Seadrill Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2023

There are 12 speakers on the call.

Operator

Hello, everyone, and welcome to today's conference call titled Seadrill Second Quarter 2023 Results. At the end of today's presentation, there will be an opportunity to ask a question. I would now like to turn the call over to Lydia Mabry, Director of Investor Relations to begin. Lydia, please go ahead whenever you're ready.

Speaker 1

Thank you, operator. Welcome to Seadrill's Q2 2023 earnings call. With me today are Simon Johnson, our President and Chief Executive Officer Grant Creed, Executive Vice President and Chief Financial Officer And Samir Ali, Executive Vice President and Chief Commercial Officer. Before we begin, I would like to remind you that some of today's comments are forward looking statements within the meaning of federal securities laws. They involve risks and uncertainty and actual results may differ materially.

Speaker 1

No one should assume these forward looking statements remain valid later in the quarter or year. For a more detailed discussion of the major risk factors affecting our business, Please refer to our latest Form 6 ks filed with the U. S. Securities and Exchange Commission. Our comments also include non GAAP measures.

Speaker 1

Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. Later in the call, following our prepared remarks, We will host a question and answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Simon.

Speaker 2

Hello, everyone, and thank you for joining us on today's call. For the Q2 of 2023, Seadrill reported adjusted EBITDA $159,000,000 on $414,000,000 of revenue, which resulted in the industry leading adjusted EBITDA margin of 38.4%. We benefited from a full quarter's contribution from contracted rigs acquired via our AquaDrill transaction. A larger fleet size, along with continued solid performance from existing operations, drove the 56% increase in revenue And 87% increase in adjusted EBITDA from the prior quarter. We've had a lot of activity at Seadrill over the past 18 months that has simplified and strengthened our business.

Speaker 2

This includes monetizing non core assets, streamlining our operating structure, enhancing scale and capacity, Highgrading our fleet and establishing a more efficient capital structure. So before Sameer discusses commercial activity and outlook And Grant reviews financial results, I want to spend the initial part of today's call reintroducing you to Seadrill. At Seadrill, we strive to operate at scale, Achieved through a combination of market selection and fleet refinement supported by capital discipline. Why do we care about scale? Because simply put, Scale supports success.

Speaker 2

It affords contracting flexibility, lowers our cost to operate and helps us attract and retain Critical talent. We're able to offer customers a more complete rig portfolio with options on technologies, pricing and availability, which makes us more commercially competitive. We can share shore based support, people and spare parts across a larger base of operations as well as performance gains and best practices, improving overall efficiency. Lastly, we can invest in developing local talent, Providing them employment stability and career pathways in the countries where we operate. Size differs from scale.

Speaker 2

If we exclude the 3 jackups we have listed for sale, Seadrill operates an 18 rig fleet. While we may be smaller than certain Other global drillers, we are still the 4th largest listed contractor. And by focusing our floating rigs in key operating markets, we achieve Significant local scale. Globally, our customers are increasingly desirous of better resource resilient contractors Who can support their success through time, drilling contractors with scale, contractors like Seadrill. We concentrate our rigs around good rocks and attractive geographies, Resilient to changes in oil price and market fortunes, achieving scale and markets that matter.

Speaker 2

Today's Seadrill is the leading international driller in Brazil, The number one operator of rigs in Angola and an established presence in the Gulf of Mexico. We have strong exposure and leverage to these three regions. They represent nearly 70% of our $2,600,000,000 quarter ending backlog and are home to 12 of our 14 active floaters Or nearly 80%. Early in the cycle, you may see us take advantage of relocating rigs where they have the best opportunities. Though our focus remains Golden Triangle Plus, we remain open to contracting another attractive hydrocarbon basis where we can capitalize on rising rates, build a more formidable backlog or to establish a pathway to scale.

Speaker 2

Currently, we market a modern floater fleet having reduced exposure to non core asset categories Through opportunistic divestitures to become more pure play. Continued fleet refinement creates economies of scale. It's more efficient to market, operate and support a fleet of like assets with similar rig designs and equipment packages. In July, we completed the successful sale of 3 tender assisted rigs acquired by the AquaDrill transaction, generating approximately $85,000,000 in proceeds. These rigs need to fit with our fleet nor our strategy, serving niche, shallow water region specific applications.

