Seadrill Limited (SDRL) Earnings Call Transcript & Summary

f Hello, everyone. Thank you for joining us, and welcome to the Seadrill Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Kevin Smith. Please go ahead.

Hello, and welcome to Seadrill's Second Quarter 2026 Earnings Call. I'm Kevin Smith, Vice President of Corporate Finance and Investor Relations, and I'm joined today by Samir Ali, President and Chief Executive Officer; Grant Creed, Executive Vice President and Chief Financial Officer; and Jacob Taylor, Vice President, Commercial. Our call will include forward-looking statements that involve risks and uncertainty. Actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or year and we assume no obligation to update them, except as required by securities laws. Our filings with the U.S. Securities and Exchange Commission provide a more detailed discussion of our forward-looking statements and the risk factors affecting our business. During the call, we will also reference non-GAAP measures. Our earnings release furnished to the SEC and available on our website includes reconciliations with the nearest corresponding GAAP measures. Our use of the term EBITDA on today's call corresponds with the term adjusted EBITDA as defined in our earnings release. I'll now turn the call over to Samir.

Thanks, Kevin. Welcome, everyone. Thank you for joining us. I'll begin with our second quarter highlights, including continued progress against our core priorities and our recent contracting successes. I'll then discuss the market backdrop and regional outlook before turning the call over to Grant to review our financial results and updated full year 2026 guidance. Second quarter financial performance was very strong, exceeding expectations. We delivered EBITDA of $144 million, underpinning our decision to raise full year revenue and EBITDA guidance. This marks our second guidance increase this year. The quarter also reflected continued execution against our core priorities: delivering safe, reliable operations, generating free cash flow and capturing the upside ahead of us. Let's start with our first priority, safe and reliable operations. We delivered another solid quarter, achieving economic utilization of 96%. We also successfully completed the West Telus reacceptance on schedule and on budget. Seadrill's One Team culture met all client expectations and the rig has been successfully operating since mid-June. This is an important milestone, it marks a second of 3 rigs to off legacy day rate contracts and begin generating revenue at substantially higher rates. Safety remains our top priority. We are proud of the progress we've made but we are never satisfied with sending still. By continuing to invest in training, knowledge sharing and leadership development, we are building an even stronger organization for the future. I want to take this moment to remind our dedicated crews. Everyone has stopwork Authority and no task is worth compromising our high safety standards. Priority 2, free cash flow generation remain on track to generate meaningful free cash flow in the second half of 2026. With that visibility, we resumed shareholder returns during the second quarter, opportunistically repurchasing $20 million of shares under our repurchase program during the last week of June. Priority three, capturing the upside. Our recent contracting success strengthens 2027 revenue visibility and demonstrate Seadrill's ability to capture the upside ahead of us. Since our May call, we have added approximately $200 million of backlog, including new contracts and contract extensions on 3 rigs in the U.S. Gulf and Malaysia. In the U.S. Gulf, the West Telus secured a 12-month contract with Telus beginning in June 2027 in direct continuation of its current program. The award adds approximately $161 million to backlog excluding additional services and reflects the strength of our operational execution and customer relationships. We are pleased to extend our partnership with Telus and thank the crew of the West Vela for their superior performance that is the foundation for what's next. Staying in the U.S. Gulf, the Sevan Louisiana has worked steadily throughout the year. The rig is expected to wrap up its current program with Walter Oil & Gas later this week. -- following the successful completion of earlier campaigns with Guardian and log in July. We also want to recognize Harbor and log for their continued trust in Seadrill. Earlier this year, Harbor and Log extended the West Neptune once again and selected the West Vela for a 270-day campaign beginning later this year. Harbor also contracted the Sevan Louisiana for a short campaign at the end of July, meaning they will have had all of Seadrill's U.S. Gulf fleet under contract in 2026. We appreciate their confidence and remain focused on delivering safe, efficient and reliable operations across every rig. And in Malaysia, our customer recently exercised a priced option for approximately 75 days on the West Capella, extending operations into the second half of 2027. Turning to the broader market. The current tender pipeline points