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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE13A-16 OR15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2019
Commission File Number333-224459
SEADRILL LIMITED
(Exact name of Registrant as specified in its Charter)
Par-la-Ville Place, 4th Floor
14Par-la-Ville Road
Hamilton HM 08 Bermuda
(441)295-6935
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form20-F or Form40-F.
Form20-F ☒ Form40-F ☐
Indicate by check mark if the registrant is submitting the Form6-K in paper as permitted by RegulationS-T Rule 101(b)(1):
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form6-K in paper as permitted by RegulationS-T Rule 101(b)(7):
Yes ☐ No ☒
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Seadrill Limited
Report on Form6-K for the nine months ended September 30, 2019
EXPLANATORY NOTE
This Form6-K contains the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the unaudited interim condensed Consolidated Financial Statements and related information and data of the Company as of and for the nine month period ended September 30, 2019.
This Form6-K is hereby incorporated by reference into our Registration Statements on (i) FormF-3 (RegistrationNo. 333-224459), and (ii) FormS-8 (RegistrationNo. 333-227101).
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 5 | |||
Interim Financial Statements (unaudited) | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-7 | ||||
F-9 |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, or the PSLRA, and are including this cautionary statement in connection therewith. The PSLRA provides safe harbor protections for forward-looking statements to encourage companies to provide prospective information about their business.
Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical or present facts or conditions.
This report on Form6-K and any other written or oral statements made by us or on our behalf may include forward-looking statements which reflect our current views with respect to future events and financial performance. The words “believe,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “plan,” “potential,” “may,” “should,” “expect” and similar expressions identify forward-looking statements.
The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including, without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies that are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.
In addition to these important factors and matters discussed elsewhere in this report on Form6-K, and in the documents incorporated by reference to this report, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include:
• | our ability to maintain relationships with suppliers, customers, employees and other third parties following our emergence from Chapter 11 proceedings; |
• | our ability to maintain and obtain adequate financing to support our business plans following our emergence from Chapter 11; |
• | factors related to the offshore drilling market, including changes in oil and gas prices and the state of the global economy on market outlook for our various geographical operating sectors and classes of rigs; |
• | supply and demand for drilling units and competitive pressure on utilization rates and dayrates; |
• | customer contracts, including contract backlog, contract commencements, contract terminations, contract option exercises, contract revenues, contract awards and rig mobilizations; |
• | the repudiation, nullification, modification or renegotiation of drilling contracts; |
• | delays in payments by, or disputes with, our customers under our drilling contracts; |
• | fluctuations in the market value of our drilling units and the amount of debt we can incur under certain covenants in our debt financing agreements; |
• | the liquidity and adequacy of cash flow for our obligations; |
• | our ability to successfully employ our drilling units; |
• | our ability to procure or have access to financing; |
• | our expected debt levels; |
• | our ability to satisfy our obligations, including certain covenants, under our debt financing agreements and if needed, to refinance our existing indebtedness; |
• | credit risks of our key customers; |
• | political and other uncertainties, including political unrest, risks of terrorist acts, war and civil disturbances, public health threats, piracy, corruption, significant governmental influence over many aspects of local economies, or the seizure, nationalization or expropriation of property or equipment; |
• | the concentration of our revenues in certain geographical jurisdictions; |
• | limitations on insurance coverage, such as war risk coverage, in certain regions; |
• | any inability to repatriate income or capital; |
• | the operation and maintenance of our drilling units, including complications associated with repairing and replacing equipment in remote locations and maintenance costs incurred while idle; |
• | newbuildings, upgrades, shipyard and other capital projects, including the completion, delivery and commencement of operation dates; |
• | import-export quotas; |
• | wage and price controls and the imposition of trade barriers; |
• | the recruitment and retention of personnel; |
• | regulatory or financial requirements to comply with foreign bureaucratic actions, including potential limitations on drilling activity, changing taxation policies and other forms of government regulation and economic conditions that are beyond our control; |
• | the level of expected capital expenditures, our expected financing of such capital expenditures, and the timing and cost of completion of capital projects; |
• | fluctuations in interest rates or exchange rates and currency devaluations relating to foreign or US monetary policy; |
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• | future losses generated from investments in associated companies or receivable balances held with associated companies; |
• | tax matters, changes in tax laws, treaties and regulations, tax assessments and liabilities for tax issues, including those associated with our activities in Bermuda, Brazil, Norway, the United Kingdom and the United States; |
• | legal and regulatory matters, including the results and effects of legal proceedings, and the outcome and effects of internal and governmental investigations; |
• | hazards inherent in the drilling industry and marine operations causing personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage, claims by third parties or customers and the suspension of operations; |
• | customs and environmental matters; and |
• | other important factors described from time to time in the reports filed or furnished by us with the SEC. |
We caution readers of this report on Form6-K not to place undue reliance on these forward-looking statements, which speak to circumstances only as at their dates. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of our financial condition and results of operations in conjunction with the interim Financial Statements presented in this report, as well as the historical Consolidated Financial Statements and related notes of Seadrill Limited included in our annual report on Form20-F filed with the SEC on March 28, 2019 (SEC FileNo. 333-224459) (the“20-F”). Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The unaudited Consolidated Financial Statements of Seadrill Limited included in this report have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”) and are presented in US Dollars.
Except where the context otherwise requires or where otherwise indicated, the terms “Seadrill,” “the Group,” “we,” “us,” “our,” “the Company” and “our Business” refer to either Seadrill Limited, any one or more of its consolidated subsidiaries, or to all such entities, and, for periods before emergence from Chapter 11 Proceedings on July 2, 2018, to Old Seadrill Limited, any one or more of its consolidated subsidiaries, or to all such entities.
References to the term “Predecessor” refers to the financial position and results of operations of Seadrill prior to, and including, July 1, 2018. This is also applicable to terms “Seadrill,” “the Group,” “we,” “us,” “our,” “the Company” or “our Business” in context of events before emergence from Chapter 11 Proceedings on July 2, 2018.
References to the term “Successor” refers to the financial position and results of operations of Seadrill after July 2, 2018. This is also applicable to terms “Seadrill,” “the Group.” “we,” “us,” “our,” “the Company” or “our Business” in context of events after emergence from Chapter 11 Proceedings on July 2, 2018.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management. Our MD&A is presented in the following sections:
• | Overview |
• | Significant developments |
• | Contract backlog |
• | Market overview and trends |
• | Results of operations |
• | Liquidity and capital resources |
• | Borrowing activities |
• | Contractual obligations |
• | Quantitative and qualitative disclosures about market risk |
• | Critical accounting estimates |
Overview
We are an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry. Our primary business is the ownership and operation of drillships, semi-submersible rigs andjack-up rigs for operations in shallow to ultra-deepwater areas in both benign and harsh environments. We contract our drilling units to drill wells for our customers on a dayrate basis. Typically, our customers are oil super-majors and major integrated oil and gas companies, state-owned national oil companies and independent oil and gas companies.
Through a number of acquisitions of companies, second-hand units and newbuildings, we have developed into one of the world’s largest international offshore drilling contractors. We own and operate 35 drilling rigs and we manage and operate 20 rigs on behalf of Seadrill Partners, SeaMex, Sonangol and Northern Drilling.
Significant Developments for the period from January 1, 2019 through and including September 30, 2019
Receipt of overdue receivable
In January 2019, we received $26 million for an overdue receivable which was fully provided in the Predecessor company. This was recognized as other operating income in our first quarter 2019 results.
Sonadrill joint venture
In February 2019, we entered into an agreement to establish a 50:50 joint venture with Sonangol called Sonadrill. The joint venture will operate four drillships, focusing on opportunities in Angolan waters. Each of the joint venture parties will bareboat two drillships into Sonadrill and we will manage and operate all the units. Seadrill is also managing the delivery and mobilization to Angolan waters of the two Sonangol drillships, from the shipyard in Korea, under a separate commissioning and mobilization agreement with Sonangol.
In October 2019, Seadrill and Sonangol contributed $50 million equity into the joint venture. On October 1, 2019, the first bareboat and management agreements for the Sonangol drilling unit, Libongos, became effective. The rig commenced its first drilling contract on October 10, 2019.
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Tender offer of Senior Secured Notes
In March 2019 we launched a consent solicitation process to amend the senior secured notes indenture which included a subsequent tender offer to purchase back $311 million of principal amount outstanding. In April 2019, we repurchased $311 million of principal senior secured notes for $342 million. The $31 million additional cash paid represents the 7% purchase premium and settlement of accruedpayment-in-kind and cash interest on the notes prior to purchase.
Cancellation of Dalian Newbuilds
The Newbuild contracts for the remaining twojack-up rigs from the Dalian shipyard, theWest Dione and West Mimas, were terminated in February 2019 and April 2019, respectively. The Seadrill contracting parties have commenced arbitration proceedings in respect of the eight newbuildjack-up rigs previously contracted to be delivered from the Dalian shipyard and are claiming for repayment of yard installments plus interest and damages. Seadrill has also filed claims for these amounts as part of the Dalian insolvency proceedings in China. Dalian has maintained it has a damages claim in respect of each of the rigs. The newbuild contracts are all with limited liability subsidiaries of Seadrill and there are no parent company guarantees.
Joint venture with Gulf Drilling International
We have entered into an agreement to establish a 50:50 joint venture (“Gulfdrill”) with Gulf Drilling International (“GDI”), which will provide drilling services in Qatar. GDI has been awarded five long-term drilling contracts in Qatar which it will novate to Gulfdrill. We will lease two of our benign environmentjack-up rigs,West Castor andWest Telesto, to GulfDrill for use under these contracts and have secured bareboat charters for a further three rigs from a third-party shipyard. GDI will manage and operate all rigs on behalf of the joint venture.
Contract Backlog
We define contract backlog as the maximum contractual operating dayrate multiplied by the number of days remaining in the firm contract period, excluding revenues for mobilization, demobilization and contract preparation or other incentive provisions.
The contract backlog for our fleet was as follows as at the dates specified:
(In $ millions) | ||||||||
Contract backlog | September 30, 2019 | December 31, 2018 | ||||||
Floaters | 409 | 630 | ||||||
Jack-ups | 1,343 | 1,457 | ||||||
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Total | 1,752 | 2,087 | ||||||
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Our contract backlog includes only firm commitments represented by signed drilling contracts. The full contractual operating dayrate may differ to the actual dayrate we ultimately receive. For example, an alternative contractual dayrate, such as a waiting on weather rate, repair rate, standby rate or force majeure rate, may apply under certain circumstances. The contractual operating dayrate may also differ to the actual dayrate we ultimately receive because of several other factors, including rig downtime or suspension of operations. In certain contracts, the dayrate may be reduced to zero if, for example, repairs extend beyond a stated period.
We project our September 30, 2019 contract backlog to unwind over the following periods:
(In $ millions) | Period ended December 31, | |||||||||||||||||||
Contract backlog | Total | 2019 | 2020 | 2021 | 2022+ | |||||||||||||||
Floaters | 409 | 137 | 263 | 9 | — | |||||||||||||||
Jack-ups | 1,343 | 83 | 177 | 169 | 914 | |||||||||||||||
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Total | 1,752 | 220 | 440 | 178 | 914 | |||||||||||||||
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The actual amounts of revenues earned and the actual periods during which revenues are earned will differ from the amounts and periods shown in the tables above due to various factors, including shipyard and maintenance projects, unplanned downtime and other factors that result in lower applicable dayrates than the full contractual operating dayrate. Additional factors that could affect the amount and timing of actual revenue to be recognized include customer liquidity issues and contract terminations, which are available to our customers under certain circumstances.
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Market Overview and Trends
The below table shows the average oil price for the nine months ended September 30, 2019 and for each year ended December 31 over the period 2015 to 2018.
Dec-2015 | Dec-2016 | Dec-2017 | Dec-2018 | Sep-2019 | ||||||||||||||||
Average Brent oil price ($/bbl) | 54 | 45 | 55 | 71 | 65 |
We have seen a stabilization in the oil and gas market in 2019 with the Brent oil price consistent at $60 per barrel for most of the period. Combined with efficiency improvements across the industry, this stabilization has led to continued improved economics for our customers, which has in turn led to increased tendering activity and a positive trend in dayrates. We expect this trend to continue if the price of oil remains stable and our customers continue to invest in projects.
The below table shows the global number of rigs on contract and marketed utilization at September 30, 2019 and for each of the four preceding years ending December 31.
Dec-2015 | Dec-2016 | Dec-2017 | Dec-2018 | Sep-2019 | ||||||||||||||||
Contracted rigs | ||||||||||||||||||||
Harsh environment floater | 45 | 35 | 30 | 31 | 35 | |||||||||||||||
Benign environment floater | 196 | 139 | 120 | 116 | 119 | |||||||||||||||
Jack-up(1) | 180 | 152 | 154 | 168 | 200 | |||||||||||||||
Marketed utilization | ||||||||||||||||||||
Harsh environment floater | 93 | % | 81 | % | 83 | % | 85 | % | 87 | % | ||||||||||
Benign environment floater | 83 | % | 71 | % | 71 | % | 73 | % | 77 | % | ||||||||||
Jack-up(1) | 83 | % | 70 | % | 70 | % | 74 | % | 84 | % |
(1) | Jack-up rigs capable of operating in water depth greater than 350 feet. |
Floater
During 2019 we have seen an increase in the number of opportunities for floaters and net floater supply has continued to decline which has improved utilization. Marketed utilization continues to improve, particularly in the harsh environment where there is high demand for high specification units relative to their supply. There is still an excess supply of benign environment units which has slowed the recovery in this market. However, we see pockets of strength forhigh-end ultra deepwater drillships with marketed utilization trending ahead.
While we see improving trends in the forward market we expect economics will not justify reactivations or newbuild rigs entering the market in 2020. There are a number of older units with nofollow-on work identified which we expect will be prime scrapping candidates, as classing expenditures can be costly and will only be completed if the economic future profile satisfies this cost.
Jack-up
We continue to see positive trends in thejack-up market with utilization and dayrates improving. The market preference for premium units continues, resulting in a bifurcation in rates and utilization for these assets. The demand and rates for premium assets has seen newbuild units begin to enter the market. As newer rigs with high specifications enter thejack-up market, this will lead to the accelerated attrition of older units.
Results of Operations
The tables included below set out financial information for the three and nine months ended September 30, 2019 and the period from July 2, 2018 through September 30, 2018 (Successor) (“September 2018 successor period”) and the period from January 1, 2018 through July 1, 2018 (Predecessor) (“2018 predecessor period”). The September 2018 successor period and the 2018 predecessor period are distinct reporting periods because of the application of fresh start accounting upon emergence from Chapter 11 bankruptcy on July 2, 2018. These periods may not be comparable to each other.
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Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Operating revenues | 367 | 249 | 990 | 249 | 712 | |||||||||||||||
Operating expenses | (435 | ) | (355 | ) | (1,231 | ) | (355 | ) | (918 | ) | ||||||||||
Other operating items | 10 | — | 39 | — | (407 | ) | ||||||||||||||
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Operating loss | (58 | ) | (106 | ) | (202 | ) | (106 | ) | (613 | ) | ||||||||||
Interest expense | (118 | ) | (131 | ) | (372 | ) | (131 | ) | (38 | ) | ||||||||||
Reorganization items | — | (5 | ) | — | (5 | ) | (3,365 | ) | ||||||||||||
Other income and expense | (342 | ) | (1 | ) | (458 | ) | (1 | ) | 161 | |||||||||||
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Loss before income taxes | (518 | ) | (243 | ) | (1,032 | ) | (243 | ) | (3,855 | ) | ||||||||||
Income tax (expense)/benefit | (3 | ) | (2 | ) | 9 | (2 | ) | (30 | ) | |||||||||||
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Net loss | (521 | ) | (245 | ) | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||||||
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1) Operating revenues
Operating revenues consist of contract revenues, reimbursable revenues and other revenues. We have analyzed operating revenues between these categories in the table below:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Contract revenues | 266 | 217 | 774 | 217 | 619 | |||||||||||||||
Reimbursable revenues | 72 | 11 | 142 | 11 | 21 | |||||||||||||||
Other revenues | 29 | 21 | 74 | 21 | 72 | |||||||||||||||
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Total operating revenues | 367 | 249 | 990 | 249 | 712 | |||||||||||||||
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a) Contract revenues
Contract revenues represent the revenues that we earn from contracting our drilling units to customers, primarily on a dayrate basis. We have analyzed contract revenues by segment in the table below.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 177 | 140 | 515 | 140 | 437 | |||||||||||||||
Jack-ups | 89 | 77 | 259 | 77 | 182 | |||||||||||||||
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Contract revenues | 266 | 217 | 774 | 217 | 619 | |||||||||||||||
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Contract revenues are primarily driven by the average number of rigs under contract during a period, the average dayrates earned and economic utilization achieved by those rigs under contract. We have set out movements in these key indicators of performance in the sections below.
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i. Average number of rigs on contract
We calculate the average number of rigs on contract by dividing the aggregate days our rigs were on contract during the reporting period by the number of days in that reporting period. The average number of rigs on contract for the periods covered is set out in the below table:
Successor | Predecessor | |||||||||||||||||||
(Number) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 7 | 7 | 7 | 7 | 10 | |||||||||||||||
Jack-ups | 10 | 9 | 9 | 9 | 8 | |||||||||||||||
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Average number of rigs on contract | 17 | 16 | 16 | 16 | 18 | |||||||||||||||
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The average number of floaters on contract for the three month period ended September 30, 2019 was the same as for the period from July 2, 2018 through September 30, 2018 (Successor) (“September 2018 successor period”) as the impact of theSevan Louisiana returning to operations in August 2019 was offset by theWest Gemini completing its contract with ENI during the same month. The average number ofjack-ups on contract for the three months ended September 30, 2019 increased by one compared to the September 2018 successor period. This was primarily due to theWest Castor returning to operations in March 2019 after being warm stacked since July 2018.
The average number of floaters on contract for the nine month period ended September 30, 2019 was the same as for the September 2018 successor period. The average number ofjack-ups on contract for the nine months ended September 30, 2019 was the same as for the September 2018 successor period due to theWest Castor returning to operations in March 2019, offset by idle time on theWest Cressida during the first half of 2019.
The average number of floaters on contract decreased by three between the period from January 1, 2018 through July 1, 2018 (Predecessor) (“2018 predecessor period”) and the September 2018 successor period. This was primarily due to theWest Carina andSevan Brasil completing contracts with Petrobras in Brazil and theWest Eclipse completing its contract with ExxonMobil in Angola. The average number ofjack-ups on contract increased by one between the 2018 predecessor period and September 2018 successor period as theWest Cressida andWestTelestostarted work on new contracts in May 2018 and June 2018, offset by the West Castorcompleting a contract in June 2018.
ii. Average contractual dayrates
We calculate the average contractual dayrate by dividing the aggregate contractual dayrates during a reporting period by the aggregate number of rig operating days for the reporting period. We have set out the average contractual dayrates for the periods presented in the below table:
Successor | Predecessor | |||||||||||||||||||
(In $ thousands) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 264 | 241 | 245 | 241 | 279 | |||||||||||||||
Jack-ups | 103 | 99 | 108 | 99 | 131 |
The average contractual dayrate for floaters increased by $23k between the three months ended September 30, 2019 and the September 2018 successor period. TheWest Gemini, West Hercules andWest Phoenix were all on higher dayrates for the three months ended September 30, 2019 compared to the previous year. The average contractual dayrate forjack-ups increased by $4k between the three months ended September 30, 2019 and the September 2018 successor period. This was primarily due to theWest Elara moving to a higher dayrate on its contract with ConocoPhillips from October 2018, offset by a lower dayrate for theAOD I after its contract with Saudi Aramco was extended in July 2019.
The average contractual dayrate for floaters for the nine month period ended September 30, 2019 was $4k higher than the September 2018 successor period. The average contractual dayrate forjack-ups for the nine month period ended September 30, 2019 was $9k higher than the September 2018 successor period. This was primarily due to theWest Elara moving to a higher dayrate on its contract with ConocoPhillips from October 2018.
The average contractual dayrate for floaters decreased by $38k between the 2018 predecessor period and September 2018 successor period due to theWest Carina andWest Eclipse completing legacy contracts for Petrobras and ExxonMobil, respectively in July 2018. The average contractual dayrate forjack-ups decreased by $32k between the 2018 predecessor period and September 2018 successor period due to theWest Elaraand West Linusmoving to lower dayrates as part of securing long-term contracts with ConocoPhillips and the West Castorcompleting a legacy contract.
