the right rates. Moving, for example, the West Polaris to a term contract in Brazil, a growing market for the industry and a key operating region for Seadrill where we've costed rigs and benefit from economies of scale. We made early decisions to implement wage increases and retention programs, securing talent that's critical to our continued delivery of safe, efficient operations. We invest in our drilling crews’ continued development, providing high fidelity simulator based training programs that allow them to practice and prepare for real life scenarios in an immersive classroom environment.
We maintain active dialog with key vendors on supply chain requirements and realities, proactively ordering long lead time items to minimize schedule risk and to improve our ability to recover from unplanned events. Lastly, to the extent we are able, we've begun performing special periodic surveys and related work on an accelerated schedule to limit the interruption to our fleet's revenue profile and coincide with a broader transition year. We're commencing a transition to a more continuous approach to required reclassification in coming years. Going forward, we anticipate that we will see less time out of service for five yearly surveys. For 2025, we continue to derisk our outlook and build greater earnings visibility through term contracts and optimized maintenance schedules.
Our active fleet is now over 60% contracted for the year 2025 and that number will rise higher as we approach recontracting windows. Additionally, reduced maintenance obligations limit future out-of-service days and related impact to revenue and margin. We remain steadfast in our belief in a long enduring offshore drilling up cycle as the world's population continues to grow in both size and wealth, so to will be attendant demand for hydrocarbons as they remain some of the most economic, efficient and reliable sources of energy. Increasingly, we expect offshore will be the source of supply of rising oil and gas demand, given the size and strength of its reserves, though rig supply remains constrained as most industry participants express reluctance to reactivate the [fee] inventory of stacked assets until customer terms and contract economics justify the time and capital investment needed.
The resulting delta between supply and demand reaffirms our view that this will be a multiyear cycle. We're not alone in this as third party analysts expect drillship demand to increase by nearly 20% in 2025 compared to 2023. At the firm level, we believe our ability to maintain a strong balance sheet and generate healthy cash flow allows us to withstand any near term adversity and capitalize on mid to longer term opportunities that will develop as the cycle progresses, creating continued value for our customers and shareholders. Based on current market conditions, we believe we can deliver meaningful ever expansion and free cash flow generation from our existing business in 2025 and beyond. Let's elaborate on what that might look like in four simple steps using high level estimates and round numbers.
So let's begin with 2023 reported EBITDA of $495 million. First, 2023 actuals only included nine months of Aquadrill contribution, future results will benefit from the full year. Second, we're on track to deliver our stated synergies of $70 million of value per year in respect to the Aquadrill transaction, largely associated with the elimination of third party rig management fees. As many of you are aware, legacy Aquadrill was more of a rig owner than operator, subcontracting drillers to operate rigs on their behalf. When we acquired the company, we acquired those contracts effectively paying industry competitors to perform a job we do ourselves every day. As the rigs transition to new contracts through 2024, we will eliminate those management fees and see immediate bottom line impact.
Third, repricing near term contracts to market rates supports further EBITDA expansion. The West Polaris will see meaningful EBITDA improvement when it moves from India to its new leading edge contract in Brazil at the end of the year despite India being a much lower cost operating environment. Finally, repricing should become particularly impactful when we mark to market our three rigs we currently operate in Brazil on long dated legacy contracts booked in the fourth quarter of 2022. These three rigs have a current average disclosed day rate of just over $250,000 per day. Were they to secure contracts at rates like that awarded to the West Auriga, they would earn nearly twice as much revenue, and assuming costs remain the same, approximately $250 million more in annual EBITDA.
Should the market improve as we believe it can, that number could be even higher. So bringing this together, you can see how we can materially improve from our 2023 baseline. We believe this level of EBITDA expansion and resulting cash flow generation is both reasonable and realistic. We should soon benefit from a full year's contribution from the legacy Aquadrill fleet and the elimination of third party rig management fees, and we will continue to see impact of near and longer term repricing as rigs roll off existing contracts. We remain confident in the value we can create in the coming years. We actively manage our business in a way that reflects tomorrow's realities and tomorrow's opportunities, which Samir and Grant will discuss in more detail.
With that, I'll turn the call to Samir.
