John Roche - VP, IR Anton Dibowitz - CEO Mark Morris - CFO

Michael Urban - Seaport Lukas Daul - ABG

Good afternoon and welcome to the Seadrill Limited Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Roche, Vice President of Investor Relations. Please go ahead.

Thank you and good afternoon everyone and welcome to Seadrill Limited's second quarter earnings conference call. With us today, we have Anton Dibowitz, our Chief Executive Officer; and Mark Morris, our Chief Financial Officer. Before we do get started, I'd like to remind everyone that much of the discussion today will not be based on historical facts but rather consist of forward-looking statements and are subject to uncertainty. We articulate some of the 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, Anton will take us through our second quarter highlights, our thoughts on current market conditions, as well as the outlook. Mark will then address our financial highlights and provide an update on the progress of our restructuring. With that, I'd like to turn over the call to Anton, our CEO. Anton?

Thank you, John, good day and evening to everyone on the call. I'd like to start by congratulating the Seadrill team; both on and offshore on another impressive quarter. Operational excellence underpinned by safety records which continues to be of industry averages and solid uptime performance remain the foundation of our office. We continue to support both our marketing and restructuring efforts. On the commercial front; increased tendering activity and contract fixtures over the last quarter are positive data points. The offshore industry continues to achieve efficiencies that allow offshore balance to be competitive with other forms of supply on a full cycle basis and provides better economics in today's oil price environment than they did just a few years ago when oil was more than double the current price. But to be clear, the offshore drilling market remains challenging and highly competitive. We continue to work closely with our customers to understand the challenges and create mutually beneficial solutions and as a result, since the end of the first quarter we have concluded 10 new commercial agreements. I'd like to highlight just a few of these. New contracts we're starting with Statoil in Brazil, the risk [ph] with Petronas in Gabon, as well as the reactivation of the West Capricorn with BP in the Gulf of Mexico were all facilitated by an industry leading position in managed pressure drilling operations. In our previously announced contracts with more lines of drilling for the West Linus and West Elara with ConocoPhillips in Norway are our testament to our ability to develop creative solutions and alignment with our customers throughout the cycle with market index rates and performance based incentives. On the cost front; we experienced an increase in G&A related to restructuring costs for the quarter. However, our run rate excluding restructuring costs remained unchanged and we project full year G&A excluding restructuring cost of $220 million. And lastly with respect to newbuilds, in July Sevan Drilling and Costco reached agreement to differ the Sevan developer delivery until June 30, 2020. As part of this agreement Costco agreed to refund $25.3 million plus interest to Sevan Drilling which was received in July, and Sevan Drilling continues to have the right to market the rig for work. We remain in constructive discussions with the rest of our shipyard regarding leaching [ph] agreements to differ our remaining newbuild for [indiscernible]. Onto the second quarter operational highlights for Seadrill Limited; the excellent operational performance I mentioned in my opening remarks has delivered a strong 97% economic utilization on our floater and jack-up fleet, another impressive quarter driven by safe and efficient operations. However, the backlog currently stands at $3.1 billion for Seadrill Limited and $6.5 billion for the Seadrill Group. And with that, I'll hand it over to Mark who will cover our financial performance and restructuring updates.

