Seadrill's (SDRL) CEO Per Wullf on Q1 2016 Results - Earnings Call Transcript

| About: Seadrill Limited (SDRL)
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Seadrill Ltd. (NYSE:SDRL) Q1 2016 Earnings Conference Call May 26, 2016 12:00 PM ET

Executives

John Roche - Director, IR

Per Wullf - CEO

Mark Morris - CFO

Anton Dibowitz - Chief Commercial Officer

Analysts

David Smith - Heikkinen Energy Advisors

Darren Gacicia - KLR Group

Operator

Good afternoon and welcome to the Seadrill First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Roche, Director of Investor Relations. Please go ahead, sir.

John Roche

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

Before we 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 update you all on progress thus far and key action items as we work through this challenging market. Mark will then address our financial highlights and outlook. And lastly, Anton will offer some color on the overall market.

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

Per Wullf

Thank you John, and good day and evening to you all. During the first quarter we continued operations a record up time by continuing to reduce our cost base. Safe and efficient operations are our bread and butter, and I am very pleased at the economic utilization we have been able to deliver in the first quarter of 2016.

At a group level, we achieved 97% economic utilization excluding bonuses achieved. Including bonuses earned, the group achieved 98% economic utilization, truly a great result that speaks to the hard work of our offshore, as well as onshore employees. As you are aware our three key priorities for 2016 are to continue to reduce costs, manage our new building program, and the shipyards to defer deliveries, and conclude our financing plan to improve liquidity and position our businesses for the recovery. On the cost side, we have begun to realize the benefits of our efficiency program and we reduced total operating costs by $79 million quarter-over-quarter with no incremental idle units. We expect to see approximately $340 million in savings on a group level during 2016 and we are very pleased with the progress on commitment shown by our teams.

During the first quarter we have been able to reach agreements with a number of shipyards to further defer deliveries in order to maintain liquidity in this challenging market. Since our last earning call, we entered into agreements with Dalian to further defer the deliveries of all eight jack-ups under construction. Following the latest deferral agreement, one jack-up is now scheduled to deliver at the very end of 2016, four units in 2017, and the remainder three units sometime in 2018. However, to remind you as we have stated in the past we will not take delivery of any new build units without a bankable contract. Mark, he will go over the financing update in greater detail later but we aim to complete our broader plan by the end of this year and are pleased with the progress so far, actually very pleased.

Moving on to the first quarter of recent highlights for Seadrill Limited, again I would like to highlight the record performance achieved by our units this quarter, to achieve limited -- we achieved 97% economic utilization on our floaters and 96% for our jack-ups, the highest in Seadrill Limited's history. Future number of contract positions and consumptions, our backlog economy stands at $4.3 billion, down from $5.1 billion during the last quarter. Seadrill group backlog stands at $9.1 billion. Despite the increase in oil prices during the first quarter, prices remained 60% below the 2014 highs. Major oil companies continue to cut activity levels for 2016 and 2017 and appear to have more rig capacity already on the contract for the decline [ph], severely affecting new demand and leading to contract renegotiations and terminations. A more sustained pair of recovery and price stability is needed before we expect to see an incremental demand from our oil companies.

And with this, I would turn things over to Mark to cover our financial performance.

Mark Morris

Thank you, Per. Good afternoon, good evening to you all. I'll briefly put out the highlights for the quarter, then provide an update of where we are with our financing plans, and then finally provide our guidance for Q2.

So turning to the quarterly highlights; against the back drop of lower revenue for the quarter, we have record operations and we continue to see the benefit of our cost reduction program coming through, both of which have contributed to improve EBITDA for the quarter. The movement in revenue can be explained by day rate reductions, increased idle time on the Sevan Driller and the West Tellus, partially offset by 3% improvement in economic utilization.

On the cost front, actions taken last year and one's we continue to take are yielding benefits as both our OpEx and G&A continue to fall. Rig operating costs reduced from $369 million to $290 million over the quarter, a 21% reduction. Finally, we exceeded our quarter one guidance, mainly due to cost savings being realized at a faster rate than we had forecast and record up-time for our fleet.

