Seadrill Limited (SDRL) Q2 FY2025 Earnings Call Transcript & Summary

Thank you for standing by. My name is Gil, and I will be your conference operator today. At this time, I would like to welcome everyone to the Seadrill's Second Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to turn today's call over to Mr. Kevin Smith, Vice President of Corporate Finance and Investor Relations. Please go ahead.

Welcome to Seadrill's Second Quarter 2025 Earnings Call. I'm Kevin Smith, Vice President of Corporate Finance and Investor Relations, and I'm joined today by Simon Johnson, President and Chief Executive Officer; Samir Ali, Executive Vice President and Chief Commercial Officer; and Grant Creed, Executive Vice President and Chief Financial Officer. Our call will include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year, and we assume no obligation to update them, except as required by securities law. Our filings with the U.S. Securities and Exchange Commission provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business. During the call, we will also reference non-GAAP measures. Our earnings release furnished to the SEC and available on our website includes reconciliations with the nearest corresponding GAAP measures. Our use of the term EBITDA on today's call corresponds with the term adjusted EBITDA as defined in our earnings release. I'll now turn the call over to Simon.

Hello, and thank you for joining us on our call. Today, I'll touch on our quarterly performance before moving to contracting updates, some company updates and the market. Samir will then discuss our commercial outlook in detail, and Grant will review our quarterly financial results and full-year guidance. In the second quarter, Seadrill delivered adjusted EBITDA of $106 million and an adjusted EBITDA margin, excluding reimbursables of 29%. Two of the active customer dialogues discussed on the previous earnings call have been successfully converted into new contracts. These fixtures underscore the strength of our commercial team in a competitive environment. The West Vela was awarded a two-well contract by Talos Energy beginning mid-November with an estimated term of 90 days and the Sevan Louisiana commenced a well intervention contract with Murphy Oil in early August and is expected to work into November. This will be our first campaign for Murphy, and we are thankful that they've entrusted the work to us. Importantly, these fixtures commenced in the second half of 2025, thereby minimizing costly gaps between contracts. Discussions around the three rigs in our Sonadrill joint venture in Angola, the Sonangol Libongos, Sonangol Quenguela and West Gemini, remain very positive, and we expect material progress on contract fixtures in the near future. In all areas where we operate, our unwavering commitment to operational excellence is what enables us to deliver best-in-class service to our valued customers, resulting in long-term partnerships. The second quarter of 2025 marked an extraordinary 15 years of operation for the West Gemini in Angola, during which the rig worked primarily for TotalEnergies. Throughout this time, we have consistently set the standard by delivering sustained operational and safety performance, achieving 97% uptime and a TRIR of 0.13 over the last decade. Total remains a critically important customer, and we thank them for their long contractual commitment to the rig. Driven by our commitment to leading-edge innovation and continuous improvement, Seadrill has established the West Minerva real-time operations center at our office in Houston. This cutting-edge facility utilizes advanced analytics and real-time data integration to enhance situational awareness, improve decision-making and streamline communication across our offshore drilling operations. The positive feedback received from clients who have toured the West Minerva reinforces its significant value proposition. Complementing the capabilities of the West Minerva, our Seadrill Academy plays a pivotal role in strengthening Seadrill's performance through world-class training and development. As part of the Seadrill Academy, the West Inspiration, our DrillSIM:6000 simulator, provides immersive scenario-based training in drilling and well control. Within the Seadrill Academy, we've successfully developed and implemented a comprehensive managed pressure drilling training course. Drawing our experience from drilling over 100 MPD wells, this in-house program is specifically designed to provide crews assigned to our 8 MPD equipped drillships with the knowledge and hands-on skills to continue to set the standard in MPD. This commitment to training and development is a cornerstone of the Seadrill culture. Together, the West Minerva and Seadrill Academy reflect Seadrill's integrated approach to technology, training and performance, a winning model of continuous improvement that both we and our clients are proud of and believe in. Shifting to the broader market outlook. We view the current environment as fleeting. Five key themes point towards a market recovery in late 2026 as widely commented on by us and our peers. Firstly, customers are focusing on exploration. At a recent conference, TotalEnergies reiterated its commitment to drill 15 to 20 exploration wells per year going forward. Meanwhile, BP confirmed increased investment in exploration with a plan to drill 40 wells over the next 3 years as part of a renewed focus on its core upstream business. This week, an exploration well in the Bumerangue block in Brazil's Santos Basin revealed BP's largest hydrocarbon discovery in 25 years. This significant find will trigger appraisal activities and underscores the potential within legacy basins. Brazil's fifth licensing round held in June highlighted a growing interest in frontier exploration and a significant reengagement of the super majors. Notably, 19 of the 34 blocks awarded were situated on the underexplored Equatorial Margin play where Exxon and Petrobras have jointly acquired 10 blocks. Chevron, in partnership with CMPC secured 9 blocks signaling Chevron's reentry into Brazil after an 11-year absence. The U.S. Gulf is set for increased exploration activity with the Bureau of Ocean Energy Management holding lease sale 262 later this year, the first since December 2023. Recent legislation mandates at least two sales annually from 2026 through 2039, an increase from the prior mandate, which only required three sales over 5 years. This expansion is expected to drive more exploration drilling and increased rig demand. Secondly, despite commodity price uncertainty, operators are moving forward with offshore project FIDs. Wood Mackenzie forecasts a substantial increase in FIDs from $91 billion in 2025 to $164 billion in 2026 and $133 billion in 2027. These figures represent the highest levels in over a decade and underpin our belief in a market recovery. Thirdly, we're encouraged by recent tendering activity and the opportunities we see developing in coming months, which Samir will cover in more detail. Fourthly, there have been seven multiyear deepwater rig contracts awarded since March, with start dates in the second half of 2026 or 2027. These contracts demonstrate customers' long-term commitment to deepwater even in an uncertain macro environment. And finally, recent transactions leave only one competitive ultra-deepwater drillship undelivered in the shipyard. Active drillship supply currently sits at 77 rigs with contracting of just 6 units needed to reach 95% utilization. The stranded assets are being sold or delivered and most of the cold-stacked drillships cannot be economically reactivated by a rational contractor. And with that, I'll turn the call over to Samir.

