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Seadrill Limited (NYSE:SDRL)
Q1 2019 Earnings Call
May 23, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Seadrill Limited Q1 Earnings Conference Call. All participants will be in a 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 like to now turn the conference over to John Roche, Vice President of Investor Relations. Please go ahead.

John Roche -- Vice President of Investor Relations

Thank you, and welcome, everyone, to Seadrill Limited's Q1 2019 quarterly conference call. 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 that are subject to uncertainty. Included on Page 2 of the presentation is a comprehensive list covering our forward-looking statements that can also be found on our our website at seadrill.com.

So moving on to the agenda. With us in the room today are Anton Dibowitz, our CEO; Mark Morris, our CFO. Also Matt Lyne, our Chief Commercial Officer; and Leif Nelson, our Chief Operating Officer. In our prepared remarks, you'll hear from Anton and Mark. Anton will cover all the highlights for the quarter and provide you all with our views on the market. Mark will then provide a review of the financial performance for the quarter and then we'll open up the line so you can take some questions from the entire team.

And with that, I'd like to turn the call over to Anton.

Anton Dibowitz -- Chief Executive Officer and President

Thanks, John, and welcome to everyone to our first quarter earnings call. Before I go into the highlights for the quarter, I'd like to touch on some of the market dynamics that we're seeing today. We are firm believers that the offshore barrel is important to meet market demand, and at the fundamentals of our business, our sound. Oil prices are well within the range with offshore projects are profitable and we expect this to translate into increasing amounts of capital being deployed into offshore. To be clear, this is not yet a healthy market with respect to day rates, but what we can see that the macro indicators are pointing to a continued recovery going forward.

There are three main areas that demonstrate the improving market fundamentals. First, upstream spending. After four consecutive years of decline, we're expecting an increase in offshore spending in 2019 while onshore spending is expected to decline, driven by investors demand for greater capital discipline and returns. As importantly as overall offshore spending, offshore exploration which is an important driver for our business is increasing. The expectations of oil in the $65 to $75 a barrel range is expected to result in offshore spending growing at a faster pace than onshore over the next few years.

Second, contracting activity. Tendering and fixture activity is improving. The harsh environment flow-to-market was the first to begin recovering, but we are now seeing an increase in other segments as well. While the shape of the recovery is outside of our control, I can tell you that we're having more and better customer conversations, both in open tenders and direct negotiations. We're also beginning to see an improvement in commercial terms with customers showing the willingness to pay for mobilizations and share in capital projects for the first time in years.

And finally utilization levels in the market are improving with market utilization close to 80% for both floaters and jack-ups. We take these factors into account when considering how we want to compete with our modern fleet. Because we firmly believe that we at the start of a recovering market, you will see disciplined and rational action from us as we move forward.

Firstly, our focus is on backlog quality over backlog quantity which means at the moment we are saying no to as much work as we are saying yes to. And second, you will not see us reactivating units and contracting long-term and less the investment is justified by the day rates we can achieve.

Now, I'll turn to results for the quarter. Economic utilization of 93% was disappointing this quarter and mainly related to subsea equipment events, specifically on the Sevan Louisiana and the West Hercules. Importantly, neither events resulted in any harm to people or the environment. Operations and safety underpin our license to operate and we take every operational incident and downtime event seriously, and are committed to returning to the utilization levels our customers have come to expect from us and you all are used to see.

Moving on, we had some great contract wins in the quarter. A few of them that I'd like to highlight. Equinor exercised two options in the West Hercules in Norway. The unit is expected to be employed until Q1 2020, and is yet another example of the strong harsh environment market. It's great to see additional duration that is solid day rates and continuing to build our relationship with Equinor. The West Telesto was awarded a six firm plus two option well contract in Malaysia. This contract included a mobilization payment. This represents an above market fixture in a low cost environment and further increases our footprint in Malaysia. The West Carina was awarded a one well contract with Petronas in Brunei. Again a contract that included mobilization revenue. The unit is expected to work in direct continuation of its existing contract with Petronas in Malaysia. And finally, The West Gemini will perform an additional well in Angola, positioning the rig nicely for the additional demand we see in Angola.

In addition to these contracts, our recent announcements relating to opportunities in Angola and Qatar position us well for work in these regions. And we are excited by these prospects. These deals are in keeping with our strategy of finding creative ways to access attractive markets, strengthen our customer relationships and grow our fleet of owned and managed rigs. Based on what we are seeing in the market, we now believe there is enough demand to keep our active fleet employed without extended periods of idle time. And you will not see us reactivating idle units unless day rates justify doing so.

