SeaDrill (SDRL) Earnings Report: Q Conference Call Transcript

Transcription

1 SeaDrill (SDRL) Earnings Report: Q Conference Transcript The following SeaDrill conference call took place on May 26, 2016, 12:00 PM ET. This is a transcript of that earnings call: Company Participants John Roche; Seadrill Limited ; Investor Relations Per Wullf; Seadrill Limited ; CEO Mark Morris; Seadrill Limited ; CFO Anton Dibowitz; Seadrill Limited ; Chief Commercial O fficer Other Participants O le Slorer; Morgan Stanley; Analyst Ian Macpherson; Simmons & Company International; Analyst Mukhtar Garadaghi; Citigroup; Analyst Anders Bergland; Clarksons Platou Securities; Analyst David Smith; Heikkinen Energy Advisors; Analyst Darren Gacicia; KLR Group Holdings, LLC; Analyst MANAGEMENT DISCUSSIO N SECTIO N Welcome to the Seadrill first-quarter 2016 earnings conference call. (O perator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to John Roche, Director of Investor Relations. Please go ahead, sir. Jo hn Ro che (Investor Relations): Thanks, O perator. Good afternoon, everyone. Welcome to Seadrill Limited's first-quarter earnings conference call. With us today we have Per Wullf, our CEO; Mark Morris, our CFO; and Anton Dibowitz, our Chief Commercial O fficer. Before we get started, I'd like to remind everyone that much of the discussion today will not be based on historical fact, but rather consist of forward-looking statements, and are subject to uncertainty. We articulate some of the key items on page 2 of the presentation. For additional information and to view our SEC filings, please visit our website at Seadrill.com. To begin the discussion today, Per will take us through our first-quarter highlights and update you all on progress thus far on key action items as we work through this challenging market. Mark will then address our financial highlights and outlook, and lastly, Anton will offer some color on the overall market. With that, I'd like to turn the call over to our CEO, Per Wullf. Per? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 1 of 11

2 Thank you, John. Good day and evening to you all. During the first quarter, we continued operations at record uptime by continuing to reduce our cost base. Safe and efficient operations are our bread and butter, and I'm very pleased at the economic utilization we have been able to deliver in the first quarter of At a Group level, we achieved 97% economic utilization, excluding bonuses achieved. Included bonuses earned, the Group achieved 98% economic utilization, truly a great result that speaks to the hard work of our offshore as well as onshore employees. As you are aware, our three key priorities for 2016 are to continue to reduce costs, manage our new building program with the shipyards to defer deliveries, and conclude our financing plan to improve liquidity and position our Business for the recovery. On the cost side, we have begun to realize the benefits of our efficiency program and we reduced total operating costs by $79 million quarter-over-quarter with no incremental idle units. We expect to see approximately $340 million in savings on a Group level during 2016 and we are very pleased with the progress and commitments shown by our teams. During the first quarter, we have been able to reach agreements with a number of shipyards to further defer deliveries in order to maintain liquidity in this challenging market. Since our last earnings call, we entered into agreements with Dalian to defer further deliveries of all eight jack-ups under construction. Following the latest deferral agreement, one jack-up is now scheduled to deliver at the very end of 2016, four units in 2017, and the remainder three units sometime in However, to remind you, as we have stated in the past, we will not take delivery of any newbuild units without a [tangible] contract. Mark, he will cover the financing update in greater detail later, but we aim to complete our broader plan by the end of this year and are pleased with the progress so far, actually very pleased. Moving on to the first-quarter operational highlights for Seadrill Limited. Again, I would like to highlight the record performance achieved by our units this quarter. For Seadrill Limited, we achieved 97% economic utilization on our floaters and 96% for our jack-ups, the highest in Seadrill Limited's history. Due to a number of contract revisions (inaudible) consumptions, our backlog currently stands at $4.3 billion, down from $5.1 billion during the last call. Seadrill Group backlog stands at $9.1 billion. Despite the increase in oil prices during the first quarter, prices remain 60% below the 2014 highs. Major oil companies continue to cut activity levels for 2016 and 2017 and appear to have more rig capacity already under contract than they require, severely affecting new demand and leading to contract renegotiations and terminations. A more sustained period of recovery and price stability is needed before we expect to see incremental demand from our oil companies. With that, I will turn things over to Mark to cover our financial performance. Mark Morris (CFO): Thank you, Per. Good afternoon, good evening to you all TheStr eet, Inc. Al l R i ghts R eser ved Page 2 of 11