Moving onto the balance sheets, as always there are various movements in the balance sheet and I am just going to draw around the main ones as identified here. Short-term restricted cash increased by $54 million during the period. This relates to our performance guarantee facilities where we provide bank guarantees in relation to subsidiary performance to customers in certain jurisdictions. During the period we replaced the existing collateral package and shared some certain equity investments with cash.

Movements in long-term restricted cash and other non-current liabilities related to repayments of the loan and its corresponding collateral being released. The loan was originally secured by our SapuraKencana equity investment but as the value of shares declined overtime, additional cash collateral was required to be posted. Repayment of this loan has reduced our normal current liabilities and released the restricted cash.

The movement of marketable security is primarily related to the re-classification of our SapuraKencana equity investments. The share sale was a post balance sheet event that required us to re-classify the investment from long-term to short-term.

Moving on to liabilities; following our announcement that we have extended and amended a number of bank facilities we have re-classified the $400 million jack-up facility from current to long-term debt to reflect its revised maturity date.

During the period the three Ship Finance entities that we consolidate as variable interest entities drew down $150 million from their bank facilities and used the proceeds to settle with other Ship Finance entities that are not consolidated. This has resulted in a $150 million decrease in long-term debt due to the related parties and a corresponding increase in long-term debt. The Ship Finance bank facilities are separate arrangements between Ship Finance and its banks.

Turning now to our liquidity; at the quarter end we had over $1 billion in cash and continue to expect good operating cash flow with a majority of our rigs working. We contracted revenue of $1.4 billion for the remainder of the year. Building on this, our cost savings program is expected to generate total cash savings of $340 million for the year on a group basis of which approximately $305 million is sustainable cost savings and $35 million is deferred CapEx. Finally, we did not expect to make any yard installments or take any new rigs this year.

Turning to our financing plans, during the quarter we extended the three nearest maturing facilities and amended certain covenants relating to our secured credit facilities. This is an important first step in our funding plan. By deferring our imminent borrowing maturities, resetting a number of covenants and removing the risk of facility prepayments related to declining rig values, we've established a more stable platform to pursue and conclude negotiations with all our stakeholders.

We are pleased with the support shown by our banking group and continue to make good progress on negotiation of broader package of measures intended to significantly improve liquidity and bridges to recovery in the sector. As you are aware, we have agreed a set of milestones which provide a timetable for advancing discussion with our banking group. These milestones will see us advancing discussions with various stakeholders with the aim of concluding and executing the plan by year-end. We will keep you updated as and when we have something to announce.

And finally turning to our guidance for the quarter; EBITDA for the second quarter is expected to be around $510 million, slightly lower than for Q1 -- sorry, for Q4 -- sorry, for Q1. Operationally, performance in the second quarter has been strong with 97% utilization for the quarter-to-date.

With that, I will hand over to Anton for some comments on the current offshore drilling market.

Anton Dibowitz

Thanks Mark. Good day and evening to all. The offshore drilling market remains extremely challenging. Despite more than doubling in oil prices from the lows earlier this year, the sentiment from oil companies remains negative and capital spending remains constrained.

The primary focus for many of our customers continues to be balancing the books with respect to revenue and planned capital expenditures. Lack of near-term planned activity from oil companies, the significant overhang of contracted rig for which no work scope currently exists and efforts to reduce current spending continues to severely affect demand and encourage renegotiations and terminations. Contractors are aggressively pursuing available work, prioritizing fleet utilization over returns. As can be expected at this point in the cycle, some operators are utilizing the fiercely competitive environment as leverage in commercial discussions. We will continue to mend contracts where it makes commercial sense and accept new work when the risk-reward profile is justifiable.

While the market will remain challenging, there are some leading indicators that leave us optimistic in the longer term. First, there is a growing consensus that we will move towards an oil production supply demand balance late in 2016 or early in 2017, a sentiment that is supported by the fact that short-term supply disruptions are having on commodity prices. Second, the significant and sustained cost in drilling activity during this downturn are having an effect both in terms of increased decline levels in existing fields and delays in new production both online. Ultimately these will need to be overcome to increase drilling in the future.

And lastly, the sustained downturn continues to encourage the cold stocking and scrapping activity that will be needed to rebalance the drilling market. Per?

