Seadrill's West Leo rig

Seadrill takes $1.2 billion impairment and moves to ditch NYSE listing

Offshore drilling contractor Seadrill booked a huge loss in the first quarter of the year due to impairment charges amid a significant reduction in global oil demand. In addition, Seadrill has decided to delist from NYSE and focus solely on its Oslo listing.

Seadrill's West Leo rig by SP Mac

Seadrill’s revenue in 1Q 2020 was $321 million with a lower proportion of reimbursable revenues, down 19 per cent from revenues of $398 million in 4Q 2019.

The decrease was largely a result of a reduction in management contract revenue for contract preparation and mobilization recharges with Northern Ocean and Sonangol.

A reduction in rig operating days and lower operational utilization also contributed to this decrease.

There was $1.2 billion of other operating losses in the first quarter.

The decrease was primarily due to impairments being recognized against drilling units following the significant reduction in global oil demand, and consequently the company’s view as to the future operating capability of certain assets.

Net loss attributable to shareholders of $1.56 billion, equivalent to a net loss per share of $15.59, compared to a net loss of $199 million in 4Q 2019.

Technical utilization and economic utilization stood at 95 per cent and 93 per cent, respectively.

Utilization was lower than anticipated as a result of fewer operating days on the West Jupiter, and contract roll-offs for the West Cressida and West Castor.

According to Seadrill, the decision to continue to invest in drilling assets without a contract requires a disciplined approach.

“It is our view that market fixtures will need to prevail at a materially higher levels before prudent reactivation decisions of currently cold stacked assets are made”, Seadrill said.

Given a material change in the macro environment, Seadrill had to assess whether the continued cold stacking of assets and the associated reactivation costs produces the investment return stakeholders deserve.

These evaluations have a direct bearing on Seadrill’s assessment of the carrying value of its fleet and, as a consequence, Seadrill has made significant impairments to rig values as it believes there is an increased probability that up to 10 assets, mainly semi-submersibles, may not return to the market and would need to be scrapped.

Anton Dibowitz, President and CEO, commented: “This industry has two fundamental challenges which are emphasized by recent events – there are too many rigs carrying too much debt. In the quarter we took an impairment of $1.2 billion as we recognize, along with others in the sector, that a number of our assets are increasingly unlikely to return to the market and need to be scrapped.

Assets across the industry also carry debt levels which are unlikely to be sustainable and consequently we should expect to see substantial indebtedness being converted to equity. Only when the industry addresses both of these issues will we be in a position where the balance of market supply and demand can deliver reasonable investment returns to stakeholders“.

During the quarter, Seadrill added $77 million in backlog, maintaining a total backlog figure of $2.5 billion.

NYSE delisting

During the quarter, Seadrill received notification from the New York Stock Exchange (NYSE) that the 30 daily trailing average stock price had dropped below $1.00/share.

The average continues below this level and more recently the market capitalization of the group has dropped below $50 million on some occasions, which is another trigger point under NYSE rules.

Whilst cures remain available with respect to these issues, the company has determined that this is an appropriate time to rationalize its listing arrangements.

As a consequence, Seadrill Limited will move to delist from NYSE in the coming months and focus upon the Oslo Stock Exchange going forward.

Going concern

Since the end of 2019, Seadrill has been working with its senior creditors to provide an interim solution to the high cash outflow for debt service prior to undertaking a more comprehensive restructuring. Whilst substantial support was indicated for this approach, as certain of the amendments impacting economic terms required 100% approval across 43 institutions, recent market uncertainties have prevented a coalescing of views.

As a consequence, Seadrill has decided not to proceed with the bank consent and has retained financial and legal advisors to prepare for a comprehensive restructuring of the balance sheet.

“Whilst we continue to evaluate various alternatives to address the cost of debt service and overall volume of debt, we do anticipate that a comprehensive restructuring may require a substantial conversion of our indebtedness to equity,” Seadrill explained.

With $1.2bn cash on hand, Seadrill believes that this provides sufficient liquidity to complete a comprehensive restructuring.

However, until such time that an agreement is reached to restructure our borrowing commitments, substantial doubt remains over ability to continue as a going concern.

Photo by SP Mac – shared with permission from the author