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Presentation

David Warwick : Hello, everyone, and welcome to Seadrill’s Q4 2022 earnings call and webcast. My name is David Warwick, and I’m the Director of Investor Relations for the company. I’d like to start by introducing you to the Seadrill team on today’s conference call. Simon Johnson, President and Chief Executive Officer; Grant Creed, EVP and Chief Financial Officer; Leif Nelson, EVP and Chief Operating and Technology Officer; and Samir Ali, EVP and Chief Commercial Officer. I will shortly hand you over to Simon who will take you through an overview of the Q4 highlights as well as touch on some of our corporate and commercial success over the quarter. Grant will then take you through our financial performance over the quarter and 2022 performance against our previously set guidance before handing back to Simon for some closing remarks, summarizing our strategy and outlook.

Following the formal presentation, we’ll be inviting questions from industry- and sell-side analysts. To participate in the Q&A session, we ask that you join the session via the conference call line. For those of you that are not tuning in via the webcast link, you will be able to access a copy of this presentation via the Investor Relations section of the Seadrill website. This conference call is being recorded, and a webcast replay of the call will be made available on our website shortly after. Before we commence, I would like to notify you of the disclaimer statement made on Slide 2. Simply put, we will be referring to forward-looking statements related to the business and company that are not historical facts. Such statements and assumptions are based upon current expectations and are therefore subject to certain risks and uncertainties.

There are many factors which could cause actual performance and results to differ materially. For further information, please take the time after the call to read this disclaimer and refer to the Q4 earnings report released earlier this morning. On that note, I will hand you over to Simon.

Simon Johnson: Welcome, everyone. Thank you for joining our virtual presentation discussing our Q4 2022 results. At the outset, I’d like to briefly clarify that, as outlined in our press release from February 28 in connection with filings made for our acquisition of Aquadrill, we chose to postpone this earnings release as a critical step in closing that transaction in the most expeditious manner. Therefore, with our Q1 2023 reporting scheduled for just over a month’s time, we’ve shortened today’s prepared remarks. Now, for a few topline figures for the quarter. Full year EBITDA for 2022 was $265 million which is at the top of the guided range. Fourth quarter revenues and EBITDA were lower than previous quarters, but this was anticipated and in line with expectations in relation to operating activity.

In October, we closed our sale of seven jackups located in the Kingdom of Saudi Arabia, which allowed us to increase our liquidity and significantly deleverage our balance sheet. Since the transaction closed, we’ve paid down almost $600 million in debt under our second lien facility. Grant will provide some more color on these topics in his prepared remarks. During the quarter, not only did we closed our sale of the Saudi jackups, but we also signed an accretive agreement to acquire Aquadrill business with which we’re very familiar given our common history. And as you will have seen, just days ago, we closed this transaction. The management team and I would like to thank the employees of both companies for their efforts and contributions in closing the deal.

The ability to transact quickly and efficiently is becoming a hallmark of the Seadrill brand. We’re very excited about the prospects this acquisition presents in today’s point rig market. Turning to our active fleet including the former Aquadrill units, we now have 14 deepwater and harsh environment floaters in operation with the West Capella expected to begin its operations offshore Eastern Africa imminently, taking the total in operation to 15. Among the operating units are the West Jupiter and West Tellus which have commenced operations with Petrobras in Brazil in December and January respectively. Additionally, we have three benign-environment jackups operating on bareboat charter to our Gulfdrill joint venture and a number of other units that we manage on behalf of other owners.

As a reminder, the former Aquadrill units are not presently managed by Seadrill, but our intention is to take control of these units at an appropriate time based on discussions with the existing managers as well as the customers utilizing the services of these rigs. Finally, during the final quarter of 2022, we delivered good operational performance with high technical utilization across the fleet. Our technical utilization was recorded at 95%, while economic utilization stood at 91%. Moving onto the next slide, the most notable event of recent months was our acquisition of Aquadrill, which we closed just a few days ago, as I previously mentioned. As a result, we’ve added four drillships, one harsh environment semi-sub, and three tender assist units to our fleet.