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iii. Economic utilization for rigs on contract
We define economic utilization as dayrate revenue earned during the period, excluding bonuses, divided by the contractual operating dayrate multiplied by the number of days on contract in the period. If a drilling unit earns its full operating dayrate throughout a reporting period, its economic utilization would be 100%. However, there are many situations that give rise to a dayrate being earned that is less than the contractual operating rate. In such situations, economic utilization reduces below 100%.
As set out in the below table, economic utilization has remained in the range of 93% to 98% for each of the periods presented.
Successor | Predecessor | |||||||||||||||||||
(Percentage) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 93 | % | 98 | % | 93 | % | 98 | % | 95 | % | ||||||||||
Jack-ups | 93 | % | 97 | % | 96 | % | 97 | % | 98 | % |
The economic utilization for floaters has decreased for the three and nine months ended September 30, 2019 to 93%. This was primarily due to operational downtime on theSevan Louisiana in early 2019 anddowntime on West Saturn andWestPhoenix in the three months ended September 30, 2019.
The economic utilization forjack-ups has decreased for the three and nine months ended September 30, 2019 to 93% and 96%, respectively. This was primarily due to theWest Linus completing its5-year class survey during the three months ended September 30, 2019.
b) Reimbursable revenues
We generally receive reimbursements from our customers for the purchase of supplies, equipment, personnel and other services provided at their request in accordance with a drilling contract. We classify such revenues as reimbursable revenues.
Reimbursable revenues for the three months ended September 30, 2019 included revenue of $41 million (nine months ended September 30, 2019: $79 million) for a contract to perform the first mobilization of theWest Mira and theWest Bollsta for Northern Drilling and $22 million (nine months ended September 30, 2019: $34 million) for a contract to perform the first mobilization of theLibongos andQuenguela for Sonangol.
c) Other revenues
Other revenues include the following:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Related party revenues(i) | 28 | 21 | 71 | 21 | 43 | |||||||||||||||
Amortization of unfavorable contracts(ii) | — | — | — | — | 21 | |||||||||||||||
Other(iii) | 1 | — | 3 | — | 8 | |||||||||||||||
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Total other revenues | 29 | 21 | 74 | 21 | 72 | |||||||||||||||
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i. Related party revenues
Related party revenues represent income from management and technical support services provided to Seadrill Partners, SeaMex and Northern Drilling.
ii. Amortization of unfavorable contracts
We recognize an intangible asset or liability if we acquire a drilling contract in a business combination and the contract had a dayrate that was above or below market rates at the time of the business combination. For the periods before emergence from Chapter 11 we classified the amortization of these intangible assets or liabilities within other revenues. Post-emergence and after the application of fresh start accounting, we have applied a new accounting policy which classifies amortization of these intangible assets and liabilities within operating expenses.
iii. Other
Other revenues for the three and nine months ended September 30, 2019 consisted of management fees for the contract to perform the first mobilization of the Sonangol rigsLibongos andQuenguela.
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Other revenues for the 2018 predecessor period included early termination fee revenue for theWestPegasusoffset by the reversal of third party management fee revenue referred above.
2) Operating expenses
Total operating expenses include vessel and rig operating expenses, amortization of favorable and unfavorable contracts, reimbursable expenses, depreciation of drilling units and equipment, and selling, general and administrative expenses. We have analyzed operating expenses between these categories in the table below:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Vessel and rig operating expenses | (188 | ) | (162 | ) | (569 | ) | (162 | ) | (407 | ) | ||||||||||
Reimbursable expense | (71 | ) | (10 | ) | (140 | ) | (10 | ) | (20 | ) | ||||||||||
Depreciation | (106 | ) | (125 | ) | (318 | ) | (125 | ) | (391 | ) | ||||||||||
Amortization of intangibles | (37 | ) | (27 | ) | (110 | ) | (27 | ) | — | |||||||||||
Selling, general and administrative expenses | (33 | ) | (31 | ) | (94 | ) | (31 | ) | (100 | ) | ||||||||||
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Total operating expenses | (435 | ) | (355 | ) | (1,231 | ) | (355 | ) | (918 | ) | ||||||||||
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i. Vessel and rig operating expenses
Vessel and rig operating expenses represent the costs we incur to operate a drilling unit that is either in operation or stacked. This includes the remuneration of offshore crews, rig supplies, expenses for repair and maintenance and onshore support costs.
For periods prior to emergence from Chapter 11 we classified certain operational support and information technology related costs incurred by our support functions within selling, general and administrative expenses. As part of fresh start accounting and for periods after emergence we classified these costs within vessel and rig operating expenses. Vessel and rig operating expenses for the September 2018 successor period, 2018 predecessor period and 2019 successor periods are therefore not comparable.
We have analyzed vessel and rig operating expenses by segment in the table below.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | (117 | ) | (103 | ) | (367 | ) | (103 | ) | (239 | ) | ||||||||||
Jack-ups | (57 | ) | (55 | ) | (163 | ) | (55 | ) | (158 | ) | ||||||||||
Other | (14 | ) | (4 | ) | (39 | ) | (4 | ) | (10 | ) | ||||||||||
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Vessel and rig operating expenses | (188 | ) | (162 | ) | (569 | ) | (162 | ) | (407 | ) | ||||||||||
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Vessel and rig expenses for the forjack-ups for the 2018 predecessor period included a bad debt expense of $48 million relating to an overdue receivable, subsequently received after emergence within “Other operating income.”
Excluding the effect of thisone-time item, vessel and rig operating expenses are mainly driven by rig activity. On average, we incur higher vessel and rig operating expenses when a rig is operating compared to when it is stacked. For stacked rigs we incur higher vessel and rig expenses for warm stacked rigs compared to cold stacked rigs. We incurone-time costs for activities such as preservation and severance when we cold stack a rig. We also incur significant costs whenre-activating a rig from cold stack, a proportion of which is expensed as incurred.
Vessel and rig operating expenses allocated to the “Other” segment represent rig related onshore costs incurred in connection with our contracts to provide technical support services to Seadrill Partners, Seamex, Sonangol and Northern Drilling.
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We have analyzed the average number of rigs by status and segment over the reporting period in the table below:
Successor | Predecessor | |||||||||||||||||||
(Number of rigs) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | ||||||||||||||||||||
Operating | 7 | 7 | 7 | 7 | 9 | |||||||||||||||
Warm stacked | 2 | 3 | 2 | 3 | 1 | |||||||||||||||
Cold stacked | 10 | 9 | 10 | 9 | 9 | |||||||||||||||
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Average number of Floaters | 19 | 19 | 19 | 19 | 19 | |||||||||||||||
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Operating | 10 | 9 | 9 | 9 | 8 | |||||||||||||||
Warm stacked | — | 1 | 1 | 1 | 3 | |||||||||||||||
Cold stacked | 6 | 6 | 6 | 6 | 5 | |||||||||||||||
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Average number ofJack-ups | 16 | 16 | 16 | 16 | 16 | |||||||||||||||
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For the three and nine months ended September 30, 2019 and the September 2018 successor period the number of cold stacked floaters increased by one and warm stacked floaters decreased by one. Between these dates theSevan Brasil andWest Eclipse were cold stacked having been warm stacked in 2018. This is offset by theSevan Louisiana which was reactivated from cold stack and theWest Gemini went from operating to warm stack in 2019.
For the September 2018 successor period and the 2018 predecessor period the number of cold stacked floaters was the same and the number of warm stacked rigs increased by two. Between these dates theWest Eclipse andWest Carina came off contract and were warm stacked.
For the three months ended September 30, 2019 and the September 2018 successor period the number of cold stackedjack-ups was the same and the number of warm stacked floaters decreased by one. Between these dates theWest Castor started a new contract with Staatsolie having been warm stacked in the September 2018 successor period.
For the nine months ended September 30, 2019 and the September 2018 successor period the number of cold stackedjack-ups was the same and the number of warm stacked floaters was the same. Between these dates theWest Castor started a new contract with Staatsolie having been warm stacked in the September 2018 successor period offset by theWest Cressida being warm stacked for seven months of the nine months ended September 30, 2019 whilst it was on contract in the September 2018 successor period.
For the September 2018 successor period and the 2018 predecessor period the number of cold stackedjack-ups increased by one and the number of warm stacked rigs decreased by two. Between these dates theWest Ariel went from warm stacked to cold stacked and theWestCressidastarted a new contract with Ophir having been warm stacked.
ii. Depreciation of drilling units and equipment
We record depreciation expense to reduce the carrying value of drilling unit and equipment balances to their residual value over their expected remaining useful economic lives. We reduced the carrying value of drilling unit and equipment balances to their fair values when we applied fresh start accounting on emergence from Chapter 11. The depreciation expense for the three and nine months ended September 30, 2019 is therefore based on lower carrying values of drilling units and equipment and is not comparable to the level of depreciation expense for the September 2018 successor period and the 2018 predecessor period.
iii. Amortization of intangibles
For periods before emergence from Chapter 11 we recognized intangible assets or liabilities only where we acquired a drilling contract in a business combination. The accounting policy we applied in the Predecessor period was to classify amortization for such contracts within other revenues. On emergence from Chapter 11 and application of fresh start accounting, we recognized intangible assets and liabilities for favorable and unfavorable drilling contracts at fair value. We amortize these assets and liabilities over the remaining contract period and classify the amortization under operating expenses.
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iv. Selling, general and administrative expenses
Selling, general and administrative expenses include the cost of our corporate and regional offices, certain legal and professional fees as well as the remuneration and other compensation of our officers, directors and employees engaged in central management and administration activities. Legal and professional fees incurred for our Chapter 11 reorganization post-petition were classified under reorganization items. As discussed above, we changed the classification of certain support function costs for periods after emergence from selling, general and administrative expenses to vessel and rig operating expenses. Selling, general and administrative expenses are therefore not comparable to between the Successor and Predecessor periods.
Selling, general and administrative expenses for the three months ended September 30, 2019, the September 2018 successor period and the 2018 predecessor period were $33 million, $31 million and $100 million, respectively. For the three months ended September 30, 2019 this includes $12 million (September 2018 successor period: $14 million) related to rigs we manage for our partners, which is charged out on a cost plus basis.
Selling, general and administrative expenses for the nine months ended September 30, 2019 were $94 million. For the nine months ended September 30, 2019 this includes $28 million (2018 predecessor period: $27 million and September 2018 successor period: $14 million) related to rigs we manage for our partners, which is charged out on a cost plus basis.
3) Other operating items
Other operating items for the three months ended September 30, 2019 represents the settlement of an insurance claim in relation to the subsea equipment incident on theSevan Louisiana. The nine months ended September 30, 2019 further includes cash received for the recovery of a receivable balance previously written down to nil on fresh start and the settlement with Jurong Shipyard regarding a long outstanding builders credit issue.
Other operating items for the September 2018 successor period and the 2018 predecessor period represents an impairment charge of $414 million against the West Alpha,West Navigator andWest Epsilon, following an assessment of recoverability, as we determined that the continuing downturn in the offshore drilling market was an indicator of impairment on certain assets. This was slightly offset by amounts recognized for contingent consideration from the sales of theWest Vela to Seadrill Partners in 2015. On emergence from Chapter 11 we recognized receivables equal to the fair value of expected future cash flows under these arrangements and have therefore not recognized further income in the Successor periods.
4) Other income and expense
We have analyzed other income and expense into the following components:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Interest income(i) | 17 | 22 | 56 | 22 | 19 | |||||||||||||||
Interest expense(ii) | (118 | ) | (131 | ) | (372 | ) | (131 | ) | (38 | ) | ||||||||||
Loss on impairment of investments(iii) | (302 | ) | — | (302 | ) | — | — | |||||||||||||
Share in results from associated companies(iv) | (33 | ) | (16 | ) | (98 | ) | (16 | ) | 149 | |||||||||||
(Loss)/gain on derivative financial instruments(v) | (4 | ) | 3 | (37 | ) | 3 | (4 | ) | ||||||||||||
Net loss on debt extinguishment(vi) | — | — | (22 | ) | — | — | ||||||||||||||
Foreign exchange loss(vii) | (8 | ) | (3 | ) | (6 | ) | (3 | ) | — | |||||||||||
Loss on marketable securities(viii) | (10 | ) | (3 | ) | (45 | ) | (3 | ) | (3 | ) | ||||||||||
Other financial items | (2 | ) | (4 | ) | (4 | ) | (4 | ) | — | |||||||||||
Reorganization items(ix) | — | (5 | ) | — | (5 | ) | (3,365 | ) | ||||||||||||
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Other income and expense | (460 | ) | (137 | ) | (830 | ) | (137 | ) | (3,242 | ) | ||||||||||
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i. Interest Income
Interest income relates to interest earned on cash deposits and other financial assets. During the period we were in Chapter 11 (September 12, 2017 to July 1, 2018), we classified interest income on cash held by filed entities within reorganization items. This totaled $6 million in the 2018 Predecessor period.
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ii. Interest expense
We have analyzed interest expense into the following components:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Cash andpayment-in-kind interest on debt facilities | (106 | ) | (120 | ) | (336 | ) | (120 | ) | (37 | ) | ||||||||||
Unwind of discount on debt | (12 | ) | (11 | ) | (36 | ) | (11 | ) | — | |||||||||||
Loan fee amortization | — | — | — | — | (1 | ) | ||||||||||||||
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Interest expense | (118 | ) | (131 | ) | (372 | ) | (131 | ) | (38 | ) | ||||||||||
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Cash andpayment-in-kind interest on debt facilities
We incur cash andpayment-in-kind interest on our debt facilities. This is summarized in the table below.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Senior credit facilities | (79 | ) | (80 | ) | (246 | ) | (80 | ) | (116 | ) | ||||||||||
Less: adequate protection payments | — | — | — | — | 104 | |||||||||||||||
Senior secured notes | (15 | ) | (26 | ) | (54 | ) | (26 | ) | — | |||||||||||
Debt of consolidated variable interest entities | (12 | ) | (14 | ) | (36 | ) | (14 | ) | (25 | ) | ||||||||||
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Cash andpayment-in-kind interest | (106 | ) | (120 | ) | (336 | ) | (120 | ) | (37 | ) | ||||||||||
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We are charged interest on our senior credit facilities at LIBOR plus a margin. This margin increased by one percentage point when we emerged from Chapter 11. There has also been an increase in LIBOR rates. Both factors increased the effective interest rate on our senior credit facilities.
During the period we were in Chapter 11, we recorded contractual interest payments against debt held as subject to compromise (“adequate protection payments”) as a reduction to debt in the Consolidated Balance Sheet and not as an expense to the Consolidated Statement of Operations. We then expensed the adequate protection payments on emergence from Chapter 11 on July 2, 2018.
On July 15, 2019, $18 million of accruedpayment-in-kind interest on our senior secured notes were compounded and additional notes were issued. At September 30, 2019, we had $476 million of principal outstanding of the $880 million senior secured notes that we issued on emergence from Chapter 11. We incurred 4% cash interest and 8%payment-in-kind interest on these notes.
Our Consolidated Balance Sheet includes $633 million of debt facilities held by subsidiaries of Ship Finance that we consolidate as variable interest entities. Our interest expense includes the interest incurred by these entities.
Unwind of discount on debt
On emergence from Chapter 11 and application of fresh start accounting, we recorded a discount against our debt to reduce its carrying value to equal its fair value. The debt discount is unwound over the remaining terms of the debt facilities.
Loan fee amortization
We amortize loan issuance costs over the expected term of the associated debt facility.
iii. Impairment of Seadrill’s investments in Seadrill Partners
On September 6, 2019, Seadrill Partners announced its suspension from trading on the NYSE. This was considered an other than temporary impairment indicator which led to an impairment review being performed in respect of the Seadrill investment in Seadrill Partners. The result of this exercise was a total impairment charge of $302 million across the investments we hold in Seadrill Partners.
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iv. Share in results from associated companies
Share in results from associated companies represents our share of earnings or losses in our investments accounted under the equity method. We reduced the carrying value of our equity method investments when we applied fresh start accounting on emergence from Chapter 11. This led to differences between (i) the book value of rig and contract asset balances recorded in the balance sheets of our equity method investees and (ii) the implied value of these assets in our consolidated balance sheet. We refer to these differences as “basis differences.” We amortize basis differences over the expected lives of the associated assets or liabilities. We classify this amortization within the “share in results of associated companies” line item in our Consolidated Statement of Operations. Therefore, the share in results from associated companies for the three and nine months ended September 30, 2019 is not comparable to the share in results from associated companies for the September 2018 successor period and the 2018 predecessor period.
We have analyzed our share of results in associated companies by equity method investment below:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Seadrill Partners | (34 | ) | (27 | ) | (112 | ) | (27 | ) | 99 | |||||||||||
Seamex | (1 | ) | (3 | ) | (14 | ) | (3 | ) | 4 | |||||||||||
Seabras Sapura | 2 | 14 | 28 | 14 | 46 | |||||||||||||||
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Share of results from associated companies | (33 | ) | (16 | ) | (98 | ) | (16 | ) | 149 | |||||||||||
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The share in after tax loss of associated companies for the three and nine months ended September 30, 2019 reflected our share of theafter-tax losses of our investments in Seadrill Partners and Seamex offset by our share of profits in the Seabras Sapura joint venture. This included a net expense for the amortization of basis differences for the three months ended September 30, 2019 of $13 million (nine months ended September 30, 2019: $63 million).
The share inafter-tax profit for the September 2018 successor period and the 2018 predecessor period reflected our share of theafter-tax loss of our investments in Seadrill Partners, Seamex and Seabras Sapura Joint venture.
v. (Loss)/gain on derivative financial instruments
On May 11, 2018, we bought an interest rate cap from Citigroup for $68 million. The interest rate cap mitigates our exposure to future increases in LIBOR over 2.87% from our floating bank debt. We also have a conversion option on a bond issued to us by Archer Limited. We record both of these assets at fair value.
The loss on derivatives for the three and nine months ended September 30, 2019 of $4 million and $37 million respectively is due to a fair value loss on our interest rate cap following a decrease in forward interest rates. The Archer conversion option remains immaterial as the current Archer stock price is below our conversion option price.
The gain on derivatives in the September 2018 successor period of $3 million respectively comprised a $11 million fair value gain on our interest rate cap caused by an increase in forward interest rates offset by a $8 million fair value loss on the Archer conversion option caused by a decrease in the Archer share price.
The loss on derivatives in the 2018 predecessor period of $4 million comprised a $6 million fair value loss on our interest rate cap driven by a decrease in forward interest rates offset by a $2 million fair value gain on the conversion option of the Archer convertible bond caused by an increase in the Archer share price.
vi. Net loss on debt extinguishment
On April 10, 2019, we purchased back $311 million of the senior secured notes issued on emergence at a 7% premium. The premium paid was recognized as a loss on debt extinguishment.
vii. Foreign exchange loss
Foreign exchange losses relate to exchange differences on the settlement or revaluation of monetary balances denominated in currencies other than the US Dollar.
viii. Loss on marketable securities
The loss on marketable securities reflect the changes in mark to market movements in our investments in Seadrill Partners common units and our Archer shares.
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ix. Reorganization items
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Advisory and professional fees | — | (5 | ) | — | (5 | ) | (187 | ) | ||||||||||||
Gain or loss onpre-petition allowable claims | — | — | — | — | 2,958 | |||||||||||||||
Interest income on surplus cash invested | — | — | — | — | 6 | |||||||||||||||
Fresh Start valuation adjustments | — | — | — | — | (6,142 | ) | ||||||||||||||
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Total reorganization items | — | (5 | ) | — | (5 | ) | (3,365 | ) | ||||||||||||
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Prior to emergence from Chapter 11, reorganization items included professional and advisory fees for post-petition Chapter 11 expenses, adjustments to the carrying value of liabilities subject to their estimated allowed claims amount, gains on liabilities subject to compromise, fresh start adjustments and interest income generated from surplus cash invested. We have also classified professional and advisory fees that we incurred post-emergence, but relate to our Chapter 11 filing, within reorganization items.
7) Income taxes
Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities related to our ownership and operation of drilling units and may vary significantly depending on jurisdictions and contractual arrangements. In most cases the calculation of taxes is based on net income or deemed income, the latter generally being a function of gross revenue.
Liquidity and Capital Resources
1) Introduction
We operate in a capital-intensive industry. We have historically funded acquisitions of drilling units and investments in associated companies through a combination of debt and equity issuances and from cash generated from operations. Although we restructured our debt through the Chapter 11 Reorganization, we remain a highly leveraged company with outstanding borrowings on our external debt facilities totaling $6.8 billion as of September 30, 2019.
