UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report:
Commission file number: 333-224459
SEADRILL LIMITED
(Exact name of Registrant as specified in its charter)
Bermuda
(Jurisdiction of incorporation or organization)
Par-la-Ville Place, 4th Floor, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda
(Address of principal executive offices)
Colleen Simmons
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda
Tel: +1 (441) 295-9500, Fax: +1 (441) 295-3494
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of class
Trading Symbol
Name of exchange on which
registered
Common stock $0.10 par value
SDRL
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period
covered by the annual report:
As of December 31, 2019, there were 100,234,973 shares, par value $0.10 per share, of the Registrant’s common stock outstanding.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[_] Yes
[X] No
If this report is an annual report or transition report, indicate by check mark if the Registrant is not required to file reports pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934.
[_] Yes
[X] No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes
[_] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit the files).
[X] Yes
[_] No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “emerging growth company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer [_]
Accelerated filer [X]
Non-accelerated filer [_]
Emerging growth company [_]
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. [_]
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
[_] International Financial Reporting Standards as issued by the International Accounting Standards Board
[X] U.S. GAAP
If ”Other” has been checked in response to the previous question, indicate by check mark which
financial statement item the Registrant has elected to follow.
[_] Other
[_] Item 17
[_] Item 18
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
[_] Yes
[X] No
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
PART 1
ITEM 1.
ITEM 2.
ITEM 3
ITEM 4.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
OFFER STATISTICS AND EXPECTED TIMETABLE
KEY INFORMATION
INFORMATION ON THE COMPANY
ITEM 4A
UNRESOLVED STAFF COMMENTS
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 8
ITEM 9.
ITEM 10.
ITEM 11.
ITEM 12.
PART II
ITEM 13.
ITEM 14.
ITEM 15
ITEM 16.
ITEM 16A.
ITEM 16B.
ITEM 16C.
ITEM 16D.
ITEM 16E.
ITEM 16F.
ITEM 16G.
ITEM 16H.
PART III
ITEM 17.
ITEM 18.
ITEM 19.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
FINANCIAL INFORMATION
THE OFFER AND LISTING
ADDITIONAL INFORMATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
CONTROLS AND PROCEDURES
RESERVED
AUDIT COMMITTEE FINANCIAL EXPERT
CODE OF ETHICS
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
CORPORATE GOVERNANCE
MINE SAFETY DISCLOSURE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
EXHIBITS
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Table of Contents
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 annual report 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 annual report, 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:
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the impact of active negotiations with our lenders to obtain certain amendments to our credit facilities and related contingency planning
efforts, the outcome of which is uncertain;
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 volatility and 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;
our liquidity and the 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;
the impact of the operating and financial restrictions imposed by covenants in our debt agreements;
our ability to satisfy our obligations, including certain covenants, under our debt agreements and, if needed, to raise new capital or
refinance our existing indebtedness;
the ability of our affiliated or related companies to service their debt requirements and comply with the provisions contained in their
loan agreements;
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 impact of global economic conditions, including potential trade wars and global health threats, such as the coronavirus, or
COVID-19, outbreak on us, our customers and suppliers;
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;
Table of Contents
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import-export quotas;
• wage and price controls and the imposition of trade barriers;
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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;
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 Form 20-F 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.
Table of Contents
PART 1.
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
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 2018 Successor period" refers to the period from July 2, 2018 to December 31, 2018.
References to the term "the year ended 2019" refers to the year ended December 31, 2019.
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 and references to the term "the year ended 2017" refers to the year ended December 31, 2017.
Unless otherwise indicated or the context otherwise requires, references in this report to the terms below have the following meanings:
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“AOD” means Asia Offshore Drilling Limited, a company incorporated under the Laws of Bermuda with registration number 44712.
"Archer" means Archer Limited, a global oilfield service company that specializes in drilling and well services. We have a 15.7%
ownership interest in the company.