With the sale of the seven jackups deployed in the Kingdom of Saudi and the addition of Aquadrill assets, our fleet has become more exposed to the attractive ultra-deepwater and harsh environment rig segments. The Aquadrill do provide Seadrill with more capacity in the ultra-deep water rig market in particular, where we continue to be encouraged by prevailing trends in day rates. Importantly, this capacity is on the water and does not require costly and lengthy rig reactivations. Our immediate focus is on seamlessly integrating Aquadrill into our business, and we believe that we are uniquely positioned to do so given the shared history of Seadrill. We are very keen to move quickly with the integration in order to realize the significant synergies arising from the transaction.

And the management team firmly believe that the acquisition cements Seadrill as an industry-leading offshore driller with critical scale. And it enhances our free cash flow outlook, and we expect it to deliver meaningful value to our shareholders through time. Now touching on market conditions on Slide 5. 2022 was an inflection point for the offshore drilling industry, and we continue to see positive developments right across the oil and gas sector. The fundamentals for offshore drilling remain favorable despite turbulent conditions in broader financial market supply. The global energy crisis experienced through 2022 has brought to light the years of underinvestment in new and continued supplies of energy. have benefited from high energy prices for some time now and chosen principally to return the profits to shareholders.

However, we are now seeing an emerging trend in their approach to capital allocation. Several of the large IOCs have indicated expansionary budgets for offshore drilling activities with greenfield activity being a prominent beneficiary. Furthermore, we are seeing a clear preference towards high-end modern equipment which plays well into the hands of Seadrill’s developing fleet. Strong demand is particularly evident in Seadrill’s key geographies namely Brazil and West Africa, where utilization rate is being pushed to high levels. While demand is a key driver, we believe that the lack of available supply of rigs, a function of fleet rationalization over the last decade, to be a critical component of the market’s continued positive momentum and trajectory through 2023 and beyond.

The outlook for the benign ultra-deep water segment remains positive with marketed utilization standing around 95% for drillships. Sales of this segment, as illustrated by leading edge day rates, consistently in the $400,000 to $450,000 per day range. We now have two units in the harsh floater segment. Several units have already left the critical Norwegian market, and we see the demand-supply balance tightening further in coming months, improving outcomes for rig owners. With our expanded rig portfolio, we are well positioned to capitalize on new opportunities. We’re excited about the market in the coming years and intend to reposition Seadrill relative to its peers with a more consistent and concentrated fleet profile. I’ll now hand over to Grant to talk you through the Q4 financial results in more detail.

Over to you, Grant.

Grant Creed: Thank you, Simon, and welcome again to all of you joining us today. We’re delighted to report full year EBITDA for 2022 of $265 million which is at the top end of the guided range. Full year revenue of $1.1 billion and CapEx of $289 million were also within the guided ranges. Fourth quarter EBITDA of $41 million was in line with expectations and previous guidance but lower than the previous quarter, primarily driven by idle time for the West Tellus, which completed upgrades for its upcoming long-term campaign with Petrobras that commenced in early January 2023. Fewer rig operating days for the West Hercules, which concluded its operations in Canada and subsequently demobilized to Norway. We did not benefit from a full quarter of operating results from the Saudi jackups following completion of the sale of that business in October.

And I have a general comment in respect of P&L geography. Results related to the Saudi jackup business up until October 18 are presented as discontinued operations on the face of the income statement. From my final comment regarding the P&L, we expect EBITDA to significantly improve again in the first quarter of this year as we benefit from a full quarter of operations in respect of all four drillships on contract in Brazil. Now onto the balance sheet. We had $480 million of unrestricted cash on hand at the quarter end, relatively high due to the proceeds received on sale of the Saudi jackup business. Other assets decreased by $89 million largely due to a combination of collections from some of the old JV in respect of management fees receivable, amortization of favorable contracts, and receipt of demobilization revenues in respect of the West Hercules.