Our liquidity requirements relate to servicing our debt, making capital investments, funding working capital requirements and maintaining adequate cash reserves to mitigate the effects of fluctuations in operating cash flows. Most of our contract and other revenues are received between 30 and 60 days in arrears, and most of our operating costs are paid monthly. We believe our current resources, available cash and cash from operations will be sufficient to meet our working capital requirements and other obligations as they fall due for at least the next twelve months from the date of this report.
Our funding and treasury activities are conducted in accordance with our corporate policies, which aim to maximize returns while maintaining appropriate liquidity for our operating requirements. Cash and cash equivalents are held mainly in U.S. dollars, with lesser amounts held in Norwegian Kroner, Brazilian Reais and Great British Pounds.
This section discusses the most important factors affecting our liquidity and capital resources.
2) Liquidity
Our level of liquidity fluctuates depending on a number of factors. These include, among others, our contract backlog, economic utilization achieved, average contract day rates, timing of accounts receivable collection, timing of payments for operating costs and other obligations.
Our liquidity comprises cash and cash equivalents. The below table shows cash and restricted cash balances for each period presented.
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Cash and cash equivalents | 1,216 | 1,542 | ||||||
Restricted cash | 229 | 461 | ||||||
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We have shown our sources and uses of cash by category of cash flow in the below table.
Successor | Predecessor | |||||||||||
(In $ millions) | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||
Cash flows from operating activities | (200 | ) | (59 | ) | (213 | ) | ||||||
Cash flows from investing activities | (3 | ) | 48 | 149 | ||||||||
Cash flows from financing activities | (355 | ) | (29 | ) | 887 | |||||||
Effect of exchange rate changes in cash and cash equivalents | — | (1 | ) | (5 | ) | |||||||
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Change in period | (558 | ) | (41 | ) | 818 | |||||||
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This reconciles to the total cash and cash equivalents, including restricted, which is as follows:
Successor | Predecessor | |||||||||||
(In $ millions) | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||
Opening cash and cash equivalents, included restricted | 2,003 | 2,177 | 1,359 | |||||||||
Change in period | (558 | ) | (41 | ) | 818 | |||||||
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Closing cash and cash equivalents, included restricted | 1,445 | 2,136 | 2,177 | |||||||||
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a) Cash flows from operating activities
Cash flows from operating activities can include cash receipts from customers, cash paid to employees and suppliers (except for capital expenditure), interest and dividends received (except for returns of capital), interest paid, income taxes paid and other operating cash payments and receipts.
We calculate cash flows from operating activities using the indirect method as summarized in the below table.
Successor | Predecessor | |||||||||||
(In $ millions) | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||
Net loss | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||
Adjustments to reconcile net loss to net cash provided by operating activities(1) | 928 | 175 | 3,808 | |||||||||
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Net loss after adjustments | (95 | ) | (70 | ) | (77 | ) | ||||||
Distributions received from associated company | 11 | 7 | 17 | |||||||||
Payments for long-term maintenance | (73 | ) | (36 | ) | (78 | ) | ||||||
Settlement ofpayment-in-kind interest on senior secured notes | (39 | ) | — | — | ||||||||
Changes in operating assets and liabilities | (4 | ) | 40 | (75 | ) | |||||||
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Net cash flows from operating activities | (200 | ) | (59 | ) | (213 | ) | ||||||
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(1) | Includes depreciation, amortization of favorable and unfavorable contracts, share of results of joint ventures and associates, impairment loss on associated companies, unrealized gains and losses on derivatives, unrealized gains and losses on marketable securities, deferred tax expense and othernon-cash items shown under thesub-heading “adjustments to reconcile net loss to net cash provided by operating activities” in the Consolidated Statements of Cash Flows presented in the Consolidated Financial Statements included in this report. |
Market conditions in the offshore drilling industry in recent years have led to lower levels of spending for offshore exploration and development. This has negatively affected our revenues, profitability and operating cash flows. During the nine months ended September 30, 2019 our cash flows from operating activities were negative, as cash receipts from customers were insufficient to cover operating costs, payments for long-term maintenance of our rigs, interest payments and tax payments.
b) Cash flows from investing activities
Net cash flows from investing activities for the nine months ended September 30, 2019 were primarily from capital expenditures offset by contingent consideration payments from Seadrill Partners from the sale of the drillshipWest Vela in 2015 and cash receipt of loans granted to Seabras Sapura.
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Net cash flows from investing activities for the period from July 2, 2018 through September 30, 2018 (Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor) were driven by our share of proceeds from the sale of theWest Rigel, contingent consideration payments from Seadrill Partners from the sale of the drillshipWest Vela in 2015, and related party loan repayments from Seadrill Partners. These cash inflows were partly offset by capital expenditures.
c) Cash flows from financing activities
Net cash flows from financing activities for the nine months ended September 30, 2019 were primarily driven by the purchase of the senior secured notes in April 2019 and repayments of debt.
Net cash flows from financing activities for the period from July 2, 2018 through September 30, 2018 (Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor) were related to proceeds from our secured note and equity issuances on emergence from Chapter 11, offset by debt repayments.
Contractual Obligations
At September 30, 2019 (Successor), we had the following contractual obligations and commitments:
Payment due by period Period ended September 30 | ||||||||||||||||||||
(In $ millions) | 2020 | 2021 - 2022 | 2023 - 2024 | Thereafter | Total | |||||||||||||||
Interest bearing debt(1) (2) | 296 | 1,310 | 2,928 | 2,237 | 6,771 | |||||||||||||||
Related party interest bearing debt | — | — | 193 | 121 | 314 | |||||||||||||||
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Total debt repayments | 296 | 1,310 | 3,121 | 2,358 | 7,085 | |||||||||||||||
Pension obligations(3) | 2 | 4 | 4 | 11 | 21 | |||||||||||||||
Operating lease obligations | 9 | 14 | 4 | — | 27 | |||||||||||||||
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Total contractual obligations | 307 | 1,328 | 3,129 | 2,369 | 7,133 | |||||||||||||||
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(1) | Debt principal repayments, excluding cash andpayment-in-kind interest. |
(2) | The above table assumes that we will make amortization payments on our secured credit facilities from 2020. Under the terms of the bank financing agreements we have the ability to defer up to $500 million of amortization payments (Amortization Conversion Election facility or “ACE”) between 90 and 120 days before such payment becomes due. The deferred amortization then becomes part of the balloon payment for each relevant facility. Based on the amortization schedule, the ACE has capacity to defer the first five quarters of amortization. |
(3) | Pension obligations are the forecasted employer’s contributions to our defined benefit plans, expected to be made over the next ten years. |
In addition to the above, we have recognized liabilities for uncertain tax positions of $97 million including interest and penalties as at September 30, 2019.
In relation to our Gulfdrill joint venture, we have entered into charter agreements to lease threejack-up rigs from a third-party shipyard. These agreements will be novated to Gulfdrill prior to the commencement of its operations. We have not recognized a lease liability for these agreements as none of the rigs had been delivered as of September 30, 2019. The maximum potential unrecognized obligation for these agreements is $15 million, which is excluded from the above table.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to several market risks, including credit risk, foreign currency risk and interest rate risk. Our policy is to reduce our exposure to these risks, where possible, within boundaries deemed appropriate by our management team. This may include the use of derivative instruments.
Credit risk
We have financial assets, including cash and cash equivalents, marketable securities, other receivables and certain amounts receivable on derivative instruments. These assets expose us to credit risk arising from possible default by the counterparty. Most of the counterparties are creditworthy financial institutions or large oil and gas companies. We do not expect any significant loss to result fromnon-performance by such counterparties.
We do not demand collateral in the normal course of business. The credit exposure of derivative financial instruments is represented by the fair value of contracts with a positive fair value at the end of each period, adjusted for ournon-performance credit risk assumption.
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Concentration of risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that most of the amounts are carried with Citibank, Nordea Bank Finland Plc, Danske Bank A/S, BNP Paribas, BTG Bank and ING Bank N.V. We consider these risks to be remote. We also have a concentration of risk with respect to customers. For details on the customers with greater than 10% of contract revenues, refer to Note 4 - Segment information.
Foreign exchange risk
As is customary in the oil and gas industry, most of our revenues and expenses are denominated in U.S. dollars, which is the functional currency of most of our subsidiaries and equity method investees. However, a portion of the revenues and expenses of certain of our subsidiaries and equity method investees are denominated in other currencies. We are therefore exposed to foreign exchange gains and losses that may arise on the revaluation or settlement of monetary balances denominated in foreign currencies.
Our foreign exchange exposure primarily relates to foreign denominated cash and working capital balances. We do not expect these exposures to cause a significant amount of fluctuation in net income and therefore do not currently hedge them. Further, the effect of fluctuations in currency exchange rates caused by our international operations generally has not had a material impact on our overall operating results.
Interest rate risk
Our exposure to interest rate risk relates mainly to our floating rate debt and balances of surplus funds placed with financial institutions. We manage this risk through the use of derivative arrangements.
On May 11, 2018, we purchased an interest rate cap for $68 million to mitigate our exposure to future increases in LIBOR on our Senior Credit Facility debt. The interest rate cap is not designated as a hedge and we do not apply hedge accounting. The capped rate against the3-month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023.
The LIBOR rate applied on our debt at September 30, 2019 was 2.11%. At this date, the interest cap would mitigate 24% of the impact of a theoretical 1% point increase in LIBOR. This is set out in the below table.
(In $ millions) | Amount | Annual impact of 1% point increase in rates (before impact of interest rate cap) | Less: impact of interest rate cap | Annual impact of 1% point increase in rates (after impact of interest rate cap) | ||||||||||||
Senior Credit Facility debt - hedged | 4,500 | 45 | (11 | ) | 34 | |||||||||||
Senior Credit Facility debt - not hedged | 1,162 | 12 | — | 12 | ||||||||||||
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Total Senior Credit Facility Debt | 5,662 | 57 | (11 | ) | 46 | |||||||||||
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We have set out our exposure to interest rate risk on our net debt obligations at September 30, 2019 in the table below:
(In $ millions) | Principal outstanding | Hedging instruments -see below | Net exposure | Annual impact of 1% increase in rates - see below | ||||||||||||
Senior Credit Facilities | 5,662 | 4,500 | 1,162 | 46 | ||||||||||||
Debt contained within VIEs | 633 | — | 633 | 6 | ||||||||||||
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Total floating rate debt obligations | 6,295 | 4,500 | 1,795 | 52 | ||||||||||||
Senior secured notes(1) | 476 | — | N/A | — | ||||||||||||
Less: Cash and Restricted Cash | (1,445 | ) | — | (1,445 | ) | (14 | ) | |||||||||
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Net debt | 5,326 | 4,500 | 350 | 38 | ||||||||||||
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(1) | The interest on the senior secured notes is fixed and therefore does not have exposure to interest rate fluctuations |
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Critical Accounting Estimates
The preparation of the Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities. We base these estimates and assumptions on historical experience and on various other information and assumptions that we believe to be reasonable. Critical accounting estimates are important to the portrayal of both our financial position and results of operations and require us to make subjective or complex assumptions or estimates about matters that are uncertain. The basis of preparation and significant accounting policies are disclosed in our annual report on Form20-F.
Critical accounting estimates that have significantly impacted the nine months ended September 30, 2019 are as follows:
Drilling Units
Generally, the carrying amount of our drilling units including rigs, vessels and related equipment are recorded at historical cost less accumulated depreciation. However, drilling units acquired through a business combination or remeasured through the application of fresh start accounting are measured at fair value as of the date of acquisition or the date of emergence, respectively. Our drilling units are subject to various estimates, assumptions, and judgments related to capitalized costs, useful lives and residual values, and impairments.
Our estimates, assumptions, and judgments reflect both historical experience and expectations regarding future operations, utilization and performance. At September 30, 2019 (Successor) and December 31, 2018 (Successor), the carrying amount of our drilling units was close to $6 billion and $7 billion respectively, representing 68% and 61% of our total assets, respectively.
Useful lives and residual value
The cost of our drilling units less estimated residual value is depreciated on a straight-line basis over their estimated remaining useful lives. The estimated useful life of our semi-submersible drilling rigs, drillships andjack-up rigs, when new, is 30 years.
The useful lives of rigs and related equipment are difficult to estimate due to a variety of factors, including technological advances that impact the methods or cost of oil and gas exploration and development, changes in market or economic conditions and changes in laws or regulations affecting the drilling industry. Were-evaluate the remaining useful lives of our drilling units as and when events occur which may directly impact our assessment of their remaining useful lives. This includes changes in the operating condition or functional capability of our rigs as well as market and economic factors. The use of different estimates, assumptions and judgments in establishing estimated useful lives and residual values could result in significantly different carrying values for our drilling units which could materially affect our results of operations.
Impairment of Equity Method Investment in Seadrill Partners
Overview
Seadrill Partners is an international offshore drilling contractor formed in 2012. It has a fleet of 11 drilling units. This comprises 4 drillships, 4 semi-submersible rigs and 3 tender rigs. All the rigs were acquired from Seadrill between 2012 to 2015. Seadrill is responsible for managing, marketing and operating the rigs and charges SDLP a management fee for these services.
Seadrill Partners has issued 3 categories of equity instrument. This includes two classes of stock (“common units” and “subordinated units”) and incentive distribution rights (“IDRs”). The holders of these equity instruments have varying rights to receive distributions from Seadrill Partners. The common units and subordinated units have equal rights to distributed profits, subject to the common units being entitled to a minimum quarterly distribution before the subordinated units may receive a dividend. The holders of the IDRs do not receive a share of the Seadrill Partners distributions until a target distribution level has been achieved. The IDRs receive an increasing share of the distribution once this has been met.
As set out in Note 13 to the accompanying financial statements, we have several investments in Seadrill Partners. These include (i) 100% of the subordinated units (1.6 million units); (ii) 35% of the common units (2.5 million out of 7.5 million total units) and (iii) 100% of the incentive distribution rights. In addition, we have investments in the common stock of 4 operating companies (“OPCOs”) controlled by Seadrill Partners. This includes (i) 42% interest in Seadrill Operating LLP which wholly owns 4 rigs and has a 56% interest in 1 rig; (ii) 49% interest in Seadrill Capricorn LLC which wholly owns 4 rigs and (iii) 39% interest in Seadrill Deepwater Drillship Ltd and 49% interest in Seadrill Mobile Units Ltd which, together, own a 44% interest in 1 rig.
We account for our investment in (i) the subordinated units and (ii) direct investments in Seadrill Partners OPCOs under the equity method. These investments were recorded at fair value when we applied fresh start accounting on July 2, 2018. Each reporting period, we (i) increase (or decrease) the value of these investments for our share of theafter-tax profits (or losses) of the entities and (ii) amortize basis differences recorded against the investments on fresh start.
Seadrill Partners common units do not meet the definition of common stock under US GAAP as they are not the lowest class of stock (because they have an additional right to dividends compared to the subordinated units). The incentive distribution rights do not meet the definition of stock. Therefore, neither category of investment is accounted for under the equity method. The common units have a readily ascertainable fair value and are therefore recorded at fair value with gains or losses taken to the Consolidated Statement of Operations. The IDRs do not have a readily ascertainable fair value and are recorded at cost less impairment. The cost of the IDRs represented the fair value of the instruments when we applied fresh start accounting on July 2, 2018.
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In addition, as set out in Note 25 to the accompanying financial statements, we had $128 million of receivables due to us from Seadrill Partners as of September 30, 2019. These receivables primarily related to management services and deferred consideration arrangements between us and Seadrill Partners.
Impairment review
Each reporting period, we are required to consider (i) whether there have been any indicators of ’other than temporary impairment’ (“OTTI”) of our equity method investments (subordinated units and direct interests) and (ii) whether there has been an impairment of the IDRs. We record an impairment charge for other-than-temporary declines in fair value when the fair value is not anticipated to recover above the carrying value within a reasonable period after the measurement date, unless there are mitigating factors that indicate impairment may not be required.
Seadrill Partners primary debt finance comes from a $2.6 billion Term Loan B (“TLB”) which comes due for repayment in February 2021 and will need to be refinanced. There has been a decrease in the share price of Seadrill Partners common units since November 2018 which culminated in the common units being suspended from trading on NYSE in August 2019 as the market capitalization decreased below $15 million for a period of 30 consecutive days. We have interpreted this decrease in share price as both (i) an indicator of OTTI for the subordinated units and direct interests and (ii) an impairment indicator for the IDRs. The evaluation of whether a decline in fair value is “other than temporary” requires a high degree of judgment and the use of different assumptions that could materially affect our earnings.
Impairment
Having identified an indicator of OTTI, we were required to value our investments in Seadrill Partners to calculate the impairment at September 30, 2019. We calculated the fair value of our investments in Seadrill Partners direct interests and IDRs to be $134 million and nil, compared topre-impairment book values of $382 million and $54 million respectively. As a result, we recorded an impairment charge of $302 million. We have recognized the impairment of these investments within “Loss on impairment of investments” in our Consolidated Statement of Operations for the three and nine months ended September 30, 2019.
We have summarized the carrying value of our investments before and after this impairment review in the below table.
Investment | Basis | September 30, 2019 Post- impairment | September 30, 2019 Before- impairment | As at December 31, 2018 | As at July 2, 2018 | |||||||||||||
Seadrill Partners subsidiaries - Subordinated units | Equity method | — | — | 17 | 37 | |||||||||||||
Seadrill Partners subsidiaries - Common units | Fair value | 2 | 2 | 45 | 91 | |||||||||||||
Seadrill Partners subsidiaries - IDRs | Cost less impairment | — | 54 | 54 | 54 | |||||||||||||
Seadrill Partners - Direct ownership interests | Equity method | 134 | 382 | 479 | 575 | |||||||||||||
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Total carrying value of our investments | 136 | 438 | 595 | 757 | ||||||||||||||
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We valued our investments in the direct interests using an income approach which discounted future free cashflows (“DCF model”). The cash flows were estimated over the remaining useful economic lives of the underlying assets, but no longer than 30 years in total, and discounted using an estimated market participant weighted average cost of capital of between11.25-12.25%.
The DCF model derived an enterprise value of the OPCOs, after which associated debt was subtracted to provide equity values. Our DCF model considered a range of scenarios to reflect different potential refinancing outcomes for Seadrill Partners. The key assumptions used in the DCF were derived from significant unobservable inputs based on our best judgments and assumptions available at the time of performing the impairment test.
The underlying assumptions used to model future rig cashflows used a methodology that examined historical data for each rig, considering the rig’s age, rated water depth and other attributes and then assessed its future marketability considering the current and projected market environment at the time of assessment.
Other assumptions, such as operating, maintenance and inspection costs, were estimated using historical data adjusted for known developments and future events that are anticipated by management at the time of the assessment. The probability applied to each scenario was set with reference to the traded price of the TLB at September 30, 2019.
These assumptions are necessarily subjective and are an inherent part of our asset impairment evaluation, and the use of different assumptions could produce results that differ from those reported. Our assumptions involve uncertainties about future demand for our services, dayrates, expenses and other market based future events, and expectations may not be indicative of future outcomes. If actual events differ from these estimates, or to the extent that these estimates are adjusted in the future, our financial condition and results of operations could be affected in the period of any such change of estimate.
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We valued our investments in the direct interests using an option pricing model. The assumptions used in the model were derived from both observable and unobservable inputs and are based on management’s judgments and assumptions available at the time of performing the impairment test. The method values different tranches in the capital structure in sequence of seniority. We employ significant judgment in developing these estimates and assumptions.
Redeemablenon-controlling interests
Subsequent to filing bankruptcy petitions, the Predecessor executed a Transaction Support Agreement (“TSA”) on April 4, 2018 with a minority shareholder of one of our subsidiaries, Asia Offshore Drilling Limited (“AOD”). The purpose of the TSA was to provide a framework for a monetization event for the minority shareholder of AOD as well as obtain unanimous approval of the AOD board of directors (which included the minority shareholder) in order for AOD to become a party to the TSA and participate in the Predecessor’s broader debt restructuring under its Chapter 11 reorganization. The TSA executed between the parties provides an option to the holders ofnon-controlling interest shares to sell the shares it owns to Seadrill Limited subject to a price ceiling (“Put Option”). After the end of the effective period of the Put Option, if the right remains unexercised, Seadrill Limited has the option to purchase thenon-controlling interest in AOD at a price subject to the floor price (“Call Option”). The Put Option generates a redemption feature for thenon-controlling interest holder that is outside the control of Seadrill Limited.
To calculate the fair value of thenon-controlling interest shares, we estimated the fair value of AOD in total and then allocated this between the shares held by us and by those held by thenon-controlling interest. We estimated the fair values of AOD in total by adjusting the Consolidated Balance Sheet position of AOD as at each reporting period for an updated fair value of the three drilling units:AOD I, AODII and AOD III. We derived the fair value of the three drilling units using a market approach discounted using a weighted average cost ofcapital of 11%. We derived the fair value of the external debt facilities with a discounted cash flow using a weighted average cost of debt of 6%.