And now, I'll turn things over to Mark to take us through the financial highlights.

Mark Morris -- Chief Financial Officer

Thank you, Anton. And good morning or good afternoon wherever you are. I'll briefly pull out the highlights from the financial quarter before providing guidance for the second quarter. Turning to the financial highlights. Of our 35 rigs, 16 were working on average through the quarter, comprising of eight floaters and eight jack-ups. Contract revenues were largely flat with $8 million of lost revenue due to downtime related issues and the lower day rates in the West Callisto following a contract extension being offset by revenue from the West Carina commencing operations.

Overall, operating revenues increased by $10 million, primarily due to higher reimbursable revenues related to the West Mira mobilization. EBITDA was in line with the previous quarter, although there were a number of movement -- number of offsetting movements as I just highlighted, plus the impact of the final installment of an overdue receivable we referred to in the last earnings call. Finally, our EBITDA of $72 million was higher than the $60 million guidance we gave, primarily due to timing of spend related to moving stacked rigs to lower cost locations.

Moving onto the balance sheet. As always, there are a number of moving parts here and I'm just going to drill out the main ones. In current assets, the 5% movement mainly reflects lower operating cash flow for the quarter, a reduction in restricted cash following a $33 million payment to settle PIK interest, a decrease in marketable securities related to the carrying value of Seadrill Partners common units and the mark-to-market valuation of our interest rate caps. The main movements in non-current assets are the normal depreciation on our drilling units, and a decrease in investments in associated companies, primarily related to the amortization of basis differences.

Moving on to the liability side, current debt increased primarily due to two items. Firstly, the tender offer for the Senior Secured Notes; and secondly, the scheduled amortization payments on our secured bank debt. You'll recall, during the quarter, we launched a consent solicitation process to amend the Senior Secured Notes indenture, which included a subsequent tender offer to purchase $311 million of principal amount outstanding.

As a result of this process, the $311 million being purchased was reclassified as a current liability. The $67 million of secured bank debt became current related to amortization payments scheduled in 1Q 2020, which we have the ability to defer under the terms of our bank financing agreements. Finally, the decrease in non-current liabilities reflects the corresponding movement of long-term debt to current debt of the two items I've just explained.

Okay. We've shown this slide for the last few quarters to remind everyone that we have four other material investments which we believe represent material value. As you can see between them, they have a combined backlog in excess of $3.5 billion, and EBITDA for Q1 of $244 million which will benefit from our economic share.

Just reconciling the main movements of the quarter on these investments. On Seamex, debt reduced by $95 million -- by $59 million, sorry, reflecting repayments of the RCF loan drawn in quarter four for working capital purposes, and normal quarterly amortization of around $18 million. On Seabras, the build up of cash is mainly attributable through amortization payments being semiannual and this not being a quarter in which such payments are made.

Turning to financing and liquidity. We continue to have strong liquidity with $1.9 billion in cash and no near-term debt maturities. Restricted cash stands at around $428 million. Our $5.7 billion of bank debt -- of our bank loans mature between 2022 and 2024, and there is no amortization until 2021 if we elect to use the $500 million amortization conversion election facility.

Reducing leverage continues to be a priority for us, so let's just highlight what we have done so far. The original $880 million of Senior Secured Notes have the benefit of a security package covering our non-consolidated entity interests, an extra account that held approximately $230 million of cash, and a pledge over accounts have received distribution, loan repayments and sales proceeds related to our non-consolidated entities.

Moneys in these accounts are effectively ring fenced to the benefit of the note holders and generally cannot be used elsewhere in the company. There has been and will continue to be a build up of cash in these accounts that we will regularly use to retire the notes or to settle PIK at par. The recent amendments to the indenture make it easier for us to retire the notes and specifically allowed us to use the $230 million of escrow moneys as part of the tender offer. The outstanding balance has been reduced from $880 million to around $458 million currently. We will continue to prioritize retiring the notes to reduce leverage and release the remaining collateral that we believe has significant value.

And now finally, turning our guidance for the second -- turning to our guidance for the second quarter. EBITDA is expected to be slightly lower for quarter two, around $55 million, reflecting the non-repeat of the overdue receivable, partially offset by the West Castor operating for a full quarter and start-up costs through West Carina which were incurred in Q1.

With that, I'll quickly hand back to Anton.

Anton Dibowitz -- Chief Executive Officer and President

Before we open up for Q&A, I wanted to add just one more item. As many of you on the call will be aware, Mark will be leaving us in the middle of the year. And as a result this will be his last quarterly earnings call, at least at Seadrill. I'd like to take this opportunity to thank Mark for his significant contribution to Seadrill over the past four years. He's been a valued member of the team, instrumental in our restructuring and without a doubt he leaves Seadrill a much better place than when he joined us. And we all wish him well on his future endeavors. With respect his replacement, we have selected the candidates are in the final stages of getting them on board and we look forward to sharing that with you in the next few weeks.