to a materially tighter environment in 2027. If these tenders convert into awards as expected, we believe drillship utilization could reach the mid-90% range by next year. Collectively, developments across strategic reserves, offshore investment and exploration activity support our view of growing demand for deepwater rigs. The U.S. Energy Information Administration's latest outlook shows OECD inventories falling to their lowest levels since at least 2003 as supply disruptions accelerate stock draws. Oil managers have also highlighted tightening supply conditions, with Chevron, knowing that supply crunch can soon be felt globally and ExxonMobil noting that the U.S. is approaching unheard of inventory levels. Wood Mackenzie forecast offshore project FIDs to rise to $165 billion in 2027, representing a 132% increase from 2025, underscoring the strength of the offshore cycle. Further, we continue to see offshore exploration activity gaining momentum, driven by structurally higher oil price, energy security coming back into vogue, slowing non-OPEC production growth and operators need to rebuild reserve bases. Equinor validated this theme in its Capital Markets Day in June, guiding to an international exploration budget for the first time. and highlighting plan to step up exploration along the Atlantic margin supported by its view that oil and gas demand will remain higher for longer. Recent exploration announcements also reinforce this momentum with Total Energy's securing offshore exploration agreements in Egypt and Syria, chevron signing an early exploration deal after Guinea, Exxon applying for new exploration permits after Guyana, and Repsol entering into an exploration agreement in Venezuela. Moving to the outlook for key regions where Seadrill operates. The U.S. Gulf remains in transition with several doses expected to become available before year-end. Seadrill is ahead of the curve by recently securing a 365-day contract at leading-edge day rates for the West Vela, bringing total year-to-date backlog added in the region to nearly $0.5 billion. The West Neptune is already contracted into late 2027 and is well positioned for attractive follow-on opportunities. We remain confident that the supply-demand balance of drillships in the region will improve in 2027. Our semisubmersible, the Sevan Louisiana is also favorably positioned as market conditions in the U.S. Gulf strengthen into 2027. While we have a strong track record of winning programs with short lead times, visibility for the balance of 2026 remains limited. We will continue to manage the asset with commercial discipline while preserving flexibility. Turning to Brazil. Brazil remains well contracted in 1 of the industry's most important deepwater geographies. Recent multiyear awards and extensions reinforce our view that Brazil remains a core source of drillship demand through the end of the decade. 25 drillships are currently contracted in the region, with only 3 expected to become available before the end of 2027 if options on a couple of rigs are exercised. A recent Petrobras prequalification exercise may be an indication of tendering activity to come. We expect Brazil to remain balanced and competitive with opportunities favoring rigs that align closely with customer needs and basin requirements. Following the completion of the West Carina contract at the end of June, we mobilized the rig outside of Brazil, consistent with typical post-contract process in the country. We are in advanced discussions for follow-on opportunities and remain confident in our ability to secure work commencing in the first half of 2027. In Southeast Asia, a region we have repeatedly identified as a source of growing demand momentum is building. A recent leading-edge fixture awarded for work commencing in mid-2028 is a positive data point. Customers' willingness to secure assets at leading-edge rates for future work is an indicator that the balance of supply and demand is expected to tuck-in. With limited drillship availability in the region, the West Capella is in a strong position to capture potential upside. In West Africa, and particularly Angola, the Sonadrill joint venture continues to demonstrate the strength of our local partnership and the reliability of our operations, with all 3 rigs delivering technical uptime above 99% during the second quarter. Our near-term commercial focus is on the West Gemini, which is due to roll off contract later this year. While the rig is well positioned for fee to work in Angola, we continue to market it across West Africa. We expect upcoming FIDs and tenders in countries such as Angola, Ghana, Cote d'Ivoire, Nigeria and Namibia to absorb a meaningful share of available rig capacity. Bringing it all together, the broader deepwater market continues to tighten, supported by improving market fundamentals, rising offshore investment and exploration momentum. We remain encouraged by the outlook across our key regions and believe Seadrill is entering 2027 from a position of strength well positioned to capitalize on the opportunities ahead. With that, I'll hand it over to Grant.