Income taxes
Seadrill is a Bermuda company that has a number of subsidiaries and affiliates in various jurisdictions. We are not currently required to pay income taxes in Bermuda on ordinary income or capital gains because we qualify as an exempt company. We have received written assurance from the Minister of Finance in Bermuda that we will be exempt from taxation until March 2035. Certain of our subsidiaries operate in other jurisdictions where income taxes are imposed. Consequently, income taxes have been recorded in these jurisdictions when appropriate. Our income tax expense is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We provide for income taxes based on the tax laws and rates in effect in the countries in which our operations are conducted and income is earned. The income tax rates and methods of computing taxable income vary substantially between jurisdictions. Our income tax expense is expected to fluctuate from year to year because our operations are conducted in different tax jurisdictions and the amount ofpre-tax income fluctuations.
The determination and evaluation of our annual group income tax provision involves the interpretation of tax laws in the various jurisdictions in which we operate and requires significant judgment and the use of estimates and assumptions regarding significant future events, such as amounts, timing and the character of income, deductions and tax credits. There are certain transactions for which the ultimate tax determination is unclear due to uncertainty in the ordinary course of business. We recognize tax liabilities based on our assessment of whether our tax positions are more likely than not sustainable, based solely on the technical merits and considerations of the relevant taxing authorities widely understood administrative practices and precedence. Changes in tax laws (such as the 2017 US tax reform), regulations, agreements, treaties, foreign currency exchange restrictions or our levels of operations or profitability in each jurisdiction may impact our tax liability in any given year.
While our annual tax provision is based on the information available to us at the time, a number of years may elapse before the ultimate tax liabilities in certain tax jurisdictions are determined. Current income tax expense reflects an estimate of our income tax liability for the current year, withholding taxes, changes in prior year tax estimates as tax returns are filed or from tax audit adjustments. Our deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities as reflected on the balance sheet. Valuation allowances are determined to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. To determine the amount of deferred tax assets and liabilities, as well as at the valuation allowances, we must make estimates and certain assumptions regarding future taxable income, including where our drilling units are expected to be deployed, as well as other assumptions related to our future tax position. A change in such estimates and assumptions, along with any changes in tax laws, could require us to adjust the deferred tax assets, liabilities or valuation allowances. In addition, our uncertain tax positions are estimated and presented within other current liabilities, other liabilities, and as reductions to our deferred tax assets within our Consolidated Balance Sheets. Refer to Note 7 – “Taxation” to our Consolidated Financial Statements included herein for further information.
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Table of Contents
Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three and nine months ended September 30, 2019 (Successor), the period from July 2, 2018 through September 30, 2018
(Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor)
Successor | Predecessor | |||||||||||||||||||||
(In $ millions) | Notes | Three months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | ||||||||||||||||
Operating revenues | ||||||||||||||||||||||
Contract revenues | 266 | 217 | 774 | 217 | 619 | |||||||||||||||||
Reimbursable revenues | * | 72 | 11 | 142 | 11 | 21 | ||||||||||||||||
Other revenues | * | 29 | 21 | 74 | 21 | 72 | ||||||||||||||||
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Total operating revenues | 367 | 249 | 990 | 249 | 712 | |||||||||||||||||
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Operating expenses | ||||||||||||||||||||||
Vessel and rig operating expenses | * | (188 | ) | (162 | ) | (569 | ) | (162 | ) | (407 | ) | |||||||||||
Reimbursable expense | (71 | ) | (10 | ) | (140 | ) | (10 | ) | (20 | ) | ||||||||||||
Depreciation | (106 | ) | (125 | ) | (318 | ) | (125 | ) | (391 | ) | ||||||||||||
Amortization of intangibles | (37 | ) | (27 | ) | (110 | ) | (27 | ) | — | |||||||||||||
Selling, general and administrative expenses | (33 | ) | (31 | ) | (94 | ) | (31 | ) | (100 | ) | ||||||||||||
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Total operating expenses | (435 | ) | (355 | ) | (1,231 | ) | (355 | ) | (918 | ) | ||||||||||||
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Other operating items | ||||||||||||||||||||||
Impairment of long-lived assets | — | — | — | — | (414 | ) | ||||||||||||||||
Other operating income | * | 10 | — | 39 | — | 7 | ||||||||||||||||
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Total other operating items | 10 | — | 39 | — | (407 | ) | ||||||||||||||||
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Operating loss | (58 | ) | (106 | ) | (202 | ) | (106 | ) | (613 | ) | ||||||||||||
Financial items and other income | ||||||||||||||||||||||
Interest income | * | 17 | 22 | 56 | 22 | 19 | ||||||||||||||||
Interest expenses | * | (118 | ) | (131 | ) | (372 | ) | (131 | ) | (38 | ) | |||||||||||
Loss on impairment of investments | 6 | (302 | ) | — | (302 | ) | — | — | ||||||||||||||
Share in results from associated companies | 13 | (33 | ) | (16 | ) | (98 | ) | (16 | ) | 149 | ||||||||||||
(Loss)/gain on derivative financial instruments | (4 | ) | 3 | (37 | ) | 3 | (4 | ) | ||||||||||||||
Net loss on debt extinguishment | — | — | (22 | ) | — | — | ||||||||||||||||
Foreign exchange loss | (8 | ) | (3 | ) | (6 | ) | (3 | ) | — | |||||||||||||
Loss on marketable securities | 10 | (10 | ) | (3 | ) | (45 | ) | (3 | ) | (3 | ) | |||||||||||
Other financial items | * | (2 | ) | (4 | ) | (4 | ) | (4 | ) | — | ||||||||||||
Reorganization items | — | (5 | ) | — | (5 | ) | (3,365 | ) | ||||||||||||||
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Total financial items and othernon-operating items | (460 | ) | (137 | ) | (830 | ) | (137 | ) | (3,242 | ) | ||||||||||||
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Loss before income taxes | (518 | ) | (243 | ) | (1,032 | ) | (243 | ) | (3,855 | ) | ||||||||||||
Income tax (expense)/benefit | (3 | ) | (2 | ) | 9 | (2 | ) | (30 | ) | |||||||||||||
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Net loss | (521 | ) | (245 | ) | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||||||||
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Net loss attributable to shareholder | (522 | ) | (240 | ) | (1,020 | ) | (240 | ) | (3,881 | ) | ||||||||||||
Net income/(loss) attributable tonon-controlling interest | 1 | (3 | ) | (1 | ) | (3 | ) | (6 | ) | |||||||||||||
Net (loss)/income attributable to redeemable non-controlling interest | — | (2 | ) | (2 | ) | (2 | ) | 2 | ||||||||||||||
Basic loss per share (US dollar) | (5.21 | ) | (2.40 | ) | (10.18 | ) | (2.40 | ) | (7.71 | ) | ||||||||||||
Diluted loss per share (US dollar) | (5.21 | ) | (2.40 | ) | (10.18 | ) | (2.40 | ) | (7.71 | ) |
* | Includes transactions with related parties. Refer to Note 25 – Related party transactions. |
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
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Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the three and nine months ended September 30, 2019 (Successor), the period from July 2, 2018 through September 30, 2018
(Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor)
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Net loss | (521 | ) | (245 | ) | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||||||
Other comprehensive loss, net of tax: | ||||||||||||||||||||
Change in fair value of debt component of Archer convertible bond | 1 | — | 7 | — | — | |||||||||||||||
Actuarial loss relating to pension | (2 | ) | — | (2 | ) | — | — | |||||||||||||
Share of other comprehensive loss from associated companies | (5 | ) | (1 | ) | (14 | ) | (1 | ) | — | |||||||||||
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Other comprehensive loss: | (6 | ) | (1 | ) | (9 | ) | (1 | ) | — | |||||||||||
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Total comprehensive loss for the period | (527 | ) | (246 | ) | (1,032 | ) | (246 | ) | (3,885 | ) | ||||||||||
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Comprehensive loss attributable to the shareholder | (528 | ) | (241 | ) | (1,029 | ) | (241 | ) | (3,881 | ) | ||||||||||
Comprehensive income/(loss) attributable to the non-controlling interest | 1 | (3 | ) | (1 | ) | (3 | ) | (6 | ) | |||||||||||
Comprehensive (loss)/income attributable to the redeemablenon-controlling interest | — | (2 | ) | (2 | ) | (2 | ) | 2 |
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
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Seadrill Limited
UNAUDITED CONSOLIDATED BALANCE SHEETS
as at September 30, 2019 and December 31, 2018
Successor | Successor | |||||||||||
(In $ millions) | Notes | September 30, 2019 | December 31, 2018 | |||||||||
ASSETS | ||||||||||||
Current assets | ||||||||||||
Cash and cash equivalents | 1,216 | 1,542 | ||||||||||
Restricted cash | 9 | 130 | 461 | |||||||||
Marketable securities | 10 | 12 | 57 | |||||||||
Accounts receivable, net | 11 | 221 | 208 | |||||||||
Amounts due from related parties | 25 | 140 | 177 | |||||||||
Other current assets | 12 | 232 | 322 | |||||||||
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Total current assets | 1,951 | 2,767 | ||||||||||
|
|
|
| |||||||||
Non-current assets | ||||||||||||
Investment in associated companies | 13 | 375 | 800 | |||||||||
Drilling units | 14 | 6,455 | 6,659 | |||||||||
Restricted cash | 9 | 99 | — | |||||||||
Deferred tax assets | 7 | 4 | 18 | |||||||||
Equipment | 15 | 25 | 29 | |||||||||
Amounts due from related parties | 25 | 537 | 539 | |||||||||
Othernon-current assets | 12 | 45 | 36 | |||||||||
|
|
|
| |||||||||
Totalnon-current assets | 7,540 | 8,081 | ||||||||||
|
|
|
| |||||||||
Total assets | 9,491 | 10,848 | ||||||||||
|
|
|
| |||||||||
LIABILITIES, REDEEMABLENON-CONTROLLING INTEREST AND EQUITY | ||||||||||||
Current liabilities | ||||||||||||
Debt due within one year | 16 | 296 | 33 | |||||||||
Trade accounts payable | 96 | 82 | ||||||||||
Amounts due to related parties | 25 | 14 | 39 | |||||||||
Other current liabilities | 17 | 305 | 310 | |||||||||
|
|
|
| |||||||||
Total current liabilities | 711 | 464 | ||||||||||
|
|
|
| |||||||||
Non-current liabilities | ||||||||||||
Long-term debt | 16 | 6,330 | 6,881 | |||||||||
Long-term debt due to related parties | 25 | 236 | 222 | |||||||||
Deferred tax liabilities | 7 | 38 | 87 | |||||||||
Othernon-current liabilities | 17 | 131 | 121 | |||||||||
|
|
|
| |||||||||
Totalnon-current liabilities | 6,735 | 7,311 | ||||||||||
|
|
|
| |||||||||
Commitments and contingencies (see note 26) | ||||||||||||
|
|
|
| |||||||||
Redeemablenon-controlling interest | 21 | 34 | 38 | |||||||||
|
|
|
| |||||||||
Equity | ||||||||||||
Common shares of par value $0.10 per share: 138,880,000 shares authorized and 100,223,567 issued at September 30, 2019 (Common shares of par value $0.10 per share: 111,000,000 shares authorized and 100,000,000 issued at December 31, 2018) | 19 | 10 | 10 | |||||||||
Additionalpaid-in capital | 3,495 | 3,491 | ||||||||||
Accumulated other comprehensive loss | 22 | (16 | ) | (7 | ) | |||||||
Retained loss | (1,629 | ) | (611 | ) | ||||||||
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|
|
| |||||||||
Total shareholders’ equity | 1,860 | 2,883 | ||||||||||
|
|
|
| |||||||||
Non-controlling interest | 20 | 151 | 152 | |||||||||
|
|
|
| |||||||||
Total equity | 2,011 | 3,035 | ||||||||||
|
|
|
| |||||||||
Total liabilities, redeemablenon-controlling interest and equity | 9,491 | 10,848 | ||||||||||
|
|
|
|
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-4
Table of Contents
Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2019 (Successor), the period from July 2, 2018 through September 30, 2018 (Successor)
and the period from January 1, 2018 through July 1, 2018 (Predecessor)
Successor | Successor | Predecessor | ||||||||||
(In $ millions) | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||
Cash Flows from Operating Activities | ||||||||||||
Net loss | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 318 | 125 | 391 | |||||||||
Amortization of unfavorable and favorable contracts | 110 | 27 | (21 | ) | ||||||||
Share of results from associated companies | 98 | 16 | (149 | ) | ||||||||
Impairment loss on associated companies | 302 | — | — | |||||||||
Share-based compensation expense | 4 | — | 3 | |||||||||
Contingent consideration recognized | — | — | (7 | ) | ||||||||
Unrealized loss/(gain) related to derivative financial instruments | 37 | (3 | ) | 4 | ||||||||
Loss on impairment of long-lived assets | — | — | 414 | |||||||||
Deferred tax benefit | (35 | ) | (5 | ) | — | |||||||
Unrealized loss on marketable securities | 45 | 3 | 3 | |||||||||
Net loss on debt extinguishment | 22 | — | — | |||||||||
Non-cash gain on liabilities subject to compromise | — | — | (2,977 | ) | ||||||||
Fresh start valuation adjustments | — | — | 6,142 | |||||||||
Otherre-organization items | — | — | 6 | |||||||||
Amortization of discount on debt | 27 | 11 | — | |||||||||
Other, net | — | 1 | (1 | ) | ||||||||
Other cash movements in operating activities | ||||||||||||
Distributions received from associated company | 11 | 7 | 17 | |||||||||
Payments for long-term maintenance | (73 | ) | (36 | ) | (78 | ) | ||||||
Settlement ofpayment-in-kind interest on senior secured notes | (39 | ) | — | — | ||||||||
Changes in operating assets and liabilities, net of effect of acquisitions and disposals | ||||||||||||
Trade accounts receivable | (13 | ) | 68 | 29 | ||||||||
Trade accounts payable | 14 | (5 | ) | 4 | ||||||||
Prepaid expenses/accrued revenue | (16 | ) | (18 | ) | 42 | |||||||
Related party receivables | 12 | 1 | (13 | ) | ||||||||
Related party payables | (11 | ) | 10 | (42 | ) | |||||||
Other assets | (48 | ) | 1 | (62 | ) | |||||||
Other liabilities | 22 | (22 | ) | (10 | ) | |||||||
Deferred revenue | 36 | 5 | (23 | ) | ||||||||
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| |||||||
Net cash flows from operating activities | (200 | ) | (59 | ) | (213 | ) | ||||||
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| |||||||
Cash Flows from Investing Activities | ||||||||||||
Additions to newbuildings | — | — | (1 | ) | ||||||||
Additions to drilling units and equipment | (37 | ) | (10 | ) | (48 | ) | ||||||
Contingent consideration received | 24 | 58 | 48 | |||||||||
Proceeds from disposal of drilling units | — | — | 126 | |||||||||
Payments received from loans granted to related parties | 10 | — | 24 | |||||||||
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| |||||||
Net cash flows from investing activities | (3 | ) | 48 | 149 | ||||||||
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F-5
Table of Contents
Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 2019 (Successor), the period from July 2, 2018 through September 30, 2018 (Successor)
and the period from January 1, 2018 through July 1, 2018 (Predecessor)
Successor | Predecessor | |||||||||||
(In $ millions) | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||
Cash Flows from Financing Activities | ||||||||||||
Proceeds from debt | — | — | 875 | |||||||||
Repayments of secured credit facilities | (22 | ) | (25 | ) | (153 | ) | ||||||
Redemption of senior secured notes | (333 | ) | — | — | ||||||||
Debt fees paid | — | (4 | ) | (35 | ) | |||||||
Proceeds from issue of Equity | — | — | 200 | |||||||||
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|
|
|
|
| |||||||
Net cash used in financing activities | (355 | ) | (29 | ) | 887 | |||||||
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|
|
|
|
| |||||||
Effect of exchange rate changes on cash | — | (1 | ) | (5 | ) | |||||||
|
|
|
|
|
| |||||||
Net decrease in cash and cash equivalents, including restricted cash | (558 | ) | (41 | ) | 818 | |||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, including restricted cash, at beginning of the period | 2,003 | 2,177 | 1,359 | |||||||||
|
|
|
|
|
| |||||||
Cash and cash equivalents, including restricted cash, at the end of period | 1,445 | 2,136 | 2,177 | |||||||||
|
|
|
|
|
| |||||||
Supplementary disclosure of cash flow information | ||||||||||||
Interest paid, net of capitalized interest | (315 | ) | (86 | ) | (38 | ) | ||||||
Taxes paid | (32 | ) | (9 | ) | (22 | ) |
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-6
Table of Contents
Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the nine months ended September 30, 2019 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the
period from July 2, 2018 through September 30, 2018 (Successor)
(In $ millions) | Common shares | Additional paid-in capital | Contributed surplus | Accumulated other comprehensive loss | Retained loss | Total equity before NCI | NCI | Total equity | ||||||||||||||||||||||||
Balance at January 1, 2018 (Predecessor) | 1,008 | 3,313 | 1,956 | 58 | 225 | 6,560 | 399 | 6,959 | ||||||||||||||||||||||||
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| |||||||||||||||||
ASU2016-01 - Financial Instruments | — | — | — | (31 | ) | 31 | — | — | — �� | |||||||||||||||||||||||
ASU2016-16 - Income Taxes | — | — | — | — | (59 | ) | (59 | ) | (25 | ) | (84 | ) | ||||||||||||||||||||
ASU2014-09 - Revenue from contracts | — | — | — | — | 7 | 7 | — | 7 | ||||||||||||||||||||||||
Share-based compensation charge | — | 2 | — | — | — | 2 | — | 2 | ||||||||||||||||||||||||
Other comprehensive income | — | — | — | 9 | — | 9 | — | 9 | ||||||||||||||||||||||||
Net loss | — | — | — | — | (181 | ) | (181 | ) | (22 | ) | (203 | ) | ||||||||||||||||||||
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| |||||||||||||||||
Balance at March 31, 2018 (Predecessor) | 1,008 | 3,315 | 1,956 | 36 | 23 | 6,338 | 352 | 6,690 | ||||||||||||||||||||||||
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| |||||||||||||||||
Share-based compensation charge | — | 7 | — | — | — | 7 | — | 7 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | — | (9 | ) | — | (9 | ) | — | (9 | ) | |||||||||||||||||||||
Reclassification ofnon-controlling interests | — | — | — | — | (43 | ) | (43 | ) | 43 | — | ||||||||||||||||||||||
Fair Value adjustment AOD Redeemable NCI | — | — | — | — | 127 | 127 | (150 | ) | (23 | ) | ||||||||||||||||||||||
Net loss | — | — | — | — | (3,700 | ) | (3,700 | ) | 16 | (3,684 | ) | |||||||||||||||||||||
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|
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|
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| |||||||||||||||||
Balance at July 1, 2018 (Predecessor) | 1,008 | 3,322 | 1,956 | 27 | (3,593 | ) | 2,720 | 261 | 2,981 | |||||||||||||||||||||||
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Cancellation of Predecessor equity | (1,008 | ) | (3,322 | ) | (1,956 | ) | (27 | ) | 3,593 | (2,720 | ) | (107 | ) | (2,827 | ) | |||||||||||||||||
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|
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| |||||||||||||||||
Balance at July 1, 2018 (Predecessor) | — | — | — | — | — | — | 154 | 154 | ||||||||||||||||||||||||
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Issuance of Successor common stock | 10 | 3,491 | — | — | — | 3,501 | — | 3,501 | ||||||||||||||||||||||||
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Balance at July 2, 2018 (Successor) | 10 | 3,491 | — | — | — | 3,501 | 154 | 3,655 | ||||||||||||||||||||||||
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| |||||||||||||||||
Other comprehensive loss | — | — | — | (1 | ) | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||
Net loss | — | — | — | — | (240 | ) | (240 | ) | (3 | ) | (243 | ) | ||||||||||||||||||||
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|
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|
|
|
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|
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| |||||||||||||||||
Balance at September 30, 2018 (Successor) | 10 | 3,491 | — | (1 | ) | (240 | ) | 3,260 | 151 | 3,411 | ||||||||||||||||||||||
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F-7
Table of Contents
Seadrill Limited
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the nine months ended September 30, 2019 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the
period from July 2, 2018 through September 30, 2018 (Successor)
(In $ millions) | Common shares | Additional paid-in capital | Accumulated other comprehensive loss | Retained loss | Total equity before NCI | NCI | Total equity | |||||||||||||||||||||
Balance at January 1, 2019 (Successor) | 10 | 3,491 | (7 | ) | (611 | ) | 2,883 | 152 | 3,035 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other comprehensive income | — | — | 1 | — | 1 | — | 1 | |||||||||||||||||||||
Share-based compensation charge | — | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||
Fair Value adjustment AOD Redeemable NCI | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | ||||||||||||||||||
Net loss | — | — | — | (295 | ) | (295 | ) | — | (295 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at March 31, 2019 (Successor) | 10 | 3,492 | (6 | ) | (907 | ) | 2,589 | 152 | 2,741 | |||||||||||||||||||
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|
|
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|
|
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|
|
| |||||||||||||||
Other comprehensive loss | — | — | (4 | ) | — | (4 | ) | — | (4 | ) | ||||||||||||||||||
Share-based compensation charge | — | 1 | — | — | 1 | — | 1 | |||||||||||||||||||||
Net loss | — | — | — | (203 | ) | (203 | ) | (2 | ) | (205 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at June 30, 2019 (Successor) | 10 | 3,493 | (10 | ) | (1,110 | ) | 2,383 | 150 | 2,533 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Other comprehensive loss | — | — | (6 | ) | — | (6 | ) | — | (6 | ) | ||||||||||||||||||
Share-based compensation charge | — | 2 | — | — | 2 | — | 2 | |||||||||||||||||||||
Fair Value adjustment AOD Redeemable NCI | — | — | — | 3 | 3 | — | 3 | |||||||||||||||||||||
Net loss | — | — | — | (522 | ) | (522 | ) | 1 | (521 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Balance at September 30, 2019 (Successor) | 10 | 3,495 | (16 | ) | (1,629 | ) | 1,860 | 151 | 2,011 | |||||||||||||||||||
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|
|
See accompanying notes that are an integral part of these unaudited Consolidated Financial Statements.
