Seadrill (SDRL) Q4 2016 Results - Earnings Call Transcript

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Seadrill Ltd. (NYSE:SDRL) Q4 2016 Earnings Call February 28, 2017 12:00 PM ET

Executives

John T. Roche - Seadrill Ltd.

Per Winther Wullf - Seadrill Ltd.

Mark Morris - Seadrill Ltd.

Anton Dibowitz - Seadrill Ltd.

Analysts

Anders Bergland - Clarksons Platou Securities AS

Gregory Lewis - Credit Suisse Securities (NYSE:USA) LLC

Lukas Daul - ABG Sundal Collier Norge ASA

Jacob Ng - Morgan Stanley & Co. LLC

Operator

Good day and welcome to the Seadrill Limited Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

John T. Roche - Seadrill Ltd.

Thank you and good afternoon, everyone, and welcome to Seadrill Limited's fourth quarter earnings 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 this presentation. 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 the fourth quarter highlights and update our progress thus far through this downturn. Mark will then address our financial highlights and outlook. And finally, Anton will offer some color on the overall market.

And with that, I'd like to turn over the call to Per Wullf. Per?

Per Winther Wullf - Seadrill Ltd.

Thanks, John. Yeah. Thank you, John, and good day and evening, everyone. During the fourth quarter, we again delivered strong operational performance, demonstrating the safe and efficient operations at the heart of what we do. With 99% uptime across our fleet, I'm very pleased with our quarter four results.

Commercially, although the market continues to be challenging, we are seeing increases in the level of tender activity following the stabilization of the oil price. As you know, improved tendering activity is a good leading indicator for market recovery, however, a more meaningful improvement in the supply/demand balance will be required to stabilize the market and eventually improve pricing.

On the cost front, we reduced rig and vessel operating costs 37% year over year, a $590 million reduction. As you are aware, we have two Samsung units scheduled for delivery in March and April. However, I can confirm that it will not be the case as the units are still incomplete and we remain in constructive discussions to defer delivery of both Samsung units until we can find a bankable contract.

Now, on to the fourth quarter operational highlights for Seadrill Limited. Our operational performance has delivered a record 99% economic utilization on both our floaters and jack-up fleet. This is truly a great result. We have successfully concluded 11 commercial arrangements since our last call, which Anton will provide some more color on later. And our order backlog currently stands at $2.5 billion for Seadrill Limited and $6.4 billion for the Seadrill Group.

And with that, I will now hand it off to Mark, who will cover our financial performance and restructuring update. Go ahead, Mark.

Mark Morris - Seadrill Ltd.

Thank you, Per. Good afternoon and good evening to you all. I'll briefly pull out the highlights for the fourth quarter, then provide an update on where we're with our restructuring plans, and then finally provide guidance for the first quarter.

As you're aware, we delayed our earnings release by a few days having identified the requirement to correct our U.S. GAAP fair value measurements in relation to our interest rate and currency swaps. These have now been corrected and restated, and further details of this can be found in our press release.

So, turning to the quarter. Revenues were down 10%, reflecting a full quarter of idle time on six more units, the West Epsilon and West Vigilant becoming idle, and a reduced dayrate on the West Saturn, this is partially offset by an improvement in utilization and the recognition of early termination fees related to the West Epsilon. Out of our fleet of 38 rigs, 21 are on contract, of which 9 are floaters and 12 are jack-ups.

On the cost side, G&A for the quarter rose mainly due to the fees related to our ongoing restructuring, severance costs and IT license costs. For the full year, we expect G&A to be around $220 million, excluding restructuring costs. Overall, we have made good progress on costs during the year.

Headcount is 25% lower, and operating costs for our floaters in operation including overhead is now down to $145,000 per day, a 28% reduction since 2014. In relation to our jack-up fleet, operating costs including overhead for rigs in operation are now down to $63,000 per day, a 29% reduction. We expect 2017 to continue at similar levels.

Moving on to the balance sheet. As always, there are various movements on the balance sheet and I'm just going to draw out the main ones as identified here. Starting with restricted cash, the main movement here reflects the maturity of certain letters of credit that were cash collateralized and the related cash becoming unrestricted. The increase in marketable securities is due to an increase in the Seadrill Partners share price over the period.