Thank you, Anton, and good afternoon and good evening, to you all. I'll briefly put out the highlights for the second quarter, then provide an update on where we are with our restructuring plans and then finally provide guidance for the third quarter. So turning to the quarter; revenues were up 1% due to the following one-off items; an $18 million revenue increase due to a negotiated early release of the West Freedom, and a $22 million revenue increase on the West Gemini reflecting the reversal of revenue recognition provision. Excluding these one-off items revenues would have been down 6% for the quarter reflecting the West Tikhana [ph] and Sevan Louisiana becoming idle during the quarter. The West Elara operating at a lower day rate and the recognition of West Hercules termination fees in Q1 not being repeated in Q2. These reductions to revenue were partially offset by full quarter of operations for the West Phoenix. The West having operating for two months during the periods of second quarter and increased demobilization revenues. Out of our fleet of 36 rigs which now excludes the West Triton and West Resolute which were sold during the quarter, 19 units are currently operating on contract, of which 8 are floaters and 11 are jack-ups. EBITDA for the quarter was $264 million. The 9% decrease reflects more idle units and increased costs mainly due to higher operating costs related to upfront costs and stacking units, certain supplier rebates and higher G&A primary related to restructuring costs as we prepare ourselves for a likely Chapter 11 filing in September. Excluding the one-off revenue items, EBITDA for the quarter would have been $224 million. So moving on to the balance sheet; as always there are number of moving parts here and I'm just going to draw out the main ones. Marketable securities increased by $22 million, primarily due to our investment in Archer now being recognized as a marketable security following Archer's restructuring in recent equity rates. This increase is partly offset by a decrease in the value of our Seadrill partners common units. Non-current assets held for sale increased by $74 million reflecting the agreed sale of the West Mischief due to a cut-out [ph] in the third quarter. Drilling [ph] by $563 million, primarily due to the sale of the three jack-up units in addition to the moment of course with depreciation. Moving on to liability side, current debt increased by $361 million due to two of our secured credit facilities becoming current and finally, other non-current liabilities increased $28 million due to the [indiscernible] of the third mobilization revenues and the unfavorable contracts. So moving onto the restructuring; in July we reached agreement with our banking group to extend the long stop date to September 12. We've also extended the two credit facilities that matured in August to mid-September just behind the longest update. The extension period provides additional time to finalize negotiations and prepare for our expected Chapter 11 filing. Our primary objective now is to conclude the final negotiations to our comprehensive restructuring plan. We are now in the balance stage of negotiations with our key stakeholders and prospective new money investors to finalize agreements and perhaps, if concluded, we'll see the raising of approximately $1 billion in new capital, five year extensions to our bank facilities, deferral of amortization and a conversion of our bonds to equity, as well as impairment losses to other stakeholders including shipyards; all of which remains subject to final due diligence documentation and requisite approvals. The Company currently expects that shareholders are likely to receive minimal recovery for their existing shares. We've also completed the insulation [ph] of our key non-consolidated entities; Seadrill Partners, CEMEX and Archer from the risk of a default caused by Chapter 11 filing by Seadrill which is an important step in preserving value. The Company's business operations remain unaffected by these restructuring efforts and the Company expects to continue to meet its ongoing customer and business commitments. I appreciate you all be keen to understand more details about the restructuring plan but at this stage it would be inappropriate for us to comment on further specifics until we have completed negotiations we should not be long now. And now finally turning to our guidance for the third quarter; EBITDA is expected to be lower at around $175 million, primarily reflecting the full quarter of idle time on the West Tikhana [ph] and Sevan Louisiana, and reduce revenue for the West Freedom and West Gemini following the one-off recognition items during the first quarter -- sorry, in the last quarter. With that, I will now hand back to Anton for the closing remarks. Thank you.

Thanks, Mark. Once again, a great thank you to all our employees for achieving another impressive operational quarter. We have made significant progress in our restructuring by insulating key non-consolidated entities and we expect the implementation of a comprehensive plan via Chapter 11 proceedings on or before September 12. Whilst the pickup in activity over the past few quarters is encouraging, bounce in the market still requires demonstrable [ph] improvement on both the supply and demand side. We are confident however that we have the right fleet, customer focus and operational performance to be well positioned when the market turnaround materializes.

Thanks Anton and Mark. Operator, I'll turn over to you for a moment to compile the queue for question-and-answers.

[Operator Instructions] Our first question comes from Mike Urban with Seaport. Please go ahead.

Good afternoon. So what are the dynamics you've given in the offshore market that's maybe -- I guess a little bit of a change relative to at least some folks thought would happen is you've seen some of your competitors go out and get pretty aggressive to reactivate stacked rigs or take delivery of newbuild rigs, of course with the assumption that a hard rig is easier to market with follow-on work and in all likelihood on a total cash basis, doing cash negative work. Does that change your view of the timing of the recovery, the effective capacity out there and kind of general views on that topic.