Long-term liabilities decreased, both primarily in relation to debt prepayments, which I’ll explain in more detail shortly. This was partially offset by mobilization revenue and in relation to Jupiter, Carina, and Saturn, which is recorded on the balance sheet and recognized as income in the P&L over the contract term. And finally, assets and liabilities related to the Saudi business were classified as held for sale on the Q3 balance sheet. These were no longer on the balance sheet after the sale closed in October. Looking at our debt profile in a bit more detail. You’ll see that we’ve been very proactive managing it following the sale of the Saudi business. Since the end of Q3, we’ve reduced our debt stack by almost $600 million. First, we made a mandatory prepayment of $192 million in October at the closing of the sale, which was followed by a voluntary prepayment of $250 million in November.

Post period, we made two further voluntary prepayments of $110 million and $40 million in February and March respectively. All told, these prepayments have reduced the relatively expensive second lien debt by approximately 83% from $713 million to $117 million. With no change to the first lien facility or convertible bond, our total debt stood at $342 million as of April. Lastly, on the financials, we will not be providing full year 2023 guidance at this point in time. Our priority is providing consolidated financial guidance that includes the Aquadrill business, and we intend to issue this in the near future. With that, I’ll now hand back to Simon before we open the line for the Q&A.

Simon Johnson: Thanks, Grant. We have, of course, spoken about many of the events on this slide previously. So I won’t touch on all of them individually. Now that we’ve concluded 2022 results, I’d like to reiterate how proud I am of our organization. It was an extremely active year that began with our successful emergence from Chapter 11 and ended with the announcement of our Aquadrill flight returning home. We’ve demonstrated that we are decisive and nimble through the execution of several strategic initiatives while at the same time delivering operationally for our clients. And on the topic of operations, I’d be remiss if I didn’t commend our workforce both onshore and offshore for getting our four seventh generation drillships operational in Brazil after large and time-consuming capital projects.

We started this year in similar fashion with the Aquadrill closing just days ago and the divestment of our stake in and Paratus Energy back in February. We are making Seadrill a simpler, more streamlined company, increasing our concentration on the markets in rig segments where we can realize the most value for our shareholders. Looking ahead, refinancing outstanding debt will be a near-term focus, and we’ll continue to monitor the market for accretive growth opportunities and/or divestment of non-core assets where attractive prices can be realized. We will continue to be an active player in our industry and, as ever, we intend to maximize value for our shareholders with operational excellence and safety at the forefront of our business. With that, we conclude our presentation.

Operator, I’ll hand you back to open up the lines for Q&A, please.

Operator: Thank you. Greg Lewis, BTIG.

Greg Lewis: Yes, thank you and good afternoon, everybody, and thank you for taking my question. Simon, I believe you touched on it briefly in your prepared remarks, but it seems like over the last couple of weeks, there has been some positive momentum in the North Sea whether it was the UK announcing they’re going to look at the windfall tax or it looks like a rig or two has moved out of the Norwegian market to outside the North Sea. Just kind of curious on your thoughts, how you’re thinking about that market realizing post the Aquadrill acquisition. Do you have another harsh weather rig, and really just can you provide a little bit more color on how you’re thinking about that market maybe in the back end of this year? And really how you’re thinking about it next year?

Simon Johnson: Yes, you bet, Greg. I’m happy to talk to that. So, yes, I mean, obviously Aquadrill delivers another harsh environment rig into our fleet in the form of the Aquarius. We have been saying for some time that we are concerned about being a sub-desirable scale in that market segment. So that gives us — obviously we’re getting closer to critical mass, which is a good thing. And its empty capacity at the moment too in as much as the rig is not currently working for anyone. So as we see the shift of certain of the units from the NCS to southern latitudes, we see that as marking an important shift in the market balance in the NCS certainly, but I think more generally in the Western European rig markets. We think that the public policy that has been expanded by the UK government in relation to our sector has not been helpful in the near term.