Speaker 2

We also announced plans to sell 3 jackup rigs, which would mark a near complete exit from the jackup business following the sale of 7 jackups in Saudi Arabia last The transaction would simplify our fleet and our financials since it involves divesting our associated joint venture interest. These are the same rigs our commercial teams worked tirelessly to extend last quarter. By selling jackups with contracts, as we've done in previous transactions, We create value for potential buyers and our shareholders. We are economic dispatchional asset owners. We continuously evaluate the strategic fit of rigs within our fleet.

Speaker 2

We don't fall in love with the steel. Operating at scale More than concentrating the right rigs in the right regions. It requires discipline. We maintain a well managed balance sheet and conservative capital structure. Our debt refinancing lowered our cost of capital, reducing annual interest expense by over 600 basis points and nearly 50,000,000 dollars compared to 2022.

Speaker 2

Additionally, it extended maturities by several years and removed restrictive covenants. At Seadrill, we focus on being the best driller, not the biggest. We create the most value for our customers by delivering safe efficient operations And in turn, we create the most value for our shareholders by building a business that generates meaningful free cash flow. We announced today that after careful consideration, our Board of Directors authorized a $250,000,000 share repurchase program, allowing us to return excess capital to shareholders after exhausting other uses. Their decision reflects confidence in our strategy to operate at scale, supported by our demonstrated commitment to market selection, fleet refinement and capital discipline and the positive market outlook.

Speaker 2

As always, we benefit from the guidance and support of our highly experienced independent directors, including notable industry leaders who have led organizations through Similar periods of evolution. I'm excited about what we're doing here at Seadrill. Around the globe, across functions, our employees show a bias towards action. They're committed, they're creative and they get stuff done. So thank you, team, for your continued contributions to making Seadrill better every day.

Speaker 2

With that, I'd like to pass it to Sameer to review our recent contracting activity, approach and outlook.

Speaker 3

Thank you, Simon. I'll begin with our fixtures in the Q2. In Qatar, an operator exercised options for the West Tucana jackup in direct continuation, Committing the rig until the Q3 of 2025. In Indonesia, an operator exercised an option for the West Capella drillship, Extending its contract by approximately 2 months through August of 2024. Lastly, in Angola, A client exercises an option for 2 Somadrill drillships.

Speaker 3

The multi well extensions will secure the Sangamo, Kangela through January 2025 and the West Gemini through May 2025. These extensions represent a Material uplift to the rig's current day rates. However, I would highlight that these were fixed priced options and they do not reflect current market rates, which are higher. Excluding cold stacked assets, 97% of our active fleet is contracted through 2023. Right now, we have 5 to 7 floaters with upcoming availability, and we are currently looking to recontract them over the next 12 to 18 months.

Speaker 3

Two floaters, the West Polaris and the Savada, Louisiana finished their existing contracts by year end. A third, the West Auriga, Finishes in the Q1 of 2024. Late next year, we may have an additional 2 to 4 floaters available for work, subject to customer decisions to extend previously negotiated options. As rigs roll off contract, we may take the opportunity to relocate them to more attractive markets. Don't be surprised if we willingly accept idle time to reposition rigs for the right opportunities.

Speaker 3

Inter country mobilization We balance our near term exposure to rising day rates in our recovering market With solid long term contracts that generate consistent cash flow, 5 of our rigs are contracted through much of 2025, including 4 in Brazil The West Saturn, which showcases rig automation and emissions technologies, is on contract through 2026. And in Norway, the Westellara, a harsh environment jackup is contracted into the Q1 of 2028. We take a portfolio approach to our recontracting. By staggering end dates, we intend to create a smooth contract expiration profile that balances near term market exposure with revenue certainty. In the early phases of a market recovery, we prefer not to book contracts of 2 months duration.

Speaker 3

When you consider our key operating geographies, duration tends to vary. Brazil, thanks in years, West Africa in months and the Gulf of Mexico in days. Yes. This is somewhat oversimplifying, but illustrative all the same. Frankly, right now, we are not seeing demand for many long term contracts outside of markets like Brazil, where they are still the norm.

Speaker 3

While some IOCs may choose to secure rates in a tightening market, For now, we see long dated contracts as being the exception method of the rule. Looking ahead, we expect continued development of the offshore drilling market, Particularly where we are focused within deepwater. Drill ship utilization is trending above 90% and in our key operating regions within the Golan Triangle, Utilization is closing in on 100% as demand outpaces supply. Assuming limited rig additions to the existing sideline capacity, Like stacked rigs and stranded assets or what we refer to as not so new builds, the market is poised for a sustained upcycle. And now I'll turn the call over to Grant.