“Bankruptcy Court” means the United States Bankruptcy Court for the District of South Texas Victoria Division;
“Centerbridge” means Centerbridge Credit Partners L.P. and certain of its affiliates;
“Chapter 11 Proceedings” means reorganization proceedings under Chapter 11 of Title 11 of the United States Code.
“Commitment Parties” means each commitment party to the Investment Agreement;
“Companies Act” means the Companies Act 1981 of Bermuda, as amended from time to time;
“Debtors” means Seadrill Limited and certain of its subsidiaries which filed voluntary petitions for reorganization under Chapter 11
of the United States Bankruptcy Code in the Bankruptcy Court on September 12, 2017;
“Effective Date” means the date of the Debtors’ emergence from bankruptcy proceedings in accordance with the terms and conditions
of the Plan;
“Employee Incentive Plan” means the employee incentive plan that was implemented by Seadrill pursuant to the terms of the Plan
which will, among other things, reserve an aggregate of 10 percent of the Common Shares, on a fully diluted, fully distributed basis,
for grants made from time to time to employees of Seadrill and its subsidiaries and otherwise contain terms and conditions (including
with respect to participants, allocation, structure, and timing of issuance) generally consistent with those prevailing in the market at
the discretion of the board of directors of Seadrill;
“Exchange Act” means the Securities Exchange Act of 1934, as amended;
"Fintech" means Fintech Investment Limited, our joint venture partner for SeaMex;
“Global Settlement” refers to the settlement announced by the Debtors on February 26, 2018 with an ad-hoc group of unsecured bond
holders, the official committee of unsecured creditors and other major creditors. This is described under the heading “The Reorganization
—Introduction”;
"Gulf Drilling International" or "GDI" refers to our joint venture partner for Gulfdrill;
"Gulfdrill" means Gulfdrill LLC, a limited liability company formed under the companies regulations of Qatar with QFC number
00770;
"Heirs Holdings" refers to HH Global Alliance Investments Limited, a company registered in Nigeria that owns a non-controlling
interest in one of our subsidiaries, Seadrill Nigeria Offshore Limited.
“Hemen” means Hemen Holding Limited, a Cyprus holding company with registration number HE87804 and Hemen Investments
Limited, a Cyprus holding company with registration number HE371665;
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“Investment Agreement” means the investment agreement described under the heading “Introduction to the Reorganization” in Item
4A;
"Mermaid" means Mermaid International Ventures, who have a 33.76% ownership interest in AOD;
"NODL" means: Northern Drilling Ltd, listed on the Oslo Stock Exchange under the trading symbol "NODL";
"NOL" means Northern Ocean Ltd, listed on the Norwegian Over The Counter under the trading symbol "NOL";
"Northern Drilling" means both NODL and NOL;
“NSNCo” means Seadrill New Finance Limited, a company incorporated under the Laws of Bermuda with registration number 53541,
formed in connection with the Reorganization and the issuer of the Senior Secured Notes;
“NYSE” means the New York Stock Exchange;
“Old Seadrill Limited” or the “Predecessor Company” means Seadrill Limited, a company incorporated under the Laws of Bermuda
with registration number 36832. Old Seadrill Limited was the parent company of Seadrill prior to its emergence from bankruptcy;
“OSE” means the Oslo Stock Exchange;
“Plan” means the Second Amended Joint Chapter 11 Plan (as modified) of Reorganization, what was filed with the Bankruptcy Court
on February 26, 2018 and confirmed by the Bankruptcy Court on April 17, 2018;
“Reorganization” means the transactions described under the heading “Chapter 11 Reorganization” in Item 4A and those transactions
contemplated by the Plan;
“RSA” means the restructuring support and lock-up agreement that the Debtors entered with a group of bank lenders, bondholders,
certain other stakeholders and new investors on September 12, 2017. This is described under the heading “Introduction to the
Reorganization” in Item 4A;
“Sapura Energy” means Sapura Energy Berhad. We previously held an investment in Sapura Energy. Sapura Energy is also our joint