3 I'll briefly put out the highlights for the quarter, then provide an update on where we are with our financing plans, and then finally provide our guidance for Q 2. Turning to the quarterly highlights. Against the backdrop of lower revenue for the quarter, we had record operations and we continue to see the benefit of our cost reduction program coming through, both of which have contributed to improved EBITDA for the quarter. The movement in revenue can be explained by day rate reductions, increased idle time on the Sevan Driller and the West Telesto, partially offset by 3% improvement in economic utilization. O n the cost front, actions taken last year and ones we continue to take are yielding benefits as both our O pex and G&A continue to fall. Rig operating costs reduced from $369 million to $290 million over the quarter, a 21% reduction. Finally, we exceeded our Q 1 guidance mainly due to cost savings being realized at a faster rate than we had forecast and record uptime for our fleet. Moving on to the balance sheet, as always, there are various movements in the balance sheet and I'm just going to draw out the main ones as identified here. Short-term restricted cash increased by $54 million during the period. This relates to our performance guarantee facilities, where we provide bank guarantees in relation to subsidiary performance to customers in certain jurisdictions. During the period, we replaced the existing collateral package of shares from certain equity investments with cash. Movements in long-term restricted cash and other non-current liabilities relate to the repayment of the loan and its corresponding collateral being released. The loan was originally secured by our SapuraKencana equity investment, but as the value of the shares declined over time, additional cash collateral was required to be posted. The repayment of this loan has reduced our non-current liabilities and released the restricted cash. The movement in marketable securities primarily relates to the reclassification of our SapuraKencana equity investment. The share sale was a post-balance sheet event that required us to reclassify the investment from long-term to short-term. Moving on to liabilities, following our announcement that we have extended and amended a number of bank facilities, we have reclassified the $400 million jack-up facility from current to long-term debt to reflect this revised maturity date. During the period, the three ship finance entities that we consolidate as variable interest entities drew down $150 million from their bank facilities and used the proceeds to settle with other ship finance entities that are not consolidated. This has resulted in $150 million decrease in long-term debt due to the related parties and a corresponding increase in long-term debt. The ship finance bank facilities are separate arrangements between ship finance and its banks. Turning now to our liquidity, at the quarter end we had over $1 billion in cash and continue to expect good operating cash flow with the majority of our rigs working, with contracted revenue of $1.4 billion for the remainder of the year. Building on this, our cost savings program is expected to generate total cash savings of $340 million for the year on a Group basis, of which approximately $305 million is sustainable cost savings and $35 million is deferred CapEx. Finally, we do not expect to make any yard installments or take delivery of any new rigs this year. Turning to our financing plans, during the quarter, we extended the three nearest maturing facilities and amended certain covenants relating to our secured credit facilities. This is an important first step in our funding plan. By deferring our imminent borrowing maturities, resetting a number of covenants, and removing the risk of facility pre-payments relating to declining rig values, we've established a more stable platform to pursue and conclude negotiations with all our stakeholders TheStr eet, Inc. Al l R i ghts R eser ved Page 3 of 11