Thanks, Samir. I'll now discuss our second quarter to 2026 financial results. recap the refinancing completed in June and then provide an update on our outlook for the balance of the year. Seadrill delivered strong second quarter financial performance, with total operating revenues of $449 million and adjusted EBITDA of $144 million. The quarter-on-quarter increase was primarily driven by more operating days and an improving average day rate. In Malaysia and Brazil, the West Capella and West Jupiter contributed full quarters of revenue after commencing their new programs in late March. While increased activity on the Sevan Louisiana and the U.S. Gulf also supported revenue growth. This was partially offset by the impact of fewer operating days for the West Tellus which underwent reacceptance testing before commencing its contract in Brazil as planned late in the second quarter. Importantly, both the West Jupiter and West Tellus even contracts are materially higher day rates, representing a meaningful step-up in revenue of roughly $400,000 per day between the 2 rigs compared with their prior contracts. Repricing these legacy contracts has long been a strategic objective and is now strengthening the cash generation from our active fleet as we move into the second half of the year and into 2027. Also contributing to second quarter revenue was an uplift in management contract revenues, reflecting an increase in the daily management fee sea drillers for providing management, operational and technical support to Sonadrill. The increase was applied retroactively from January 1, 2026. And now moving to operating expenses, which were $377 million in the second quarter, up $43 million from the prior quarter. The increase was primarily attributable to the West Capella and West Jupiter returning to operations for the full quarter. Resulting EBITDA was $144 million a sequential increase of $47 million compared to the prior quarter, with an EBITDA margin, excluding reimbursables, of 33.5%. And now turning to the balance sheet and cash flow statements. I'll start by providing a recap of the refinancing completed in June. The refinancing strengthens our financial flexibility, extends debt maturities further into the next decade and reinforces our commitment to maintaining a resilient through-cycle capital structure. Seadrill issued $700 million of 6.75% senior notes due in 2034 and used part of the proceeds to redeem $575 million of 8 3/8% senior secured second lien notes due 2030. We also increased the revolving credit facility from $225 million to $300 million and extended the maturity by 3 years to 2031. We ended the quarter with total cash of $360 million, a $31 million increase from the prior quarter. The net proceeds from the refinancing as well as a $30 million lump sum receipt for mobilization revenue related to the West Jupiter contract in Brazil were partially offset by $57 million of capital expenditures, a $16 million final payment for a legal judgment related to the Sonadrill joint venture, as previously disclosed in 2025, an accelerated interest payments of $20 million relating to the redemption of the old notes, and a build in accounts receivable primarily related to the commencement of West Jupiter and West Capella contracts plus timing of receipts across the remainder of the fleet. Notably, we are entering a stronger phase of cash generation, major project-related outflows are now behind us. With cash benefits from the West Capella, West Jupiter and West Telus contracts ahead of us, we expect cash flow to strengthen through the second half of the year, including the anticipated collection of the West Tellus mobilization fee in the third quarter. Seadrill remains focused on 3 financial priorities to enhance long-term shareholder value, generating free cash flow, disciplined capital deployments and maintaining a robust balance sheet. On June 22, the Board of Directors authorized an extension of the $208 million remaining on the share repurchase program through the end of the current calendar year. And during the last week of June, we repurchased $20 million worth of shares. And now turning to our outlook for the remainder of the year. strong project execution and higher-than-anticipated utilization have driven the increase in the revenue and EBITDA guidance ranges set out in our press release. We now anticipate operating revenues of $1.5 billion to $1.55 billion, and that excludes $50 million of reimbursable revenues and EBITDA of $420 million to $450 million. Our updated guidance ranges reflect 2 factors for the second half of the year, assumed utilization for the Sevan Louisiana which was fully contracted in the second quarter that has less visibility for the remainder of 2026 and the timing of repair and maintenance expenses, which we expect to be higher of the balance of the year. Our EBITDA guidance includes a noncash net expense of $30 million related to the amortization and mobilization costs and revenues, of which $16 million has been recognized through the end of the second quarter. Full year capital expenditure guidance range maintained at $200 million to $240 million. With 3 major projects delivered on time and on budget, a strengthened balance sheet and a supportive commercial backdrop, Seadrill is well positioned to generate meaningful free cash flow in the second half of the year and create long-term shareholder value. And with that, I'll hand back to Samir for his closing remarks.

Thanks, Grant. For Seadrill, the message is straightforward. Our commercial approach remains centered on winning direct continuation work and maximizing the total economic value of contracts. In the U.S. Gulf, we secured work for the West Vela at leading-edge day rates despite near-term oversupply. In Brazil, West Africa and Southeast Asia, our fleet remains well positioned for both established and emerging sources of deepwater demand. Across the rest of the world, the demand outlook continues to support our conviction that available high-specification floaters will become increasingly scarce as the cycle progresses. Taken together, Seadrill is well positioned to create long-term shareholder value through disciplined contracting, free cash flow generation and a relentless focus on safe and reliable operations. With that, I'll hand the call over for questions.