venture partner for Seabras Sapura;
“Seabras Sapura” refers to our joint venture with Sapura Energy. We refer to our investments in Seabras Sapura Participacoes SA and
Seabras Sapura Holding GmbH together as “Seabras Sapura”;
“Seadrill Limited” or the “Successor Company” means Seadrill Limited (formerly known as “New SDRL Limited”), a company
incorporated under the Laws of Bermuda with registration number 53439. Seadrill Limited has been the parent company of Seadrill
since its emergence from bankruptcy;
“Seadrill Common Shares” or the "Shares” means common shares, par value $0.10 per share, of Seadrill Limited;
“Seadrill Partners” means Seadrill Partners, LLC, a limited liability company formed under the Laws of the Republic of The Marshall
Islands with registration number 962166;
“SeaMex” means SeaMex Limited, a limited liability company formed under the Laws of Bermuda with registration number 48115;
“Senior Secured Notes” means the Senior Secured Notes issued by NSNCo in connection with the Reorganization;
"Ship Finance" means SFL Corporation Ltd, formerly Ship Finance International Limited;
"Ship Finance VIE" refer to the consolidated entities that have sale and leaseback arrangements with SFL Corporation Ltd for the
semi-submersible rigs West Taurus and West Hercules and the jack-up rig West Linus;
"Sonadrill" refers to Sonadrill Holding Ltd, a limited liability company registered in England with registration number 11922814; and
"Sonangol" refers to Sonangol EP, our joint venture partner for Sonadrill.
Throughout the report we refer to customers, suppliers and other key partners by the names they are commonly known by instead of their full
legal names.
References in this annual report to “Total,” “Petrobras,” “ExxonMobil,” “LLOG,” “Saudi Aramco,” “ConocoPhillips” and “Equinor” refer to
our key customers Total S.A., Petroleo Brasileiro S.A., Exxon Mobil Corporation, LLOG Exploration Company LLC, Saudi Arabian Oil Company,
ConocoPhillips and Equinor ASA, respectively.
References in this annual report to “Cosco,” “Samsung,” “DSME,” “Dalian,” “Jurong,” and “HSHI” refer to the shipyards Cosco (Qidong)
Offshore Co. Limited, Samsung Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Dalian Shipbuilding Industry Offshore Co.,
Ltd., Jurong Shipyard Pte Ltd., and Hyundai Samho Heavy Industries Co. Ltd., respectively.
Unless otherwise indicated, all references to “US$” and “$” in this annual report are to, and amounts are presented in, US dollars. All references
to “€” are to euros, all references to “£” or “GBP” are to pounds sterling, all references to “NOK” are to Norwegian krone and all references to
“SEK” are to Swedish krona.
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Table of Contents
A.
SELECTED FINANCIAL DATA
Our selected Statement of Operations and other financial data with respect to the fiscal year ended December 31, 2019, the 2018 Successor
period, the 2018 Predecessor period and the fiscal year ended December 31, 2017 and our selected balance sheet data as of December 31, 2019
and 2018 have been derived from our Consolidated Financial Statements included in Item 18 of this annual report, or the Consolidated Financial
Statements, which have been prepared in accordance U.S. GAAP.
Our selected Statement of Operations and other financial data for the fiscal years ended December 31, 2016 and 2015 and our selected balance
sheet data as of December 31, 2017, 2016 and 2015 have been derived from the Consolidated Financial Statements that are not included herein.
The following table should be read in conjunction with “ITEM 5. Operating and Financial Review and Prospects” and our Consolidated Financial
Statements and notes thereto, which are included herein. Our Consolidated Financial Statements are maintained in U.S. dollars. We refer you to
the notes to our Consolidated Financial Statements for a discussion of the basis on which our Consolidated Financial Statements are prepared,
and we draw your attention to the statement regarding the application of Fresh Start accounting as described in Note 1 "General information"
of our Consolidated Financial Statements included herein.
The below table summarizes certain line items from the consolidated statements of operations for the last five fiscal years.