4 We are pleased with the support shown by our banking group and continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge us to a recovery in the sector. As you're aware, we've agreed a set of milestones would provide a timetable for advancing discussion with our banking group. These milestones will see us advancing discussions with various stakeholders, with the aim of concluding and executing the plan by the year end. We will keep you updated as and when we have something to announce. Finally, turning to our guidance for the quarter. EBITDA for the second quarter is expected to be around $510 million, slightly lower than for Q 1. O perationally, performance in the second quarter has been strong with 97% utilization for the quarter-to-date. With that, I will hand over to Anton for some comments on the current offshore drilling market. Anton Dibowitz (Chief Commercial Officer): Thanks, Mark. Good day and evening to all. The offshore drilling market remains extremely challenging. Despite the more than doubling in oil prices from the lows earlier this year, the sentiment from oil companies remains negative and capital spending remains constrained. The primary focus for many of our customers continues to be balancing the books with respect to revenue and planned capital expenditures. Lack of near-term planned activity from oil companies, a significant overhang of contracted rigs for which no work scope currently exists, and efforts to reduce current spending continues to severely affect demand and encourage renegotiations and terminations. Contractors are aggressively pursuing available work, prioritizing fleet utilization over returns. As can be expected at this point in the cycle, some operators are utilizing the fiercely competitive environment as leverage in commercial discussions. We will continue to amend contracts where it makes commercial sense and accept new work when the risk/reward profile is justifiable. While the market will remain challenging, there are some leading indicators that leave us optimistic in the longer-term. First, there is a growing consensus that we will move towards an oil production supply/demand balance late in 2016 or early in 2017, a sentiment that is supported by the effect that short-term supply disruptions are having on commodity prices. Second, the significant and sustained cuts in drilling activity during this downturn are having an effect, both in terms of increased decline levels on existing fields and delays in new production being brought online. Ultimately, these will need be overcome through increased drilling in the future. Lastly, the sustained downturn continues to encourage the cold stacking and scrapping activity that will be needed to rebalance the drilling market. Per? Although the industry remains challenging, we must remember that this is a cyclical industry. However, we believe we have reached bottom, rate-wise. With a premium fleet, dedicated employees, and continued demonstration of a safe and efficient operation, Seadrill is well placed for the future. Thanks. Jo hn Ro che (Investor Relations): Thanks, Per. Operator, we'll turn over to you for a moment to compile the list for Q&A. Q UESTIO NS & ANSWERS 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 4 of 11

5 (O perator Instructions) Ole Slorer of Morgan Stanley. Ole Slorer (Analyst - Morgan Stanley): Thank you. Thank you very much. Congrats with some good results in a tough environment. Mark, I wonder whether you could just bring us up to speed a little bit on the debt renegotiations, and clearly these are very complicated agreements to reach, but it was earlier signaled that the target was midsummer and now it's the end of the year. But on a positive note, we saw you do a small deal with some of your bond holders where you retired some bonds at a discount, suggesting there is a movement. Can you give us a little more color on what you're trying to achieve and how far you've come? Mark Morris (CFO): We are on schedule. Maybe there was some misconfusion. O riginally, we said that we would communicate our plans by the mid-year, which we also are ahead of that. I don't think we'd ever indicated that we would actually conclude everything by the mid-year. O ur plan has always been to try within 2016 to conclude everything. You're right, O le, there are a number of moving pieces here in terms of looking at the -- dealing with the banks first and then the bond holders, and that obviously, when we think about the recapitalization piece, any new money we may be considering. In respect of the recent private exchange, again, it is what it was, a private exchange. It's more of a tactical move. We were approached by a particular bond holder who had expressed some interest on the basis that we thought an exchange made sense. It was done -- an undertaking under a 3(a)(9) basis. Is it a fundamental of our refinancing plans? No. Is it tactical and opportunistic? Yes. That covers that piece. Where we are at the moment, there are a number of milestones set out. We are currently in discussions with our banking group. When we've concluded those, we'll obviously -- and have got agreement, we will obviously be conditioned on the other two parts of the systems happen. We will then move on to the other pieces. But we're currently in discussions with them, and when we've got our position, something that we can announce, we will of course bring that back to the market and keep you informed. Ole Slorer (Analyst - Morgan Stanley): Thank you for that., Mark Thanks for clarifying. Per, I wonder whether you could gives us your latest thoughts on the supply side of rigs. We've seen a number of rigs retired, as you highlighted. Typically, when companies make a decision to retire a rig at the Board level, it doesn't change -- almost irrespective of market conditions thereafter. Could you give us a little bit of an overview of what you think is yet to be scrapped beyond what we've seen, retired or recycled or what the current term is? 60 have gone, 40 needs to go. Okay. Then we have balance in the market. We have seen it and drillers have old rigs. We cannot really contribute there, but drillers that have old rigs, they have really done something and I haven't seen this going so -- in such a path as it's going now. This is good to see. But it 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 5 of 11