Speaker 4

Thanks, Sameer. I'll discuss our second quarter results before outlining our recent refinancing and capital allocation approach. In the Q2, Seadrill generated $414,000,000 in total operating revenues, An increase of $148,000,000 or 56 percent from the prior quarter. This includes $329,000,000 of contract Drilling revenues, which increased sequentially by $143,000,000 or 77%, primarily due to an increase in operating days Now that the Aquador rigs are included in Seadrill's results. In today's press release, we included a basic calculation Many of you are likely already using to derive contract drilling revenues based on the number of contracted rigs in our fleet, The day rate they earn and the economic utilization they achieve.

Speaker 4

The arithmetic will get you close to reported contract drilling revenues, I will always differ somewhat from the actual numbers since day rate, as defined, does not always capture the total contract value. Here's why. 1st, day rates never include performance bonuses awarded for achieving operational targets. 2nd, we often provide customers with additional services like managed pressure drilling or equipment monitoring. Whether we charge those as part of our day rate or as a separate line item varies by client, region and service providers.

Speaker 4

3rd, Rates sometimes include revenues related to moving a rig to and from its intended drilling location or mob and demob. Sometimes they don't. Often it depends on the extent of the relocation. This quarter we reported economic utilization of 93 Slightly less than target due to weather related impacts and one time operational events. A Seadrill owned rig that is managed 3rd party contributed a significant portion of the unplanned downtime.

Speaker 4

We can't predict unplanned downtime, but we can prepare for it. At Seadrill, we minimize its impact by crewing our rigs with experienced, educated teams who can recognize and react to potential problems, Providing access to critical spare parts on deck and onshore and supporting the crew with expert services, which ensures the continued delivery of safe and efficient operations. Beyond contract drilling revenues, We generated additional revenues from management contracts, largely related to 3 floating rigs we operate in Angola as part of the Sonangol joint venture. And that's the West Gemini, Sonangol Lebengos and Sonangol Quangella. And that totaled $66,000,000 for the quarter.

Speaker 4

We earned an additional $19,000,000 in reimbursable and other revenues. Operating expenses for the quarter increased 41% to $308,000,000 owing largely to our change in fleet size. Rig operating costs, Which consists primarily of labor, remains under pressure as inflation continues to creep higher and the market for skilled rig crews remains tight in certain geographies. When you consider our floaters of a manning of roughly 160 people working across 2 rotating shifts or tours, You can appreciate the potential magnitude of this impact. Our second quarter numbers Also include onetime merger and integration related expenses of $16,000,000 This translates into adjusted EBITDA of 100 and £39,000,000 resulting in 38.4 percent adjusted EBITDA margin, a 6 40 basis points improvement from the prior quarter.

Speaker 4

Now on to the balance sheet. Cash flow from operations of $20,000,000 for the quarter were negatively impacted by working capital movements, including Accounts receivable build related to the timing of cash receipts, increased operating days and higher rates in respect to certain rigs. Reduction of accounts payable and accruals incurred late last year early this year in respect to the mobilization and operations preparation of the 4 rigs in Brazil. And finally, the timing of funding payments made to the AquaDryl rig managers. Long term maintenance costs of $23,000,000 which are included within operating activities within the cash flow statement and $14,000,000 of rig Equipment additions resulted in total CapEx of $37,000,000 for the quarter.

Speaker 4

Year to date, we have spent $58,000,000 in CapEx, deferred much of our spending to the second half of the year. Unlike last year, where we had big capital projects related to rig reactivations and upgrades, This year's spending thus far consists of several investments to enhance the marketability and operating life of rigs across our fleet. Later in the year, we expect CapEx spending to increase as we begin purchasing long lead items related to special periodic surveys or SPSs scheduled for next year. Our guidance for the full year remains unchanged And to recap, we anticipate total operating revenues to be between 1 point $44,000,000,000 $1,490,000,000 adjusted EBITDA to be $435,000,000 to $485,000,000 And CapEx and long term maintenance to be between $210,000,000 $250,000,000 Now moving on to our recent refinancing. After quarter end, we completed a successful debt offering at competitive rates, Issuing $575,000,000 in senior secured second lien notes at 8.38, substantially lowering our costs of capital.

Speaker 4

Additionally, we established a $225,000,000 revolving credit facility. We used most of the proceeds from the refinancing to pay down the outstanding amounts of our existing debt facilities and related transaction and exit fees. Approximately $230,000,000 of net At quarter end, Seadrill had total debt of $355,000,000 and $530,000,000 $539,000,000 in cash and cash equivalents, including $127,000,000 in restricted cash. The value accretive divestiture, as Simon mentioned earlier, would further fortify our balance sheet as well improving I now want to spend some time discussing how we approach capital allocation. 1st, we must maintain an appropriate level of cash to run our business effectively.