(In millions of U.S. dollars except common
share and per share data)
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
Year ended
December
31,
2016
Year ended
December
31,
2015
Statement of Operations Data:
Total operating revenues
Net operating (loss)/ income
Net loss
Loss per share, basic
Loss per share, diluted
1,388
(295)
(1,222)
(12.18)
(12.18)
541
(175)
(605)
(6.02)
(6.02)
712
(613)
(3,885)
(7.71)
(7.71)
2,088
(728)
(3,102)
(5.89)
(5.89)
3,169
1,026
(155)
(0.36)
(0.36)
4,335
1,019
(635)
(1.29)
(1.29)
The below table summarizes certain line items from the consolidated balance sheets for the last five fiscal years.
(In millions of U.S. dollars except common share and per
share data)
Successor
As of December 31,
Predecessor
As of December 31,
2019
2018
2017
2016
2015
Balance Sheet Data (at end of period):
Cash and cash equivalents
Drilling units
Newbuildings
Investment in associated companies
Total assets
Long-term debt (including current portion) (1)
Common share capital
Total equity
Common shares outstanding (in millions)
Weighted average common shares outstanding (in millions)
1,357
6,401
—
389
9,279
6,623
10
1,793
100
100
1,542
6,659
—
800
10,848
6,914
10
3,035
100
1,255
13,216
248
1,473
17,982
8,699
1,008
6,959
505
1,368
14,276
1,531
2,168
21,666
9,514
1,008
10,063
504
1,044
14,930
1,479
2,592
23,439
10,543
985
10,068
493
100
505
501
493
(1)
Includes $7,705 million of debt classified as liabilities subject to compromise in 2017.
The below table summarizes certain line items from the consolidated cashflow statements for the last five fiscal years.
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(In millions of U.S. dollars except common
share and per share data)
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
Year ended
December
31,
2016
Year ended
December
31,
2015
Statement of Cash Flows data:
Operating cash flows
Investing cash flows
Financing cash flows
Capital expenditure (1)
(256)
(26)
(367)
(162)
(26)
61
(208)
(98)
(213)
149
887
(127)
399
358
(846)
(150)
1,184
354
(1,405)
(231)
1,788
(165)
(1,370)
(1,041)
(1) Capital expenditures include additions to drilling units and equipment, additions to newbuildings, as well as payments for long-term maintenance.
B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D.
RISK FACTORS
Our assets are primarily engaged in offshore contract drilling for the oil and gas industry in benign and harsh environments worldwide, including
ultra-deepwater environments. The following risks principally relate to the industry in which we operate and our business in general. Other risks
relate principally to the market for and ownership of our securities and our emergence from bankruptcy. The occurrence of any of the events
described in this section could materially and negatively affect our business, financial condition, operating results, cash available for the payment
of dividends or the trading price of our common shares. Unless otherwise indicated, all information concerning our business and our assets is
as of December 31, 2019. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our business operations.
Risks Relating to Our Company and Industry
The success and growth of our business depend on the level of activity in the offshore oil and gas industry generally, and the drilling industry
specifically, which are both highly competitive and cyclical, with intense price competition.
Our business depends on the level of oil and gas exploration, development and production in offshore areas worldwide that is influenced by oil
and gas prices and market expectations of potential changes in these prices.
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Oil and gas prices are extremely volatile and are affected by numerous factors beyond our control, including, but not limited to, the following:
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• worldwide production of, and demand for, oil and gas and geographical dislocations in supply and demand;
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the cost of exploring for, developing, producing and delivering oil and gas;
expectations regarding future energy prices and production;
advances in exploration, development and production technology;
the ability or willingness of the Organization of the Petroleum Exporting Countries, or OPEC, and other non-member nations,
including Russia, to set and maintain levels of production and pricing;
the decision of OPEC or other non-member nations to abandon production quotas and/or member-country quota compliance within
OPEC agreements;
the level of production in non-OPEC countries;
international sanctions on oil-producing countries, or the lifting of such sanctions;
government regulations, including restrictions on offshore transportation of oil and natural gas;
local and international political, economic and weather conditions;
domestic and foreign tax policies;
the development and exploitation of alternative fuels and unconventional hydrocarbon production, including shale;
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• worldwide economic and financial problems and the corresponding decline in the demand for oil and gas and, consequently, our
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services;
the policies of various governments regarding exploration and development of their oil and gas reserves, accidents, severe weather,
natural disasters and other similar incidents relating to the oil and gas industry; and
the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak
of armed hostilities or other crises in the Middle East, Eastern Europe or other geographic areas or further acts of terrorism in the
United States, Europe or elsewhere.