6 shouldn't stop now. We have seen a number of units being parked in various shores and various places and we all know them as drillers, and it's more detailed, so we also know what will never come back out again. There is a queue also because it is a costly thing to scrap rigs, and to green-scrap units, you can only do very few places, so there is actually a queue, but we need to see another 40 units go before you will have balanced, Ole. Ole Slorer (Analyst - Morgan Stanley): O kay. Thanks for that and I'll hand it back. Ian Macpherson of Simmons. Ian Macphe rso n (Analyst - Simmons & Company International): Thank you very much. Good job on the cost. I had a question just regarding the $305 million of structural sustainable cost savings that you're outlining for this year, if you could provide some more context or a reference point around that? Is that all in the OpEx or is some of that also in the CapEx line, as well? Just give us whatever directional guidance you could for OpEx through the balance of the year, that would be super helpful? Thanks. Well, if we just look at our cost saving plan, actually start back in 2014, we're past $1 billion now in cost savings. Last year, it was $830 million we saved on a Group perspective. Two-thirds of it, that was actually deferred savings and one-third was sustainable savings. What we're talking about now, almost all of it, except for around $30 million, that is O pex cost. We have revamped the whole operating structure on our units. We took some really, really tough decisions last year. You see the effect now. But it is -- you can call it a journey. It's a tough journey. But we are resetting the whole cost structure, running our daily operating cost, running our rigs. So this is sustainable savings. Roughly 65% of our operating cost is actually crew costs, so we have had a lot of our employees taking really tough pay cuts in order -- and that has been necessary, in order to reset the cost. That's why I can say very firmly this is sustainable savings. So it is operating cost saving. Ian Macphe rso n (Analyst - Simmons & Company International): Thank you, Per. I really am trying to get more to the numbers. Is the OpEx line expected to decline significantly from where it was in the first quarter throughout the year or second half versus first half of the year, for example? That's all I'm getting to? You will see it decline further over the year as we are fine-tuning this one here, but it is a big chunk you have seen this quarter. That's how I can explain it. Ian Macphe rso n (Analyst - Simmons & Company International): 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 6 of 11

7 O kay. Thank you very much. Mukhtar Garadaghi. Mukht ar Garadaghi (Analyst - Citigroup): Thanks for taking my question, gentlemen. I just wanted to -- for you to give your perspective on demand, please. Would you expect the deepwater rig demand to trough? And some of your operating time, uptime, [particularly] has been very strong and operators are talking about efficiencies and the rest. Where do you see the demand to recovery three to five years out? That's my first question. Thank you and 2017, that's [all clear]. I've said also to a number of people today that we are raising bottom utilization-wise. You still dive somewhat, but utilization will go on and flatten out on a low, low here in Then when you see an oil price and you see it sitting here, and you see for a longer period, you'll also go and see that the utilization becomes stable there. Then as all of our downturn, you'll see a period where we have a flat utilization and then we will start to get more work. But very tough [waits], as we see now and you will be out in 2018, 2017, late 2017, beginning 2018 before you will start to see day rates of interest on our contracts, where it really see that it is a day rate recovering, but utilization, of course, will go and come -- start to come in Mukht ar Garadaghi (Analyst - Citigroup): Thank you. Just on termination, first of all, do you still have discussions of terminations within your fleet or do you think most of them are done? How do you plan to recognize the termination fees from an accounting perspective? Is it going to show up in quarterly EBITDA or are they had spaced out like you did it before? Thank you. I'll let Anton answer that one. He's sitting in the middle of it. Anton Dibowitz (Chief Commercial Officer): Hi. It's no secret that a lot of our customers still remain under significant price pressure, and pressure to reduce their short-term costs. So discussions with operators about rate renegotiations and terminations continue and they will continue for a while. As far as how we recognize it, it does depend on the contract to a certain extent and how that's interpreted within GAAP. But generally, the termination fee is recognized ratably over the original period of -- the period of the original contract, remaining contract, price determination. Mukht ar Garadaghi (Analyst - Citigroup): Okay. That's very helpful. Thank you TheStr eet, Inc. Al l R i ghts R eser ved Page 7 of 11