In respect to the accounts receivable, there are number of moving parts. The decrease is mainly attributable to the receipt of early termination payments on a number of our units, specifically the West Hercules and West Epsilon. The impact of less rigs working, resulting lower billings. And lastly, the receipt of demobilization revenue from the West Alpha. The movements in related party balances reflect year-end settlements of intercompany balances due. And finally on the liability side, the decrease in accounts payable is mainly due to a decrease in operating rig expenses as fewer rigs are working.

Regarding our restructuring, our objective is to find a solution that bridges us to a recovery in the sector, achieves a sustainable capital structure, and protects value for our stakeholders. We've been engaged in extensive discussions with our lenders and potential new investors, including Hemen, regarding the terms of a comprehensive restructuring. These discussions have also included the ad hoc committee of bondholders. While the ad hoc committee is not presently restricted, they have indicated a willingness to become restricted again in the future.

We currently believe that material additional amendments to the terms of the proposed bank amendments will be necessary to raise the new capital. Feedback from stakeholders and potential new inventors also indicates that a comprehensive and consensual agreement will likely require conversion of our bonds to equity. Under such circumstances, the new capital raise and any resulting debt conversion would likely result in substantial dilution to our shareholders and potential losses for other financial stakeholders.

Discussions with all parties actively continue. However, given timing, it will be challenging for us to finalize a fully consensual agreement before the April 30. Although an extension of this date is possible with lender consents, we may be unable to obtain an extension on terms acceptable to the company. In the event of a consensual restructuring agreement is not concluded or an agreement to an extension is not reached, we are also preparing various contingency plans, including potential schemes of arrangement or Chapter 11 proceedings.

Finally, turning on to our guidance for the first quarter. EBITDA is expected to be low, at around $250 million, mainly reflecting the full quarter of idle time on the West Vigilant and West Epsilon.

With that, I will now hand over to Anton to comment on the market outlook.

Anton Dibowitz - Seadrill Ltd.

Thanks, Mark, and good day to everyone. The short- to medium-term outlook for the chartering market remains extremely challenging. Whilst tendering activity has continued at increased levels over the past few months, near-term drilling programs continue to be largely based on spot market activity and a number of oil companies continue to have excess rig capacity on contract. Available work is fiercely competitive with drilling contractors biding at or below cash breakeven rates in order to keep rigs working.

In the floater segment, we continue to expect utilization levels to get worse during 2017 before it gets better, as more units become available than are required in the short-term. Scrapping and cold stacking of all the units continues and a rational analysis of the cost of reactivation versus the remaining useful lives for these units will mean that many of these older, less capable rigs should never return to the competitive market.

In the jack-up segment, we expect utilization levels to be challenged for the foreseeable future, due to the significant supply overhang, which will not be addressed as quickly as the floater market due to less scrapping activity and a greater order book of new but undelivered units.

The excellent performance demonstrated by our operational teams around the world and strong relationships with customers have enabled us to conclude 11 commercial agreements since the start of the fourth quarter. The commercial developments on our fleet are detailed in our release, and I do not intend to cover them all, but would like to add some color surrounding a few of the new fixtures.

The jack-up AOD III received a three-year contract extension from Saudi Aramco. This extension will follow the similar extensions of both the AOD I and AOD II earlier in the year, and is a testament to both the excellent operations that our teams have delivered and our ongoing relationship with Saudi Aramco.

The West Phoenix was awarded a short-term contract with Nexen Petroleum in the UK. This contract will run in direct continuation from the contract we announced with Total UK during our last call, and we'll keep that rig active and available to take advantage of the continued strengthening in demand we see in the North Sea.

We secured a one well extension plus one option for the West Elara from Statoil in Norway. As with the West Phoenix, we see excellent potential to secure additional work on the West Elara in North Sea. The West Saturn secured a one well contract with Ophir in Côte d'Ivoire with commencement during the second quarter of 2017. We're taking advantage of the time until startup of this new contract to perform periodic classing activities and install the second BOP, making this an even more attractive asset for future follow-on opportunities.

