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 November 24, 2015, 12:00 PM ET. This is a transcript of that earnings call: Company Participants John Roche; Seadrill; Investor Relations Per Wullf; Seadrill; CEO Mark Morris; Seadrill; CFO Anton Dibowitz; Seadrill; Chief Commercial O fficer Other Participants Jacob Ng; Morgan Stanley; Analyst Mukhtar Garadaghi; Citigroup; Analyst Mark Brown; Seaport Global Securities; Analyst J.B. Lowe; Cowen; Analyst Lukas Daul; ABG Sundal Collier; Analyst Anders Bergland; Clarksons Platou; Analyst Harold Oyen; SEB; Analyst Neesha Khanna; Credit Suisse; Analyst MANAGEMENT DISCUSSIO N SECTIO N Welcome to the Seadrill Limited Third Q uarter 2015 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. Jo hn Ro che (Investor Relations): Hi. Good afternoon. Welcome to Seadrill Limited's third-quarter earnings conference call. With me today, I have Per Wullf, our Chief Executive O fficer; Mark Morris, our Chief Financial O fficer; 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 review our SEC filings, please visit our website at Seadrill.com. To begin the discussion today, Per will take us through the third-quarter highlights and updates on our progress thus far on certain 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. And with that, I'd like to turn over the call to our CEO, Per Wullf. Per? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 1 of 11

2 Thanks, John. (Inaudible) operating performance. We continue to make good progress on our cost-saving program. O ur discussions with the shipyards continue to be constructive regarding deferrals. In coming quarters, we will provide insight into 2017 environment as we see evidence of either demand or high response to the current over-supply of drilling units. However, in any scenario Seadrill is well positioned with a best-in-class fleet and strong operating performance. At the group level we achieved 92% economic utilization. Just as a reminder, this paper excludes bonuses achieved. Including bonuses earned, the group achieved 94% economic utilization. This is an unprecedented result and I'm proud to have achieved this during a period of focus of driving down costs. We will continue to have an intense focus on operating excellence and efficiency. This is our bread and butter and what we do best. Specifically on the efficiency point, our cost saving plan at the group level established at the beginning of 2014 continues to progress well, following approximately $250 million of cash savings realized in In 2015 the group has continued these efforts, driven by reducing or postponing spending in operating expenses, G&A and CapEx, and is now targeting cash savings for the year of roughly $600 million. Approximately one-third of the cash savings is sustainable and is comprised of headcount reductions, insured savings, supplier discounts, travel costs and compensation adjustments. Two-thirds of the program is deferrals, comprises of lower amount allocated to operating preparation, capital expenditures and long-term maintenance. During 2016 we expect to achieve an additional $200 million in cash savings compared to this year-end spend. Please note that all our cash savings relates to operational rigs and consequently excludes savings from specked units. Moving on to operational highlights for Seadrill Limited standalone, as I mentioned in my opening remarks, we had a strong operational quarter for Seadrill Limited. We achieved 90% economic utilization on our floater fleet and 98% for our jack-ups. O ur backlog is currently $6 billion. In terms of the overall market environment, which Anton will talk in more detail later in the call, let me offer some high-level comments. The impact of persistent low oil prices continues to be seen in the oil companies budgeting and spending activity with the year-on-year decline experienced in 2015 expected to continue in After two significant year-on-year declines there is some recovery in spending expected in O ur forward visibility continues to be challenging and the timing and extent of the recovery remains uncertain. Utilization on pricing across all market segments remain low and in many cases has drifted lower during the quarter. We continue to believe that this challenging market will continue through 2016 and that visibility for 2017 is likely to materialize as we see the development of market utilization over the next couple of quarters. I again stress that Seadrill is well equipped to manage through this downturn and take advantage of the upturn as it materializes after having taken decisive actions early. Now I will turn things over to Mark to review our financial performance. Here you go, Mark. Thank you, Per. Good afternoon and good evening to you all. I've not had the opportunity to meet all of you yet. I look forward to doing so in coming weeks and months. I've been here now just over two-and-ahalf months and thought I would share with you a few thoughts regarding the business as I see it and my 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 2 of 11