F-8
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – General information
Seadrill Limited is incorporated in Bermuda and is a publicly listed company on the New York Stock Exchange and the Oslo Stock Exchange. We provide offshore drilling services to the oil and gas industry. As at September 30, 2019 we owned and operated 35 offshore drilling units and had an option to acquire one semi-submersible rig. Our fleet consists of drillships,jack-up rigs and semi-submersible rigs for operations in shallow and deepwater areas, and in benign and harsh environments. We also manage and operate a further 20 rigs on behalf of Seadrill Partners, SeaMex, Sonangol and Northern Drilling.
Except where the context otherwise requires or where otherwise indicated, the terms “Seadrill,” “the Group,” “we,” “us,” “our,” “the Company” and “our Business” refer to either Seadrill Limited, any one or more of its consolidated subsidiaries, or to all such entities, and, for periods before emergence from Chapter 11 Proceedings on July 2, 2018, to Old Seadrill Limited, any one or more of its consolidated subsidiaries, or to all such entities.
References to the term “Successor” refers to the financial position and results of operations of Seadrill after July 2, 2018. This is also applicable to terms “Seadrill,” “the Group,” “we,” “us,” “our,” “the Company” or “our Business” in context of events after emergence from Chapter 11 Proceedings on July 2, 2018. References to the term “the September 2018 successor period” refers to the period from July 2, 2018 to September 30, 2018.
References to the term “Predecessor” refers to the financial position and results of operations of Seadrill prior to, and including, July 1, 2018. This is also applicable to terms “Seadrill,” “the Group,” “we,” “us,” “our,” “the Company” or “our Business” in context of events before emergence from Chapter 11 Proceedings on July 2, 2018. References to the term “the 2018 Predecessor period” refers to the period from January 1, 2018 to July 1, 2018.
Basis of presentation
The Consolidated Financial Statements are presented in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). The amounts are presented in United States dollar (“U.S. dollar,” “$” or “US$”) rounded to the nearest million, unless otherwise stated. The accompanying Consolidated Financial Statements present the financial position of Seadrill Limited, the consolidated subsidiaries and our interests in associated entities. Investments in companies in which we control, or directly or indirectly hold more than 50% of the voting control are consolidated in the Consolidated Financial Statements, as well as certain variable interest entities of which we are deemed to be the primary beneficiary (though not directly or indirectly holding more than 50% of the voting control).
The accompanying unaudited interim financial statements, in the opinion of management, include all material adjustments that are considered necessary for a fair statement of the Company’s financial statements in accordance with generally accepted accounting principles in the United States of America. The accompanying unaudited interim financial statements do not include all of the disclosures required in complete annual financial statements. These financial statements should be read in conjunction with our annual financial statements filed with the SEC on Form20-F for the year ended December 31, 2018 (SEC FileNo. 333-224459).
Significant accounting policies
The accounting policies adopted in the preparation of the unaudited interim financial statements are consistent with those followed in the preparation of our annual audited Consolidated Financial Statements for the year ended December 31, 2018 except as discussed below or unless otherwise included in these unaudited interim financial statements as separate disclosures.
Leases
We adopted ASU2016-02, Leases (Topic 842) on January 1, 2019. As a result, we now recognizeright-of-use assets and lease liabilities on our balance sheet and disclose key information about leasing arrangements which are included within Note 18 - Leases. Refer to Note 2 – Recent Accounting Pronouncements for more information on the adoption of this update and the changes to our accounting policy.
Note 2 – Recent accounting pronouncements
Recently adopted accounting standards
We adopted the following accounting standard updates (“ASUs”) since the reporting date of our Form20-F report which covered the period to December 31, 2018.
F-9
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU2016-02 Leases(also2018-10,2018-11,2018-20, and2019-01)
In February 2016, the FASB issued ASU2016-02, Leases (Topic 842). The update requires an entity to recognizeright-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. It also offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The guidance became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years using a modified retrospective application.
We transitioned to the new standard using the modified retrospective approach as permitted by the standard. We determined that our drilling contracts contain a lease component as well as a revenue component. We have elected to apply the practical expedient provided to lessors and will not separate the lease and nonlease revenue components within our drilling contracts. We will continue to apply the Topic 606 to our drilling contracts instead of Topic 842 because the nonlease component is the predominant component within our drilling contracts. As a result, our pattern of revenue recognition did not change significantly compared to prior accounting standards due to the adoption of this update.
In addition, within our operating leases, where we are lessees, we elected not to separate nonlease components from lease components and instead we account for each separate lease component and the nonlease components associated with that lease component as a single lease component in accordance with Topic 842. We have also elected not to apply the recognition requirements in Topic 842 to short-term leases, being leases lasting less than one year. Instead, we recognize short-term lease payments in our Consolidated Statement of Operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
We recognized an aggregate lease liability of $25 million and aright-of-use asset of $23 million on adoption on January 1, 2019. There was no impact to our opening retained earnings as a result of adopting this update. Prior period amounts are not adjusted and continue to be reported in accordance with the previous guidance in Topic 840.
Other ASUs
We additionally adopted the following accounting standard updates in the year which did not have any material impact on our Consolidated Financial Statements and related disclosures:
• | ASU2018-07 Compensation - Stock compensation (Topic 718) |
• | ASU2018-16 Derivatives and Hedging (Topic 815) |
Recently issued accounting standards
The FASB issued the following ASUs that we have not yet adopted but which could affect our Consolidated Financial Statements and related disclosures in future periods:
ASU2016-13 - Financial Instruments - Measurement of Credit Losses on Financial Instruments(Also2019-04 and2019-05)
In June 2016, the FASB issued ASU2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model foravailable-for-sale debt securities. In April 2019, the FASB issued ASU2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which provides additional guidance on the accounting for credit losses. In May 2019, the FASB issued ASU2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which provides transition guidance for entities to elect the fair value option of certain financial instruments. These guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted only from January 1, 2019. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as at the beginning of the first reporting period in which the guidance is adopted.
We are in the early stage of evaluating the impact of this standard update. Our customers are international oil companies, national oil companies and large independent oil companies. Our financial assets are primarily held with counter parties with high credit standing and we have historically had a low incidence of bad debt expense. We are in the process of evaluating the impact of this standard update on our Consolidated Financial Statements and related disclosures.
F-10
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ASU2018-13 Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update is intended to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the US GAAP information requirements that are most important to users of an entity’s financial statements. The guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of this standard update on our Consolidated Financial Statements and related disclosures.
ASU2018-14 Compensation - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The update is intended to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the US GAAP information requirements that are most important to users of an entity’s financial statements. The guidance will be effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. We are in the process of evaluating the impact of this standard update on our Consolidated Financial Statements and related disclosures.
ASU2018-15 Intangibles
In August 2018, the FASB issued ASU2018-15, Intangibles-Goodwill andOther-Internal-Use Software (Subtopic350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The update is intended to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of this standard update on our Consolidated Financial Statements and related disclosures.
ASU2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The update is intended to improve general purpose financial reporting by considering indirect interests held through related parties in common control arrangements on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance will be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of this standard update on our Consolidated Financial Statements and related disclosures.
Note 3 – Chapter 11 proceedings and fresh start accounting
On September 12, 2017, Seadrill Limited and certain of its subsidiaries, “the Debtors,” filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code. On February 26, 2018, the Debtors filed a proposed Second Amended Joint Chapter 11 Plan of Reorganization with the Bankruptcy Court and on April 17, 2018 the Bankruptcy Court entered an order confirming the Second Amended Joint Chapter 11 Plan of Reorganization (as modified), as amended and supplemented the “Plan.” For further information on the Plan, please refer to the Seadrill Limited Annual Report on Form20-F for the year ended December 31, 2018.
The Debtors subsequently emerged from bankruptcy on July 2, 2018 following the satisfaction of each of the conditions precedent to the Plan. Although we are no longer adebtor-in-possession, we were adebtor-in-possession for the entire period ended June 30, 2018.
On July 2, 2018, we had 100 million New Seadrill Common Shares outstanding, allocated as set forth below, in accordance with provisions of the Plan and issued on the Effective Date:
• | 14.25% of the New Common Shares issued to holders of unsecured claims against the Company and certain of its Chapter 11 debtor affiliates; |
• | 23.75% of the New Common Shares issued to participants in the $200 million equity investment under the Plan; |
• | 54.625% of the New Common Shares issued to participants in the $880 million senior secured notes investment under the Plan; |
• | 1.9% of the New Common Shares issued to holders of existing common equity interest in the Company as of the Effective Date, an effective exchange ratio of approximately 0.0037345 New Common Shares per each Existing Share; and |
• | 5.475% of the New Common Shares issued as a structuring fee to certain of the new money investors. |
F-11
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Fresh start accounting
Upon emergence from bankruptcy, we applied fresh start accounting to our Consolidated Financial Statements in accordance with the provision set forth in ASC852 as (i) the holders of existing voting shares of the Company prior to emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims.
We elected to apply fresh start accounting effective July 1, 2018 (the “Convenience Date”), to coincide with the timing of the normal third quarter reporting period, which resulted in Seadrill becoming a new entity for financial reporting purposes. We evaluated and concluded that events between July 1, 2018 and July 2, 2018 were immaterial and that the use of an accounting Convenience Date of July 1, 2018 was appropriate.
The effects of the Plan and the application of fresh start accounting were applied as of July 2, 2018 and the new basis of our assets and liabilities are reflected in our Consolidated Balance Sheet and the related adjustments thereto were recorded in the Consolidated Statement of Operations of the Predecessor as “Reorganization items.” As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Consolidated Financial Statements for the period after July 1, 2018 (the “Successor”) will not be comparable with the Consolidated Financial Statements prior to that date.
The Plan presented on February 26, 2018, and confirmed by the Bankruptcy Court on April 17, 2018, estimated a range of distributable value for the Successor Company of between $10.2 billion and $11.8 billion. We derived the reorganization value based on themid-point of this range of estimated distributable values. This was approximately $11.0 billion.
Reorganization items
Expenses and income directly associated with the Chapter 11 cases are reported separately in the Consolidated Statement of Operations as “Reorganization items” as required by ASC 852,Reorganizations. This category was used to reflect the net expenses and gains and losses that are the result of the reorganization of the business.
The following table summarizes the components included within reorganization items:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Advisory and professional fees | — | (5 | ) | — | (5 | ) | (187 | ) | ||||||||||||
Gain on liabilities subject to compromise | — | — | — | — | 2,958 | |||||||||||||||
Interest income on surplus cash invested | — | — | — | — | 6 | |||||||||||||||
Fresh Start valuation adjustments | — | — | — | — | (6,142 | ) | ||||||||||||||
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Total reorganization items | — | (5 | ) | — | (5 | ) | (3,365 | ) | ||||||||||||
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Advisory and professional fees- Professional and advisory fees incurred for post petition Chapter 11 expenses. Professional and advisoryexpenses have been incurred post-emergence but relate to our Chapter 11 filing.
Gain on liabilities subject to compromise -On emergence from Chapter 11 we settled our liabilities subject to compromise in accordancewith the Plan. This includes settlement on our unsecured bonds, newbuild global settlement claim and interest rate and cross-currency interest rate swaps.
Interest income on surplus cash invested- Interest income recognized on cash held within entities that had filed for Chapter 11.
Fresh start valuation adjustments- On emergence from Chapter 11, our assets and liabilities subject to compromise in accordance with ASC852 related to fresh start reporting. The effects of the application of fresh start accounting were applied as of July 2, 2018 and the new basis of our assets and liabilities are reflected in the Consolidated Balance Sheet.
F-12
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Segment information
Operating segments
We provide drilling and related services to the offshore oil and gas industry. We have three operating segments:
1. | Floaters: Services encompassing drilling, completion and maintenance of offshore exploration and production wells. The drilling contracts relate to semi-submersible rigs and drillships for harsh and benign environments inmid-, deep- and ultra-deep waters; |
2. | Jack-ups: Services encompassing drilling, completion and maintenance of offshore exploration and production wells. The drilling contracts relate tojack-up rigs for operations in harsh and benign environments; and |
3. | Other: Operations including management services to third parties and related parties. Income and expenses from these management services are classified under this segment. |
Segment results are evaluated on the basis of operating income, and the information given below is based on information used for internal management reporting.
Total operating revenue
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Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 184 | 147 | 539 | 147 | 482 | |||||||||||||||
Jack-ups | 90 | 84 | 262 | 84 | 193 | |||||||||||||||
Other | 93 | 18 | 189 | 18 | 37 | |||||||||||||||
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Total operating revenues | 367 | 249 | 990 | 249 | 712 | |||||||||||||||
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Depreciation
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Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 85 | 100 | 259 | 100 | 298 | |||||||||||||||
Jack-ups | 21 | 25 | 59 | 25 | 93 | |||||||||||||||
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Total | 106 | 125 | 318 | 125 | 391 | |||||||||||||||
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Amortization of intangibles
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Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 33 | 19 | 85 | 19 | — | |||||||||||||||
Jack-ups | 4 | 8 | 25 | 8 | — | |||||||||||||||
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Total | 37 | 27 | 110 | 27 | — | |||||||||||||||
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F-13
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Operating loss - Net loss
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Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floater operating loss | (61 | ) | (91 | ) | (227 | ) | (91 | ) | (446 | ) | ||||||||||
Jack-up operating (loss) / income | (1 | ) | (15 | ) | 17 | (15 | ) | (167 | ) | |||||||||||
Other operating income | 4 | — | 8 | — | — | |||||||||||||||
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Operating loss | (58 | ) | (106 | ) | (202 | ) | (106 | ) | (613 | ) | ||||||||||
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Unallocated items: | ||||||||||||||||||||
Total financial items and other | (460 | ) | (137 | ) | (830 | ) | (137 | ) | (3,242 | ) | ||||||||||
Income taxes | (3 | ) | (2 | ) | 9 | (2 | ) | (30 | ) | |||||||||||
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Net loss | (521 | ) | (245 | ) | (1,023 | ) | (245 | ) | (3,885 | ) | ||||||||||
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Drilling units - Total assets
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Floaters | 5,334 | 5,508 | ||||||
Jack-ups | 1,121 | 1,151 | ||||||
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Total drilling units | 6,455 | 6,659 | ||||||
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Unallocated items: | ||||||||
Investments in associated companies | 375 | 800 | ||||||
Marketable securities | 12 | 57 | ||||||
Cash and restricted cash | 1,445 | 2,003 | ||||||
Other assets | 1,204 | 1,329 | ||||||
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Total assets | 9,491 | 10,848 | ||||||
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Drilling units - Capital expenditures(1)
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Floaters | 42 | 36 | 90 | 36 | 93 | |||||||||||||||
Jack-ups | 4 | 10 | 20 | 10 | 24 | |||||||||||||||
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Total | 46 | 46 | 110 | 46 | 117 | |||||||||||||||
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(1) | The Successor periods include additions to equipment. |
F-14
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Geographic segment data
Revenues are attributed to geographical segments based on the country of operations for drilling activities, i.e. the country where the revenues are generated. The following information presents our revenues and fixed assets by geographic area:
Revenues
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Norway | 127 | 35 | 296 | 35 | 82 | |||||||||||||||
Angola | 64 | 19 | 113 | 19 | 100 | |||||||||||||||
Nigeria | 55 | 54 | 159 | 54 | 105 | |||||||||||||||
Brazil | 49 | 49 | 142 | 49 | 188 | |||||||||||||||
Saudi Arabia | 33 | 38 | 102 | 38 | 79 | |||||||||||||||
United States | 19 | 15 | 50 | 15 | 30 | |||||||||||||||
Others(1) | 20 | 39 | 128 | 39 | 128 | |||||||||||||||
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Total | 367 | 249 | 990 | 249 | 712 | |||||||||||||||
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(1) | Other countries represent countries in which we operate that individually had revenues representing less than 10% of total revenues earned for any of the periods presented. |
Fixed assets – drilling units(1)
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Norway | 1,853 | 1,326 | ||||||
Malaysia | 811 | 1,070 | ||||||
Spain | 279 | 875 | ||||||
Brazil | 667 | 688 | ||||||
United States | 644 | 658 | ||||||
Other(2) | 2,201 | 2,042 | ||||||
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Total | 6,455 | 6,659 | ||||||
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(1) | The countries in this table represent the location of the drilling unit at the end of the reporting period and are not necessarily indicative of the geographic distribution of the revenues or operating profits generated by the assets during the period. In most cases these locations are different to the country in which the Company that owns the drilling unit is registered. |
(2) | “Other” represents countries in which we operate that individually had fixed assets representing less than 10% of total fixed assets for any of the periods presented. |
Major Customers
We had the following customers with contract and reimbursable revenues greater than 10% in any of the periods presented:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Total | 20 | % | 29 | % | 22 | % | 29 | % | 21 | % | ||||||||||
Equinor | 20 | % | 15 | % | 19 | % | 15 | % | 6 | % | ||||||||||
Northern Drilling | 12 | % | — | % | 9 | % | — | % | — | % | ||||||||||
ConocoPhillips | 10 | % | 8 | % | 12 | % | 8 | % | 9 | % | ||||||||||
Saudi Aramco | 10 | % | 17 | % | 11 | % | 17 | % | 12 | % | ||||||||||
Petrobras | 8 | % | 12 | % | 12 | % | 12 | % | 26 | % |
F-15
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Revenue from Contracts with Customers
The following table provides information about receivables, contract assets and contract liabilities from our contracts with customers:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Accounts receivable, net | 221 | 208 | ||||||
Current contract assets(1) | 2 | 1 | ||||||
Non-current contract assets | — | — | ||||||
Current contract liabilities (deferred revenue)(1) | (49 | ) | (12 | ) | ||||
Non-current contract liabilities (deferred revenue) | (9 | ) | (9 | ) |
(1) | Current contract assets and liabilities balances are included in “Other current assets” and “Other current liabilities,” respectively in our unaudited Consolidated Balance Sheet. |
Significant changes in the contract assets and the contract liabilities balances during the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor) are as follows:
(In $ millions) | Contract Assets | Contract Liabilities | Net Contract Balances | |||||||||
Net contract liability at January 1, 2018 (Predecessor) | 7 | (55 | ) | (48 | ) | |||||||
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Amortization of revenue that was included in the beginning contract liability balance | — | 25 | 25 | |||||||||
Cash received, excluding amounts recognized as revenue | — | (2 | ) | (2 | ) | |||||||
Cash received against the beginning contract asset balance | (7 | ) | — | (7 | ) | |||||||
Contract assets recognized during the period | 9 | — | 9 | |||||||||
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Net contract liability at July 1, 2018 (Predecessor) | 9 | (32 | ) | (23 | ) | |||||||
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Fresh start adjustments | — | 32 | 32 | |||||||||
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Net contract asset at July 2, 2018 (Successor) | 9 | — | 9 | |||||||||
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Cash received, excluding amounts recognized as revenue | — | (5 | ) | (5 | ) | |||||||
Cash received against the beginning contract asset balance | (9 | ) | — | (9 | ) | |||||||
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Net contract liability at September 30, 2018 (Successor) | — | (5 | ) | (5 | ) | |||||||
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Significant changes in the contract assets and the contract liabilities balances during the nine months ended September 30, 2019 (Successor) are as follows:
(In $ millions) | Contract Assets | Contract Liabilities | Net Contract Balances | |||||||||
Net contract liability at January 1, 2019 (Successor) | 1 | (21 | ) | (20 | ) | |||||||
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Amortization of revenue that was included in the beginning contract liability balance | — | 4 | 4 | |||||||||
Cash received, excluding amounts recognized as revenue | — | (41 | ) | (41 | ) | |||||||
Cash received against the beginning contract asset balance | (1 | ) | — | (1 | ) | |||||||
Contract assets recognized during the period | 2 | — | 2 | |||||||||
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Net contract liability at September 30, 2019 (Successor) | 2 | (58 | ) | (56 | ) | |||||||
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Certain direct and incremental costs that are expected to be recovered, relate directly to a contract, and enhance resources that will be used in satisfying our performance obligations in the future. Such costs are deferred and amortized ratably to contract drilling expense as services are rendered over the initial term of the related drilling contract.
