John Roche - Director, IR Per Wullf - CEO and President Mark Morris - CFO Anton Dibowitz - EVP, Seadrill Management Ltd.

Ian Macpherson - Simmons Mukhtar Garadaghi - Citi Jacob Ng - Morgan Stanley Anders Bergland - Clarksons Eugene Landes - Eugene Landes Investment Management

Good afternoon. And welcome to the Seadrill Second Quarter 2016 Conference Call. All participants will be in listen-only-mode today. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Now I'd like to turn the conference over to John Roche, Investment Relations Director. Please go ahead sir.

Thank you and good afternoon. Welcome to Seadrill Limited second quarter earnings call. With us today, we have Per Wullf, our Chief Executive Officer; Mark Morris, our Chief Financial Officer; and Anton Dibowitz, our Chief Commercial Officer. 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 two of the presentation. For additional information and to view our SEC filings, please visit our website at seadrill.com. To kick off the discussion today, Per is going to take us through the second quarter highlights; Mark will then pick-up on our financial highlights and outlook; and finally Anton will offer some colour on the overall market. And with that I'd like to turn over the call to our CEO, Per Wullf. Per?

Thank you, John and good day and evening to everybody. First, I would like to congratulate all of our onshore and offshore employees on another fantastic quarter. During the second quarter we set a new record for vessel uptime, and 99% economic utilization for the group, an impressive result to be proud of. And now looking at some highlights for the second quarter; against a tough market backdrop where the majority of customer conversations continue to be related to playing down extend [ph] arrangements and in some instances rates are being negotiated lower without extending contract terms. Our backlog has remained resilient, improving $21 million over the quarter but excluding quarterly consumption. Vessel and rig operating costs were down $42 million compared to the first quarter. $21 million of this improvement is related to direct marketing improvements on rigs and operations. In our first quarter report we indicated that the full year 2016 total cash saving were expected to be around $340 million at the group level. During the second quarter we have identified a further $50 million and now expect full year cash saving of approximately $390 million. On the newbuild side we currently have no deliveries scheduled for the remainder of 2016 and are maintaining a proactive dialogue to further defer any units due in 2017. Again, and as I said before, I would like to stress that we do not intend to take delivery of any rigs without a tangible contract. And now, on to the second quarter operational highlights for Seadrill Limited. We improved on Q1's operational performance in all operating segments. For Seadrill Limited, we achieved 98% economic utilization on our floaters and 99% for the jack-ups, the highest in Seadrill Limited's history. Our backlog currently stands at $3.6 billion, down from $4.3 billion during the last quarter. Seadrill Group backlog stacks at $8 billion. As Anton will further explain shortly, although there has been an uptick in tendering activity in the spot market, offshore drilling is a late cycle market and remains challenging. Now I'll turn things over to Mark, who will cover our financial performance. There you go, Mark.

Thank you, Per, and good afternoon or good evening to all of you. I will briefly pull out the highlights for the second quarter, then provide an update on where we are with our financing plans and then finally, provide our guidance for Q3 and full year 2016. So, turning to the quarterly highlights; against a backdrop of slightly lower revenue for the quarter we had record operational uptime, and we continued to see the benefits of our cost-reduction programs coming through, which contributed to our improved EBITDA. The lower revenue was due to the West Castor and West Prospero completing their contracts during the quarter and the revised lower day rate on the West Tellus. These revenue reductions were partially offset by 1% improvement in economic utilization, and the West Phoenix, West Eclipse and Sevan Driller commencing operations during the second quarter. As you will recall, West Phoenix was on contract, but idle during the winter period at the customer's request, and recommenced operations during February this year. On the cost front, actions taken last year and ones we continue to take are yielding benefits as both our OpEx and G&A continue to fall. Rig operating costs reduced from $290 million to $248 million over the quarter, a 15% reduction. We performed slightly better than our guidance for the quarter, due to improved cost performance and record operational uptime. Moving on to the balance sheet; as always, there are various movements on the balance sheet, and I'm just going to draw out the main ones as identified here. The main movements in assets this quarter reflect repayment by Seadrill Partners of a maturing $110 million loan, the sale of our stake in SapuraKencana for $195 million; and the $75 million loan to Archer as agreed last year as part of their ongoing restructuring process. Other movements are predominantly working capital related and an increase in the share price of our Seadrill Partners' common units. Moving on to liabilities; the only thing really worth mentioning here is the movement between the long-term debt and the current portion of long-term debt. This relates to the reclassification of the $2 billion NADL and $400 million jack-up facilities being reclassified from non-current to current debt. The remaining decrease in long-term debt is due to quarterly amortization payments. Turning now to our liquidity, at the quarter end, we had $1.3 billion in cash. On the cost side, since the end of 2015 we have reduced headcount from 7,100 to 6,500, an 8% reduction. The average operating costs, including G&A of our operating floater fleet has been reduced by 17% year-to-date relative to full year 2015. Similarly, average daily jack-up OpEx has been reduced by 28%. Finally, there are no new yard instalments or deliveries in 2016. Turning to our financing plans; not a lot more we can share with you at this stage, but we continue to make good progress with our banks. As you're aware, back in April, we contemplated -- we completed the first part of our plans, which created a stable platform for negotiating a longer term and more comprehensive solution to refinance and recapitalize the business. We have met the miles [ph] and obligations as they have become due and we remain in constructive discussions with our banks around the long-term solution that will bridge us to a recovery in the industry. We continue to expect this process will conclude by the year-end. Finally, turning to guidance for the third quarter; EBITDA for the third quarter is expected to be lower at around $380 million, mainly reflecting increased idle time and lower day rates on a number of our units, as described in our press release. And expect the conclusion of ongoing blend-and-extend negotiations. For the full year we expect EBITDA of around $1.8 billion. With that I'll hand over to Anton for some comments on the current offshore drilling markets.