I think that there’s more sensible ideas that are being brought to the fore now. But I don’t think they’re going to make as important a contribution to the supply demand balance in the near term as the movement of some of those units to other countries like Australia, Canada, Namibia, I think, that’s the most sort of powerful near-term impact or catalyst on the development of that market from what has been a little bit of a stale and sort of depressed outlook. That’s rapidly changing to one where there’s a much healthier balance between demand and available supply. So we think we’re favorably exposed. We do have to go on reactivation for the Aquarius to bring it back to work. Our view is that that reactivation will need to be funded by the client.

So we’re setting the threshold pretty high in terms of putting that rig back into a market that makes the attributes of that rig. And as I say, we’re going to be strictly observing financial prudence in how we approach those opportunities.

Greg Lewis: Okay, great. And then realizing, again, it has been a week, so you probably haven’t even started realizing synergies from the Aquadrill acquisition, but with that transaction closed, how are you thinking about positioning the company around potential additional opportunities for rig growth, whether that’s on the more traditional M&A side or it looks like there are still maybe one or two stranded newbuilds at the shipyards and maybe a couple more that I’m not thinking about the right way, and/or is there potential for Seadrill to potentially manage maybe some of those rigs that are currently looking to come out of those shipyards?

Simon Johnson: Yes. Well, what I would say is we’ve probably taken a more wide-ranging approach to how we might sort of make money through the business, rig management as being a feature of what we’ve done in the past. It’s not the core of what we do. But certainly, we would be interested in participating in rig management opportunities for those new builds, I think, critically if there’s a path to ownership of the assets. I think as the stranded asset inventory starts getting depleted, obviously there’s more and more people chasing fewer and fewer available units. So I think, as you think about the supply inventory generally, it’s getting very, very tight now. So I think whereas we’ve been principally focused on acquiring balance sheets up until now, I think that we would have an open mind to acquiring a stranded asset as long as we have a pretty high level of confidence of our ability to contract that unit.

So I sort of answered your questions in reverse there, Greg. But I think also, additionally on top of that, obviously the Aquadrill acquisition just gives us a lot more options for our customers and a lot more sort of near-term capacity as well. So the market is getting to really interesting phase at the moment, and we’re super pleased with how things are developing for us in the space generally.

Greg Lewis: Yes, 100% we agree. I did have one other question on Grant, I mean, you mentioned the step-up that we’re going to see in Q1. I don’t know how granular you want to be but is there any kind of guidance you can give us maybe on a percentage basis or how just so there maybe isn’t any confusion. How many incremental do you think we’re going to see roughly in Q1 versus Q4?

Grant Creed: Greg, I’m reluctant to give you anything sort of firm in that respect. I think what I can say now is, as I mentioned in the prepared remarks, the Brazil rigs are on contract. So to go now run their models. It’s not extremely as quite a simple business than you know what rigs are on contract. I think generally the market has a good idea of the day rates on each of the rigs. So I think you’ll be able to get pretty close.

Greg Lewis: Okay, great. Thank you very much for the time.

Simon Johnson: Thanks for the questions, Greg.

Operator: Fredrik Stene, Clarksons Securities.

Fredrik Stene: Hey, Simon and team, congratulations on the transaction first and foremost. And that goes to you, Steven, as well if you’re listening in here. I think it’s great to see consolidation. My question — or I have several questions, but I’ll try to keep it short here. I guess, you said briefly that, in the near term, you could look at your capital structure and particularly on the back of you reducing the second lien piece, I guess, kind of grouping that maybe into simpler structure would make sense. So are you able at this point to share, not necessarily specifics, but at least an idea of how you think that could look like, and if you have any ideal leverage level that you would look at as well.

Simon Johnson: Yes. So I’ll start off by saying that our existing debt not only is it’s more expensive than we would like it to be, and think where the market is today, but also contains unhelpful complex covenants that we would like to remove. So I think a refinancing of some sort does make sense. And we’ve been doing our work to review what are the pros and cons of the options we see in front of us. We have Norwegian bond, US bond, direct lenders. I can’t I go into details now where we’re landing and what the leverage metrics are. I think we also look at use of proceeds as well and what that may be. But I’m reluctant at this stage, Fredrik, to give you any more details on that.