Thanks, Simon. As anticipated, 2025 is shaping up to be a year marked by softer utilization and a corresponding increase in competition, placing downward pressure on the near-term day rates. Despite the challenging backdrop, we have executed two new contracts. The Sevan Louisiana has secured work in the U.S. Gulf with Murphy Oil, which will generate earnings and cash flow into November 2025. The rig's unique abilities to operate in shallow water environments in dynamic positioning mode opens up a broader spectrum of work opportunities with new operators. Staying in the U.S. Gulf, the West Vela has secured approximately 90 days of additional work with Talos Energy, commencing in November with a break of around 1 month following the end of the current program. The rig continues to exceed expectations, enabling us to add term at strong rates at a time when many of our peers are experiencing increased idle periods in the U.S. Gulf. We are aggressively pursuing opportunities to fill our order book for the remainder of 2025 while also focusing on securing contracts for work with a 2026 and 2027 commencement date. As Simon mentioned, we are beginning to see evidence to support our view that an increase in activity is likely and frankly, necessary to support energy demand through the rest of the decade and beyond. Paradoxically, market conditions are objectively better and subjectively worse. The current trend of declining utilization exists in the same environment where we have a tightening of supply of rigs and the need for significant oil and gas investment to meet growing energy demand. Rystad is forecasting a step change in customer spending from land to sea in 2026, where offshore CapEx will exceed onshore CapEx for the first time in a decade. The economics of offshore exploration are increasingly attractive, and we anticipate an inflow of capital into this market. When compared to 2025, deepwater spending is expected to increase over 80% and over 130% in 2026 and 2027, respectively. If realized, this level of investment would extend the durability of the cycle and help address any temporary dislocations between rig supply and demand. Our analysis indicates that drillship utilization will demonstrably improve in late 2026 and 2027. Positioning our high-specification floater fleet at the heart of the deepwater market allows us to capitalize as spending is redirected towards offshore basins. In Brazil, which hosts the largest concentration of deepwater rigs, we anticipate demand to remain robust. The recent FID of the Gato do Mato project, Equinor's RFI for an additional rig on the Bacalhau field and Petrobras' Mero and Búzios tenders give us confidence Brazil will remain the key deepwater destination for some time. This is complemented by a notable uptick in interest by the super majors. During the recent offshore bid round, over $180 million in signing bonuses were paid. For context, this is more than double compared to the last round held in 2023. Seadrill is a leading operator in Brazil with six drillships currently working in the country. Our strong track record, deep customer relationships and local presence position us well. Of our fleet, only the West Carina has near-term availability, and we are actively exploring opportunities both inside and outside Brazil for this unit. Here in the U.S. Gulf, we maintain our view that around four to five rigs are expected to be marketed and available at year-end, creating a temporary oversupply. Despite these headwinds, we have secured near-term work for the West Vela, which is a testament to the exceptional operational performance delivered by our crews. We anticipate demand will improve in 2026 and again in 2027, with idle rigs being reabsorbed and stronger utilization supporting rate progression. Regarding our fleet, we are in active dialogue with multiple customers for work with a 2026 start date for the West Vela and West Neptune. To finish our overview of the Golden Triangle, West Africa remains a significant source of incremental growth with at least six long-term drillship opportunities targeting 2026 and 2027 commencement dates. Securing term work for rigs in Angola remains a key strategic priority for the Sonadrill joint venture as we look to enhance the longevity of the partnership. Discussions for all three rigs remains constructive, and we look forward to providing an update in due course. Outside of the Golden Triangle, Norway remains a region in balance, whilst East Africa and Asia Pacific are showing tangible signs of incremental demand. We are currently tracking opportunities that could absorb over 22 years of drillship demand with programs commencing in 2026 and 2027. The West Capella is engaged in a competitive tender process for term work in Asia, and we are tracking at least 13 active programs across Mozambique, Australia and Southeast Asia with start-ups in the next 2 to 3 years. In summary, we see the potential for strong market recovery in late 2026 and 2027. While the precise timing of customer demand remains uncertain, the underlying need for exploration and reserve replacement is clear. Our fleet is underpinned by a solid foundation of backlog extending into 2028. And as market fundamentals improve, we remain confident in our ability to maximize earnings and cash flow for each rig. And with that, I'll hand it over to Grant.