Deferred revenue -The deferred revenue balance of $49 million reported in “Other current liabilities” at September 30, 2019 (Successor) isexpected to be realized within the next twelve months and $9 million reported in “Othernon-current liabilities” is expected to be realized within the following next twelve months. The deferred revenue included above consists primarily of mobilization and upgrade revenue for both wholly and partially unsatisfied performance obligations as well as expected variable mobilization and upgrade revenue for partially unsatisfied performance obligations, which has been estimated for purposes of allocating across the entire corresponding performance obligations. The amounts are derived from the specific terms within drilling contracts that contain such provisions, and the expected timing for recognition of such revenue is based on the estimated start date and duration of each respective contract based on information known at September 30, 2019. The actual timing of recognition of such amounts may vary due to factors outside of our control.
F-16
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Loss on impairment of investments
The total impairments of investments for the three and nine months ended September 30, 2019 (Successor) and for the period from July 2, 2018 through September 30, 2018 (Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor) were as follows:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Seadrill Partners - Direct ownership interests | (248 | ) | — | (248 | ) | — | — | |||||||||||||
Seadrill Partners subsidiaries - IDRs | (54 | ) | — | (54 | ) | — | — | |||||||||||||
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Total loss on impairment of investments | (302 | ) | — | (302 | ) | — | — | |||||||||||||
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On September 6, 2019, Seadrill Partners LLC received notification from the New York Stock Exchange (“the NYSE”) that trading of their common units had been suspended due to the Company’s low market capitalization. Management determined that the investments in Seadrill Partners was other than temporarily impaired. As a result, an impairment of $302 million was recognized against the Seadrill Partners direct ownership interests, subordinated units and IDRs in the Consolidated Statements of Operations within “Loss on impairment of investments” (December 31, 2018 (Successor): nil) for the three and nine months ended September 30, 2019.
Equity method investments
We hold investments in both subordinated units of Seadrill Partners and direct ownership interests in controlled subsidiaries of Seadrill Partners, which are accounted for under the equity method. The fair value of these investments are not readily determinable, as they are not publicly traded. These investments were recognized at fair value on the deconsolidation of Seadrill Partners in January 2014 and therefore categorized at level three on the fair value hierarchy. Level three inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
As at September 30, 2019 (Successor), the carrying value of the equity method investment in Seadrill Partners were adjusted to fair value, resulting in a loss recognized in the Consolidated Statements of Operations of $248 million in “Loss on impairment of investments” for the three and nine months ended September 30, 2019.
The fair value of equity method investments was derived using an income approach, which discounts future free cash flows. The estimated future free cash flows associated with the investments were primarily based on expectations around applicable day rates, drilling unit utilization, operating costs, capital and long-term maintenance expenditures, applicable tax rates and industry conditions. The cash flows were estimated over the remaining useful economic lives of the underlying assets but no longer than 30 years in total, and discounted using an estimated market participant WACC of11.25-12.25%.
The discounted cash flow model derived an enterprise value of the investments, after which associated net debt was subtracted to provide equity values. We have applied a probability weighted range of results against our model inputs to reflect the potential refinancing of Seadrill Partners.
Investments recorded at cost less impairment
We also hold the Seadrill Limited member interest, which is a 0%non-economic interest, and which holds the rights to 100% of the Incentive Distribution Rights “IDRs” of Seadrill Partners. The Seadrill Limited member interest and the IDRs in Seadrill Partners are accounted for as cost-method investments on the basis that they do not represent common stock interests and their fair value is not readily determinable.
As at September 30, 2019 (Successor), the carrying value of the cost method investments in Seadrill Partners were adjusted to a fair value of nil, resulting in a loss recognized in the Consolidated Statements of Operations of $54 million in “Loss on impairment of investments” for the three and nine months ended September 30, 2019. The value was determined using a Black-Scholes based Option Pricing Model (“OPM”) waterfall which included all debt and equity components of the business. The method values different tranches in the capital structure in sequence of seniority.
F-17
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Taxation
Income tax expense for the three months ended September 30, 2019 was $3 million (period from July 2, 2018 through September 30, 2018: expense of $2 million). Income tax benefit for the nine months ended September 30, 2019 was $9 million (period from January 1, 2018 through July 1, 2018 and period from July 2, 2018 through September 30, 2018: expense of $30 million and $2 million respectively).
The income tax benefit was primarily due to the release of uncertain tax positions relating to changes in US tax legislation that was recognized in a prior period, and a reduction of the deferred tax liability on unremitted earnings of subsidiaries.
Seadrill Limited is incorporated in Bermuda, where a tax exemption has been granted until 2035. Other jurisdictions in which Seadrill’s subsidiaries operate are taxable based on rig operations. A loss in one jurisdiction may not be offset against taxable income in other jurisdictions. Thus, we may pay tax within some jurisdictions even though we might have losses in others.
Tax authorities in certain jurisdictions examine our tax returns and some have issued assessments. We are defending our tax positions in those jurisdictions.
The Brazilian tax authorities have issued a series of assessments with respect to our returns for certain years up to 2012 for an aggregate amount equivalent to $161 million including interest and penalties. The relevant group companies are robustly contesting these assessments, including filing relevant appeals, an adverse outcome on these proposed assessments could result in a material adverse impact on our Consolidated Balance Sheet, Statement of Operations or Statement of Cash Flow. On May 6, 2019, we received notice that we would need to post 330 million Brazilian Reais of collateral with a financial institution in order to continue with our appeal against certain years. This amount was transferred to BTG Bank and is currently being held in restricted cash. See Note 9 – Restricted cash .
The Nigerian tax authorities have issued a series of claims and assessments both directly and lodged through the Chapter 11 process with respect to returns for subsidiaries for certain years up to 2016 for an aggregate amount equivalent to $171 million. The relevant group companies are robustly contesting these assessments including filing relevant appeals in Nigeria and it is also intended that one or more formal objections against these claims for distribution purposes may be filed in the US court. An adverse outcome on these proposed assessments could result in a material adverse impact on our Consolidated Balance Sheet, Statement of Operations or Statement of Cash Flow.
Note 8 – Loss per share
The computation of basic loss per share (“EPS”) is based on the weighted average number of shares outstanding during the period. Diluted EPS includes the effect of the assumed conversion of potentially dilutive instruments.
The components of the numerator for the calculation of basic and diluted EPS were as follows:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Net loss attributable to shareholder | (522 | ) | (240 | ) | (1,020 | ) | (240 | ) | (3,881 | ) | ||||||||||
Effect of dilution | — | — | — | — | — | |||||||||||||||
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Diluted net loss available to shareholders | (522 | ) | (240 | ) | (1,020 | ) | (240 | ) | (3,881 | ) | ||||||||||
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The components of the denominator for the calculation of basic and diluted EPS were as follows:
Successor | Predecessor | |||||||||||||||||||
(In millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Basic earnings per share: | ||||||||||||||||||||
Weighted average number of common shares outstanding | 100 | 100 | 100 | 100 | 504 | |||||||||||||||
Diluted earnings per share: | ||||||||||||||||||||
Effect of dilution | — | — | — | — | — | |||||||||||||||
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Weighted average number of common shares outstanding adjusted for the effects of dilution | 100 | 100 | 100 | 100 | 504 | |||||||||||||||
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F-18
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The basic and diluted loss per share were as follows:
Successor | Predecessor | |||||||||||||||||||
(In $) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Basic loss per share | (5.21 | ) | (2.40 | ) | (10.18 | ) | (2.40 | ) | (7.71 | ) | ||||||||||
Diluted loss per share | (5.21 | ) | (2.40 | ) | (10.18 | ) | (2.40 | ) | (7.71 | ) |
Note 9 – Restricted cash
Restricted cash as at September 30, 2019 (Successor) and December 31, 2018 (Successor) was as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Accounts pledged as collateral for senior secured notes(1) | 19 | 328 | ||||||
Accounts pledged as collateral for performance bonds and similar guarantees | 103 | 101 | ||||||
Demand deposit pledged as collateral for tax related guarantee(2) | 80 | — | ||||||
Other | 27 | 32 | ||||||
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Total restricted cash | 229 | 461 | ||||||
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(1) | The balance as at December 31, 2018 was used to repurchase senior secured notes on April 10, 2019 (see Note 16 - Debt for further details). In September 2019, Seabras Sapura repaid $19 million of related party and shareholder loans, with the cash proceeds held in escrow against a future redemption of senior secured notes. |
(2) | We placed a total of 330 million Brazilian Reais of collateral with BTG Bank under a letter of credit agreement. This related to long-running tax disputes which are currently being litigated through the Brazilian courts. |
Restricted cash is presented in our Consolidated Balance Sheets as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Current restricted cash | 130 | 461 | ||||||
Non-current restricted cash | 99 | �� | — | |||||
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Total restricted cash | 229 | 461 | ||||||
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Note 10 – Marketable securities
We hold investments in certain marketable securities which we record at fair value and recognize any changes directly in net income. The below table shows the carrying value of our investments in marketable securities for periods presented in this report.
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Seadrill Partners - Common units | 2 | 45 | ||||||
Archer | 10 | 12 | ||||||
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Total marketable securities | 12 | 57 | ||||||
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F-19
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The below table shows the gain and losses recognized through net loss for the periods presented in this report.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Seadrill Partners - Common units | (7 | ) | 6 | (43 | ) | 6 | (5 | ) | ||||||||||||
Archer | (3 | ) | (9 | ) | (2 | ) | (9 | ) | 2 | |||||||||||
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Total loss on marketable securities | (10 | ) | (3 | ) | (45 | ) | (3 | ) | (3 | ) | ||||||||||
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Note 11 – Accounts receivable
Accounts receivable are held at their nominal amount less an allowance for doubtful amounts. Doubtful amounts are recognized when it is unlikely that required payments of specific amounts will occur as a result of the financial condition of the customer. As at September 30, 2019 (Successor) we had no allowances for doubtful accounts netted against our accounts receivable (December 31, 2018 (Successor): nil).
We recognized no bad debt expense for the three and nine months ended September 30, 2019 (Successor) and for the period from January 1, 2018 through July 1, 2018 (Predecessor) we recognized $48 million. We recognized no bad debt expense for the period from July 2, 2018 through September 30, 2018 (Predecessor).
Note 12 - Other Assets
As at September 30, 2019 (Successor) and December 31, 2018 (Successor), we had the following other assets balances.
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Favorable contracts to be amortized | 58 | 186 | ||||||
Taxes receivable | 55 | 50 | ||||||
Prepaid expenses | 48 | 32 | ||||||
Reimbursable amounts due from customers and related parties | 43 | 10 | ||||||
Right of use asset | 18 | — | ||||||
Insurance receivable(1) | 14 | 1 | ||||||
Deferred contract costs | 13 | 15 | ||||||
Derivative asset - interest rate cap | 2 | 39 | ||||||
Other assets | 26 | 25 | ||||||
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Total other assets | 277 | 358 | ||||||
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(1) | In January 2019, there was a loss incident on theSevan Louisiana related to a malfunction of its subsea equipment. As at September 30, 2019, we have incurred $19 million of costs to repair the equipment, of which $4 million has been recovered and an additional $14 million will be recoverable under our physical damage insurance. This is presented within “Insurance receivable” in the table above and within “Other current assets” in our Consolidated Balance Sheet as at September 30, 2019. |
Other assets were presented in our Consolidated Balance Sheets as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Other current assets | 232 | 322 | ||||||
Othernon-current assets | 45 | 36 | ||||||
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Total other assets | 277 | 358 | ||||||
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F-20
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 – Investment in associated companies
As at September 30, 2019 (Successor) and December 31, 2018 (Successor), the carrying values of our investments in associated companies were as follows.
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Seadrill Partners - Direct ownership interests | 134 | 479 | ||||||
Seadrill Partners subsidiaries - Subordinated units(1) | — | 17 | ||||||
Seadrill Partners subsidiaries - IDRs(1) | — | 54 | ||||||
Seabras Sapura | 91 | 77 | ||||||
Seabras Sapura - Shareholder loans | 123 | 132 | ||||||
SeaMex | 27 | 41 | ||||||
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Total investment in associated companies | 375 | 800 | ||||||
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(1) | These balances are recorded at cost less impairment as (i) they do not represent common stock interests and (ii) their fair values are not readily determinable. |
In September 2019, Seabras Sapura repaid $9 million of shareholder loans, with the cash proceeds held in escrow against a future redemption of senior secured notes.
In September 2019, an impairment of $302 million was recognized against the Seadrill Partners direct ownership interests and IDRs in the Consolidated Statements of Operations within “Loss on impairment of investments” (December 31, 2018 (Successor), nil). See Note 6– Loss on impairment of investments for further details.
Note 14 – Drilling units
The following table summarizes the movement for the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor):
(In $ millions) | Cost | Accumulated depreciation | Net book value | |||||||||
As at January 1, 2018 (Predecessor) | 17,335 | (4,119 | ) | 13,216 | ||||||||
Additions | 117 | — | 117 | |||||||||
Depreciation | — | (388 | ) | (388 | ) | |||||||
Impairment | (414 | ) | — | (414 | ) | |||||||
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As at July 1, 2018 (Predecessor) | 17,038 | (4,507 | ) | 12,531 | ||||||||
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Fresh Start adjustments | (10,241 | ) | 4,507 | (5,734 | ) | |||||||
As at July 2, 2018 (Successor) | 6,797 | — | 6,797 | |||||||||
Additions | 42 | — | 42 | |||||||||
Depreciation | — | (123 | ) | (123 | ) | |||||||
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As at September 30, 2018 (Successor) | 6,839 | (123 | ) | 6,716 | ||||||||
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The following table summarizes the movement for the nine months ended September 30, 2019 (Successor):
(In $ millions) | Cost | Accumulated depreciation | Net book value | |||||||||
As at January 1, 2019 (Successor) | 6,890 | (231 | ) | 6,659 | ||||||||
Additions | 106 | — | 106 | |||||||||
Depreciation | — | (310 | ) | (310 | ) | |||||||
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As at September 30, 2019 (Successor) | 6,996 | (541 | ) | 6,455 | ||||||||
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F-21
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 15 – Equipment
Equipment consists of office equipment, software, furniture and fittings.
The following table summarizes the movement for the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor):
(In $ millions) | Cost | Accumulated depreciation | Net book value | |||||||||
As at January 1, 2018 (Predecessor) | 84 | (55 | ) | 29 | ||||||||
Additions | 9 | — | 9 | |||||||||
Depreciation | — | (3 | ) | (3 | ) | |||||||
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As at July 1, 2018 (Predecessor) | 93 | (58 | ) | 35 | ||||||||
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Fresh start adjustments | (64 | ) | 58 | (6 | ) | |||||||
As at July 2, 2018 (Successor) | 29 | — | 29 | |||||||||
Additions | 3 | — | 3 | |||||||||
Depreciation | — | (2 | ) | (2 | ) | |||||||
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As at September 30, 2018 (Successor) | 32 | (2 | ) | 30 | ||||||||
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The following table summarizes the movement for the nine months ended September 30, 2019 (Successor):
(In $ millions) | Cost | Accumulated depreciation | Net book value | |||||||||
As at January 1, 2019 (Successor) | 34 | (5 | ) | 29 | ||||||||
Additions | 4 | — | 4 | |||||||||
Depreciation | — | (8 | ) | (8 | ) | |||||||
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As at September 30, 2019 (Successor) | 38 | (13 | ) | 25 | ||||||||
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Note 16 – Debt
As at September 30, 2019 (Successor) and December 31, 2018 (Successor), we had the following liabilities for third party debt agreements:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Secured credit facilities | 5,662 | 5,662 | ||||||
Senior secured notes | 476 | 769 | ||||||
Credit facilities contained within variable interest entities | 633 | 655 | ||||||
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Total debt principal | 6,771 | 7,086 | ||||||
Less: debt discount | (145 | ) | (172 | ) | ||||
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Carrying value | 6,626 | 6,914 | ||||||
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This was presented in our Consolidated Balance Sheets as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Debt due within one year | 296 | 33 | ||||||
Long-term debt | 6,330 | 6,881 | ||||||
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Total debt principal | 6,626 | 6,914 | ||||||
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F-22
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Key changes to borrowing facilities
On April 10, 2019, we repurchased $311 million of our principal senior secured notes for $342 million. The $31 million additional cash paid represents the 7% purchase premium and settlement of accruedpayment-in-kind and cash interest.
On July 15, 2019, $18 million of accruedpayment-in-kind interest on our senior secured notes were compounded and additional notes were issued.
Collateral
Our credit facilities are secured by, among other things, liens on our drilling units. Our credit facility agreements contain cross-default provisions, meaning that if we defaulted and amounts became due and payable under one of our credit agreements, this would trigger a cross-default in our other facilities so that amounts outstanding under our other credit facility agreements become due and payable and capable of being accelerated.
Debt maturities
The outstanding debt as at September 30, 2019 is repayable as follows:
Successor | ||||
(In $ millions) | Year ended September 30, | |||
2020 | 296 | |||
2021 | 550 | |||
2022 | 760 | |||
2023 | 1,655 | |||
2024 | 1,273 | |||
2025 and thereafter | 2,237 | |||
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Total debt principal(1) (2) | 6,771 | |||
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(1) | Debt principal repayments, excluding cash andpayment-in-kind interest. |
(2) | The above table assumes that we will make amortization payments on our secured credit facilities from 2020. Under the terms of the bank financing agreements, we have the ability to defer up to $500 million of amortization payments (Amortization Conversion Election facility or “ACE”) between 90 and 120 days in advance of such payments becoming due. The deferred amortization then becomes part of the balloon payment for each relevant facility. Based on the amortization schedule, the ACE has capacity to defer the first five quarters of amortization. |
Note 17 – Other Liabilities
As at September 30, 2019 (Successor) and December 31, 2018 (Successor), we had the following other liability balances.
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Accrued expenses | 119 | 107 | ||||||
Uncertain tax positions | 97 | 100 | ||||||
Contract liabilities | 58 | 21 | ||||||
Employee withheld taxes, social security and vacation payments | 45 | 40 | ||||||
Taxes payable | 35 | 42 | ||||||
Accrued interest expense | 26 | 61 | ||||||
Lease liabilities | 20 | — | ||||||
Unfavorable contracts to be amortized | 8 | 27 | ||||||
Other liabilities | 28 | 33 | ||||||
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Total Other Liabilities | 436 | 431 | ||||||
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F-23
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other liabilities were presented in our Consolidated Balance Sheets as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Other current liabilities | 305 | 310 | ||||||
Othernon-current liabilities | 131 | 121 | ||||||
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Total Other Liabilities | 436 | 431 | ||||||
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Note 18 - Leases
We have operating leases relating to our premises, the most significant being our offices in London, Liverpool, Oslo, Stavanger, Singapore, Houston, Rio de Janeiro and Dubai. Rent expense for the nine months ended September 30, 2019 (Successor) was $9 million and for the period from July 2, 2018 through September 30, 2018 (Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor) was $4 million and $9 million, respectively.
Below are the significant assumptions and judgments we applied to account for our leases in accordance with Topic 842.