Decreases in oil and gas prices for an extended period of time, or market expectations of potential decreases in these prices, have negatively
affected and could continue to negatively affect our future performance. Although the market experienced a stabilization in oil and gas prices
in 2019, there is no guarantee that this will remain stable going forward and prices can significantly fluctuate in the future. Moreover, in March
2020, members of OPEC and Russia failed to reach an agreement to extend their previously agreed oil production cuts. Consequently, Saudi
Arabia has announced a significant reduction in its export prices and Russia has announced that all agreed oil production cuts between members
of OPEC and Russia will expire on April 1, 2020. As a result of these announcements, the price of oil fell approximately 20% on March 9, 2020.
We cannot anticipate whether or when this dispute will be resolved and production returned to normalized levels. In the absence of a resolution,
oil prices could remain at current levels, or decline further, for an extended period of time. Any perceived or actual further reduction in oil prices
could have a material adverse effect on our business, financial condition and results of operations.
Continued periods of low demand can cause excess rig supply and intensify competition in our industry, which often results in drilling rigs,
particularly older and less technologically-advanced drilling rigs, being idle for long periods of time. We cannot predict the future level of demand
for drilling rigs or future condition of the oil and gas industry with any degree of certainty. Any future decrease in exploration, development or
production expenditures by oil and gas companies could further reduce our revenues and materially harm our business.
In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, which could reduce demand for our services
and adversely affect our business, including, but not limited to, the following:
•
•
•
•
•
•
•
•
the availability and quality of competing offshore drilling units;
the availability of debt financing on reasonable terms;
the level of costs for associated offshore oilfield and construction services;
oil and gas transportation costs;
the level of rig operating costs, including crew and maintenance;
the discovery of new oil and gas reserves;
the political and military environment of oil and gas reserve jurisdictions; and
regulatory restrictions on offshore drilling.
The offshore drilling industry is highly competitive and fragmented and includes several large companies that compete in many of the markets
we serve, as well as numerous small companies that compete with us on a local basis. Offshore drilling contracts are generally awarded on a
competitive bid basis or through privately negotiated transactions. In determining which qualified drilling contractor is awarded a contract, the
key factors are pricing, rig availability, rig location, the condition and integrity of equipment, the rig’s and/or the drilling contractor’s record of
operating efficiency, including high operating uptime, technical specifications, safety performance record, crew experience, reputation, industry
standing and customer relations. Our operations may be adversely affected if our current competitors or new market entrants introduce new
drilling rigs with better features, performance, prices or other characteristics compared to our drilling rigs, or expand into service areas where
we operate.
Competitive pressures and other factors may result in significant price competition, particularly during industry downturns, which could have
a material adverse effect on our results of operations and financial condition.
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Historical downturns in activity in the oil and gas drilling industry has had an adverse impact on our business and results of operations, and
any future downturn or volatile market conditions is likely to adversely impact our business and results of operations.
The oil and gas drilling industry is cyclical but has been in a prolonged downcycle since 2014. The price of Brent crude fell from $115 per barrel
in June 2014 to a low of $30 per barrel in January 2016. As at December 31, 2019, the price of Brent crude was approximately $68 per barrel.
After OPEC and Russia failed to agree on recent production cuts, however, Brent crude reached a low of $22 per barrel on March 30, 2020.