Thanks, Samir. I'll now walk through our second quarter financial results before providing an update on our full year 2025 guidance. Total operating revenues for the second quarter were $377 million, representing a sequential increase of $42 million. This improvement was driven almost entirely by higher contract drilling revenues. Both the West Neptune and West Polaris benefited from sequential increases in operating days as the Neptune completed its scheduled SPS and upgrades, while the Polaris commenced its contract with Petrobras in mid-February. These items were partially offset by reduced operating days for the West Capella, which completed its contract in the prior quarter. In addition, economic utilization improved to 93%, up from 84% in the first quarter. The marked increase in revenue conversion was driven by the West Auriga and West Polaris, which resolved teething issues following the commencement of their inaugural long-term drilling contracts in Brazil as well as the West Tellus, which resumed operations in February. Finally, management contract revenues increased $4 million quarter-on-quarter to $65 million, reflecting an agreed upon inflationary increase for the daily management fee Seadrill earns for providing management, operational and technical support to Sonadrill. The increase was retroactively applied from January 1, 2025. Turning to expenses. Total operating expenses for the second quarter were $371 million, up from $317 million in the prior quarter. This increase was driven primarily by a $51 million accrual recorded in management contract expenses related to an unfavorable legal judgment associated with the establishment of the Sonadrill joint venture dating back to 2018. As previously disclosed, approximately $10 million of the total liability pertains to 2025 and impacts current year adjusted EBITDA and the remainder relates to prior periods. Adjusted EBITDA was $106 million, up $73 million from the prior quarter. And adjusted EBITDA margin, excluding reimbursables, was 29.5%. Moving to the balance sheet and cash flow statement. We continue to maintain a robust balance sheet with ample liquidity and the lowest net leverage in our peer group. At the end of the second quarter, gross principal debt remained $625 million with maturities extending through 2030. We held $419 million in cash, which included $26 million of restricted cash. Net cash flow from operations during the second quarter was $11 million and includes unfavorable working capital movements of $66 million, driven by an increase in trade receivables for the West Neptune, West Tellus and West Polaris as well as settlements of project costs incurred in prior periods related to the West Auriga and West Polaris contract preparations and the West Neptune special periodic survey and upgrades. Payments for capital additions captured within investing activities were $23 million. Now moving on to our full year outlook. We maintain the adjusted EBITDA range of $320 million to $380 million, and that's based on an updated range for operating revenues of $1.32 billion to $1.38 billion, which excludes $50 million of reimbursable revenues. Adjusted EBITDA guidance includes a noncash net expense of $33 million related to the amortization of mobilization costs and revenues, of which $14 million has been recognized through June 30. Full year capital expenditure guidance range is also maintained at $250 million to $300 million. And with that, I'll hand back to Simon for his closing remarks.