John?

John Roche -- Vice President of Investor Relations

Great. Before we do open up for Q&A, I just like to request that, that we limit questions to one question and one follow-up to allow everyone to have a chance to participate. So now (ph) I turn over to the operator to assemble the queue.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Lukas Daul with ABG. Please go ahead.

Lukas Daul -- ABG Sundal Collier Holding -- Analyst

Thank you. Good afternoon, guys.

Anton Dibowitz -- Chief Executive Officer and President

Good afternoon, Lukas.

Lukas Daul -- ABG Sundal Collier Holding -- Analyst

And one (ph) question on the market. I think that the fundamentals are certainly moving in the right direction, although it is not being appreciated by the equity markets as of now. But could you sort of at least work -- walk us through your thoughts on how you see these sort of recovery developing in terms of utilization and rates? Because I think that one of the reasons is that expectations are maybe not aligned with the dynamics of the industry. So if you could share some of your thoughts on that, I think it would be greatly appreciated.

Anton Dibowitz -- Chief Executive Officer and President

Yes. Look, I'll start with some general comments about the market and maybe -- and then I'll let Matt turn over to kind of what we're seeing in the specific market. I think overall looking at where the market is quarter-to-quarter can be a little bit deceiving. This is a longer term game that we see playing out. And what we can see is that obviously it is a quarter-over-quarter and six months over six months it is improving. What we have seen from where we were six months ago, most importantly as I mentioned, the tone of our customer conversations, the discussions about mobilization and CapEx. And what we're seeing in the forward market and you've seen it from fixtures that have been made public as well as the conversations we're having with customers it's day rates that are clearly in contango where the spot market is what it is, but there is a general acknowledgement from contractors and from our customers that a contract starting next year or the year after needs to be at a significantly higher price.

We can't control. There a lot of external factors that are going to affect how the market recovers, trade disputes, geopolitical, GDP growth. What we do know is that the fundamentals are there that though the offshore barrels are needed that exploration is coming back, and that all points to a continued improvement year-over-year as we go forward the next two years.

Matt, do you want to address some of the regional markets?

Matt Lyne -- Senior Vice President, Commercial

I think if you break it down by the asset classes, the harsh environment has always been very positive for us, and you can see the balance there. The jack-up market, if you look back to January 17, on the market utilization, we're up over 10% now which is obviously a positive sign. And that's largely driven by obviously the long-term stacking and unwillingness to reactivate assets, but also the demand in the Middle East which is really important for the high spec premium fleet owners like ourselves.

In the floater market, we've sort of had a subdued reaction in the recovery by the Golden Triangle. We now see increased activity in both Africa and South America. Although it's taking a little time for those rates to materialize, it's certainly looking a lot more warm and fuzzy for 2020 and beyond. And I think probably the biggest factor is we're starting to see longer term development opportunities materialize which really help us with the supply demand curve.

Anton Dibowitz -- Chief Executive Officer and President

I'll just add one more thing to your question. What's important for the recovery in the market is having disciplined action from the players in the market. I think we've been extremely public about how we see the market going forward. And 80% marketed utilization is very close to what historically has been those inflection points. And we can already see that happening. And that is -- that remains dependent on continued discipline and we're certainly going to do it on our part from market players who are not you know bringing cold stacked rigs back into the market and adding supply before there is a significant strength.

If there is discipline in the market then the speed and the pace of the recovery is going to get under way fairly quickly. If there is a continued lack of discipline for market players and supply continues to get added back into the market, then it will be a different story. We can only control what we do but we're certainly going to play our part in that.

Lukas Daul -- ABG Sundal Collier Holding -- Analyst

Okay. And then unrelated follow-up maybe to Mark. But when it comes to monetization, some of your strategic stakes or the stakes that you have in other companies. How are you looking at it in terms of opportunities in terms of timing? Is that something which is only on the table?

Mark Morris -- Chief Financial Officer

Yes. I mean I don't think it's any great trade secret that we have a number of core investments which we would expect to keep and flourish. And those are the drilling investments that we have in Seamex and Seadrill partners. And then there are businesses that are non-core to us, but they're still good businesses. And Archer which of course was a spin out from Seadrill originally, and of course the joint venture we have with Sapura Energy in Seabras. And when we think about how we look at continuing to de-lever the Senior Secured Notes, there are a number of things that we can do. And some of that will come from realizing some of those sales in non-core assets.

