Seadrill Limited

Good day and good afternoon. Welcome to the CGO Limited Q1 2020 results for the quarter-ended 31 March 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. 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 consists of forward-looking statements that are subject to uncertainty. Included on page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to view our SEC filings, Please visit our website at www.seadrill.com. I would now like to turn the conference over to Anton Dibovitz, Chief Executive Officer. Please go ahead.

Thank you. Good morning and welcome to Seadrill's earnings call for the quarter ended 31st March 2020. Thank you to those dialing in today to listen. I'm Anton Dibovitz, the Chief Executive. I will first take you through some of the highlights for the quarter. provide an overview of market conditions and how we're meeting some of the challenges, including navigating the COVID-19 pandemic. I'll then hand over to Stuart Jackson, our CFO, to take you through our financial performance before we open up the line for questions. During the Q&A session, we will also have Leif Nelson, Chief Operating Officer, and Matt Line, Chief Commercial Officer, available to answer questions. During Q1, we have continued to deliver for our customers and demonstrated our ability to adapt to the new reality imposed by COVID-19. I particularly would like to express deep gratitude to all of our people who have gone above and beyond to ensure operational continuity for Seedwell and our customers this quarter. I continue to be humbled by their dedication. Turning now to the results of the quarter, which Stuart will give you more detail on later. Technical utilization for the quarter was a solid 95%. We had adjusted EBITDA of $55 million and we closed the quarter with $1.2 billion in cash on hand. Operationally, we're monitoring and managing the impact of COVID-19 and the effect this and the weaker oil price is having on our customers' behavior. Amidst these challenges, we had a solid operational quarter. and we continue to receive recognition from our customers during the quarter for excellent operational delivery on both our owned and managed rigs. We remain laser focused on improving the efficiency with which we run our business, which I'll come back to later. On the commercial side, we added 77 million in backlog during the first quarter and have added another 41 million post-quarter end. We ended the quarter with a backlog position of $2.5 billion. Subsequent to the quarter, Beate Bua joined the Board of Directors, replacing Birgit Ringsted-Bartel, effective April 21st. I'd like to personally thank Birgit for her dedication and service to CEDRAL. We wish her good luck in her future endeavors and welcome Beate to the Board. Moving on to take a closer look at the market. CEDRAL and the industry have encountered significant challenges this quarter. The impact of COVID-19 and an adverse market environment as a result of both supply and demand side shocks are events whose effects are being felt not only by us, but also the entire industry. With operators, our customers, cutting CapEx budgets, we're experiencing a reduction in exploration activity and delays in sanctioning of development programs. These deep cost-cutting measures will impact supply and demand dynamics. putting pressure on day rates and driving down utilization for all asset types in the coming quarters. In response to the current environment, we are maintaining our cost competitive position by reducing costs both on and offshore. Our focus today is on preserving liquidity and adjusting our cost base in line with current and expected future market conditions. In anticipation of an extended downturn, we're evaluating how we position ourselves most effectively for the future. This includes appraising the long-term viability of our assets and taking the necessary steps to remove uncompetitive rigs from the market. Re-evaluating our liabilities and enacting measures to streamline our capital structure, all of which Stuart will expand upon later. As noted in the previous slide, COVID-19 has wrought an unprecedented impact not only on the global markets, but also on people. We are treating this crisis as an ongoing operational incident, focusing on the health and welfare of our people, maintaining operational continuity, and managing through the period in collaboration with our customers. Our people are both our greatest asset and our greatest responsibility. I cannot stress enough the heroic efforts our people have gone to in particular those whose time on board rigs can now be measured in terms of months and not weeks to continue to deliver safe operations in the midst of COVID-19 related border closures and travel restrictions. We have adapted and more recently are seeing opportunities at times working together with our peers to start to facilitate crew rotations via charter flights in locations where commercial air travel is not yet available. Operationally, we've continued to provide seamless business