1. | We apply judgment in determination whether a contract contains a lease or a lease component as defined by Topic 842. |
2. | We have elected to combine leases andnon-lease components. As a result, we do not allocate our consideration between leases andnon-lease components. |
3. | The discount rate applied to our operating leases is our incremental borrowing rate. We estimated our incremental borrowing rate based on the rate for our traded debt. |
4. | Within the terms and conditions of some of our operating leases we have options to extend or terminate the lease. In instances where we are reasonably certain to exercise available options to extend or terminate, then the option was included in determining the appropriate lease term to apply. Options to renew our lease terms are included in determining theright-of-use asset and lease liability when it is reasonably certain that we will exercise that option. |
For operating leases where we are the lessee, our future undiscounted cash flows as at September 30, 2019 are as follows:
Successor | ||||
(In $ millions) | Year ended September 30, | |||
2020 | 9 | |||
2021 | 8 | |||
2022 | 6 | |||
2023 | 2 | |||
2024 and thereafter | 2 | |||
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Total | 27 | |||
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The following table gives a reconciliation between the undiscounted cash flows and the related operating lease liability recognized in our Consolidated Balance Sheets as at September 30, 2019:
Successor | ||||
(In $ millions) | As at September 30, 2019 | |||
Total undiscounted cash flows | 27 | |||
Less discount | (7 | ) | ||
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Operating lease liability | 20 | |||
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Of which: | ||||
Current | 7 | |||
Non-current | 13 |
F-24
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table gives supplementary information regarding our lease accounting at September 30, 2019:
Successor | Successor | |||||||
(In $ million) | Three Months Ended September 30, 2019 | Nine months ended September 30, 2019 | ||||||
Operating Lease Cost: | ||||||||
Operating lease cost | 2 | 9 | ||||||
Short-term lease cost | — | 1 | ||||||
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Total Lease cost | 2 | 10 | ||||||
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Other information: | ||||||||
Cash paid for amounts included in the measurement of lease liabilities- Operating Cash flows | 2 | 10 | ||||||
Right-of-use assets obtained in exchange for operating lease liabilities during the period | — | 1 | ||||||
Weighted-average remaining lease term in months | 35 | 35 | ||||||
Weighted-average discount rate | 13 | % | 13 | % |
We also have operating subleases, where we are the lessor, relating to some of our premises. The most significant subleases being our offices in Stavanger and Houston. We do not expect to derive further value from the subleased portion of ourright-of-use assets following the end of the sublease term. These subleases do not include variable payments, and do not include options for a lessee to purchase the underlying asset. We do not allocate lease consideration between lease andnon-lease components because we have elected not to separate lease andnon-lease components for our operating leases where Seadrill is the lessor.
For our operating subleases, the future undiscounted cash flows as at September 30, 2019 are as follows:
Successor | ||||
(In $ millions) | Year ended September 30, | |||
2020 | 1 | |||
2021 | 1 | |||
2022 | 1 | |||
2023 | — | |||
2024 and thereafter | — | |||
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Total | 3 | |||
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Note 19 – Common shares
Share capital for the period from January 1, 2018 through July 1, 2018 (Predecessor), the period from July 2, 2018 through September 30, 2018 (Successor) and the period January 1, 2019 to September 30, 2019 (Successor) was as follows:
Issued and fully paid share capital $0.10 par value each | Issued and fully paid share capital $2.00 par value each | Treasury shares held by the Company - $2.00 par value each | ||||||||||||||||||||||
Shares | $ millions | Shares | $ millions | Shares | $ millions | |||||||||||||||||||
At January 1, 2018, March 31, 2018, June 30, 2018 and July 1 2018 (Predecessor) | — | — | 508,763,020 | 1,017 | (4,244,080 | ) | (9 | ) | ||||||||||||||||
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Cancellation of Predecessor Company common stock | — | — | (508,763,020 | ) | (1,017 | ) | 4,244,080 | 9 | ||||||||||||||||
Successor Company share issuance | 100,000,000 | 10 | — | — | — | — | ||||||||||||||||||
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At July 2, 2018 and September 30, 2018 (Successor) | 100,000,000 | 10 | — | — | — | — | ||||||||||||||||||
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At January 1, 2019, March 31, 2019, June 30, 2019 (Successor) | 100,000,000 | 10 | — | — | — | — | ||||||||||||||||||
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Shares issued under RSU plan | 223,567 | — | — | — | — | — | ||||||||||||||||||
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At September 30, 2019 (Successor) | 100,223,567 | 10 | — | — | — | — | ||||||||||||||||||
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F-25
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On April 26, 2019, we approved the grant of 1.8 million performance shares to certain employees under our employee incentive plan. The performance shares were granted on May 31, 2019. The awards are subject to service and performance conditions and the vesting period ends on March 31, 2022.
As at September 30, 2019, 223,567 shares were vested and issued in relation to the RSU plan.
Note 20 –Non-controlling interest
Changes innon-controlling interest for the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor) were as follows:
(In $ millions) | North Atlantic Drilling Ltd | Sevan Drilling Limited | Asia Offshore Drilling Ltd | Ship Finance Internation al Ltd VIEs | Seadrill Nigeria Operations Limited | Total | ||||||||||||||||||
As at January 1, 2018 (Predecessor) | 76 | 226 | 149 | (59 | ) | 7 | 399 | |||||||||||||||||
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Adoption of new accounting standard ASU2016-16 - Income Taxes | (25 | ) | — | — | — | — | (25 | ) | ||||||||||||||||
Net income attributable tonon-controlling interest | (17 | ) | (10 | ) | — | 4 | 1 | (22 | ) | |||||||||||||||
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As at March 31, 2018 (Predecessor) | 34 | 216 | 149 | (55 | ) | 8 | 352 | |||||||||||||||||
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Net income attributable tonon-controlling interest | (143 | ) | — | 1 | 3 | 1 | (138 | ) | ||||||||||||||||
Redeemablenon-controlling interest | — | — | (150 | ) | — | — | (150 | ) | ||||||||||||||||
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As at June 30, 2018 (Predecessor) | (109 | ) | 216 | — | (52 | ) | 9 | 64 | ||||||||||||||||
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As at July 1, 2018 (Predecessor) | (109 | ) | 216 | — | (52 | ) | 9 | 64 | ||||||||||||||||
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Elimination of NCI of North Atlantic Drilling Ltd and Sevan Drilling Limited | 109 | (216 | ) | — | — | — | (107 | ) | ||||||||||||||||
Fair value adjustment of the non-controlling interest in the Ship Finance VIEs and Seadrill Nigeria Operations Limited | — | — | — | 199 | (2 | ) | 197 | |||||||||||||||||
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As at July 2, 2018 (Successor) | — | — | — | 147 | 7 | 154 | ||||||||||||||||||
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Net income attributable tonon-controlling interest | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||
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As at September 30, 2018 (Successor) | — | — | — | 144 | 7 | 151 | ||||||||||||||||||
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Changes innon-controlling interest for the period from January 1, 2019 (Successor) through to September 30, 2019 (Successor) were as follows:
(In $ millions) | Ship Finance International Ltd VIEs | Seadrill Nigeria Operations Limited | Total | |||||||||
As at January 1, 2019 (Successor) and March 31, 2019 (Successor) | 145 | 7 | 152 | |||||||||
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Net loss attributable tonon-controlling interest | (2 | ) | — | (2 | ) | |||||||
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As at June 30, 2019 (Successor) | 143 | 7 | 150 | |||||||||
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Net income attributable tonon-controlling interest | (1 | ) | 2 | 1 | ||||||||
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As at September 30, 2019 (Successor) | 142 | 9 | 151 | |||||||||
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F-26
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 21 – Redeemablenon-controlling interest
Changes in redeemablenon-controlling interest for the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor) are set out in the table below.
(In $ millions) | Asia Offshore Drilling Ltd | |||
As at December 31, 2017 (Predecessor) and March 31, 2018 (Predecessor) | — | |||
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Reclassification fromnon-controlling interest | 150 | |||
Fair value adjustment on initial recognition | (127 | ) | ||
Net income attributable to redeemablenon-controlling interest in the period from January 1, 2018 through July 1, 2018. | 2 | |||
Fresh start adjustments | 5 | |||
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As at July 1, 2018 (Predecessor) | 30 | |||
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As at July 2, 2018 (Successor) | 30 | |||
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Net loss attributable to redeemablenon-controlling interest in the period July 2, 2018 through September 30, 2018. | (2 | ) | ||
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As at September 30, 2018 (Successor) | 28 | |||
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Changes in redeemablenon-controlling interest for the period from December 31, 2018 to September 30, 2019 are set out in the table below.
(In $ millions) | Asia Offshore Drilling Ltd | |||
As at December 31, 2018 (Successor) | 38 | |||
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Net loss attributable to redeemablenon-controlling interest in the period | (1 | ) | ||
Fair value adjustment | 1 | |||
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As at March 31, 2019 (Successor) | 38 | |||
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Net loss attributable to redeemablenon-controlling interest in the period | (1 | ) | ||
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As at June 30, 2019 (Successor) | 37 | |||
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Fair value adjustment | (3 | ) | ||
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As at September 30, 2019 (Successor) | 34 | |||
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On April 4, 2018, the Predecessor executed a Transaction Support Agreement (“TSA”) with a minority shareholder of one of Seadrill Limited’s subsidiaries, Asia Offshore Drilling Limited (“AOD”). The TSA provided a put option to the holders ofnon-controlling interest shares. The put option may be exercised from October 1, 2019 until September 30, 2020.
The put option gave the holders the right (with no obligation) to sell the shares it owns to Seadrill subject to a price ceiling. After the end of the effective period of the put option, if the right remains unexercised, Seadrill gets the right (with no obligation) to purchase thenon-controlling interest in AOD at a price subject to the floor price (“Call Option”). The Call Option may be exercised from October 1, 2020 until March 31, 2021. While the Call Option provides for a redemption mechanism, the redemption option is made by Seadrill. The put option, however, generates a redemption feature for thenon-controlling interest holder that is outside the control of Seadrill.
The redemption feature caused thenon-controlling interest held in AOD to be reclassified from equity to “Redeemablenon-controlling interest” within the Consolidated Balance Sheet. We record the redeemablenon-controlling interest at fair value. Any fair value adjustment to generate an expected redemption value has been recognized through retained earnings.
F-27
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 22 – Accumulated other comprehensive income / (loss)
Accumulated other comprehensive income / (loss) for the period from January 1, 2018 through July 1, 2018 (Predecessor) and the period from July 2, 2018 through September 30, 2018 (Successor) were as follows:
(In $ millions) | Unrealized gain on marketable securities | Unrealized gain on foreign exchange | Actuarial (loss) / gain relating to pension | Share in unrealized gain from associated companies | Change in unrealized gain on interest rate swaps in VIEs | Change in debt component on Archer facility | Total | |||||||||||||||||||||
As at December 31, 2017 (Predecessor) | 31 | 36 | (26 | ) | 15 | 2 | — | 58 | ||||||||||||||||||||
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Adoption of accounting standard update | (31 | ) | — | — | — | — | — | (31 | ) | |||||||||||||||||||
Other comprehensive income | — | — | — | 9 | — | — | 9 | |||||||||||||||||||||
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As at March 31, 2018 (Predecessor) | — | 36 | (26 | ) | 24 | 2 | — | 36 | ||||||||||||||||||||
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Other comprehensive income | — | — | 1 | 2 | — | 2 | 5 | |||||||||||||||||||||
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As at June 30, 2018 (Predecessor) | — | 36 | (25 | ) | 26 | 2 | 2 | 41 | ||||||||||||||||||||
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As at July 1, 2018 (Predecessor) | — | 36 | (25 | ) | 26 | 2 | 2 | 41 | ||||||||||||||||||||
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Reset accumulated other comprehensive (loss)/income | — | (36 | ) | 25 | (26 | ) | (2 | ) | (2 | ) | (41 | ) | ||||||||||||||||
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As at July 2, 2018 (Successor) | — | — | — | — | — | — | — | |||||||||||||||||||||
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Other comprehensive loss | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
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As at September 30, 2018 (Successor) | — | — | — | (1 | ) | — | — | (1 | ) | |||||||||||||||||||
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Accumulated other comprehensive income / (loss) for the period from January 1, 2019 (Successor) through to September 30, 2019 (Successor) were as follows:
(In $ millions) | Unrealized gain on marketable securities | Unrealized gain on foreign exchange | Actuarial (loss) / gain relating to pension | Share in unrealized loss from associated companies | Change in unrealized gain on interest rate swaps in VIEs | Change in debt component on Archer facility | Total | |||||||||||||||||||||
As at January 1, 2019 (Successor) | — | — | 1 | (5 | ) | — | (3 | ) | (7 | ) | ||||||||||||||||||
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Other comprehensive (loss)/income | — | — | — | (4 | ) | — | 5 | 1 | ||||||||||||||||||||
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As at March 31, 2019 (Successor) | — | — | 1 | (9 | ) | — | 2 | (6 | ) | |||||||||||||||||||
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Other comprehensive (loss)/income | — | — | — | (5 | ) | — | 1 | (4 | ) | |||||||||||||||||||
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As at June 30, 2019 (Successor) | — | — | 1 | (14 | ) | — | 3 | (10 | ) | |||||||||||||||||||
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Other comprehensive (loss)/income | — | — | (2 | ) | (5 | ) | — | 1 | (6 | ) | ||||||||||||||||||
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As at September 30, 2019 (Successor) | — | — | (1 | ) | (19 | ) | — | 4 | (16 | ) | ||||||||||||||||||
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Effective January 1, 2018, we adopted ASU2016-01, which applies to equity investments that are neither (i) accounted for under the equity method or (ii) result in consolidation. Under ASU2016-01 we record such investments at fair value and recognize any changes directly in net income, unless there is no readily ascertainable fair value, in which case we record the investment at cost less impairment. For fiscal periods beginning prior to January 1, 2018, marketable securities not accounted for under the equity method were classified asavailable-for-sale. Unrealized gains and losses on equity securities classified asavailable-for-sale were recognized in other comprehensive income. When we adopted ASU2016-01 on January 1, 2018, we reclassified $31 million of previously recognized fair value gains from accumulated other comprehensive income to retained earnings.
Income taxes associated with each component of other comprehensive income were nil for the nine months ended September 30, 2019 (Successor) (September 30, 2018 (Successor): nil).
F-28
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 23 – Risk management and financial instruments
We are exposed to several market risks, including credit risk, foreign currency risk and interest rate risk. Our policy is to reduce our exposure to these risks, where possible, within boundaries deemed appropriate by our management team. This may include the use of derivative instruments.
Credit risk
We have financial assets, including cash and cash equivalents, marketable securities, other receivables and certain amounts receivable on derivative instruments. These assets expose us to credit risk arising from possible default by the counterparty. Most of the counterparties are creditworthy financial institutions or large oil and gas companies. We do not expect any significant loss to result fromnon-performance by such counterparties.
We do not demand collateral in the normal course of business. The credit exposure of derivative financial instruments is represented by the fair value of contracts with a positive fair value at the end of each period, adjusted for ournon-performance credit risk assumption.
Concentration of risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that most of the amounts are carried with Citibank, Nordea Bank Finland Plc, Danske Bank A/S, BNP Paribas, BTG Bank and ING Bank N.V. We consider these risks to be remote. We also have a concentration of risk with respect to customers. For details on the customers with greater than 10% of contract and reimbursable revenues, refer to Note 4 - Segment information.
Foreign exchange risk
As is customary in the oil and gas industry, most of our revenues and expenses are denominated in U.S. dollars, which is the functional currency of most of our subsidiaries and equity method investees. However, a portion of the revenues and expenses of certain of our subsidiaries and equity method investees are denominated in other currencies. We are therefore exposed to foreign exchange gains and losses that may arise on the revaluation or settlement of monetary balances denominated in foreign currencies.
Our foreign exchange exposure primarily relates to foreign denominated cash and working capital balances. We do not expect these exposures to cause a significant amount of fluctuation in net income and therefore do not currently hedge them. Further, the effect of fluctuations in currency exchange rates caused by our international operations generally has not had a material impact on our overall operating results.
Interest rate risk
Our exposure to interest rate risk relates mainly to our floating rate debt and balances of surplus funds placed with financial institutions. We manage this risk through the use of derivative arrangements.
On May 11, 2018, we purchased an interest rate cap for $68 million to mitigate our exposure to future increases in LIBOR on our Senior Credit Facility debt. The interest rate cap is not designated as a hedge and we do not apply hedge accounting. The capped rate against the3-month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023.
The LIBOR rate applied on our debt at September 30, 2019 was 2.11%. At this date, the interest cap would mitigate 24% of the impact of a theoretical 1% point increase in LIBOR. This is set out in the below table.
(In $ millions) | Amount | Annual impact of 1% point increase in rates (before impact of interest rate cap) | Less: impact of interest rate cap | Annual impact of 1% point increase in rates (after impact of interest rate cap) | ||||||||||||
Senior Credit Facility debt - hedged | 4,500 | 45 | (11 | ) | 34 | |||||||||||
Senior Credit Facility debt - not hedged | 1,162 | 12 | — | 12 | ||||||||||||
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Total Senior Credit Facility Debt | 5,662 | 57 | (11 | ) | 46 | |||||||||||
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F-29
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We have set out our exposure to interest rate risk on our net debt obligations at September 30, 2019 in the table below:
(In $ millions) | Principal outstanding | Hedging instruments - see below | Net exposure | Annual impact of 1% increase in rates - see below | ||||||||||||
Senior credit facilities | 5,662 | 4,500 | 1,162 | 46 | ||||||||||||
Debt contained within VIEs | 633 | — | 633 | 6 | ||||||||||||
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Total floating rate debt obligations | 6,295 | 4,500 | 1,795 | 52 | ||||||||||||
Senior secured notes(1) | 476 | — | N/A | — | ||||||||||||
Less: Cash and Restricted Cash | (1,445 | ) | — | (1,445 | ) | (14 | ) | |||||||||
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Net debt | 5,326 | 4,500 | 350 | 38 | ||||||||||||
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(1) | The interest on the senior secured notes is fixed and therefore does not have exposure to interest rate fluctuations |
Gains and losses on derivatives reported in Consolidated Statement of Operations
Gains and losses on derivatives reported in our Consolidated Statement of Operations included the following:
(In $ millions) | Successor | Predecessor | ||||||||||||||||||
(Loss)/gain recognized in the Consolidated Statement of Operations relating to derivative financial instruments | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Interest rate cap agreement | (4 | ) | 11 | (37 | ) | 11 | (6 | ) | ||||||||||||
Archer convertible debt instrument | — | (8 | ) | — | (8 | ) | 2 | |||||||||||||
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Loss on derivative financial instruments | (4 | ) | 3 | (37 | ) | 3 | (4 | ) | ||||||||||||
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Interest rate cap- This represents changes in fair value on our interest rate cap agreement referred above.
Archer convertible debt instrument- This represents gains and losses on the conversion option included within a $45 million convertiblebond issued to us by Archer. Please see Note 25 – Related party transactions for further details.
Derivative financial instruments included in our Consolidated Balance Sheet
Derivative financial instruments included in our Consolidated Balance Sheet, within “Other Assets” included the following:
(In $ millions) | Maturity date | Applicable rate | Outstanding principal - September 30, 2019 | As at September 30, 2019 | As at December 31, 2018 | |||||||||||||||
Interest rate cap | June | 2023 | 2.87 | % LIBOR cap | 4,500 | 2 | 39 | |||||||||||||
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Fair values of financial instruments
Fair value of financial instruments measured at amortized cost
The carrying value and estimated fair value of our financial instruments that are measured at amortized cost at September 30, 2019 and December 31, 2018 are as follows:
Successor | Successor | |||||||||||||||
As at September 30, 2019 | As at December 31, 2018 | |||||||||||||||
(In $ millions) | Fair value | Carrying value | Fair value | Carrying value | ||||||||||||
Assets | ||||||||||||||||
Related party loans receivable(1)(Level 2) | 486 | 486 | 476 | 476 | ||||||||||||
Liabilities | ||||||||||||||||
Secured credit facilities(Level 2) | 5,472 | 5,541 | 5,388 | 5,519 | ||||||||||||
Credit facilities contained within variable interest entities(Level 2) | 603 | 609 | 612 | 626 | ||||||||||||
Senior secured notes(Level 1) | 453 | 476 | 770 | 769 | ||||||||||||
Related party loans payable by the VIE(Level 2) | 229 | 236 | 222 | 226 |
(1) | Excludes Archer convertible debt receivable, which is measured at fair value on a recurring basis |
F-30
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Level 1
The fair value of the senior secured notes were derived using market traded value. We have categorized this at level 1 on the fair value measurement hierarchy. Refer to Note 16 – Debt for further information.