And timing, I think look, we're not going to be rushed to do something. It's all about ensuring that we achieve value, but that is sort of one of the thought processes. As well as obviously potentially doing some refinancing within Seamex, which could realize a particular credit note that we have there that if refinancing goes on that. So there's a number of activities that are ongoing and we will continue to look at those and make decisions based on timing and the value we can receive just to as and when we retire them or sell them.

Lukas Daul -- ABG Sundal Collier Holding -- Analyst

Okay. Thank you, Mark, and good luck in the future.

Mark Morris -- Chief Financial Officer

Thanks very much, Lukas.

Operator

The next question comes from Patrick Fitzgerald with Baird. Please go ahead.

Patrick Fitzgerald -- Robert W. Baird -- Analyst

Hi, guys. So one question, one follow up. Could you remind us just what the contracts activity when the Seabras Sapura vessels come off contract? And what contracting activity is looking like for those vessels that come off contract in terms of getting new contracts?

Anton Dibowitz -- Chief Executive Officer and President

We have two of the vessels that will be rolling in 2019. We're just going to see -- have to see how that that plays out. There are some opportunities down in Brazil and we're hopeful about the opportunities to extend those, but we'll just have to see how that plays out. The remainder of the vessels are on long-term contracts.

Patrick Fitzgerald -- Robert W. Baird -- Analyst

Okay. And to the extent, that there's a dividend or refinancing like you talked about that...

Anton Dibowitz -- Chief Executive Officer and President

Yes.

Patrick Fitzgerald -- Robert W. Baird -- Analyst

...just to be clear, that cash would be restricted cash that could be used to retire the secured notes, right?

Anton Dibowitz -- Chief Executive Officer and President

Yes. Well, I think we need to be careful with terms (ph) restricted numbers because they can apply to slightly different silos of operations. So the way to think about it at high level is, we've got what I will call our operating cash that relates to our rigs that we normally would refer to it as rig-co. (ph) And then we have money that really relates to the benefits of the Senior Secured Note holders. And generally distributions and loan repayments as they come in go into various accounts that are pledged to the Senior Secured Notes. And depending on which accounts it is within the Senior Secured Notes tells you what you can or can't do with it. But in essence, it's all -- always related to either paying down PIK interest or paying down principal. It's not that, that money can generally go straight into rig-co, (ph) the main operating company. There are certain circumstances under which some moneys can without getting into solid technical details here, but generally the way you think about it is that money sort of lives in its own universe generally. And so distributions and dividends coming in effectively grows up until such time as we net down these Senior Secured Notes.

Patrick Fitzgerald -- Robert W. Baird -- Analyst

Okay. Thanks.

Anton Dibowitz -- Chief Executive Officer and President

Okay.

Operator

(Operator Instructions) The next question comes from Michael Alsford with Citi. Please go ahead.

Michael Alsford -- Citigroup -- Analyst

Thanks a lot for taking my question. Just got one please. I just wonder whether you could help, guide on what the investment levels will be in terms of CapEx for this year for the Company -- for the Group as a whole. Thank you.

Mark Morris -- Chief Financial Officer

In total CapEx for the full year?

Michael Alsford -- Citigroup -- Analyst

Yes, exactly. Yes, please.

Mark Morris -- Chief Financial Officer

Yes. I mean, we would -- I mean I think there are various things that move around. We don't normally break that number out specifically. But I think sort of if you're talking in the sort of 150 to 250 sort of probably what we would have budget, that sort of range.

Michael Alsford -- Citigroup -- Analyst

Okay. Thanks very much. And so that would incorporate any sort of incremental spend on rigs plus sort of maintenance on the fleet, essentially? (multiple speakers)

Mark Morris -- Chief Financial Officer

Yes. On the CapEx, yes.

Michael Alsford -- Citigroup -- Analyst

Lovely. All right. Thank you.

Mark Morris -- Chief Financial Officer

Okay. Thank you.

Operator

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

John Roche -- Vice President of Investor Relations

Thank you. And thanks everyone for joining us today. This concludes our first quarter conference call. Speak to you all in about three months time.

Operator

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

Duration: 26 minutes

Call participants:

John Roche -- Vice President of Investor Relations

Anton Dibowitz -- Chief Executive Officer and President

Mark Morris -- Chief Financial Officer

Matt Lyne -- Senior Vice President, Commercial

Lukas Daul -- ABG Sundal Collier Holding -- Analyst

Patrick Fitzgerald -- Robert W. Baird -- Analyst

Michael Alsford -- Citigroup -- Analyst

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