Speaker 4

Cash requirements may fluctuate with the changing size of our rig fleet, Evolving maturity of our business model and emerging upcycle. As operators of a capital intensive business in a cyclical industry, We value conservative balance sheet management and intend to maintain prudent net leverage ratios throughout the cycle in line with well capitalized peers. Next, we must invest in maintaining and servicing our existing rig fleet, ensuring we continue to deliver safe Recognizing the visibility we have into maintenance schedules, we may occasionally reserve cash in anticipation of higher volumes of work, particularly related to SBSs required by regulatory agencies like ABS and DNV and completed every 5 years to ensure whole classification. We start planning for SBSs years in advance, identifying the scope of work to be undertaken before starting more detailed planning. We plan to undergo a high number of SBSs within the next 2 years since we have a large number of rig anniversaries that land in the same year.

Speaker 4

Expect us to set aside cash to finance what could be large projects. Then we evaluate the potential for investments in our core asset categories we believe will generate strong returns on capital. This could mean investing in our existing fleet to upgrade capabilities and adopt new technologies, Both of which enhance the marketability or lives of our rigs. It could also mean making disciplined acquisitions. Only once we have financed these 3 primary uses of cash: strengthening the balance sheets, maintaining our fleet And making accretive investments, where we evaluate returning excess capital to shareholders with the intention of ultimately returning the majority of our cash flow to shareholders.

Speaker 4

The Board's repurchase authorization gives us the necessary tool to fulfill this final objective. The $250,000,000 repurchase program does not have a fixed duration or expiration nor does it obligate us to purchase any shares. It simply allows us the opportunity to evaluate and act upon potential opportunities to return cash to shareholders when competing uses for cash With that, I'll return to Simon for closing remarks.

Speaker 2

Over the past 18 months, Seadrill We've achieved significant scale in target markets, concentrating our modern floater focused fleet Largely within the Golden Triangle to achieve scale benefits that improve execution and maximize shareholder value. Market fundamentals reinforce our view that this emerging up cycle will be long and durable. Early in the cycle, expect us to take advantage Available opportunities to strengthen the organization and deepen our competitive advantage, whether that relates to market selection, Fleet refinement or capital discipline. As I stated earlier, we strive to be the best, not the biggest, creating value across stakeholder groups, including our customers, employees and their shareholders. Our share repurchase program provides a new tool we may use to deliver that value.

Speaker 2

The Board's $250,000,000 authorization reflects confidence in our strategy to operate at scale and a positive market outlook. I'd now like to open

Speaker 5

the call up for questions.

Operator

Thank you. We will now enter our Q and A session. Our first question comes from Greg Lewis from BTIG. Greg, your line is now open. Please go ahead.

Speaker 6

Yes. Thank you and good afternoon, good morning, everybody. I did have kind of a broader question Before, I guess, maybe we talk a little bit about individual rigs. But really, Simon, how do you balance The upcoming rig availability on a couple of rigs versus the potential to, I believe in conversation, you just kind of highlighted the willingness or really the desire, assuming that the terms and pricing are right is To reactivate a rig like the Aquarius, for example. So really just trying To gauge how we're thinking about maybe bidding some of our stacked rigs versus some of our rigs that have You know, availability here over the next 12 months, which, yes, just kind of curious on your thoughts around that.

Speaker 2

Thanks for the question, Greg. Perhaps I can kick off the answer and then Sameer can jump on the back end of it. But Let me first talk just a little bit about the cold stack rigs and how we think about them. And we have 3 at the moment. We have 2 semisubmersibles, one of which is a harsh environment rig and also a jackup that's been long term stacked in the Far East.

Speaker 2

And look, simply put, we're not marketing those rigs Very hard. We respond to inbound customer queries about them, but we believe that our customers should help bear the cost burden of reactivation. And really, Unless they give a positive response to that, the conversation typically doesn't go much further. We just feel that customers have a much lower cost of capital on a relative basis than we enjoy. And if we are to bring additional supply into the market, then they need to bear the burden of applying the capital.