[Operator Instructions] Your first question from the line of Doug Becker with Capital One Securities. Please go ahead, your line is now open.

Thank you. Samir you extended the share repurchase program through December. We actually saw the restart of buybacks with about 20 million shares in the second quarter. Just how would you frame the scale and the pace of buybacks once we see the free cash flow inflection in the second half of the year?

Sure Doug, I'll start and I'll hand over to Grant. Holistically, our job at Seadrill as a management team is to maximize free cash flow. So every contract we look at, everything we're doing around here, we are hyper focused on generating as much free cash flow as possible, but Grant can kind of speak through the mechanics of how we're thinking about it.

Yes. Doug. And just to add to that, look, when we think about the thing we look at is our cash position. And of course, we had a very healthy cash position in June, and that was further supported by a successful refinancing those executed in June. Then we look at forecast cash going forward. And as we discussed on our prepared remarks, we're at this inflection point that we've been looking for some time, primarily related to the repricing off of legacy contracts and spot rate contracts. . So we're starting to enjoy the step up in earnings, and we saw during Q2 as expected, we had some working capital build, but that's going to be behind us from the Q3 onwards. So we're looking healthy in that perspective. And then deploying the capital is all about assessing the alternatives through a disciplined and deliberate lens and then when the share price started trading in the 30s in June, it became apparent to us that a buyback was going to be a very accretive use of that capital. So that's a little bit of insight as to how we approach the buybacks. And yes, I hope that helps.

No, that's helpful context. Is the plan to kind of utilize the full remaining share authorization over the course of this year? Or just to be determined based on the parameters you just laid out?

Yes. Look, Doug, it's to be determined. We take those decisions at any point in time, and we'll see how it goes the rest of the year. Yes. Yes. It's a discussion, obviously, we have with our Board on a regular basis. But coming back to it, the management team's focus is maximizing cash flow and then we have an in-depth discussion with the Board of how we want to deploy that capital.

The next question comes from the line of Eddie Kim with Barclays. Please go ahead.

This is the second consecutive quarter where you've raised full year guidance, which is particularly notable as offshore drillers are more commonly known to lower full year guidance than to raise. So could you just talk about what has surprised you to the upside compared to when you first provided full year guidance at the beginning of the year? Is it contracts you secured that you didn't necessarily expect to or better operational performance or cost maybe getting pushed into 2027? Just some more color on the main drivers of the guidance raised in the past 2 quarters would be great.

Thanks. I'd say, first and foremost, operational execution has been great this year. So the operations team has done a fantastic job on executing work. The project we know that those projects are key to determining our results in any year, and we executed those very well for the Jupiter Capella and Tellus. And then on the rig activity side, I'd say Carina ended up working longer than we anticipated at the beginning of the year. And then the -- we call the Louisiana of the show me rig where we don't get too far ahead of ourselves in booking or estimating or forecasting revenue for that rig. She ended working more in the first half of the year than we anticipated. On the expense side, I think it's more or less in line with how we are seeing expenses, but I would say that repairs and maintenance is skewed to the second half of the year. We see that quite often in our business that the first half of the year, we spent less on represents projects in particular than in the second half.

Understood. And then my follow-up is just more broadly, I mean the outlook you laid out was pretty constructive with drillship utilization potentially reaching the mid-90s by next year, feels like leading edge day rates are now firmly in the mid-400s, as indicated by the most recent contract you signed on the Western Vela well as other contracts industry what? Is there any reason to believe that leading edge rates shouldn't continue to move higher next year off of this current mid-400 level, just given tightness in the market and -- and if it's not, what would you say of the potential headwinds or roadblocks that might prevent that from happening?

Ed. So look, the day rate progression is purely driven by utilization, right? So we continue to expect utilization to improve. I mean it is a global market, and rigs are going to continue to move from kind of Western Hemisphere into Eastern Hemisphere. So that should drive kind of day rate momentum. But the other thing I'd say, at least for Seadrill, we look at it holistically. It's not just day rate, right? It is the full contract value. It is mobilization fees. It's Ts&Cs. How do we make sure that we are maximizing the cash out of that contract, not just -- we don't have a huge ego around here. It's not about getting the highest day rate. It is getting the best potential contract for our rigs. But that's how I'd say we holistically look at it, it's definitely not just day rate driven for us.