3 priorities. This is a great business looking at the growth in margins it has generated but it's in challenging times for the industry currently. It's a sound business model which is fundamentally a leasing business and which we own and operate. And to be good at leasing, you need to do five things well -- buy the right assets at the right price at the right time, operate them efficiently and finance them cheaply. This is easier said than done but this Company has had a good track record in having achieved this. We have one of the youngest and most modern fleets. We have earned our reputation as a safe and efficient operator. We have scale in an industry where there are barriers to entry to be a proven operator. We have a supportive banking group and we have a strong anchor shareholder who is a seasoned operator in the shipping and rig businesses. O f course, that doesn't mean we don't have our challenges. We do. We've come into the down cycle with too many newbuilds on order, rising leverage, and some refinancing and liquidity needs to address the 2017 and 2018 time frame. We are addressing all of these areas. Per has highlighted that we continue to have constructive negotiations with the yards regarding deferments. And my priorities are on addressing our refinancing and liquidity needs and reducing our cost base. As our plans develop we will of course share these with you at the appropriate time. Now turning to the Q 3 earnings, I'll start with the nonrecurring impairment items and then focus on the underlying Q 3 performance. We've taken a number of impairment charges in the quarter, reflecting continued uncertainty in the market and sustained lower share prices of certain investments. In summary, we've impaired our investment in Seadrill Partners by $1.1 billion, in SapuraKencana by $167 million, and written down the goodwill on our floater fleet by $563 million. We no longer retain goodwill on the balance sheet. In total, we've taken non-cash impairments of $1.8 billion. More details on this can be found in our press release and in the notes to the accounts. Turning to our underlying performance, revenues were down in Q 3 compared to Q 2, primarily driven by more idle units and the sale of the West Polaris to Seadrill Partners in quarter two. The idle fleet currently stands at nine units, comprising five floaters and four jack-ups. The reduction in revenue was partially offset by a full quarter of operations for the West Tellus and the West Tucana, and the commencement of operations for the West Carina. Additionally, we continue to receive deferred consideration in connection with the West Polaris and West Vela contracts, which amounted to $19 million during the quarter. We had a sound quarter operationally and this can be seen in the EBITDA figure with lower revenues being partially offset by lower O pex. A good quarter operationally-wise but reflecting the market environment. Turning to the main movements in the balance sheet, I just picked up the four main moving pieces here which are new buildings -- the movement here reflects the West Mira cancellation; goodwill -- we've already talked about the impairment of $563 million; investments in associated companies with production and carrying values associated with the impairments in Seadrill Partners and SapuraKencana; and, finally, the main movement in other and non-current assets in recognition of the receivable due deemed recoverable from the shipyard as a result of the West Mira cancellation. Turning to guidance, EBITDA is expected to be approximately $30 million less in the third quarter driven by increased idle time on various vessels, as listed here, and a planned SPS survey for the West O rion. O perationally, performance in the fourth quarter has been good to date at 98% utilization TheStr eet, Inc. Al l R i ghts R eser ved Page 3 of 11

4 With that, I will hand over to Anton for some comments on the current offshore drilling market. Anton? Anton Dibowitz (Chief Commercial Officer): Thanks, Mark. As we expected, the offshore drilling market continues to be challenging as oil companies focus their efforts on cutting costs due to revised vendor pricing and delay and redesign of planned development programs. In the long run, though, the ability to undertake drilling at reduced costs and developments at significantly lower hurdle rates than thought of just a few years ago will be positive for the industry as a whole, including drilling contractors, as investments in drilling will be more attractive. In the current environment, the jack-up and floater markets continue to see day rates at or below cash breakeven levels. For the most part, customer conversations remain focused on expanding existing contracts or tradeoffs between existing and newer units, rather than contracting new units for work. Given the reduced activity level, it's likely that the majority of units with contracts expiring in the next year will find it difficult to find reasonable follow-on work. It will be important to observe how rig owners react when faced with idle times on units and face the choice to stack or scrap. Larger drilling companies with diversified fleets will find it easier to make sound economic decisions and cold stack idle units, as each individual rig represents a smaller percentage of their overall fleet. Significant cold stacking activity would represent a positive development in the market, effectively reducing marketed supply and helping to stabilize utilization and pricing until a more fundamental recovery is in place and day rates improve sufficiently to justify reactivations. In the floater market, there's been about 45 retirements since the market softened, more than the previous 20 years combined. Given competition for more capable assets and the significant capital investments required, very few rig owners will find economic justification to keep these old assets working. O n the newbuild side of the floater equation, the order book stands at approximately 70 units, of which 29 are Sete newbuilds. A significant number of these have already been delayed or cancelled and we expect this trend to continue until the market improves. Between delivery delays and scrapping activity, it is likely that there will be overall contraction in the floater fleet between now and In the jack-up market, there are currently 66 idle units that are more than 30 years old. There are another 64 units rolling off contract by the end of 2016 which are also older than 30 years. Together, these 130 rigs, or approximately 30% of the total jack-up fleet, represent prime candidates for retirement. 125 additions to the jack-up fleet are currently planned. However, a significant portion of these orders were placed by investors with no or little operating track record. The deployment of these jack-ups may be rationalized as speculators exit projects and the rigs come to market in the hands of more established players who will only take delivery when economically viable. The market is and will remain extremely challenging through But with a premium fleet operated by dedicated crews, we will continue to demonstrate the ability to provide safe and efficient operations that our customers demand. Thanks, Anton. Although the market outlook looks grim, we are prepared. We have acted early and are controlling the things that are in our control. We are in a cyclical business. We have seen these cycles before. I've been in this business for over 35 years. This is a cycle like any other cycle and it certainly will not last. It is important to keep in mind that the tougher it gets in the near term, the more capacity will be taken 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 4 of 11