Per Wullf

And although the industry remains challenging, we must remember that this is cyclical [ph] industry. However, we believe we have reached bottom rate flies, with a premium fleet, dedicated employees and continued demonstration of a safe and efficient operation, Seadrill is well placed for the future. Thanks.

John Roche

Thanks, Per. And operator, we'll turn over to you for a moment to compile the list for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question will come from Oli [ph] of Morgan Stanley.

Unidentified Analyst

Thank you very much and congrats with some good results in a tough environment. The -- Mark, I wonder whether you could just bring this upto speed a little bit on the debt renegotiations. And these are very complicated agreements to reach but it was earlier signaled that the target was mid-summer and now it's the end of the year but on a positive note, they saw you do a small deal with some of your bond holders where you've retired some bonds at a discount and suggesting that there is a movement. So can you kind of give us a little bit more color on what you're trying to achieve and how far you've come?

Mark Morris

Yes, I mean we are on the schedule. I think maybe there was a misconfusion; originally, we said that we would communicate our plans by the mid-year which we're also ahead of that. I think we have indicated that we would actually conclude everything by the mid-year. So our plan though has been to try within 2016 to conclude everything and you're right, although I mean look there are a number of moving pieces here in terms of looking at the -- dealing with the banks first and then the bond holders and obviously, when we think about the recapitalization piece, any new money we may be considering. In respect of the recent private exchange, I mean again, it is what it was a private exchange, it's more of a tactical move, we've approached by a particular bond holder who had expressed some interest on the basis that we thought an exchange made sense. It was done undertaking under a 3(a)(9) basis. Is it a fundamental of our refinancing plans? No. Is it tactical and opportunistic? Yes.

And so I think that sort of covers that piece. Where we are at the moment, look there are a number of milestones set out, we are currently in discussions with our banking group and when we've concluded those, we'll obviously and have got agreement of lot to be conditioned on the other two parts of the system happening, we will then move on to the other pieces. But we're currently in discussions with them and when we thought of our position, something that we can announce, we will of course bring that back to marketing, keep you informed.

Unidentified Analyst

Well, thanks for that Mark. Thanks for clarifying. And Per, I wonder whether you could give us your latest thoughts on the supply side of rigs. I mean we've seen a number of rigs retired as you highlighted, and typically when companies make a decision to retire a rig at the board level, it doesn't change, it's almost irrespective of market conditions thereafter. So could you give us a little bit of an overview of what you think is yet to be scrapped, beyond what we've seen or retired or recycled or what is currently termed as [ph]?

Per Wullf

Yes, 60 have gone, 40 needs to go. Okay? Then, we have balance in the market. And we have seen it and drillers have out rigs, we cannot really contribute there but drillers have old rigs placed. They have really done something and I haven't seen this going so -- in shots of pass, it's going now, this is good to see. But it shouldn't stop now. We have seen a number of units being parked in various shores and various places and we all know that as lessons more detail so we also know one will never come back out again. But there is a cure also because it is a cost of signature were to scrap rigs and to green scrap units that can only do very few places. So this is actually a queue, but we need to see another 40 units go before you will have balanced.

Unidentified Analyst

Okay, thanks for that. And I'll hand it back.

Operator

And our next question comes from Ian Macpherson of Simmons.

Ian Macpherson

Thank you very much. It could cause some -- good job on the cost and I had a question just regarding the $305 million of structural sustainable cost savings if you're outlining for this year. You could have provided some more contacts to our reference point around that. Is that all in the OpEx or some of that also in the CapEx line as well, just try to give us whatever directional guidance you could for OpEx through the balance of the year that will be helpful. Thanks.

Per Wullf

Well, if we just look at our cost saving plan at the starting, back in 2014, we have passed $1 billion now in cost saving and last year was $830 million we saved on improved perspective to further bit -- that was actually deferred savings and one was sustainable saving. What we're talking about now almost all of it except for around $30 million that is or ex-cost we have revamped the whole operating structure on our units. We took some very, very tough decisions last year. You see the effect now but it is -- given part of that journey is not -- it's a tough journey but we are resetting the whole cost structure, running on what the cost running already.

So this is sustainable saving, so roughly 65% of our operating cost is actually crude cost, so we've had a lot of our employees taking really tough pay cuts in order -- and that has been necessary in order to reset the cost, that's why I can say very firmly this is sustainable saving. So we ducted operating cost saving.