Speaker 2

Now these units, it's not demolition through neglect. These units have value in the current condition, but it may not be for us. So we'll continue to monitor the market, but most of our focus is on ensuring that we have ongoing work for those rigs that are rolling contracts that are already won today. We believe that we're very early in the cycle and we're prepared to take some risk In terms of contract opportunities, we're focused on getting the right rigs in the right markets. But let me pass to Sameer, and he can talk specifically about

Speaker 7

Sure. Thanks, Simon. So, yes. Hey, Greg, it's Samir. I'd say, we are looking for some opportunities for the active fleet that's rolling off.

Speaker 7

Dana, we've got 2 rigs that roll off at the end of this year. I'd say we're in dialogue on both

Speaker 4

of them. The Gulf of Mexico is still

Speaker 7

a bit of a, as I I said earlier, the contracting cycle is a little shorter here and demand pops up kind of closer to when you actually need to drill. That's it. We are in active dialogue. We may have some white space on some of our rigs, but we're optimistic that we'll be able to recontract the rigs that are rolling off here in the near term.

Speaker 6

Okay, great. And then just as I think about the opportunity in the Golden Triangle, let's Talk maybe about outside the Golden Triangle, as we focusing in on the Polaris. As we think about that rig, and realizing that I believe ONGC may bring another tender to the market. Is it plausible to think that rig stays in the region, I. E, the broader, call it, Asia, Indiamarket versus or do we actually Should we be thinking about that rig potentially mobilizing to the Golden Triangle?

Speaker 6

And in the event, if that rig were to mow, Any kind of guidance around how we should be thinking about timing and costs of mobilizing that rig to the Atlantic base?

Speaker 7

Sure. So I'd say the Polaris, she will roll off here at the end of the year. We are looking To relocate her potentially into other parts of Southeast Asia, bringing her across to the Gulf, it's a possibility. But I'd say we Given her capabilities, we think that's the right market for her and we are pursuing opportunities within that region. So could it be India possibly?

Speaker 7

Could it be Parts of Southeast Asia possibly. I think for us, the key thing for us is to bring the rig back under our management. We do pay somebody else to manage it. And for us, we're looking forward to bringing that rig back and putting Seadrill coveralls on that rig and being able to put it to work most likely in that part of the world.

Operator

Thank you. Our next question comes from Ben Nolan from Stifel. Ben, your line is now open. Please go ahead.

Speaker 8

Yes. Thanks and I appreciate you guys taking my question. So Simon, maybe this one I'll start with you. I know in the We've had conversations that your expectation that the deepwater market was likely to consolidate even further I'm curious if maybe you could update me on how you're thinking about that. Is it happening the way that you thought that it would Or not?

Speaker 8

And how do you see it going forward?

Speaker 2

Yes. Thanks for dialing in, Ben. Look, I think it's always difficult to predict precisely the pace of industry consolidation. I think it's going to be a continuing theme In our view, to be resilient on a 3 cycle basis, drillers simply have to have a scale. And we believe that Seadrill, along with our 3 larger peers, obviously, have achieved that minimum efficient scale.

Speaker 2

So, we're Pretty skeptical about the possibility of sustained success with smaller players. So we argue that there's room for further consolidation. I think the problem that we've seen is that the markets improved rapidly in a relatively short space of time. And as the day rate environment improves, so too do the underlying asset values. So it takes a bit longer time to get some of those deals done.

Speaker 2

And we continue to surveil the market and see how that sort of plays out. So am I surprised there hasn't been more yet possibly, But I'm sure that will continue to be a feature of the landscape in the months and years ahead.

Speaker 8

Okay. I appreciate that. And then I guess if I could follow-up just on maybe related to Greg's question and the Potential of maybe the bring back some of the cold stacked rigs. I know that you've talked about having your customers pay to have those reactivated for a while now. Has the tenure of that conversation changed at all?

Speaker 8

Or do you feel like maybe the ice is starting to thaw and your customers are Coming a little bit more open to that idea or is it still

Speaker 9

a pretty big ask?

Speaker 2

Well, I mean, we've had sort of sporadic interest in those rigs through time, so there hasn't really been a clear pattern to that. What I would say is that, obviously, it's Probably headed up a bit of late because of the renewed interest in the semi submersible market, particularly with the opening up of the opportunities offshore Namibia. What I would say is that we continue to work with our customers to think creatively about how they can be successful in executing their work and We can be successful in generating good returns for our shareholders. And there's quite a big sort of Venn diagram to explore there. Instead of sort of people pushing the balance of power from one group to the other, I think we need to think differently about how we can work together.