In summary, we are pleased with the momentum we've built through recent contract awards. We remain actively engaged in constructive dialogues with customers for additional opportunities. As we look towards 2026, we are focused on maximizing profitability and minimizing gaps between contracts. With our backlog profile and disciplined approach to contracting, we remain well positioned to deliver long-term shareholder value as the market improves. Through leading edge innovations and our relentless pursuit of operational excellence, we will continue delivering safe, efficient and reliable operations for our customers every day. With that, I'll now hand the call over for questions. Operator?

[Operator Instructions] First question comes from the line of Fredrik Stene with Clarksons Securities.

So I wanted to touch upon the contracting opportunities that you're mentioning and maybe even more so in the recent report, you did have the Vela and the Louisiana contract today, but I also got the impression that there is more in store in the relatively near future. And just looking at the fleet roll-off, I would be inclined to think that this potentially relates to the Sonadrill rigs, potentially relates to the ongoing Búzios tender, for example. So any more color you can give on that would be super helpful, also some specifics. And as an overarching question around this, based on the discussions that you're currently having, do you have a pipeline of potential work for all your rigs, that is non-stacked rigs going forward?

Fredrik, there's, I guess, a few questions in there. So I'll start with the Angola one. So as some of you may be aware, there's been a bit of political unrest in Angola, which has candidly added some delays to administrative process there and delayed approvals. But we remain quite optimistic in our abilities to recontract our Angola fleet. We're in advanced dialogue on all three assets. So for us, that is a market that we continue to believe we have a competitive position in and should be able to announce something hopefully in the near future. But again, it takes some time. I'd also say, if you look at that market, you've seen some assets leave which, again, positions -- gives us confidence that we are at the top of the pecking order there of getting new contracts. You had asked about Brazil a little bit. I can't get into it specifically, but we've done a pretty good job of contracting our fleet in Brazil. We have six rigs down there. Of the six, we have the Carina that's really the one with availability. And I'd say we feel pretty good where we're positioned. You've got opportunities both with Petrobras, which are in the public domain, but you've also got some super majors that are also looking for assets in Brazil and outside of Brazil as well. So for us, we are marketing the rig in multiple regions across the world. And then kind of to close out and you had asked about of our fleet that's not stacked. So yes, we have candidly active dialogue on all of those assets. So for us, we feel -- we said in the prepared remarks, and we continue to believe that second half of '26 and into 2027 is where we start seeing the recovery in the market. We think we're approaching the bottom, which could be later this year, early next year, but -- and then we kind of start recovering into '26 into 2027.