And lastly, SeaMex, our 50-50 JV in Mexico, agreed to provide Pemex with a discount to contracted rates for two years, effective November 2016, and simultaneously received 29-month contract extensions at the current contracted dayrates for each of the five jack-ups contracted. The net impact on the contract backlog for SeaMex was an increase of $580 million and ensures a critical mass of continued operations in this developing market for the next five years.

In closing, we can see that the longer-term leading indicators for our business are finally turning in the right direction. As the effects of a number of years of under-spending on E&P set in, offshore production will not only be required, but will also provide a cost competitive option to meet demand requirements. Seadrill's premium fleet, global scale and best-in-class operations means that it is well-placed to capitalize on the market upswing when it comes. Per?

Per Winther Wullf - Seadrill Ltd.

Yeah. Thank you, Anton. Once again, safe and efficient operation continues to be our bread and butter, and thanks to our dedicated and committed employees. We continue to see an improvement in the level of bidding activity following increase and stabilization of the oil prices. Improving dayrates will not be a feature in 2017, we know that. However, based on the expected level of scrapping and cold stacking activity, we believe there is room for some optimism. Our scale and young fleet position us well for the eventual recovery in the industry, and our key stakeholders have demonstrated a desire to be part of a solution with the right structure and terms.

Moving on to the restructuring, this is a complicated transaction with many stakeholders. While there is a desire by all for consensual solution, the restructuring effort have now been ongoing for over a year. We have reached a crossroad where we'll either achieve a consensual solution, further defer the Long Stop Date to allow additional time for negotiations or implement an in-court solution.

And with that, I will hand it back over to you, John.

John T. Roche - Seadrill Ltd.

Thanks, Per. We'll pause for a moment while we accumulate the Q&A roster. Operator, when you're ready, we can take the first caller there.

Question-and-Answer Session

Operator

All right. Thank you. We will now begin the question-and-answer session. And our first question comes from Anders Bergland with Clarkson. Please go ahead.

Anders Bergland - Clarksons Platou Securities AS

Yes. Good afternoon, gentlemen. Just a quick question on reactivation costs, et cetera. Looking at – with a slight pickup in activity and I guess you're bidding whatever you have of available assets, what kind of reactivation costs can we be looking at, for instance, for all of the idle or less warm stacked floaters, both in time and in actual costs?

Mark Morris - Seadrill Ltd.

Well, if you take the jack-ups first, it's fairly easy. If you put a rough in and then say, within 60 days we have a jack-up up going, and our jack-ups are not cold stacked, they're actually with people on, and it's pending on whether that is a five-year classing or not, how costly it's going to be. But you could use a rough figure of $10 million for the jack-ups, that would be a good figure.

When you take the floater side, it's again – let's say, we've been working with a figure of $30 million for reactivating a unit, and then there could come classing should that be required. We have just done one – just for your information, we have just done one of our newbuilds, we are considering to take out from a cold stacking to a warm stacked mode, and the project plan actually show that it is less than $30 million to get a unit out. And timing-wise, we should have around 60 days for – 60 days to 90 days on a floater.

Anders Bergland - Clarksons Platou Securities AS

So, would you say that those $30 million in predominantly getting the crew in and training of that and prepare them for work?

Mark Morris - Seadrill Ltd.

Yeah. That's a good figure to use. But so far, we had over $30 million, but that is what we have in our calculations.

Anders Bergland - Clarksons Platou Securities AS

Okay. Thank you very much.

Operator

The next question comes from Greg Lewis with Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Yes. Thank you and good afternoon.

Per Winther Wullf - Seadrill Ltd.

Good afternoon.

Mark Morris - Seadrill Ltd.

Afternoon

Gregory Lewis - Credit Suisse Securities (USA) LLC

So, I just have a question regarding the ongoing tendering in India. It looks like Seadrill may have been the low bidder in work for some DP floaters in India. And I guess my question is, having not currently been on the ground in India, as we think about startup costs to get rigs up and running in India or any – I think we'll use that as an example, to get rigs up and running in India, what do you think the initial costs are to sort of set up onshore support to service a multi-year contract in India?

Anton Dibowitz - Seadrill Ltd.