Speaker 2

And as I've said continuously, it's really about the relative cost of capital. When you're faced with big capital events, I mean, really, the person who has the best ability to apply that capital for the cheapest cost of funds, they should be the ones who are Putting the big builds. But equally, we're just as excited to talk to our customers about putting performance at risk in our contracting Arrangements as well. So, the industry has been very staid about how we've contractors are being remunerated for the work that they deliver. This is clearly outside there's very there isn't much long term visibility in the market today.

Speaker 2

And so one of the ways that we can sort of bridge that real constraint that we face on an investment front is for the customers Think differently about how they remunerate us and how we share risk of capital investment. So I've talked at length about that. My view hasn't changed, and we'll continue to pursue opportunities that kind of reflect that belief. And I don't know what our competitors will do. They'll have to make their own choices about that.

Speaker 2

But I think in the long run, the sense of our approach will prevail.

Operator

Our next question comes from Frederic Steen from Clarksons Securities. Frederic, your line is now open. Please proceed.

Speaker 9

Hey, Simon and team, and congratulations on a strong quarter. I wanted to touch A bit on the capital allocation side here. As you announced in conjunction with this report, you're Initiating a SEK 2.50 share repurchase program as well. And I was Wondering on the back of your comments, Grant, about the priorities with the cash that you have. If you were, would they be able to give a bit more color on how you albeit in the future would weigh the different way of Paying shareholders, either through share buybacks, which is kind of in place today, but also when you potentially would start Thinking about cash out through dividends and also in relation to this 50% or more FCF target of distributions.

Speaker 9

Do you have and I'm sorry if I missed this in the prepared remarks, but do you have like a Time frame of when you're paying out that 50% or more since SEF can differ wildly from quarter to quarter?

Speaker 4

Thanks, Frederic. Look, I think I'm not going to go through the whole sort of waterfall of the capital allocation again It's laid out there in the speaker notes, which by the way we'll include on our website. But yes, but in a nutshell, looking after our existing fleet, then it's looking for Then it's looking for accretive opportunities and of course, all the while ensuring the balance sheet is strong. And if that's the case, then we'll look to return cash to Shareholders, for now, we have concluded that share buybacks is the most attractive and value maximizing form of return For the company at this juncture, we'll going on to your next point to the next question on Will we consider dividends? I mean, yes, we'll consider all forms of shareholder returns and continue to consider those as we move forward.

Speaker 4

And And we'll make decisions at that point in time on what's going to maximize value for our shareholders. I'm not going to go into more specifics on that for now, Frederic, and then on the 30% of free cash flow, as it relates to timing, We're still going to work through with our Board exactly when what time period that commitment will relate to. But Yes, I hope the market sees this facility of €250,000,000 as a strong start upon which we look to build.

Speaker 9

Thanks. And just a final follow-up in terms of the Cash priority waterfall. You said that you would look for potential accretive Investments and since this relates to a cash waterfall, I would kind of assume that you're potentially looking at single asset Transactions. But in a broader sense, are you also Finding opportunities that you would consider paying for with your share at this point since it's been doing Good run lately?

Speaker 2

Yes. Freddie, let me have a crack at that at Simon. Look, I think we're willing to consider anything from upgrades to buying standalone rigs to buying balance sheets. So I think The only thing that differs is the means of consideration that we would provide depending on the size of the transaction. Whether for small and more discrete capital outlays, we're going to fund that through cash where possible So that we minimize any potential dilution to our shareholders.

Speaker 2

When we start to look at larger, shall we say, more strategic combinations, Well, then it's more likely to be financed, if you like, on a relative share price type approach. So the key thing to understand though is we're not going to do anything of that nature unless it compares favorably With the returns that would come from returning that cash to our shareholders. So these opportunities need to be competitive. We're constantly calculating what our weighted average cost of capital is. And we have investment thresholds and risk premiums depending on the type of Project that we're looking at.

Speaker 2

And within that sort of that process, the back end, if we don't come up with an efficient way To use that money and growth CapEx, shall we say, then we're going to return that capital to the shareholders. And what you're saying today It's really just our first step in that process. If we don't have a value accretive alternative to deploy the money within the enterprise, we will return it to our shareholders in the manner that we've described. So hopefully, people will notice that this is just yet another data point that underlies our consistent reliability In delivering on what we promised to do, at Seadrill, we execute on our plans and hopefully people see that broader message behind what we've announced today.

Speaker 9

Great. Thank you both for the answers. That's it for me. Thanks.

Speaker 2

Good luck, Frederic. Thank you.

Operator

Thank you. Our next question comes from David Smith from Pickering Energy Partners.