Thanks, Mark. As Per noted in his opening the offshore drilling market remains challenging. While there has been some increase in tendering activity this has been from a low base and generally for short term work, that too near cash breakeven levels. There continue to be multiple rigs bid for all opportunities and the supply excess continues to grow. The majority of customer conversations continue to be related to blend-and-extend arrangements and other renegotiations. In some instances rigs are being renegotiated lower without extending the contract term, with cancellation and re-tendering by oil companies as the alternative. Entering into these agreements should be viewed within the context of a significant oversupply and a market in which operators have developed a clear preference for units that are currently operating who have not been idle for a significant period of time. A better indication of demand in 2017 may emerge after our customers complete their annual budgets later in the year. But in the longer run the current level of investment is not sustainable. An increased capital expenditure will be required to slow decline curves and grow production. We've noted a number of contract revisions in new awards in our quarterly release and I'm not going to re-cover those in details, but would like to offer some context on just a few of these items. The jack-ups AOD 1 and 2 received three year contract extension on the back of excellent performance, thereby ensuring work for these units with Saudi Aramco a key customer in an important market until mid-2019. The West Ariel and West Freedom both moved to flotel mode. The day rate reductions in both cases are accompanied by reductions in operating costs in this non-drilling mode. In the case of the Freedom we also received a short contract extension at the original rate. So while the agreement represents a reduction in backlog they are materially neutral from an overall cash perspective. The West Castor contract with ENI will be the first jack-up operation for an international oil company in Mexico and adds another rig to the five jack-ups we already have operating in that market. And with respect to the notice of termination received on West Pegasus, as noted we have disputed the grounds for termination and while this is an ongoing process I would add that the rig was not terminated for convenience [ph] or lack of performance which has been excellent. Despite the current market challenges we continue to deliver best-in-class safety and operational performance. And in this way we maintain excellent relationships with our key customers, protect our backlog and position ourselves optimally for an eventual market recovery. Per?

Thanks, Anton. Although there are some signs that we have seen the worst of this downcycle we are not out of the woods yet. In the first two quarters of 2016 we have continued improving operations, presenting [ph] in back-to-back record uptime. Further reduced costs, leading to improved EBITDA on lower revenues, managed newbuilding commitments by deferring near term deliveries and our financing plans are on track. We fundamentally believe in the future of the offshore drilling business and that our modern high specification fleet positions us well. Thanks.

Great. Thanks, Per. And we just like to turn over to the operator to assemble the Q&A queue. I just request that if we limit questions to one question and one follow-up that is appreciated. Operator, over to you.

Thank you. [Operator Instructions] Our first question comes from Ian Macpherson of Simmons. Please go ahead.

I'm sorry if I…

I'm sorry. Mr. Macpherson you're accidently cut-off. If you could call back into the question queue. And meanwhile we can take our next questioner, Mukhtar Garadaghi from Citi. Please go ahead.

… secured. And on the bank side, how's the bank's stance [ph] and sort of underlying valuation for options.

Mukhtar, sorry to interrupt you. We missed the first part of your question, would you mind starting over?

Yes, sorry about that. I was asking could you please comment on the restructuring discussions, both with on the unsecured side and secured, to the degree that it's possible at this stage. As well as any comments on has the bank's position changed in the last few months in terms of underlying values assumed for some of the rig especially un-contracted rigs. Thank you.

Mukhtar, it's Mark here. Look we are covered against a lot of the mechanics of where we are. We're making good progress. Clearly we're starting with our secured lenders. There is no good package here that we're looking at in terms of sort of five year runway. But obviously there is a sequence by which we will deal with relevant stakeholders. And we're sort of on track at making progress with our banks. I'm not sure I should sort of comment really any further than that at this stage.

Okay. And in terms of -- I just want to understand in terms of general dynamics we have seen couple of Chapter 11s in the second. Do you still see this as sort of constructive discussions given you have had couple of sort of covenant left on the other facility, should we expect this similar sort of outcome for the rest?

That's certainly our plan in terms of how we intend and plan going forward. And of course as we've already alluded to we -- our discussions with the banks remain constructive.

Thank you.

Our next question comes from Jacob Ng of Morgan Stanley. Please go ahead.