5 out of the system and the healthier this industry will be in the long term. Seadrill will survive and has world-class talent to lead us through these challenging times and we will be able to capitalize on the recovery when it happens. Jo hn Ro che (Investor Relations): Thanks, Per. O perator, we'd like to open up for Q&A, please. I'd just like to remind everyone, one question and one follow-up. And any more technical accounting questions, please give me a call. We'll take them all offline. Q UESTIO NS & ANSWERS (O perator Instructions) Jacob Ng of Morgan Stanley. Jaco b Ng (Analyst - Morgan Stanley): Thank you, gents. Could you clarify [is it usual] or the shipyard can market West Mira for resale during arbitration? O r is it more so the case that resales freeze during this period? West Mira -- we're not in control of West Mira anymore. We've been in arbitration with that rig so this is in full control of the shipyard and they can sell it, they can do whatever they want with it. Jaco b Ng (Analyst - Morgan Stanley): O K. But the arbitration process doesn't tie up the rig per se? Yes, and you've seen in our third quarter we feel very good about this situation and we look forward to receive our installment. It will take some time because it will go through the arbitration, obviously. Jaco b Ng (Analyst - Morgan Stanley): Got it. How is West Regal tracking versus its original schedule? What portion of perhaps the delay could we ascribe to currency upgrades for Rosneft? You're correct that we did an additional upgrade of the rig to be in colder water. And that was all negotiated more than a year ago. So, we moved the delivery from January 15 to May 15. That unit is still trying to be repaired so it's ready to be taken over. We are in December now and I guess this rig will be ready sometime in December. Jaco b Ng (Analyst - Morgan Stanley): Got it. Just last one from me, can you help us understand when the SPS clock generally starts for newbuilds? Does this commence upon commissioning or upon delivery of the rig? And just want to see are vendor equipment warranties generally adjusted for delivery delays? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 5 of 11