Speaker 5

I wanted to circle back to similar comments about potential idle time to reposition rigs. I expect for most of the past 8 or 9 years, you wouldn't have been reimbursed for much more than the actual Moab cost. But I'm curious if you're seeing operator willingness to compensate you For not just the actual expense of the Moab, but the opportunity cost of that downtime.

Speaker 7

Hey, Dave, this is Samir. I'd say, we're trying to get that from clients. I'd say it's still early days and there's still some pushback on Doing that. I think my comment was more of, as Simon stated, we want to try to pull our rigs into regions and cluster them a little bit. So don't be surprised if we try to cluster assets again.

Speaker 7

And that's what we were trying to allude to there.

Speaker 5

Absolutely. Makes sense. Follow-up, if I may. We've seen some indication of IOCs looking at multiyear terms for drillships with Yes, 20, 25 start dates. I'm curious how you're thinking about pricing relative to leading edge rates For work where the rate is fixed, 4, 5, maybe 6 years from now, but also curious if you think there is operator appetite For signing term with index pricing and if that mechanism would be of interest to you.

Speaker 7

Yes. So we are looking we're open to looking at index pricing. We're also think a big thing for us given the inflationary market we're in, we're also looking for inflation protection, our costs increasing and making sure that we still generate the margin Expect to generate. I'd say for us, when we're looking at contracts starting in 2025 or 26 that are longer dated, we can be creative and we can be flexible. And I think the key there is trying to be creative, right, and looking out what is the drilling market going to be in 2,030.

Speaker 7

And we've got some innovative ways that we've Started looking at it and I think we're getting some traction with clients on that as well.

Speaker 5

All right. Looking forward to what those are. Thank you very much.

Speaker 2

Thanks, Dave.

Operator

Thank you. Our next question comes from Eddie Kim from Barclays. Eddie, your line is now open. Please go ahead.

Speaker 10

Hi, good morning. Yes, I saw your comment about the long dated contracts Currently being the exception rather than the rule, quite interesting. It feels almost contrary To what we've been seeing recently, we've seen a handful of multiyear contracts out of West Africa and offshore Mexico, for example. And I believe many of your peers have talked about operators or certain operators looking to secure rigs Outside the scope of certain specific projects. So, yes, could you provide just any color with regards to that comment?

Speaker 10

Is this a change from what you've been seeing over the past 6 months or so? Or Has this been your view, all along? Just any additional commentary or color on that comment?

Speaker 7

Sure. So I'd say I think that's been our consistent view for a while. We are seeing some long dated contracts. I don't want to say that there's none of them. As you pointed out, there's been a few and I think my peers speak about one that a lot of us have spoken about.

Speaker 7

But overall, I think we're still seeing stuff Sub a year, sub-eighteen months. Brazil is obviously the exception where you're seeing 3 year contracts come out. But everything seems to still be Sub-eighteen months and I'm using an arbitrary number of 18 months plus or minus. But overall, you're not seeing the 3, 4, 5 year contract that you saw in the previous cycle, across the board, I guess, is the right way to describe it. We're starting clients are starting to come back to those, but as Eric, our view has been pretty consistent for the last 6 months.

Speaker 7

They're still relatively short.

Speaker 5

Got it. Got it. Understood.

Speaker 10

Thank you. Just my follow-up is on the not so new builds that you mentioned. There's a couple of them in the shipyards that are unspoken for on the floater side.

Speaker 5

Do you

Speaker 10

have an estimate for how much it would cost to acquire one of those not so newbuilds and bring to market? And how would you prioritize Potentially acquiring one of those assets versus reactivating one of your stacked assets?

Speaker 2

Andy, let me start and then Samir can fill in the gaps. As you say, there's only a few of those drill ships left now without a natural owner. So, we've been sort of watching developments as they've unfolded. You're right, there is a significant amount Of CapEx that's still required to deliver those units, even though they're mechanically complete, there's still a lot of work that is required to be done To commission their systems, prepare them for work and then mobilize them. So we're very conscious of that.

Speaker 2

When you think about the value of that, if it's a unit that has Special opportunities or special capabilities that might be attractive standalone, but we're also triangulating that against The opportunity to acquire assets on a standalone basis or the implied value of assets in balance sheets that we may be able To acquire as well. So we're mindful of the all in CapEx is often a much bigger number than The sticker price for nominal acquisition. And I think too as we go further into the cycle, we have increasingly we have concerns about cost inflation and project risk and that compared to other cycles that I've certainly experienced in my time in the business, one of the features of where we're at right now is the risk Of those capital projects, very much lies with the contract, but not with their clients. So, we We are conscious of that risk and we balance that as we compare those opportunities against other ones that we might transact against. But Samir, let me pass to you for any additional comments.