Also congrats on the good quarter. You mentioned six months ago that Seadrill Partners would not be part of your refinancing strategy. But I wonder though if there is any change through that thought process in light of one of your peers recently announcing [indiscernible] rollout, at [indiscernible]?

The short answer is no. I mean I notice there is obviously other things that some of our peers have done. I mean also all of these are unique and you have to talk to them as the rationale for what they've done. With regard to SDLP, as an MLP the only area where there is some slight overlap is in relation to full units which is the Polaris DT-50 and T-60 where the facilities that stick within Seadrill also extend down when they were dropped down into SDLP. So those four units potentially will get scooped up and wrapped up in the refinancing and recapitalization plans we have. But in terms of other implications for SDLP nothing and what we see here today.

Understood. Now congratulations on the West Castor contract with ENI in Mexico. We know -- is understandably stretched but I was hoping if you could elaborate on what kind of opportunities you're seeing in Mexico from customers besides Pemex both in the jack-up and the floater market?

Jacob thanks. It is, as I mentioned, it's great that we got the Castor on contract in Mexico. It's the first for an international. We want to be in there for a number of years working for Pemex. And I think that contract is a testament to the fantastic operations that our team down there has demonstrated. PEMEX is on the journey to open up the market and being there and having experience in the market is hopefully going to serve us well and we expect that, as that market opens up and the more ISE's come into that market, both on the jack-up and also potentially on the deepwater side.

Thank you.

[Operator Instructions] Our next question comes from Ian McPherson of Simmons. Please go ahead.

Hi, thanks. I got disconnected there on the first try. I'm sorry, if I missed this in the prepared remarks. Anton, did you state what the status is of the West Hercules termination payment is? Have you already collected that, or is that forthcoming in the second half?

The payments -- the payment is coming. It's the simple answer. It's a structured as a one payment, and it will be coming. Obviously, there, just like with any other part of the contract, there's a billing process that needs to go through and then the payment will come in due course.

In this quarter.

In this quarter.

In this quarter. I thought -- But I was assuming that your EBITDA guidance in the press release does not include that, is that correct?

Does not really.

We checked over the remaining period of that contract how we would normally run. Okay. So this contract was meant to last onto spring next year and over that period, we will go and sort of amortized it over that period, okay? Does that answer your question?

Yes. Thanks, Per. And then my follow-up, if I may, on West Pegasus and the PEMEX contracts, typically, we think of those as having short termination provisions in Mexico. Do you feel like you have an argument to defend your backlog in this termination, or we unlikely to see a material settlement if at the conclusion of this?

Look, as we noted in press release, fortunately, this is an ongoing dispute and there are legal implications and payer swaps that we can take. So I'm not going to comment any further on that.

Okay. Thank you.

Our next question comes from Anders Bergland of Clarksons. Please go ahead.

Thank you, and good afternoon, everyone. Just a quick question on idle units. With the communication with the E&P companies, they have [indiscernible] in the statement that they will not take or contract units that have been cold stacked. How do you guys sort of go to think about the units that are idle now in terms of stacking costs? How far down can you take the stacking costs before it starts to pull back and at what level can you keep it at the semi-warm stack? Thank you.

Well, I'll try to answer this one. It was a lot of questions. But what I can say is that strategically, we will go on the half, we have warm stacked jack-ups to satisfy needs going forward, and we have warm stack deepwater units, and that's both in the North Sea as well as in West Africa, as an example, and here lately, with Pegasus in the U.S. Gulf. So we will go on and keep one. We will go and have one stack units available all the time. As they will go on come into market, we will keep taking cold stacked units out. So that is our strategy. So we don't intend to have more than one unit, warm stack in West Africa as an example. Then if there are coming more, we simply cold stack them, because we see a benefit for us there. You are correct that a number of customers will not go on and take units, if that cold stacked. It is our duty to make sure that warm stacked units are available for them.

Okay. Thank you. Just a follow up, with one on the floater side, I’m sorry for that. But could you let’s say you can sell at around $30,000 to $40,000 a day or do you have to justify your number?

When we run a warm stacked unit, we always reduce the amount of feed and all that. So you have to look at -- if you take Orion, as we have found it in Namibia right now she would be able to go out in roughly 60 days or something like that. That's how we have to look at it, something going on. But you never get a contract like the Monday to a first day [ph] anyway you know. So I think we should look at a roughly a six-day bed and the cost for having us sitting there as between $35,000 and $40,000 a day.

Okay. Thank you very much.

There are no further questions. At this time I would like to turn the conference back -- well we have one last question from Eugene Landes of Eugene Landes Investment Management. Please go ahead.

Just thinking about what your next projection of that [indiscernible] through run, let's say in the next year to stop deflating [indiscernible] is there any projections on that?

Sorry. We are having trouble hearing the question there. It's very garbled. I think we'll have to move to next caller.

There are no further questions in the queue. I would like to turn the conference back to management for any closing remarks.

So this concludes the Seadrill's second quarter earnings conference call. I thank everyone for joining and enjoy the rest of your day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.