Okay. I know there has been some present speculation about the recent bid opening on the 98/2 Block. That's an ongoing process, so we're not going to get into details of what the situation is there. I would say opening in a new market, obviously, we like many other drillers are on accumulation of people who have a long history working with us and also with other people. So, there is experience to go into most of the deepwater markets or most of the markets around the world. And starting up an operation in a new country, I would say, is marginal compared to the rest of the cost of the operation, I mean, it's not a – and it's not a differentiating factor for us.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Okay. And then just as we look out to Mexico, I mean, clearly that's a market where we look at your jack-up exposure, you're already in that market. How should we think about the progression of Mexico over the next sort of two years? And as you look at that market, is that a market that's going to be led by an increase in jack-up activity or do you think it can kind of be a double – I don't know, win where you actually see floater and jack-up activity sort of move in tandem higher?

Anton Dibowitz - Seadrill Ltd.

Well, we've obviously been in Mexico for a significant period of time, both on the deepwater side and on the jack-up side right now. So, we have experience in drilling deepwater wells in Mexico, and in fact, I think we've drilled the deepest well drilled in Mexico with the West Pegasus. It's a very interesting market. The liberalization of that market and the steps they've taken to open up that market to the international oil companies leave us with good promise. We obviously know the market. It was a significant part of the reason why we got the contract with Eni to take the West Castor in there, because it is a difficult market to get started off in and having an idea of how to operate on the ground was – and our track record there was a good part of why we were able to secure that work. So, we feel quite good about our competitive advantage in being able to secure additional work in Mexico.

Gregory Lewis - Credit Suisse Securities (USA) LLC

Okay. Perfect. Thank you for the time.

Anton Dibowitz - Seadrill Ltd.

Sure.

Operator

And the next question comes from Stan Genshaw with HSBC. Please go ahead.

Unknown Speaker

Hi, guys. Thanks for taking my question. I've got one question, but it's got two sides to it. You mentioned you're seeing a continuing scrapping in both the floaters and the jack-ups space. How much incremental scrapping have you seen after the OPEC deal? And do you feel that there are people who are holding out for the recovery there as opposed to scrapping their vessels which delays the recovery in the balancing of supply and demand?

Anton Dibowitz - Seadrill Ltd.

I wouldn't say we've seen necessarily a difference in the willingness to scrap before and after the OPEC deal and I don't think that's a primary driver. I think the drivers remain the same, and that has to do with the competitiveness and the age of the assets that are in people's fleets. There's been about 75 rigs that flow on the floater side that have been scrapped already and we see a significant number of potential additional scrapping candidates.

If you look at the floater fleet right now, there are at least 20 that have been stacked for more than a year and are more than 30 years old, and about the same number that are on contract rolling off in – during 2017 that are of the same age. And I think all of these make very viable candidates for scrapping when you consider how they compete against the more advanced and younger rigs of the kind we operate. And also when you consider the periodic classing costs that it's going to take to keep those rigs working when they don't have a significant useful life left in them.

Unknown Speaker

What about jack-ups?

Anton Dibowitz - Seadrill Ltd.

The jack-up story is a little – as I said in the prepared comments, we haven't seen the same level of jack-up scrapping activity. It's largely based on the fact that there is not a huge difference in the cost to cold stack or warm stack a jack-up. So, most people take the option just to go ahead and warm stack it and see how the market develops. But the story there is very much the same. There are 120 jack-ups in the market that are more than 35 years old. And over time, given the amount of newbuilds in the market and those rigs are going to have a hard time competing, it may take a little bit longer for that fleet renewal story to play out there, just because it's easier to not scrap them, but it will eventually play out.

Unknown Speaker

And you mentioned the 75 on the floater side. Over what time period is that?

Anton Dibowitz - Seadrill Ltd.

That's since the start of 2014.

Unknown Speaker

And how many vessels over 10 years, do you see still given the market?

Anton Dibowitz - Seadrill Ltd.

How many vessels over 10 years?

Unknown Speaker

Yeah. Sorry, I mean, it's an arbitrary number, but it's...

Anton Dibowitz - Seadrill Ltd.

We go by generation, but probably about another 50, when you look at second, third, fourth generations.