Speaker 7

Yes. I'd say, we definitely we do know what those rigs Cost and what it costs to kind of crew them up and spare them. I like analogy, so I'd say buying a rig from a yard is like buying a house, you still have to go furnish it. And, furnishing can be pretty expensive sometimes. So when we look at it, we're looking at that total And it's still a reasonable amount of money to go spend right now.

Speaker 7

Is it insurmountable? No, but we'd have to find the right opportunity with the right client to kind of

Speaker 5

justify that type of investment.

Speaker 10

Right. Got it. Makes sense. Thank you both. I'll turn it back.

Speaker 2

Thank you, Eddie.

Operator

Thank you. Our last question today comes from Hamed Khorsand from BWS Financial. Hamed, please go ahead. Your line is now open.

Speaker 3

Hi. So the first question

Speaker 11

I had was just given that you only have 2 rigs coming up for renewal, How are you going about the marketing aspect of this process given the market dynamics?

Speaker 7

Yes. So this is Samir. We are in constant dialogue with the clients that we think would pick up those assets. So we are pushing it in different markets for one of them. And for one of them, we are over every stone we can and trying to find different applications for that asset as well.

Speaker 7

So there are some unique capabilities of one of those assets. So For us, it's the how do you market those unique capabilities and fit a niche for a client.

Speaker 11

Okay. My other question was about the SPS. You said there's going to be more next year. How does that Affect the next year's idle time and potential revenue? I mean, that's a good question.

Speaker 11

And yes,

Speaker 4

The anniversaries of our rigs mean that we do have more SBSs landing next year. And so that is, of course, going to impact CapEx, but also revenue because while you undertake the SBS, you have out of service days where you're generally on 0 rates. And that's I mean, Leif can chime in, but it's, as a rule of thumb, what, like 20, but could be more 4 days. It's really on a case by case basis. It could be up to 20 days.

Speaker 4

We do seek to minimize those out of service days, and that's something we are very focused on here at Seadrill To reduce the impact on the revenue line, but there is a impact. But, Leif, do you have anything else to add?

Speaker 8

Thanks, Grant. No, I would agree. We try and minimize the impact based on spare capital equipment, but then depending on the So it's somewhere to 2 to 3 weeks if we have to change thrusters or exchange of EOP. We'll try and minimize the impact using capital equipment we have on the COVID.

Speaker 11

Okay. Would it depend on if it's the anniversary or if it's the contract rolling over that

Speaker 4

you would do the SPS? You do generally, and Lee can again provide more detail, but we generally have some Flexibility with the classing society to move it. So it's not like literally on the day, nor necessarily on the very year. You can apply for Some flexibility to coincide with the end of the contract. But, Leif, anything else to add?

Speaker 8

You summed it up right, Grant. We have a window. We can attack it during that window. We try and tie it to an end of a contract, but sometimes it's inevitable. We need to take a pause in the contract and I have a couple of weeks to do some maintenance.

Speaker 2

Yes. Just as a general follow-up to Grant and Leigh's comments, Eddie. I mean, one of the things that we've been doing at Seadrill is we've been a bit of a pace set on the technology front by implementing Condition based monitoring systems that allow us to minimize the intrusion of those surveys for certain key capital equipment items By monitoring their condition through time and so that we don't perform unnecessary maintenance and that we're aware of work that needs to be performed well ahead of time and And Leif has been instrumental in developing that. And I might add too, we He's actually dialing in from annual leave in Colorado. So it is his commitment to the company knows no bounds.

Operator

Thank you. There are no further questions on the line. So I'd now like to turn the call back to Simon Johnson for any closing remarks.

Speaker 2

Well, thank you everyone for dialing in today. Recent years have been a rough procedural, but we've been turning things around since our emergence From Chapter 11 last year, we've achieved a lot over the past 18 months and now with our refinancing in place, announcement of our share buyback and restrictive covenants That we emerged from Chapter 11 with are now in the rearview mirror. So we're focused on value accretive growth and returning capital That we can't deploy efficiently within the business. We've been busy. We will continue to be busy and we will stay focused and we look forward To sharing the journey with you.

Speaker 2

So thank you for dialing in today. Thank you for your interest in our company and we'll see you next quarter.

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Earnings Conference Call
Seadrill Q2 2023
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