continuity. Our onshore teams have all adopted new ways of working, and through collaboration with our partners and suppliers, we have not yet faced a situation where we have stopped operations due to a lack of spare parts or necessary supplies in any of our 28 worldwide operating locations. Despite our contract backlog being relatively less effective than our peers, have taken proactive measures to address the changed market environment through the implementation of a company-wide cash preservation and efficiency plan targeted to deliver more than $130 million in cash savings over the next 18 months, including reducing G&A headcount by more than 15% and reducing target compensation for the senior management team and myself by 20% to 45%. Finally, while our strong relationships enable us to focus on maintaining our operational delivery, these are challenging times across the industry, including for our customers. Where needed, we're having constructive discussions to manage contractual issues arising from COVID-19 focused on mutually beneficial outcomes. On the commercial front, we're pleased to report adding $77 million to our backlog this quarter. A respectable result given the uncertainty in the market today. The backlog we've secured this quarter is the result of strong relationships we hold with our customers, leading to repeat business. The majority of our backlog secured this quarter comes from our harsh environment segment. Four options were exercised on the West Hercules contract with Equinor, with whom we have amassed a frame agreement in Norway, adding $51 million to our backlog. The continuous optionality mechanism in this contract could see it continue to be utilized by Equinor until 2022. In addition, we added $17 million to our backlog in our benign environment ultra-deepwater floater segment as the Savon, Louisiana received the one well extension in the Gulf of Mexico with water, oil, and gas. Finally, we saw $9 million added to our backlog from our benign environment jackup segment with single well extensions for the West Colesto and West Crescida. During the quarter, as a result of COVID-19 related impact on our customs operations in Angola, we agreed to suspend the operations on the West Gemini. The rig has been moved to Namibia and is expected to restart operations in Angola in Q1 of 2021. While we haven't had a rig terminated to date, we have received a notice of intent to terminate the West Phoenix. due to a delay in the customer's development drilling program. The rig is currently operating in Norway with Neptune Energy, who have indicated operations are expected to conclude in July, seven months earlier than anticipated. The EBITDA impact over the firm term is expected to be neutral. Following the quarter end, the West Saturn Drill Ship was awarded a two-well contract, adding $41 million of firm backlog and two and a half years of continuous optionality thereafter. This contract extends our long-standing productive relationship with Exxon and continues our presence in the attractive Brazil market where we have operated for over a decade. We have $2.5 billion worth of backlog to deliver over the next few years and we're confident this pipeline of work combined with our premium customer base puts us in a solid position ahead of the eventual market recovery. Continuing with commercial and operational developments, our non-consolidated entities have seen strong performance this quarter, again, despite the challenging environment. Exemplifying this, Segal Partners had an economic utilization of 99% for the quarter, one of the strongest operational quarters in its history, despite COVID-19 disruptions. Segal Partners is currently in discussions to address its 2021 debt maturity with the aim of building a sustainable capital structure that supports its continued and safe operations. Seabrass, our 50-50 PLSV JV with Sepura Conchana, continues to deliver solid operations with five vessels remaining on contract with Petrobras in Brazil and the sixth vessel operating in the spot market, the most recent being a short-term assignment in Mexico. In Gulf Drill, progress continues. The JV has one rig operating, a second expected to commence in July, and the remaining three units on track to commence over the next 12 months. Within the CMEX JV in Mexico, we concluded our long-dated negotiations with PMEX regarding contract day rates. In summary, we granted day rate concessions for six months with market index rates thereafter under the current contracts, while gaining a three-year extension on all five rigs. cementing our anchor position in this key jack-up market until 2026. Sanadro, as with most operations in Angola, has been impacted by operator decisions related to COVID-19. We've agreed to suspend operations on the Libangos through the remainder of 2020 with expected restart in Q1 of 2021. And now I'll hand it over to Stuart, who'll take you through the financials. Thank you, Anselm. I'll start with slide nine, which is the revenue and EBITDA bridge for the quarter.