Yes. And just to add, Fredrik, to Samir's comments. So I think that we're increasingly confident that the market is going to improve through '26. The work is starting to appear in tendering activity and some of those long-dated FIDs that have been awarded of late. 2025 is a nice sight, but we've demonstrated our ability to win work that our peers haven't been able to put a glove on. So we're quite pleased with the progress of our contracting, and we'll just continue to work diligently. The best advertisement that we have for us is the performance of our rigs. most notably the West Vela and the Sevan Louisiana. Those rigs are winning these contracts by virtue of performance they provide every day to our client base. And I'm ecstatic with what the guys and the rigs have been able to deliver to the clients.

All right. That's super helpful. And then just a super short follow-up to my one question is, are there any rigs for which we should expect prolonged idle time in between contracts?

Look, I think we're using every endeavor to ensure that we don't create our own white space. We do have a couple of small gaps that we spoke to with the Louisiana in the near term. But I think the marketing team has really taken up the baton and then ensuring that we endeavor to keep the rigs working and that we build backlog that's in continuous -- in direct continuation of existing contractual commitments. And so far, I've been really pleased with what the guys have been able to deliver there. So we'll see how it goes. It's a competitive environment, but it's an improving one. And so I'm really confident with what we've delivered and how things will pan out going forward. Anything to add, Samir?

No.

Your next question comes from the line of David Smith with Pickering Energy Partners.

If I recall correctly, you previously didn't sound keen on putting in capital into idle assets without strong line of sight for contracting. And Samir, I appreciate your comments about being in advanced dialogue in the Angola market. But I just wanted to make sure, thinking about the prior comments about not investing in the rigs -- in idle rigs. Is it fair to think that you probably wouldn't start the SPS to the Gemini unless you had pretty strong visibility for future work?

Yes, that's correct, Dave. Generally speaking, we're reluctant to engage in work that isn't -- that is discretionary ultimately without a firm contract behind it. I think Samir gave a really good indication of where we're at with those rigs that are looking at work down in Angola. So at the same time, we don't want to extend unnecessarily idle periods while we're waiting for final approval. So I think what we have done there with Gemini is, we offloaded a lot of equipment -- operator equipment in Angola before we moved to Namibia, and we've essentially been standing by. We have done a little bit of work, but it's not of a material quantum. And we hope, as Samir said, to have some good news on the contracting front. And at the same time, we'll press the button on going full forward with the survey work and contract preparation that will be required for that work.

Just a little bit bigger picture one, if I may. In previous cycles, I think we've typically seen floater contract lead times kind of go in the same direction as utilization and backlog. But the past 4, 5 months, we've seen operators locking in multiyear contracts with lead times of 12, 15, 24 months. Even though near-term demand looks soft and the rig count has been trending lower, it's creating some multi-quarter gaps in between contracts, which is -- seems fairly uncommon versus prior cycles. One of the few reasons that I can think of, for the change in operator behavior compared to prior cycles, maybe operators are saying the same thing that contractors have been saying, right? The demand outlook in late '26 and '27 is strong. The market could be tight better to lock in the rigs they need now. But maybe I'm missing a better explanation. So I was curious for your thoughts.

Dave, let me start and then Samir can add some color. But no, we see it the same way you do. We think that there's an improving dynamic. We're clearly in a bit of a trough at the moment. We've talked about how the markets developed and what unique features this business cycle versus previous. And one of those has been a lack of visibility. But yes, we believe fundamentally that those people who are going long and long now are doing so because I believe it will confer an advantage with what's coming ahead. When we think about that and when we think about our exposure to the market, a lot of people are concerned about our ability to recontract. We're relatively calm in terms of what lies in front of us and we see our near-term exposure to the market as evidence of operating leverage relative to our peers. And certainly, Samir and I've had a lot of high-minded conversations about the importance of not going long and low. And I think some of these longer-term fixtures that have been brought to market recently, I think they were greeted by spectators and market participants with great interest and applause. And we were certainly glad to see those rigs receive that work. But it will be interesting to see whether those fixtures stand the test of time and whether they'll come to be seen as being the -- such good fixtures in the future. Like I said, we believe now is not the time to go long and low.