8 Anders Bergland of Clarksons. Ande rs Be rgland (Analyst - Clarksons Platou Securities): Good afternoon, gentlemen, and thank you for taking my call. Per, you mentioned that another 40 you units need to go in order to balance the market. Are you thinking of this as floaters, irrespective of age, or are we talking about more, let's say, on the fifth gen side of the floater fleet? Secondly, the lump sum payment for the West Hercules calculation, when will that be paid? Thank you. Firstly, when we talk 40 to go, I'm talking about floaters. Okay? And you'll see now -- what we've seen in the beginning, we see really old units and the [so] old units being scrapped that should never have been on the list anyway. But what we see of units being scrapped now is actually units that can drill and that just won't fit in tomorrow's market. You'll see 40 and go. You're going to see a number, 50, being scrapped here and a last portion of what you'll see being scrapped now is those 50. They simply don't have a place in the market when the market recovers. It will be so expensive to get them back into and get them reintroduced that they were going to be scrapped. So I'm sure the drillers that have that kind of rigs, they'll keep scrapping them. Going to the -- I hope that answers the question. Anton Dibowitz (Chief Commercial Officer): I can handle it. I can also add to it. There are approximately 50 rigs cold stack floaters in the market right now. A significant portion of them that are towards the end of their useful life, and of the rigs that are on contract in the floating market, another 35 are more than 30 years old that are going to roll off contract in the next 18 months. So there's no shortage of a pool of potential candidates to help rebalance the market. O n the payment of the Hercules termination fee, it's governed by the contract. The payment is due in the normal billing cycle, so after the contract ends the payment is due 30 days thereafter. Ande rs Be rgland (Analyst - Clarksons Platou Securities): O kay. Just a quick follow-up. Sorry, just a quick follow-up-- Anton Dibowitz (Chief Commercial Officer): Just to be clear, from a cash perspective, the payment is due 30 days. But as I mentioned to the previous question from the previous caller, from a recognition purposes under GAAP, it will be recognized ratably over the term to when the original contract would have ended. Ande rs Be rgland (Analyst - Clarksons Platou Securities): O kay. And just a quick follow-up on the floater scrapping side. You have the West Navigator, 15-year-old vessel, cold stacked. Is that -- does that fall between two chairs in terms of it still has 15 good years in it, but on the other hand, it might be hard to see that it's going to get the contract. How do you see that one play out? It's a very valid question because she's not the youngest [wick] we have on our [mid-plan]. She's from 2000, actually, and she could fall in between, you could say. O ne advantage is that she's working a niche 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 8 of 11