I don't think it changes our view on the timing of the recovery. I think it's a strategic decision and we do the same, take it on a case-by-case basis. As I maybe more – as importantly or more importantly than having a stacked rig it's having the ability and the confidence from your customer that you can take a rig out of warm stack or cold stack and put it effectively to work and that's one of the things that's having global scale and a large fleet and a competent workforce gives you with the customers. We're planning to do the same thing with the Hercules in the North Sea; it's a cold stacked rig that we're putting back to work. The short-term contract that is going to be on and obviously it doesn't paint for itself on the reactivation but we make that decision based on the strength we see in that market and the ability to get a contract for that rig is based on the customers confidence that we can effectively put it back to work with a good clue and deliver operations for them against any rig in the market.

Got you, makes sense. And we've also started to see some consolidation in the market; maybe it's a bit premature to comment on it specific to Seadrill just because you haven't even gone through the restructuring process yet but are those kind of deals -- one, are there more of those available out there do you think? And two, are they sufficient in terms of the ability to get this market back in balance ultimately?

Well, I'm not going to comment on specific deals because you would have to ask the folks who do in most deals but although I'd say in general for the market, I think it's very, very positive. For some folks M&A is a result of their meeting to renew that fleet and go through a fleet renewal process wherein the folks are in position that we have a young, versatile, modern fleet; so we don't have to do that for that's the reason. But in general, for the market it's good; I think having fewer rational competitors in the market will allow people to make rational decisions when it comes to reducing the supply side and scrapping some rigs that otherwise wouldn't come out of the market. I think there will be more consolidation as we go forward and I think it's good for the market in general and for the industry.

Okay, that's all for me. Thank you.

The next question comes from Lukas Daul with ABG. Please go ahead.

Thank you, good evening guys. Just following up on the Barclays reactivation; could you just sort of touch up on the scope and the cost associated with that?

Sure. To reactivate the rig, you're looking at a number of less than $10 million, of course in conjunction with that we have to look at what's coming up on the rig in the next year when there is an SBF that's going to be due later in the year. So given the fact that we wouldn't want to have to either operate the tech in regard of operations who will take the decision to accelerate some of those SVS activity. So we can be ahead of the curve when it comes to later in '18 but you know, the absolute -- the rig is say around the $10 million mark.

And the state banking stacking some of your assets as you've wrote in the report -- what is that in dollar terms?

To stack a rag, to cold stacked rig?

Yes, it's the preparation for stacking, yes.

So to go through the preservation process for a high expected [ph] floater, you're talking less than $5 million, probably around $3 million to $4 million to preserve the equipment, you seemed to be notified I was getting the right place.

Yes, okay. And the MP upgrade that you are going to take up softer run [ph], can you say what's the ballpark cost associated with that and how many rigs do you now have would earnings MPDCAT [ph].

MPD Systems all installed on the rig is around 30 million. We will, after the series have five MPD systems. We have a long history with MPD starting in Brazil where we started operating them ourselves and as I mentioned our comments have that industry leading position there. These systems are the second and third generations, we're onto our third generation in the system and these systems are modular, so while we are in store on the rig for the current operation, the way we're setting these up on the rigs, they are modular and can do move around our premium flow to fleet, so we can match it to future customer needs, so once it's on our rigs, it's not -- doesn't have to be therefore either, we have some flexibility to redeploy that elsewhere in the fleet, so it is a true capital investment.

Okay. And finally, you previously spoke about some portfolio approach to your fleet when it comes to sort of contracting rigs at this point in the cycle. And on the floater side, are you sort of still looking for more term work or do you think that maybe we are approaching a point where you could wait out than sort of wait for better pricing?

I think it very much depends, you know, again, case by case it depends on the opportunity, the market we're going into and the term. I will say some of the opportunities out in the market; let's all be honest; the rates right now are around OpEx breakeven, there are some very long-term jobs or term jobs over a couple of years with a number of years of options behind them where in order to win the work you would be required to lock in at very, very low rates and to be honest I don't think that's something we're very interested in. If we have an opportunity to lock up in a rig in a market where we see future potential or with a client for a year and a couple of years, I think that's something that we would entertain. But there is a balance to be struck and I think you correctly said it's according -- having a portfolio approach about it, it has to be the work rate, work market and what's the overall term commitment.

Okay, understood. Okay, thank you and good luck with the restructuring.

Thank you, Lukas.

[Operator Instructions] Since there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to John Roche for any closing remarks.

Thank you and thanks everyone for joining us today. This concludes Seadrill Limited's second quarter earnings call. Have a good day.

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