Level 2
Upon the adoption of fresh start accounting, the related party loans receivable from Seadrill Partners, SeaMex and Seabras Sapura were recorded at fair value. We estimated that the fair value continues to be equal to the carrying value as at September 30, 2019 as the debt is not freely tradable and cannot be recalled by us at prices other than specified in the loan note agreements and the loans were entered into at market rates. They are categorized as level 2 on the fair value measurement hierarchy. Other trading balances with related parties are not shown in the table above and are covered under Note 25 – Related party transactions. The fair value of other trading balances with related parties are also assumed to be equal to their carrying value.
The fair value of the secured credit facilities and Ship Finance loans were derived using the discounted cash flow model, using a cost of debt of 6%.
The fair value of the loans provided by Ship Finance to our VIE’s were derived using the discounted cash flow model, using a cost of debt of 11%. We have categorized this at level 2 on the fair value measurement hierarchy. Refer to Note 25 – Related party transactions for further information.
Financial instruments measured at fair value on a recurring basis
The carrying value and estimated fair value of our financial instruments that are measured at fair value on a recurring basis at September 30, 2019 (Successor) and December 31, 2018 (Successor) are as follows:
Successor | Successor | |||||||||||||||
As at September 30, 2019 | As at December 31, 2018 | |||||||||||||||
(In $ millions) | Fair value | Carrying value | Fair value | Carrying value | ||||||||||||
Assets | ||||||||||||||||
Cash and cash equivalents(Level 1) | 1,216 | 1,216 | 1,542 | 1,542 | ||||||||||||
Restricted cash(Level 1) | 229 | 229 | 461 | 461 | ||||||||||||
Marketable securities(Level 1) | 12 | 12 | 57 | 57 | ||||||||||||
Related party loans receivable - Archer convertible debt(Level 3) | 50 | 50 | 43 | 43 | ||||||||||||
Interest rate cap(Level 2) | 2 | 2 | 39 | 39 | ||||||||||||
Temporary equity | ||||||||||||||||
Redeemablenon-controlling interest(Level 3) | 34 | 34 | 38 | 38 |
Level 1
The carrying value of cash and cash equivalents and restricted cash, which are highly liquid, was a reasonable estimate of fair value and categorized at level 1 on the fair value measurement hierarchy. Quoted market prices were used to estimate the fair value of marketable securities, which were valued at fair value on a recurring basis.
Level 2
The fair value of the interest rate cap as at September 30, 2019 was calculated using well-established independent valuation techniques and counterpartynon-performance credit risk assumptions. We have categorized these transactions as level 2 on the fair value measurement hierarchy.
Level 3
The Archer convertible debt instrument is bifurcated into two elements. The fair value of the embedded derivative option was calculated using a modified version of the Black-Scholes formula for a currency translated option. Assumptions include Archer’s share price in NOK, NOK/USD FX volatility and dividend yield. The fair value of the debt component was derived using the discounted cash flow model including assumptions relating to cost of debt and credit risk associated to the instrument.
The redeemablenon-controlling interest in AOD was calculated by applying a fair value to the three AOD rigs and debt facility using a discounted cash flow model. The rig values were determined using an income approach based on projected future dayrates, contract probabilities, economic utilization, capital and operating expenditures, applicable tax rates and asset lives, discounted using a weighted average cost of capital of 11%. The fair value of the debt was derived using the discounted cash flow model, using a cost of debt of 6%.
F-31
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 24 – Variable Interest Entities (VIEs)
The combined assets and liabilities in the financial statements of the VIEs as at September 30, 2019 (Successor) and as at December 31, 2018 (Successor) are as follows:
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(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Cash and cash equivalents | 16 | 2 | ||||||
Investment in finance lease | 984 | 1,024 | ||||||
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Short-term interest bearing debt(1) | 48 | 33 | ||||||
Long-term interest bearing debt(1) | 561 | 593 | ||||||
Other liabilities | 4 | 2 | ||||||
Short-term amounts due to related parties | 9 | 31 | ||||||
Long-term debt due to related parties(2) | 236 | 222 | ||||||
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Total liabilities of the VIEs | 858 | 881 | ||||||
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Equity of the VIEs | 142 | 145 | ||||||
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Book value of units in the Company’s consolidated financial statements | 798 | 823 |
(1) | Total interest bearing debt comprises principal outstanding of $633 million offset by $24 million debt discount (December 31, 2018: $655 million principal outstanding offset by $29 million debt discount). |
(2) | We present balances due to/from Ship Finance on a net basis, due to the fact that there is a right to offset established in the long-term loan agreements, and the balances are intended to be settled on a net basis as shown in the table below: |
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Debt principal outstanding | 314 | 314 | ||||||
Debt discount | (78 | ) | (88 | ) | ||||
Trading asset positions held against long-term loan | — | (4 | ) | |||||
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Long-term loan due to related parties | 236 | 222 | ||||||
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Note 25 – Related party transactions
Our main related parties include (i) affiliated companies over which we hold significant influence and (ii) companies who are either controlled by or whose operating policies may be significantly influenced by our largest shareholder, Hemen.
Companies in which we hold significant influence include (i) Seadrill Partners, (ii) SeaMex and (iii) Seabras Sapura. Companies that are controlled by or whose operating policies may be significantly influenced by Hemen include (i) Ship Finance, (ii) Archer, (iii) Frontline, (iv) Seatankers and (v) Northern Drilling. In the following sections we provide an analysis of (i) transactions with related parties and (ii) balances outstanding with related parties.
Related party revenue
The below table provides an analysis of related party revenues for periods presented in this report.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Management fees revenues (a) | 28 | 21 | 70 | 21 | 41 | |||||||||||||||
Other | — | — | 1 | — | 2 | |||||||||||||||
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Total related party operating revenues | 28 | 21 | 71 | 21 | 43 | |||||||||||||||
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F-32
Table of Contents
Seadrill Limited
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(a) We provide management and administrative services to Seadrill Partners and SeaMex and operational and technical support services to Seadrill Partners, SeaMex and Northern Drilling. We charge our affiliates for support services provided either on a cost-plus mark up or dayrate basis.
(b) In addition to the amounts shown above, we recognized reimbursable revenues from Northern Drilling of $41 million in the three months ended September 30, 2019 for work to perform the first mobilization of the Northern Drilling rig,West Mira andWest Bollsta. As at September 30, 2019 our Consolidated Balance Sheet included a $28 million reimbursable receivable from Northern Drilling for costs to be recovered from this arrangement.
Related party operating expenses
The below table provides an analysis of related party operating expenses for periods presented in this report.
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Related party inventory purchases | 1 | — | 1 | — | 3 | |||||||||||||||
Other related party operating expenses | — | 1 | 1 | 1 | 4 | |||||||||||||||
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Total related party operating expenses | 1 | 1 | 2 | 1 | 7 | |||||||||||||||
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Related party financial items
The below table provides an analysis of related party financial income for periods presented in this report.
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(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Interest income (c) | 7 | 7 | 23 | 7 | 12 | |||||||||||||||
Other | — | 1 | — | 1 | 2 | |||||||||||||||
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Total related party financial items | 7 | 8 | 23 | 8 | 14 | |||||||||||||||
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(c) We earn interest income on our related party loans to SeaMex and Seabras Sapura (see below).
Related party receivable balances
The below table provides an analysis of related party receivable balances for periods presented in this report.
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(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Related party loans and interest (d) | 486 | 476 | ||||||
Deferred consideration arrangements (e) | 38 | 59 | ||||||
Convertible bond (f) | 50 | 43 | ||||||
Trading balances (g) | 103 | 138 | ||||||
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Amounts due from related parties - current | 140 | 177 | ||||||
Amounts due from related parties - non current | 537 | 539 | ||||||
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Total related party receivables | 677 | 716 | ||||||
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(d) We have loan receivables outstanding from SeaMex and Seabras Sapura. We have summarized the amounts outstanding in the table below:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
SeaMex seller’s credit and loans receivable | 416 | 398 | ||||||
Seabras loans receivable | 70 | 78 | ||||||
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Total related party loans and interest | 486 | 476 | ||||||
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SeaMex loans include $250 million “sellers credit” provided to SeaMex in March 2015 which matures in December 2019 but is subordinated to SeaMex’s external debt facility, which matures in March 2022. As such, we have classified this balance asnon-current on our Consolidated Balance Sheet. Additionally, a $45 million working capital loan was advanced to SeaMex in November 2016. The sellers credit and working capital loan both earn interest at 6.5% with the total accrued to date of $121 million.
Seabras loans include a series of loan facilities that we extended to Seabras Sapura between May 2014 and December 2016. The $70 million balance shown in the table above includes (i) $59 million of loan principal and (ii) $11 million of accrued interest. The loans are repayable on demand, subject to restrictions on Seabras Sapura’s external debt facilities. We earn interest of between 3.4% - LIBOR + 3.99% on the loans, depending on the facility.
In addition to the Seabras loans referred above, we have made certain other shareholder loans to Seabras Sapura, which we classify as part of our equity method investment in Seabras Sapura. See Note 13 – Investment in associated companies for further details.
(e) Deferred consideration arrangements include receivables due to us from Seadrill Partners from the sale of theWest Vela and theWestPolaristo Seadrill Partners in November 2014 and June 2015 respectively. We have summarized amounts due for each period in the tablebelow:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
West Vela - Mobilization receivable | 21 | 31 | ||||||
West Vela - Share of dayrate | 17 | 27 | ||||||
West Polaris | — | 1 | ||||||
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Total deferred consideration receivable | 38 | 59 | ||||||
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On adoption of fresh start accounting, we recorded receivables forWest Vela share of dayrate andWest Polaris earnout. These amounts were previously accounted for as gain contingencies so were only recognized when realized. Under fresh start accounting, the receivables were recognized at fair value of $29 million and $1 million respectively and the gain was recognized in reorganization items.
We recorded the following gains on other operating income for these arrangements:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
West Velaearn out realized | — | — | — | — | 7 | |||||||||||||||
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Total contingent consideration recognized | — | — | — | — | 7 | |||||||||||||||
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(f) On April 26, 2017, we converted $146 million, including accrued interest and fees, in subordinated loans provided to Archer into a $45 million convertible loan. The subordinated convertible loan bears interest of 5.5%, matures in December 2021 and has a conversion right into equity of Archer Limited in 2021.
The loan receivable is a convertible debt instrument comprised of a debt instrument and a conversion option, classed as an embedded derivative. Both elements are measured at fair value at each reporting date. As at September 30, 2019 (Successor), the fair value of the convertible debt instrument was $50 million of which the split between debt and embedded derivative option was $50 million and nil respectively.
The fair value gain/(loss) on the convertible bond for periods presented is summarized below:
Successor | Predecessor | |||||||||||||||||||
(In $ millions) | Three Months Ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Nine months ended September 30, 2019 | Period from July 2, 2018 through September 30, 2018 | Period from January 1, 2018 through July 1, 2018 | |||||||||||||||
Fair value gain of Archer debt component | 1 | — | 7 | — | 2 | |||||||||||||||
Fair value gain of Archer embedded conversion option | — | (8 | ) | — | (8 | ) | 2 |
(g) Trading balances primarily comprise receivables from Seadrill Partners and SeaMex for related party management fees. In addition, certain receivables and payables arise when we pay an invoice on behalf of Seadrill Partners or SeaMex and vice versa. Receivables and payables are generally settled quarterly in arrears.
Related party payable balances
Related party liabilities are presented in our Consolidated Balance Sheets as follows:
Successor | Successor | |||||||
(In $ millions) | As at September 30, 2019 | As at December 31, 2018 | ||||||
Related party loans payable (h) | 236 | 222 | ||||||
Trading balances (i) | 14 | 39 | ||||||
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Total related party liabilities | 250 | 261 | ||||||
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Of which: | ||||||||
Amounts due to related parties - current | 14 | 39 | ||||||
Long-term debt due to related parties | 236 | 222 | ||||||
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Total related party liabilities | 250 | 261 | ||||||
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(h) Related party loans include related party loans from Ship Finance to the Ship Finance subsidiaries that we consolidated as variable interest entities (see Note 24 – Variable Interest Entities (VIEs) for further details).
The loans bear interest at a fixed rate of 4.5% per annum and mature between 2023 and 2029. The total interest expense incurred for the three months ended September 30, 2019 (Successor) was $3 million and the nine months ended September 30, 2019 (Successor) was $10 million. For the period from January 1, 2018 through July 1, 2018 (Predecessor) the total interest expense incurred was $7 million and the period from July 2, 2018 through September 30, 2018 (Successor) was $4 million.
(i) Trading balances primarily include related party payables due from our Ship Finance variable interest entities to Ship Finance and trading balances due from us to SeaMex and Seadrill Partners.
Other related party transactions
Seabras Sapura guarantees -In November 2012, a subsidiary of Seabras Sapura Participações S.A. entered into a $179 million senior securedcredit facility agreement in order to part fund the acquisition of the Sapura Esmeralda pipe-laying support vessel, with a maturity in 2032. During 2013 an additional facility of $36 million was entered into, with a maturity in 2020. As a condition to the lenders making the loan available, we provided a sponsor guarantee, on a joint and several basis with the joint venture partner, Sapura Energy, in respect of the obligations of the borrower. The total amount guaranteed by the joint venture partners as at September 30, 2019 (Successor) was $161 million (December 31, 2018 (Successor): $165 million).
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Other guarantees- In addition, we have made certain guarantees over the performance of Northern Drilling and Sonadrill on behalf ofcustomers.
Omnibus agreement- In 2012 we entered into an Omnibus Agreement with Seadrill Partners. The agreement outlines the following provisions: (i) anon-competition agreement with Seadrill Partners for any drilling rig operating under a contract for five or more years; (ii) rights of first offer on any proposed sale, transfer or other disposition of drilling rigs; (iii) rights of first offer on any proposed transfer, assignment, sale or other disposition of any equity interest in Seadrill Operating LP, Seadrill Capricorn Holdings LLC and Seadrill Partners Operating LLC (the “OPCO”); and (iv) indemnification – Old Seadrill Limited agreed to indemnify Seadrill Partners against certain environmental and toxic tort liabilities with respect to the assets contributed or sold to Seadrill Partners, and also certain tax liabilities.
Note 26 – Commitments and contingencies
Legal Proceedings
From time to time we are a party, as plaintiff or defendant, to lawsuits in various jurisdictions for demurrage, damages,off-hire and other claims and commercial disputes arising from the construction or operation of our drilling units, in the ordinary course of business or in connection with our acquisition or disposal activities. We believe that the resolution of such claims will not have a material impact, individually or in the aggregate, on our operations or financial condition. Our best estimate of the outcome of the various disputes has been reflected in our unaudited Consolidated Financial Statements as at September 30, 2019.
Seabras Sapura joint venture
The Sapura Esmeralda operates under a Brazilian flag. The right to operate under such Brazilian flag is being challenged in the Brazilian courts. An adverse decision in the Brazilian courts could affect the operations of the Sapura Esmeralda and potentially impact its commercial agreements and related financing. Due to the backlog of cases we estimate a decision within approximately 3 years.
Dalian Newbuilds
At September 30, 2019, all eight of the newbuilding contracts with Dalian had been terminated by both parties. Accordingly, the Seadrill contracting entities had no contractual obligation to take delivery of the rigs. Contracts for six of the rigs (West Titan,West Proteus, WestRhea, West Hyperion, West Tethysand West Umbriel) were terminated as of December 31, 2018, and we had total contractual obligations asat December 31, 2018 of $0.4 billion.
In February 2019, the Seadrill contracting party terminated the newbuilding contract for thejack-up rigWest Dione due to: (i) delays to delivery of the rig, and (ii) Dalian being subject to bankruptcy proceedings. In March 2019, Dalian disputed the Seadrill contracting party’s termination and purported to terminate the newbuilding contract itself for the alleged wrongful termination.
In March 2019, Dalian purported to terminate the eighth newbuilding contract for theWest Mimas. In April 2019, the Seadrill contracting party rejected Dalian’s termination of the contract as wrongful and reserved all its rights. The Seadrill contracting party terminated the contract for theWest Mimas for: (i) delays to delivery of the rig, (ii) Dalian being subject to bankruptcy proceedings, and (iii) Dalian’s wrongful purported termination in March 2019.
In March 2019, the Seadrill contracting parties commenced arbitration proceedings in London for all eight rigs and will claim for the return of the paid installments plus interest and further damages for losses.
In January 2019, Dalian appointed an administrator to restructure its liabilities. The Seadrill contracting parties have filed their claims against Dalian in the Dalian insolvency and the insolvency administrator is currently considering whether to accept or reject the claims in the insolvency. The arbitrations are currently not being progressed by agreement of the parties, pending the insolvency administrator’s decision whether to accept or reject the Seadrill contracting parties’ claims. Dalian has stated that it has claims for damages in respect of each of the rigs, but it has not quantified those damages. The administrator has submitted a draft reorganization plan to the insolvency court which has stated that it will convene a creditor’s meeting 30 days from when it receives the same for a vote on the draft plan. The contracts are all with limited liability subsidiaries of Seadrill. There are no parent company guarantees.
Nigerian Cabotage Act litigation
Seadrill Mobile Units Nigeria Ltd (“SMUNL”) commenced proceedings in May 2016 against the Honourable Minister for Transportation, the Attorney General of the Federation and the Nigerian Maritime Administration and Safety Agency with respect to interpretation of the Coastal and Inland Shipping (Cabotage) Act 2003 (the “Act”). On June 28 2019, the Federal High Court of Nigeria delivered a judgement finding that: (1) Drilling operations fall within the definition of “Coastal Trade” or “Cabotage” under the Act and (2) Drilling Rigs fall within the definition of “Vessels” under the Act. The impact of this decision is that the Nigerian Maritime Administration and Safety Agency (“NIMASA”) may impose a 2% surcharge on contract revenue from offshore drilling operations in Nigeria as well as requiring SMUNL register for Cabotage with NIMASA and pay all fees and tariffs as may be published in the guidelines that may be issued by the Minister of Transportation in accordance with the Act. However, on 22 July, 2019, SMUNL filed an appeal to the Court of Appeal challenging the decision of the Federal High Court. Due to the volume of cases currently being handled by the Court of Appeal sitting in Lagos we anticipate a decision within3-5 years.
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Although we intend to strongly pursue this appeal, we cannot predict the outcome of this case. We do not believe that it is probable that the ultimate liability, if any, resulting from this litigation will have a material effect on our financial position. Accordingly, no loss contingency has been recognized within the Consolidated Financial Statements.
Oro Negro
Oro Negro, a Mexican drilling rig contractor, filed a Complaint on June 6, 2019 in the United States Bankruptcy Court, Southern District of New York, within Chapter 15 proceedings ancillary to its Mexican insolvency process. The Complaint names Seadrill and its JV partner asco-defendants along with other defendants including Oro Negro bondholders. With respect to Seadrill, the Complaint asserts claims relating to alleged tortious interference but does not seek to quantify damages. On August 26, 2019, we submitted a motion to dismiss the Complaint on technical legal grounds. Gil White, the CEO of Oro Negro responded to this motion on October 25, 2019. Seadrill had the opportunity to reply to this in further support of the motion by November 15, 2019 before the extended deadline of December 16, 2019. We intend to vigorously defend against the claims Oro Negro asserts and dispute the allegations set forth in the Complaint. The costs of defending the claims against Seadrill and its JV partner are being met by the joint venture, SeaMex.
Other contingencies
Sevan Louisiana loss incident
i. Physical damage insurance
In January 2019, there was a loss incident on theSevan Louisiana related to a malfunction of its subsea equipment. As of September 30, 2019, we have incurred $19 million of costs to repair the equipment, of which $4 million has been recovered and an additional $14 million will be recoverable under our physical damage insurance.
ii. Loss of hire insurance
The loss incident has resulted in a period of downtime for theSevan Louisiana. As a result, we have recovered $10 million insurance income from loss of hire of theSevan Louisiana. As any further loss of hire in bringing the rig back to work has not been readily determined as at September 30, 2019 we have not recognized the gain contingency.
Note 27 – Subsequent Events
Amortization Conversion Election (ACE) facility drawdown
On November 20, 2019, we made an election to draw down $63 million on our ACE facility. This will defer $63 million of amortization payments on our senior credit facilities that would have become due in March 2020. The amounts deferred will become due for repayment along with the balloon payment for each relevant facility.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SEADRILL LIMITED | ||||||
November 21, 2019 | ||||||
By: | /s/ Anton Dibowitz | |||||
Name: Anton Dibowitz | ||||||
Title: Chief Executive Officer of Seadrill Management Ltd. | ||||||
(Principal Executive Officer of Seadrill Limited) |
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