Ian Macpherson

Thank you, Per. I'm just -- I really, I'm trying to get more to the numbers. Is the OpEx line expected to decline significantly from where it was in the first quarter throughout the year or second half versus first half of the year; for example, that's all I'm coming getting to.

Per Wullf

Yes, you will see the decline further over the year as we are fine tuning this one here but it is a big chunk you have seen this quarter, that's how I can explain it.

Ian Macpherson

Okay. Thank you very much.

Operator

The next question comes from Luka Kar with Karbagi [ph].

Unidentified Analyst

Thanks for taking my question gentlemen. I just wanted to get your perspective on demand base, what do you expect deepwater rig demand to trough? And some of the -- your operating time, up-time has been very strong and operators are talking about efficiencies and the rest. Where do you see the demand to recovery three to five years out? That's my first question. Thank you.

Per Wullf

Yes, 2016 & 2017 that's all clear and I've said also a number a day that we are reaching bottom utilization-wise. You still dive somewhat but utilization will go on and flatten out on a low in 2016. And then when you see an oil price and you see it sitting here and you see it for a longer period, you will also go and see that the utilization becomes stable there. And then as all other downturn, you will see a period where we have a flat utilization and then we will start to get more work but very tough rates as we see now. And you will be out in 2018, 2017 -- late 2017, beginning 2018, before you will start to see day rates of interest on our contracts. Wait, we hadn't seen that it is a day rate recovering but utilization of course will go on and come -- start to come in 2017.

Unidentified Analyst

Thank you. And just on termination; first of all, do you still have discussions on terminations within your fleet or do you think most of them are done? And how do you plan to recognize the termination fees from an accounting perspective that is going to show up in quarterly EBITDA or are they spaced out like you did it before? Thank you.

Per Wullf

I would let Anton answer that one. He is sitting in the middle of it.

Anton Dibowitz

Okay, hi. It's no secret that a lot of our customers still remain under significant price pressure and pressure to reduce their short-term costs. So discussions with operators about rate renegotiations and terminations continue, and I think they will continue for a while. As far as how we recognize it, it does depend on the contract to a certain extent and how that's interpreted within GAAP but generally, it's -- the termination fee is recognized relatively over the original period of the original contract -- remaining contract prior to termination.

Unidentified Analyst

Okay. That's very helpful. Thank you.

Operator

Our next question comes from Andrews Bergland [ph] of Clarksons.

Unidentified Analyst

Yes, good afternoon gentlemen, and thank you for taking my call. Per, you mentioned that another 40 units need to go in order to balance the market. Are you thinking of this as floaters irrespective of age or are we talking about more or less on the fifth gen side of the filter fleet? And secondly, the lump-sum payment for the West Hercules cancellation, when will that be paid? Thank you.

Per Wullf

Yes, firstly when we talked four weeks ago, I am talking about floaters, okay. And you will see now -- what we have seen in the beginning, we see really old units and we saw old units being scrapped, that should never be on the list anyway but we see our units being scrapped now, it's actually units that can't drill and the jobs won't fit in tomorrow's market. And -- so you will see fourth gen go, you're going to see number fifth gen being scrapped here, and a large portion of what you will see being scrapped now is the fifth gen. They simply don't have a place in the market when the market recovers and it would be so expensive to get them back into and get them re-introduced that they will going to be scrapped. So I am sure the drillers have that kind of risk and they will keep scrapping. Going through the -- I hope that answers your question.

Anton Dibowitz

I can handle it. I'll add to that, I mean I think there are approximately 50 rigs cold-stacked floaters in the market right now, a significant portion of them that are towards the end of their useful life. And off the rigs that are on contract in the floating market, another 35 or more than 30-years old that are going to roll the contract in the next 18 months, so there is no shortage of pool of potential candidates to help rebalance the market. On the payment of the Hercules termination fee, it's governed by the contracts, the payment is due in the normal billing cycles, so after the contract ends, the payment is due in 30 days thereafter.

Unidentified Analyst

Okay, sorry, just a quick follow-up…

Anton Dibowitz

From a cash perspective -- just -- from a cash perspective, the payment is due 30 days but as I mentioned to the previous question from the previous caller, from a recognition purposes under GAAP, it will be recognized relatively over the term to when the original contract would have ended.