6 It's depending on the rig in question how you negotiate this, first. If you look at Mira, if you refer to that one, this is not in Seadrill's control so I don't know. But I can tell you for the rigs we have done deferrals on, then the SPS will start when we take delivery. So, in the [Samsung] case where we have deferred a couple of drillships until April 17, then the SPS will be nil, April 17, and many will come five years later. Jaco b Ng (Analyst - Morgan Stanley): Thank you. I'll turn it over. O ur next question is from Mukhtar Garadaghi of Citi. Please go ahead. Mukht ar Garadaghi (Analyst - Citigroup): Good evening, gentlemen. Thanks for taking my question. Just a quick question around your discussions with the yards. Have these discussions become more difficult as more players look to delay rigs? And what are the financial discussions like in terms of the delays in terms of what it's costing you? And my second question, just to confirm on West Regal, do you still expect to take delivery in 2015 or are discussions continuing on that rig, as well? Thank you. If we look at the negotiations with the shipyards, I think we should put it up in two portions. Rigs that are ready on time, or will be ready on time, we have made agreements with. That is the jack-ups in China, obviously, and there's a couple of our driller ships, those at Samsung. The remaining yards, we have a hefty delay. And there we are not that busy in negotiating and ending up an agreement on deferral. It's not that the discussions are more difficult. They're not yet coming to an agreement. O bviously the closer you get to a potential cancellation point the stronger your case is, from our side, to make a good deferral agreement. But let me comment on that and say this is extremely important for us that it is a good solution for both the shipyard and for Seadrill because we also need the shipyards going forward. And also please don't underestimate that we also have a major shareholder in the Company that have other things going on in these shipyards. So, concluding on that one, I will say that it's not difficult. It's just a process we've got to go through. When I come to North Atlantic drilling, we're going to take delivery of regal or not, it's not appropriate really to answer that one right now. We are in the middle of -- we've just finished the second sea trial and the shipyard is now closing what we call A punches. They have to be closed on Monday, 100%. We are in the middle of it, so I think we should take this talk in a week or two. Mukht ar Garadaghi (Analyst - Citigroup): And if the delivery doesn't come in December, you have grounds to walk away? I think I would like to -- obviously we have grounds to walk away, if that is the best solution, because if the unit is not ready on time, and time will show on Monday if we are there or we are not. We are in a good constructive dialogue with the yard how to proceed going forward. So, I cannot really comment anymore until we are past Monday next week. Mukht ar Garadaghi (Analyst - Citigroup): 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 6 of 11

7 Thank you. O ur next question is from Mark Brown of Seaport Global Securities. Please go ahead. Hi. First question is, based on your outlook and implied net cash position entering 2017, how are you considering funding the $1 billion unsecured note and the $2 billion NADL credit facility? Thank you for that question. Like I said earlier on, when we are in a position, having got our plans, of course that's something we will share with the market. But I don't want to get drawn in at this stage. I've only been in the Company two-and-a-half months. We're currently in, what I'd say, our usual sort of budget and forecasting cycle look over the next three and five years. I think part of that is also looking at our cash flow requirements, the hazards and the opportunities where we see opportunities that we can build on. That's the basis of that, of course, looking at other maturities we have, and just looking at our capital structure at the moment and how we sit in terms of our banking arrangements because we have a lot of bank debt. And from that basis, once we've got a position, then of course we'll be in a position to see what the balance is and what we need to do. But I'm not at a stage to get drawn into what type of financing instruments we may or may not use in relation to meeting our refinancing liquidity requirements in 2017 and O K. Just regarding the NADL facility, if some of your rigs are cold stacked upon its maturity, what ability would you expect to have to pledge rigs as collateral to refinance the facility? Can you repeat that? I didn't get the question there. Can you repeat it, please? Just regarding the NADL facility, if several of your rigs are cold stacked, what ability do you expect to have to pledge rigs as collateral to refinance the facility? Jo hn Ro che (Investor Relations): Sorry, you're talking about using stacked rigs as collateral, yes? Yes. Jo hn Ro che (Investor Relations): When this facility matures it's going to be roughly half the original facility, so we will have paid down a significant amount of debt there. As a reminder, Seadrill does guarantee this facility. Very similar banking group. When we look at the balloon there, I think there is an ability to finance a significant portion of that with the existing leveraged capacity in the units that are currently in the facility TheStr eet, Inc. Al l R i ghts R eser ved Page 7 of 11

8 O K. Thank you. If I could just also ask, regarding the ongoing investigations at Sevan, has that affected your ability to negotiate contracts with Petrobras, either renegotiating existing contracts or extensions on Sevan Driller and the West Orion? Anton Dibowitz (Chief Commercial Officer): This is Anton. From the marketing side I wouldn't see any read-through to Seadrill business. We're operating with our rigs as normal with Petrobras. O K. Thank you. O ur next question is from J.B. Lowe of Cowen. Please go ahead. J.B. Lowe (Analyst - Cowen): Good morning, guys. I just had a question on the $200 million in cash savings you said that you were going to be realizing next year just on operating rigs. Can you give us any color on what that assumes in terms of rigs that roll off contract next year? Does that assume that those rigs are not going to be working after their contracts are over? We know now what will roll, what will not roll over. And the $200 million -- two things. Number one is this is sustainable savings. That is number one. Number two is that sustainable savings only relate to rigs we have operating. O K? J.B. Lowe (Analyst - Cowen): O K. The other question is the $30 million reduction in EBITDA in the fourth quarter, you said that so far this quarter rigs are operating at a 98% utilization. If that was to continue for the rest of the quarter, would that $30 million reduction still be in play? Is that what you're basing that $30 million reduction on? We have a good quarter so far but we still have five weeks left, obviously. But what we know now and what we can see, it will be around $30 million with what we know. Because, like Mark mentioned, we have a little bit increased idle time on a couple of vessels we know about and a planned five-year [classing] on West Orion rig like we have done this year. J.B. Lowe (Analyst - Cowen): Thanks very much. O ur next question is from Lukas Daul of ABG. Please go ahead. Lukas Daul (Analyst - ABG Sundal Collier): Thank you. Good evening, guys. You are talking in the report about 180 to 200 floaters needed to replace the reserves. Can you talk a little bit more about what number of rigs do you think will be needed for exploration? And did you include that in that number? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 8 of 11