Fredrik Stene: Yes. No, that’s very understandable. I think on this transaction or potential strategic transactions, you touched upon that with Greg already. But just on the broader markets, given that we’re now seeing the stranded assets being taken into market, and I think quite a few of them or almost all of them have soon to be owners or companies that are looking actively to take out the rest. And then you have some of your peers that are still — in addition to yourself that are still stuck with its stacked assets, which I think at least some of them are keen to put back into work. So when you put that all together, how do you think the day rate mechanics will kind of work out in the short term versus the longer term? Do you think we’ll need some sort of plateau as we kind of churn through those assets or — and then accelerate a bit more or do you think you will have positive directional momentum also through ’23, ’24 regardless of those stacked assets coming back into play.

Grant Creed: I think in the near term, Fredrik, our expectation is that you may see something of a plateau in the rates, but that’s principally a function of market participant behavior. I don’t think it’s necessarily reflective of underlying fundamentals. We’re firmly of the view that the supply demand balance is what it is and that, at some level, will just drive behavior forward regardless of what people may choose to do with individual market fixtures and so on. So I think there’s some potential for slight increase in the spread and the flattening of rate development here in the next couple of months. But I think as we get into the capital budgeting season in the next quarter and we start to see that tightening of supply in terms of the units that are stranded in the shipyards disappearing, then I think you’re going to end up with two camps there that can be those who have a certain capacity that they can’t get to work because they’re facing long and expensive reactivations, and then there are going to be those with rigs on the water.

And so I think for those with rigs on the water are going to be the pacesetters in terms of rate development. And those have to bring units back to work that will face frankly an arbitrage. And that arbitrage will both work for them and against them, but principally against them in terms of rate structure. So, yes, look, I think there’s a number of our peers that have got a lot of rigs to reactivate. We’re not in that position thankfully. We have pretty much fully contracted with one or two swing assets that we can bring back to the market if we get the right commercial terms. We’re not going to do that on a speculative basis. So I think we’re confident in the development of market, and we think that will overcome any near-term headwinds.

Fredrik Stene: That’s very helpful. And just as a follow-up to that, have you noticed in your own discussions with clients kind of versus where, for example, where you were six months ago. How have the other T&Cs of the contract structures changed in addition to just day rates going a bit up?

Simon Johnson: Well, I think you have to ask in order to be served. So what I would say is I don’t know if they’ve started offering massively different terms. I think the most obvious thing that we’ve seen is an understanding that they need to be much more flexible on intake windows and things of that nature, and that they have to plan further and further ahead. In so far as the contractual Ts and Cs are concerned, I mean really that requires adult behavior on the part of the people operating the market. And certainly for us, our concerns with things like supply chain inflation and the potential for country-specific changes in operating costs, we’re very focused on protecting margins. We’re very focused on protecting against changes in war and currency controls and things of that nature.

But you have to positively ask the customer to address those kinds of issues. And that’s a little bit that we hope will separate us from some other players. We’re not losing sight of the contractual asks. We’re looking to expand on that part of the commercial bargain. It’s through time that has proven to be far more important than a direct that exists for a moment in time.

Fredrik Stene: All right. Thank you so much for all your comments. And, again, congratulations on completing the acquisition.

Simon Johnson: Thanks very much, Fredrik. Have a great day.

Operator: Hamed Khorsand, BWS Financial.

Hamed Khorsand: Hi. So the first question I had was, is there any plan or any strategy behind some of the assets you’ve gained from Aquadrill? And if you’re looking to monetize them in any way, does it fit the larger profile what you will see Seadrill as in the next three years?