Revenue for the quarter was $321 million compared to $398 million for the fourth quarter of 2019. This 19% reduction was predominantly a result of a reduction in our reimbursable revenue from Northern Ocean and from Sonodron under the management contracts we have for their rigs. We also saw a reduction in the rig operating days during the quarter. EBITDA for the quarter was $55 million compared to $39 million in the fourth quarter of 2019. Most material change in relation to the operating costs where we had lower repair and maintenance expenses and lower personnel costs as a result of the completion of contracts. We're also starting to see some of the early benefits of the SG&A reductions which Anton mentioned. Finally, our EBITDA margin for the quarter was at 17%, which compares to 10% in the fourth quarter of 2019. Turning then to the abbreviated income statement below adjusted EBITDA, our income statement is obviously dominated by the rig impairments we've taken during the quarter, and I will come back to those later. Of the other material movements, depreciation and amortization is down as a result of the completion of fable drilling contracts recognized on Fresh Start. Our share of results in associated companies predominantly relates to our share of the loss in Cedral Partners, which has taken material impairments during the quarter. From an investment perspective, we've also written down the value of our Cedral Partners holding to zero as we expect this entity will move into a comprehensive restructuring of its balance sheets in the coming future. Finally, with respect to our investment in the Archer convertible bond, we took an impairment of the carrying value, having reached an agreement with Archer to reduce the face value of the debt, but also to reduce the conversion price of the bond. In overall terms, our net loss for the quarter was $1.565 billion. The largest settlement of that is obviously the impairments we've taken, so turning then to the impairment of the rig assets. The serial change in the oil price encountered in the first quarter of 2020 was the trigger to reevaluate the carrying value of our assets. In this respect, we've looked at the expected duration of assets being cold stacked, which we now expect to be longer, the reactivation costs associated with those assets, which we now expect to be higher because of longer durations in cold stacking, and the return that can be achieved from the reactivation investment, which we now expect to be lower because of cost increases and the lower oil price expectations. On that basis, the probability of scrapping assets, particularly semi-submersible assets, has increased, and we've therefore taken a 1.2 billion in payment charge during the quarter. With respect to retiring assets, there are up to 10 rigs which may be scrapped, and over the coming months, we will be looking to prioritize these activities. Going then to cash flow. From a cash flow perspective, we had a net cash outflow of $159 million during the quarter. The main drivers for this were an increase in the changes in operating assets and liabilities, as work performed for Sonodrill and Norrelation is still to be reimbursed under our management contracts. Our investing activities reflected the purchase of a non-controlling interest in Hares Holding in Nigeria, Our financing activities saw a higher outflow as the SHIP finance variable interest entity made an external debt prepayment during the quarter. And finally, from an FX perspective, the change in the Brazilian Real for cash held in a tax pay and defend regime resulted in a revaluation when measured in dollar terms. Then from the balance sheet at the end of the quarter, Total cash was at $1.2 billion, of which $167 million was in restricted cash. Other movements on the assets, our current assets were down following changes in the management contract receivables and the application of the new accounting standard on credit loss allowances. And on our non-current assets, this reflected the $1.2 billion impairment charge, as well as the novation of right of use and lease liabilities novated to Elftrill Joint Venture. On the liability side, the major change of note is the debt repayment in respect of SHIB Finance VIE. Our equity and redeemable non-controlling interest at the end of the quarter were 116 million, which reflects the losses we booked during the first quarter of 2020. Turning then to the capital structure, There are a number of changes arising in the quarter which impact our capital structure in different ways. Firstly, we were notified in March that the New York Stock Exchange 30-day average share price had dropped below $1 per share. As a consequence, we need to either cure or delist from the New York Stock Exchange. And we've taken the decision to delist from the NYSE and focus our activities on the Oslo listing going forward. We will support arrangements for US-held shares to trade in the over-the-counter market. And we'll also be taking this opportunity to move to half-yearly reporting commencing in the second quarter of 2020. With respect to the balance sheet, we've been engaged with our senior creditors since late 2019 in discussions around an interim solution before moving to a more comprehensive restructuring. With the market changes both from an oil price and a COVID-19 perspective arising in the last three months, we've decided not to progress with the interim solution and to move directly to a comprehensive restructuring. As a consequence, we're in the process of confirming appointments for both financial and legal advisors at this time. Our expectation is that a comprehensive restructuring will encompass substantial conversion of indebtedness into equities. Finally, in relation to the balance sheet, I would say, and the restructuring, I would say that we have $1.2 billion of cash on hand, and we believe this is sufficient liquidity to manage the ongoing operating activities as well as to manage the restructuring process. Finally, Anton has mentioned the focus on cash preservation. In this regard, we have taken a number of actions which will lead to $130 million of cost reductions over the coming 18 months, a 15% reduction in our onshore G&A And also as a result of reduced activity levels, there will also be a reduction in our total onshore and offshore headcount, reducing from 4,500 to 3,100. And with that, I'll pass back for questions.