Samir Ali: Thank you, Simon. I'll review our recent contract awards and then walk through our fleet status, providing a Seadrill specific market outlook. Since we last spoke during our third quarter earnings call, we have secured approximately 80 months or 6.5 years worth of additional backlog across four drillships on an average day rate close to $475,000 per day. These awards are a testament to the strong brand and industry leading team at Seadrill. In December of last year, as a part of the [busiest] tender, Petrobras awarded both the West Auriga and the West Polaris multiyear contracts for offshore Brazil, representing $1.1 billion in combined contract backlog. We expect the contracts to commence in late 2024. Notably, the West Auriga represents one of the highest day rates achieved thus far in the cycle by any industry player with an implied day rate of approximately $500,000 per day.
In January, we announced another market leading rate this time in the US Gulf of Mexico. The West Vela secured a 150 day contract with implied day rate of approximately $490,000 per day, excluding managed pressure drilling services. We expect the work to commence in direct continuation of the rig's existing firm term contracts, securing the rigs in the US Gulf of Mexico to the middle of next year. Lastly, the operator of West Capella exercised a priced one well option valued at $24 million to maintain her for their current program. While we anticipate the option would carry the Capella through November, recent changes in the clients well schedule means she will only be working through August. Unlike firm term contracts, well based agreements may move to the left or the right depending on drilling programs and schedules.
As of today, our 2024 contracted utilization is a solid 80%, excluding three cold stacked rigs, which we market selectively. We currently have 39 months of uncontracted rig time across our fleet for the calendar year 2024. Scheduled maintenance should consume approximately seven months worth of this idle time with five rigs requiring varying amounts of out of service time based on our current plans. Contract preparation could consume an additional 17 months, largely related to our two Brazil contract awards I mentioned earlier. We are actively looking to secure work for the remaining 15 months. The Sevan Louisiana is currently undergoing five year maintenance through the first half of March after completing her well based contract earlier and effectively drilling herself out of work in December of last year.
The Louisiana is one of the last remaining semisubmersibles in an increasingly bifurcated US Gulf of Mexico. She competes in a smaller secondary segment focused on lower priced and more niche applications. We continue to market her actively in the US Gulf and further abroad. And while we don't have anything to announce today, we remain optimistic on her contracting potential. Turning to the two rigs that were awarded contracts in Brazil. Both the West Polaris and the West Auriga requires significant modifications, mobilization and intake and acceptance by Petrobas and regulatory agencies before they begin their new contracts at year end. So while the rigs are technically available to work now, the opportunity to slot in short term work is limited as any delays could jeopardize the rig schedule arrival offshore Brazil.
We knew meaningful white space was a possible outcome when we pursued these contracts. Securing fifth and sixth rigs in Brazil strengthens our already leading position in the local market and enhances our economies of scale. We expect the West Phoenix, our harsh environment semi in Norway, to finish its well based contract in August. The rig will require a shipyard stay for upgrades and maintenance before she begins her next contract, and her destination market will influence the type and level of investment made. The Phoenix will be the first floater available in the Norwegian market. While we remain optimistic about our contracting prospects, we expect any potential future work will not start before the second quarter as the North Sea operators typically wait until spring to be in drilling programs.
As previously stated, we now expect the West Capella to end its current contract in August, subject to well schedule. She is one of the few available rigs in Southeast Asia. Additionally, she is equipped with MPD. Given recent discoveries in Indonesia and elsewhere, we are confident we can secure further work for the rig soon. Lastly, we expect the West Neptune to be out of service for 45 days in the third quarter for a special periodic survey and upgrades scheduled between wells on its existing contract in the US Gulf of Mexico. That concludes my walk through the Seadrill rig fleet. We expect to provide more insight on our 2025 contracting outlook the deeper we get into the year. Lead times for future contracts vary by region from six to 18 months depending on geography.
In some regions, customers are initiating conversations for projects with start dates in 2026 and beyond. In others, they're not even yet discussing the fourth quarter. In either case, we believe we are well positioned to secure the right contracts to generate the earnings potential, Simon alluded to earlier. And with that, I'll pass the call to Grant.