9 Anton Dibowitz (Chief Commercial Officer): Look, in many models, many people have their own models. We're not going to get into slicing and dicing between exploration and development. We're in the middle of a cycle. The numbers, if we return to a long run rate to where we were the last couple of years ago, implies a certain number of rigs in the market. And I think that's where those numbers come from. As the cycle evolves, you see a swing between exploration and development, and that has a lot to do with what the forward-looking E&P budget for the operators are, how much they're focusing on development, and how much they need to replace reserves, and you see that swinging back to the exploration side. I hope that covers it. Lukas Daul (Analyst - ABG Sundal Collier): OK. And then one question for Mark on the refinancing. Obviously you have a bank facility due in the second quarter next year, which is collateralized by West Eminence. How do you see the chances of rolling that over, given the rig will be without work? I think our view is that it's good, yes, standing from where we are. But, like I said, all of this will get rolled up in the review that we're doing. And, like I said, when we completed that review and we're ready to share those findings, that's what we'll do. In relation to the evidence, I think we've got good confidence that we'll be able to extend the financing, do refinancing. Lukas Daul (Analyst - ABG Sundal Collier): OK. Thanks. The next question is from Anders Bergland of Clarksons. Please go ahead. Ande rs Be rgland (Analyst - Clarksons Platou): Good evening, gentlemen. Congratulations for the good quarter. A couple of questions. Could you give some color on the renegotiations with regards to Petrobras? And, secondly, can you give any color on what kind of financing you can get on the rig from the yard without the contract? Thank you. Anton Dibowitz (Chief Commercial Officer): This is Anton. I can take discussions with Petrobras. We've been in Brazil since It's a very important deepwater market, has been and will continue that way. Petrobras, like every other oil company and operator around the world, is under severe pressure to manage their costs. We're in continual dialogue with them and our other operators to see if there's some mutually beneficial and commercial arrangement that can be had. And we'll continue those discussions with them, as we will with our other customers. But beyond that, I wouldn't want to get into any details. If I just can add on, I would just say thank you for congratulating us, OK, because we had a good quarter. Ande rs Be rgland (Analyst - Clarksons Platou): And on the financing side of rigs in the yards without contracts? 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 9 of 11

10 If I understood your question, generally our view, in looking at financing the metal as opposed to a rig with a contract, certainly some of the discussions would suggest that around 50% LTV level is something we can get for three, four years. Ande rs Be rgland (Analyst - Clarksons Platou): O K. Thank you very much. That's all from me. Our next question is from Harold Oyen of SEB. Please go ahead. Harold Oyen (Analyst - SEB): All my questions have been a answered. Thanks. And the next question is from Neesha Khanna of Credit Suisse. Please go ahead. Neesha Khanna (Analyst - Credit Suisse): Hi. Good afternoon. This is Neesha calling in for Greg. I had a quick question about the contingency consideration. O n a go-forward basis, how much per quarter do you expect to recognize, and the duration of the recognition, as well? If I recall, I think it's about $19 million per quarter. Neesha Khanna (Analyst - Credit Suisse): And for how long? The length of the contract. Neesha Khanna (Analyst - Credit Suisse): OK. Perfect. Thank you. Jo hn Ro che (Investor Relations): O perator, I'm actually showing no further questions on my screen here. So, I'd like to thank everyone for joining our third-quarter conference call. We'll speak to you next quarter. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. 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 2014 TheStreet, Inc. All Rights Reserved Page 10 of 11

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