Unknown Speaker

Thank you. That's everything from my end.

Anton Dibowitz - Seadrill Ltd.

Thanks.

Operator

The next question comes from Lukas Daul with AFG (sic) [ABG]. Please go ahead.

Lukas Daul - ABG Sundal Collier Norge ASA

Thank you. Good evening, gentlemen. I had a question on West Saturn. It ended the contract in January and it's going out again sometime in the second quarter. Trying to understand what is happening with the OpEx on that rig during that idle period. How much are you able to reduce it?

Per Winther Wullf - Seadrill Ltd.

Well, you have to look at it as a warm stacked rig in that period, because we take the junior crew off when that is happening, almost all of them, and we run with a minimum manning of 13, 14 people. So, you can just put $40,000 a day cost on that rig, that would be a good figure.

Lukas Daul - ABG Sundal Collier Norge ASA

Okay. And then you previously talked about sort of having a portfolio approach to your fleet, keeping some of the rigs warmer in order to go back to work. If you look at your idle floaters, which are the ones being most ready going back and which are the coldest ones?

Per Winther Wullf - Seadrill Ltd.

Well, we have three warm stacked rigs right now on the floater side. We have Pegasus sitting in Mexico, we have Leo sitting up Gran Canaria warm-stacked, then we have Orion down in Namibia, and we are considering whether we'll keep them all three warm. It might be that we'll cold stack one of them. So, that's on the side.

Then, obviously, we also have Saturn, you just learned about and Seadrill Partners, they have Capella obviously. In the North Sea, we have Phoenix, we are bidding and using as a warm rig, the next rig to come out there, but they're presently cold as Venture and Hercules. And we are, as we speak, considering to reactivate one of them due to the bidding activity in the North Sea.

Lukas Daul - ABG Sundal Collier Norge ASA

Okay. Great color. Thanks.

Operator

Next question comes from Jacob Ng with Morgan Stanley. Please go ahead.

Jacob Ng - Morgan Stanley & Co. LLC

Thank you and good afternoon. Just wondering if you can speak to how much oil companies are focusing on contracted balance sheets today when awarding new work and whether you've seen any sort of ramifications in this front as your recapitalization discussions continue?

Mark Morris - Seadrill Ltd.

No. Obviously, having the restructuring discussions in front of us don't make it any easier. But I think we've demonstrated an operational track record, our customers understand the performance we deliver, and I hope you can see by the number of – with 11 commercial deals that we've done since our last earnings call that we are still managing to get our rigs contracted.

Jacob Ng - Morgan Stanley & Co. LLC

That's good. Thanks. Now, my follow-up is, prior guidance was that Seadrill Partners would be kept separate from the restructuring process for the most part. And it seems like that's changed with the latest proposals that Seadrill Partners is now making to lenders. So, I was just wondering if you can help us understand what's driven that change.

Mark Morris - Seadrill Ltd.

I think, just to make sure we're not confusing anything, I mean, the restructuring that is going on at Seadrill is one that is going on at Seadrill. There are a number of facilities that crossover from Seadrill into Seadrill Partners as we sold rigs down. In fact, a number of rigs being the Vela and Polaris T15 and T16 have had those facilities moved into Seadrill Partners with the original intention them effectively acting sort of bridging loan until we refinance with our recourse back to Seadrill.

Of course, as the sort of music has stopped, they've been sort of left there. But there is no direct involvement with Seadrill Partners other than obviously to insulate it in the sense that it's always been a long-term objective to cut the guarantees either through a refinancing, which have been the original approach, which still maybe an approach or by entering into the arrangements that would ultimately see those guarantees being cut, and those are discussions we are carrying on with our lenders. But there is no other involvement in terms of directly restructuring of SDLP, Seadrill Partners being encapsulated from the rest of Seadrill.

Jacob Ng - Morgan Stanley & Co. LLC

Understood. Thank you.

Mark Morris - Seadrill Ltd.

Okay.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to John Roche for any closing remarks.

John T. Roche - Seadrill Ltd.

Thanks, everyone, for joining us today. This concludes our fourth quarter conference call. Thank you.

Operator

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

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