Now we're open the line for questions. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Once again, it is star then 1 to ask a question. The first question comes from Lucas Dahl of ABG. Please go ahead.

Thank you. Good afternoon, guys.

Hi, Lucas.

Talking a little bit about your decision to sort of go ahead with scrapping the assets and in particular the semis. Can you sort of put a bit more color on that in terms of how much of the decision was influenced by the capex that would be necessary to bring them back to service and how much is sort of influenced by your view on the demand for these assets going forward?

I'll start with that and see if Stuart has something to add afterwards. I think, Lucas, both of those are significant components of it. I mean, we continually assess the viability and competitiveness of our assets in the market. One part of it is how much CapEx is required to reactivate it. And obviously, the longer a rig is stacked and hasn't been in the market, the more significant is going to be the CapEx that's required to bring it back into the market. and then the next thing is what the forward outlook for the market looks like and as Stuart said, factor in what sort of return when you look at those together, combination of the markets and the investment required, whether it justifies the long-term viability of the assets. We've always been, I would say, quite financially disciplined with how we spend our CapEx and not bringing grids back into a market that can support it. But this is an ongoing process and obviously the changes that we've seen in the market for the last six months have moved some of those factors that go into that calculus and henceforth we've come to these decisions to take these impairments.

Just to add to that, I think Anton's mentioned in his quote that the industry is beset with too many assets and too much debt. So whilst we've been having discussions with our banks around an interim solution, they're moving to comprehensive restructuring, which is addressing the liability side of the asset. It's also incumbent on us to address the asset side of the balance sheet. And in that respect, we've made sure we introduce investment return measures I understand.

and I think sort of it's although it's a difficult decision it's probably the right thing to do but on that note I think it will be equally important that sort of others in the industry follow through on that and we have seen some of your publicly listed peers doing a similar thing but I was wondering whether you have an opinion on What the smaller private companies might do in the light of this downturn?

Obviously, I can't speculate or know what's in folks' minds. I would say overall, the way we view it, and let's just talk about the high-spec flow decide. We would like to see, and we are, as Stuart said, going to do our part, but would probably like to see around 50 rigs taken out of the market.

Okay. That's good. Thank you very much.

Thank you. Again, if you have a question, please press star then 1 on a touch-tone phone. The next question comes from Patrick Fitzgerald of Baird. Please go ahead.

Well, guys, thanks for taking the question. Did the large receivable get paid at CMEX when the contract was successfully renegotiated?

Sorry, quick about CMEX receivables? Yeah. We have received... payments from PMAX during the first quarter. The challenges with payments from contractors or subcontractors are not just about us. Of course, I think having concluded the negotiations and having a clear path forward with them, we believe will help that. But we did receive some monies during the quarter and due course we expect to continue to collect.

Okay, but you still have, you know, like net debt to third parties went up despite you generating, you know, a decent amount of EBITDA in the quarter. So, you know, like we don't get to see a full balance sheet for that entity. But, you know, it seems to me reasonable to assume that the receivable balance is still very high relative to historical levels there, right?

The receivable balance is higher than we would like it to be, and I think as you rightly put it, these long-dated negotiations that we were having, while certainly not the only factor, played into it partly, and having concluded those fairly recently, I believe that we'll work through that.

Okay, thank you. And just a question about how the market Thank you very much.

I think the four protects us from where we think the market will go in the near term. And you can probably take a read from the first six months worth of fixed rate that you'll see in the fleet status as an indication of where that sits. So, you know, where it's going to go in six to 12 months time, I think there will be some downward rate pressure given the drop in the number of tenders and activity in the market compared to what we're seeing in Q4. and the first half of Q1 before COVID hit.

Okay, thank you. That's helpful. And what is the, sorry, you know, but this is a simple question, but I actually don't know the answer. What is the rate and the maturity of the debt at the third-party debt at CMEX and CBOS?

So in terms of CMEX, The maturity date is March of 2021, but we don't expect all the debt will be repaid at that time. It's being amortized as we go ahead. But the contracts go beyond the point at which we anticipate repayment of all the debt. And at Seabrass, there are different maturities from 2025.

The maturities there on the third-party debt start at 2025?

matured by 2025 on the largest element of the SEBR.

Okay. And what are the blended rates of those two entities? Blended interest rates? Yeah. I haven't got that information up top.

We can provide you that later.

All right. Thanks. I'll jump back in queue. Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Anton Dibovitz for any closing remarks. I'd like to thank everybody for your interest in calling in today and we look forward to talking to you again next quarter.

Thanks a lot and have a great day.

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