Simon Johnson: Yes, Hamed. Absolutely. Fleet compositions and active discussion within the management group from the Board at the moment. So as you rightly point out, we are acquiring a number of rigs through Aquadrill that aren’t sort of what I consider to be core assets in the form of the three tender assist rigs. Through time recently here, we’ve reduced our exposure to the jackup space as well. We still have three units that are leased to go through JV and on contract for the next couple of years with staggered expiration dates. And we have a stacked unit as well. So I think increasingly, as we go forward, you can see a shift in our focus to units that are basically focused on the ultra-deepwater and the harsh environment space.

But we’re in no rush also to sell those assets that have come to us either through acquisition or have been a part of our original fleet. We’re only going to divest if the terms are attractive to us frankly. So we’re going to be looking at opportunities there, both to kind of clean up the fleet that we’ve got to make for more consistent, nice metric profile. But then we’re also looking at opportunities for expansion as well. So we’ll continue to look around for assets that might be available on a one-off basis or where they might make sense in our fleet and not in somebody else’s. We have a lot of active discussions across the space there. So, yes, we’re looking to have a more, shall we say, a less wide-ranging profile across the fleet going forward.

But it will take some time to achieve that and constant surveillance and financial discipline on how we transact around achieving that outcome.

Hamed Khorsand: Okay. And my other question was regarding those synergies that you’ve highlighted in the past. How fast could that develop as the biggest portion of those synergies coming from you moving away from the management contracts that Aquadrill has?

Grant Creed: Yes, that’s right. Look, I think — So we’ve talked about $70 million annually. The vast majority of that is in relation to the MSAs. Aquadrill, as I think almost everyone knows, has only a small group of employees with small office space. So the G&A synergies are approximately $10 million or so of that $70 million. And then the rest is MSA related. Those MSAs base case is they continue with the current managers until the existing contracts expire, and then we’ll take over. And those are generally within the next year and in some cases slightly more than a year. But by in the next two years’ time that will be fully realized.

Hamed Khorsand: Okay. Thank you.

Operator: Matt Polyak, Hummingbird Capital.

Matt Polyak: Hey, good afternoon, guys. Thanks so much for taking the time. Just wanted to kind of go down the linear logic path here. If you wouldn’t mind, obviously, some of your peers have come to the debt market and seems like there’s a window open here. Could you just talk about the puts and takes of shareholder returns versus allocating capital to potentially stranded assets and weigh that against sort of the perceived secondary risk that there is post deal close here?

Simon Johnson: Yes. Okay. I can start off, Matt, and then maybe Grant let some color. Look, I think the key thing to understand is that we’re fully contracted at present, and we don’t have a lot of on the sidelines that is going to massively distract us from delivering operating days. So really what we’re trying to do is, if you take the view as we do that there’s not going to be any new building in the sector for the foreseeable future, at some point it makes sense to — if you can obtain access to them or on some kind of optional or committed or stage basis, at some stage, it makes sense to look at those new assets. And I think the way that the market has developed in the last 12 months, looking forward the next 12 months, I think that there’s a case to say that there’s no room for a little bit more aggressive behavior if you’re at the fully contracted end of the spectrum, which we clearly are in terms of not having too much residual stack capacity waiting to come back to work.

So that’s how we kind of think about it is on what might look a little bit sporty today, in the very near future looking backwards might look like it was a much more interesting approach. Does that answer your question, Matt?

Matt Polyak: I guess I was really kind of asking about the puts and takes of utilizing capital to spend on stranded assets versus shareholder returns and thoughts around buybacks or dividends and whether or not there’s room for both because you guys obviously alluded to shareholder returns as well pretty heavily.

Simon Johnson: Yes. Well, look, we think there’s room for both. I think the casing understands we’re not going to grow capital around on a wholesale basis, we’re going to be looking on a selective opportunistic basis where we think there’s good value. In so far as it relates to capital return, I think we’ve communicated pretty loudly that that is going to be an essential part of our proposition to the market, but we really need to get this Aquadrill integration out of the way first. And you’ll see us promulgating some firm positions on what we might do there in conjunction with the Board as we get towards the end of this year. We’re not able to do that just now.

Matt Polyak : Got it. Thank you.