The next question is from the line of Fredrik Stene with Clarksons Securities.

Samir and team, congratulations on a very strong operational quarter. I wanted to -- and thanks for actually providing quite detailed commentary on the regions already. But I wanted to be a bit more rig-specific maybe. Obviously, like the West Carina, the Gemini, I'm pretty sure that those are very high on our list in terms of what's getting recontracted. So and you seem relatively positive on the Carina, maybe from the first half of next year. But maybe if you leave those aside and think about the rigs that are rolling off in the second half of next year, have you started progression on new contracts for those rigs? And I guess in the context of your market view expecting mid-90s utilization for drillships -- how would you also kind of think about locking in short versus long-term work as you work on extending those rigs, weighing visibility versus upside capture. Any color would be very helpful.

Fredrik, Jacob here. I'll go ahead and take that one. us, I mean going back to what Samir said, we are heavily focused on our capital discipline, cash management and swift payback period is the highest priority. Rates will increase as utilization tightens. And the way we look at it right now is if we are successful in securing work for, say, the Carina, then we have assets like the Gemini, potentially even the Auriga to play for the upside. So we'll continue just to monitor the opportunities as they come. But if we start seeing the utilization tighten or squeeze to above 95%. I think it's just inherent that we're going to see rates pushing up to the higher 400s.

Fredrik, the only thing I'd add to that is, look, you saw it with the Vela, we've got direct continuation -- our team's focus is minimizing as many gaps as humanly possible, right? For us, gaps are wasted money in waste of time. So whatever we can do to close those will be very important to us.

All right. Very helpful. And then just maybe 1 quick to Grant as well. You gave some commentary about the working capital, and there were overarching comments that the second half would be better on free cash flow. I was hoping that given the working capital builds in the second quarter, in particular, as new contracts start up, are you able to kind of help us quantify a bit how you think maybe like the working capital element, in particular, going to be reversed in the second half as things normalize and as you start, or you get some mobilization fee from Petrobras, et cetera?

Yes, sure. I think now you can think of the -- so the build in accounts receivable this quarter was primarily Jupiter and Capella, Remember, they started contracts late March. And so they start collecting revenue then in Q2 -- in Q3 rather. So I think about them then on a normalized working capital rate. So don't expect any sort of reversal or inflow, but I'd consider them at a normal level, so no outflow beyond that. Then on the Telus, I guess, is going to be the interesting rig to look at from a working capital perspective in Q3 because she will then have a working capital build on account able just as we experienced on Jupiter and Capella, but we will also enjoy the mobilization receipt from Petrobras of $40 million in Q3. . I think as far as we're Gavis concerned, that's the 1 to watch in Q3, really, Fredrik. And once that's behind us, we really then should be on a sort of a normal basis.

All right. Your next question comes from the line of Gregory Lewis with BTIG.

Samir, kind of curious on your views on, I guess, kind of dovetails on Fredrik's question clearly, there's opportunities in Asia for rigs, obviously, all over the world, are West Africa as well, gold Triangle. But as we think about Asia, we think about India, I know the last rig you guys had in India was Polaris, that was the 6-gen rig in the Capella operated in Asia is 6 gen. How do you think about the opportunity set for some gen rigs in Asia, just given that historically, they got part of the world has been maybe a lower on average pricing market for, I guess, we'll call the leading-edge, high-quality drillships.

Yes. So I'd start with our sixth-generation rigs, yes, there are 6, but there are dual activity. The Capella has MPD on it, the Polaris is MPD on it. So I'd say the better than your average sixth-gen rig working in those markets. So yes, there's a bit of a difference, but not as much as you would think. And if we look at the Carina, we've positioned her -- she's currently in Walvis Bay. So she's got access to both Africa and Asia as a potential. And as we look at the Asian market, it's back to look at the whole contract value. Your OpEx is a little lower out there. So can you get still good return. But I'll let Jacob kind of speak to the opportunity specifically.

I think 1 thing I would add to that is -- in 2024, we saw 1 of our sixth-gen units kind of in a niche position, and we are opportunistic about that and we got a rate of 545,000 a day. And so there could be a scenario where the seventh gens get scooped up early on in this cycle. And what's left are the sixth gens to play for the upside. So we look at both parts of our fleet is opportunity, we're not just focused on kind of the higher end rates for the 710 units.