9 market, so it is a little bit different when you talk about North Sea rigs compared to [United Bora], so it's very dependent on recovery of that market. But she is a drill ship and there's only another couple of drill ships that can actually work in harsh environment water. So that he is an advantage to her. But obviously, we'll see how that goes along and she has been idle the past year. Ande rs Be rgland (Analyst - Clarksons Platou Securities): O kay. Thank you very much. The next question comes from David Smith of Heikkinen Energy Advisors. David Smit h (Analyst - Heikkinen Energy Advisors): Thank you for taking my question. I just wanted to confirm whether the West Taurus and the West Eminence were indeed cold stack? And if so what the approximate stacking cost is and how you think about the cost of reactivation? First of all, two rigs are sitting at Tenerife. They're both cold stacked. So we are running -- we're having a stacking cost of less than $10,000 a day, including overhead. So that is a fact. We took an investment of close to $10 million before we stacked the unit in order to make sure it was preserved right. O nce you reactivate it, of course, you will go and have a cost and it is in two tiers. There's a reactivation cost and there's a reclassing cost, and that varies a little bit. Typically, reclassing costs us around $30 million for whether it is Eminence or it is Taurus, reclassing cost or reactivating cost is a little bit different. It's depending on how many main engines, [truck stocks], et cetera, you have to overhaul, et cetera, so I can not give you an exact figure on that. But we have [bought it] for them, but I don't have it right here. David Smit h (Analyst - Heikkinen Energy Advisors): That was great color and appreciated. Just a quick follow-up. Was wondering if there are any other sixth or seventh gen rigs that are cold stacked or that you're contemplating to cold stack this year? Of ours? We don't intend to cold stack any of our sixth gens this year. As we speak, we could come -- we could have a couple of rigs being warm stacked. We don't know, but they will be warm stacked for the remainder of the year as I see it and then we have to take it from there. David Smit h (Analyst - Heikkinen Energy Advisors): Great. Thank you very much. Darren Gacicia of KLR Group. Darre n Gacicia (Analyst - KLR Group Holdings, LLC): Thanks for taking my question. In discussing delayed deliveries for new rigs, I know that some of the shipyards have been restructuring themselves and going through their own turmoils. Is any of the change 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 9 of 11

10 of what's happening at the shipyard level changing any of the dialogue you have with them with regard to putting off deliveries? No, it hasn't changed the dialogue. We talk with different people because it seems to change a little bit of the management out there, I will say that. But we have managed and we will manage going forward to move these vessels and take delivery once we can bank them and they're bankable. So we can move it and I don't think the restructuring that's happening or probably will going to happen in Korea, as an example, that will have any effect on this negotiation. We have two drillships coming in 2017 that will be pushed further. That's from Samsung. We have a couple of drillships coming from DSME in 2018 and beginning We will take that when we come a 1.5 years further along. If you recall, our jack-ups have no recourse so that is an option to buy, you could call them, so we'll push them on so we can justify to take them on board. Darre n Gacicia (Analyst - KLR Group Holdings, LLC): Given that there's a different sponsor profile, let's call it, for the jack-up market versus maybe the drillship market, do you have any color or feel for how the jack-up newbuild situation might play out? Do you think there are certain number of those that don't come? Do you have a view on that and would you be willing to share your thoughts? Anton Dibowitz (Chief Commercial Officer): This is Anton. I can answer that. There are 120 or so newbuild jack-ups that are sitting at the yard. A significant percentage of those, 75[%] or so, were set in motion by speculators. We'll probably see some of those go away, but ultimately, a lot of those rigs will come to market at some time or another. Darre n Gacicia (Analyst - KLR Group Holdings, LLC): Thanks. That's helpful. (O perator Instructions) Showing no further questions, I would like to turn the conference back over to Management for any closing remarks. Jo hn Ro che (Investor Relations): Thanks, Operator. Thanks everyone who joined us today. This concludes our call. Thank you. The conference is now concluded. Thank you for attending today's presentation. All rights reserved (c) 2014 TheStreet, Inc. Please feel free to quote up to 200 words per transcript. Any quote should be accompanied by "Provided by TheStreet" and a link to the complete transcript and Any other use or method of distribution is strictly prohibited. THE INFORMATION CONTAINED IN EACH WRITTEN OR AUDIO TRANSCRIPT (the "TRANSCRIPT") IS A REPRO DUCTIO N O F A PARTICULAR CO MPANY'S CO NFERENCE CALL, CO NFERENCE PRESENTATIO N O R 2014 TheStreet, Inc. All Rights Reserved Page 10 of 11

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