Unidentified Analyst

Okay. And just a quick follow-up on the floater scrapping side, you have the West Navigator, 15-year old vessel cold-stacked, is that -- does that fall between two chairs in terms of it still has 15 good years in it but on the other hand it might be hard to see that it's going to get the contract. How do you see that one play out?

Per Wullf

Yes, it is a very valid question because she is not the youngest fleet we have from our mid-plan, she is from 2000, she could fall in-between you could say. One advantage is that she is working in a niche market, so it is a little bit of different when you talk about North Sea rigs compared to benign [ph]. So it's very dependent on recovery of that market but she is a drug [ph] ship and there is only another cover of ships that can actually work in harsh environment water, so that is an advantage to her, but obviously, if you see how that goes along and she has been idle the past year.

Unidentified Analyst

Okay. Thank you very much.

Operator

The next question comes from David Smith of Heikkinen Energy Advisors.

David Smith

Hi, thank you for taking my question. I just wanted to confirm whether the West Taurus and the West Eminence were indeed cold-stacked? And if so, what the approximate stacking cost is and how you think about the cost of reactivation?

Per Wullf

First of all, the two rigs are sitting at rift, they are both cold-stacked, okay. So we are running -- we're having a stacking cost of less $10,000 day including overheads, okay. So that is a fact. We took an investment of close to $10 million before we stacked the unit north to make sure it was preserved right. Once you reactivate it, of course, you will go on to have a cost and it is two-tiers, there is a re-activation cost and there is re-classing cost and that varies a little bit, typically re-classing cost is around $30 million whether it is Eminence or it is Taurus, re-classing cost or reactivating cost is little bit different, it's depending on main engines, thrust, etcetera; you have to overhaul etcetera, so I cannot give you an exact figure on that but we audited it but I don't have it right here.

David Smith

That was great color and appreciate it. And just a quick follow-up, I was wondering if there or any other sixth or seventh gen rigs that are cold-stacked or being contemplating cold-stacked this year?

Per Wullf

Well, we don't intend to cold-stack any of our sixth gen this year as we speak. We could have a probably resting stack, we don't know but there will be long stacked for the remainder of the year as I see and then we have to take it from there.

David Smith

Great. Thank you very much.

Operator

And next we have a question from Darren Gacicia of KLR Group.

Darren Gacicia

Hey, thanks for taking my question. In discussing the late deliveries for new rigs, I know that some of the shipyards have been restructuring themselves and going through their own turmoils. Has any of the change of what's happening kind of at the shipyard level, changing any of the dialogue that you have with them with regard to putting off deliveries?

Per Wullf

No, it hasn't changed the dialogue. We talk with different people because there seems to change a little bit of the management of the -- we'll say that. But we have managed and we will manage going forward to move these vessels and take delivery once we can bank them -- and are bankable. So we can move -- and I don't think the restructuring is happening, probably don't have in Korea as an example that will have any effect on this negotiation. We have two dual ships coming in 2017 that will be pushed further, from Samsung. And we have probably dual ships coming from GSME [ph] in 2018, and beginning 2019 we will take that when we come year and a half further along. And if you recall, our jack-ups have no recall, so that is an option to buy you could call them. So we will push them until we can justify to take them onboard.

Darren Gacicia

Given that there is a different sponsor profile that's called for the jack-up market versus maybe the drill ship market, do you have any color filled for how that the jack-up new build situation might add. I mean do you think there are certain number of those that don't come, do you have a view on that? And would you be willing to kind of share your thoughts?

Anton Dibowitz

This is Anton, I can answer that. There are 120 or so new build jack-ups that are sitting at the yard. A significant percentage of those 75 or so are -- were set in motion by speculators, I think we'll probably see some of those go away but ultimately a lot of those rigs will come to market at some time or another.

Darren Gacicia

Thanks, that's helpful.

Operator

[Operator Instructions] And showing no further questions, I would like to turn the conference back over to management for any closing remarks.

John Roche

Thanks, Lauren. Thanks everyone who joined us today. This concludes our call. Thank you.

Operator

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

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