Grant Creed: Thanks, Samir. I'll start by reviewing our recent financial results before providing our full year guidance. For the full year 2023, we delivered $495 million of adjusted EBITDA on $1.5 billion in revenue. This translates into industry leading EBITDA margin of 33%. Turning to the fourth quarter. Adjusted EBITDA was $100 million consistent with expectations as our 2023 full year guidance implied softer fourth quarter EBITDA of $90 million to $110 million. Total operating revenues were relatively flat quarter-on-quarter at $408 million. We recognized $315 million in contract revenues, a slight decline from the prior quarter, primarily due to unplanned downtime related to well control equipment and the Sevan Louisiana finishing a well based contract earlier than anticipated.
We recognized an additional $73 million in management contract revenues, which represents income generated from the three rigs we operate as part of our Sonadrill JV. The $5 million sequential increase reflects higher reimbursable revenue relating primarily to rig maintenance that was offset by a corresponding increase in management contract expenses. Lastly, we recognized $14 million in other revenues, which includes bareboat charter income from our Gulfdrill joint venture and $6 million in reimbursables, which is offset by corresponding reimbursable expenses. Now turning to expenses. For the fourth quarter, vessel and rig operating expenses were up $36 million sequentially, primarily composed of three components. Noncash accruals represented $15 million and much of the remaining $21 million was distributed relatively equally across two primary categories.
The first category was planned maintenance projects and capital spares purchases, which was heavily related to timing. The second was rig personnel. Fourth quarter results include the impact of pay rises and retention programs, reflecting a tight labor market and inflationary environment. Additionally, we saw third party managers on legacy Aquadrill rigs use temporary contract labor to fill crew vacancies. SG&A costs were $6 million higher than the prior quarter, primarily related to severance. Moving on to the balance sheet and cash flow statement. We maintained a strong balance sheet and sound capital structure. At year end, we had total gross debt of $625 million and $697 million in unrestricted cash resulting in a net cash position of $72 million.
Fourth quarter operating cash flow totaled $140 million on the back of solid earnings and supported by a reduction in working capital. Capital expenditure for the fourth quarter totaled $90 million, divided almost equally across long term maintenance costs, which, for your awareness, are treated as operating cash flows and the cash flow statement and capital upgrades related to contract preparation and incremental equipment spend. This was slightly higher than previously guided on our third quarter call due to the need to secure long lead items for the Auriga and Polaris projects. This yielded free cash flow of $92 million for the quarter. Now let's discuss our guidance. Our full year guidance reflects our expectations that 2024 is a transition year.
We expect total operating revenues between $1.47 billion and $1.52 billion. Guidance largely reflects firm revenues, including 92% of contract drilling revenue already secured in our backlog as well as the fleet status and outlook that Samir reviewed earlier. We anticipate adjusted EBITDA to be $400 million to $450 million. Key points to note are extensive contract preparation and mobilization of the West Auriga and the West Polaris ahead of the Brazil contracts, and planned out of service time related to special periodic surveys and associated maintenance. Note that our revenue and adjusted EBITDA guidance includes amortized mobilization revenues and expenses of approximately $40 million and $45 million respectively. It also includes reimbursable revenue and expenses of approximately $70 million.
And as a reminder, reimbursables are low margin revenues. And finally, we expect CapEx of $400 million to $450 million. This reflects a spike in our SPS cycle as well as major projects for the Auriga and Polaris, which are due to commence long term campaigns towards the end of the year. As it relates to capital allocation, we remain committed to shareholder returns, the pace at which we've bought back our own shares certainly demonstrates this. We initiated a $250 million share repurchase program in September. We completed it by November. And in December, we expanded it by an incremental $250 million. To date, we have repurchased $342 million worth of Seadrill shares at what we believe is a highly accretive price level. This represents 11% of our total share capital.
We remain committed to continued value creation across the cycle. Back to you, Simon.
Simon Johnson: Before we open the call for questions, I want to thank our employees for their continued contributions to our progress. As you're aware, we are closing our corporate office in London and concentrating our headquarters in Houston, bringing together our senior leadership and broader corporate team and aligning our presence with key customers, vendors and fleet operations. The moves marks another transition this calendar year. We're excited about the energy and enthusiasm that being together will create. To our London team, thank you for your efforts to strengthen our organization during your tenure. For those who will make the move to Houston, thank you for your continued commitment to Seadrill and interest in making us one of the best in the industry.
So in closing, to all of our employees, suppliers and customers, thank you for your engagement and ideas as we consider how we can be more collaborative, efficient and responsive in our daily operations. It's through our combined efforts that we will continue to improve. With that, we can open the call for questions.
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