If we are unable to secure contracts for our drilling units upon the expiration of our existing contracts, we may stack our units. When idled or
stacked, drilling units do not earn revenues, but continue to require cash expenditures for crews, fuel, insurance, berthing and associated items.
As of December 31, 2019, we had two “warm stacked” units, which means the rig is kept operational and ready for redeployment, and maintains
most of its crew, 16 “cold stacked” units, which means the rig is stored in a harbor, shipyard or a designated offshore area, and the crew is
reassigned to an active rig or dismissed. Without new drilling contracts or additional financing being available when needed or available only
on unfavorable terms, we will be unable to meet our obligations as they come due or we may be unable to enhance our existing business, complete
additional drilling unit acquisitions or otherwise take advantage of business opportunities as they arise.
During volatile market conditions or expected downturns, our customers may also seek to cancel or renegotiate our contracts for various reasons,
including adverse conditions, resulting in lower dayrates. Our inability, or the inability of our customers to perform, under our or their contractual
obligations may have a material adverse effect on our financial position, results of operations and cash flows.
From time to time, we are approached by potential buyers for the outright purchase of some of our drilling units, businesses, or other fixed assets.
We may determine that such a sale would be in our best interests and agree to sell certain drilling units or other assets. Such a sale could have
an impact on short-term liquidity and net income. We may recognize a gain or loss on disposal depending on whether the fair value of the
consideration received is higher or lower than the carrying value of the asset.
We do not know when the market for offshore drilling units may recover, or the nature or extent of any future recovery. There can be no assurance
that the current demand for drilling rigs will not further decline in future periods. A future decline in demand for drilling rigs would adversely
affect our financial position, operating results and cash flows.
An economic downturn could have a material adverse effect on our revenue, profitability and financial position.
We depend on our customers’ willingness and ability to fund operating and capital expenditures to explore, develop and produce oil and gas,
and to purchase drilling and related equipment. There has historically been a strong link between the development of the world economy and
the demand for energy, including oil and gas. The world economy is currently facing a number of challenges. Concerns persist regarding the
debt burden of certain European countries and their ability to meet future financial obligations and the overall stability of the euro. Further, the
COVID-19 outbreak that began in December 2019 was declared a global pandemic on March 11, 2020 by the World Health Organization. The
COVID-19 outbreak has had numerous effects on the global economy and could cause a global economic downturn. A renewed period of adverse
development in the outlook for the financial stability of European countries, or market perceptions concerning these and related issues, could
reduce the overall demand for oil and natural gas and for our services and thereby could affect our financial position, results of operations and
cash available for distribution. In addition, turmoil and hostilities in the Ukraine, Korea, the Middle East, North Africa and other geographic
areas and countries are adding to the overall risk picture.
Negative developments in worldwide financial and economic conditions could further cause our ability to access the capital markets to be severely
restricted at a time when we would like, or need, to access such markets, which could impact our ability to react to changing economic and
business conditions. Worldwide economic conditions have in the past impacted, and could in the future impact, lenders willingness to provide
credit facilities to our customers, causing them to fail to meet their obligations to us.
A portion of the credit under our credit facilities is provided by European banking institutions. If economic conditions in Europe preclude or
limit financing from these banking institutions, we may not be able to obtain financing from other institutions on terms that are acceptable to
us, or at all, even if conditions outside Europe remain favorable for lending.
An extended period of adverse development in the outlook for the world economy could also reduce the overall demand for oil and gas and for
our services. Such changes could adversely affect our results of operations and cash flows beyond what might be offset by the simultaneous
impact of possibly higher oil and gas prices.
Our business is capital intensive and, to the extent we do not generate sufficient cash from operations, we may need to raise additional funds
through public or private debt or equity offerings to fund our capital expenditures. Our ability to access the capital markets may be limited by
our financial condition at the time, by changes in laws and regulations or interpretations thereof and by adverse market conditions resulting from,
among other things, general economic conditions and contingencies and uncertainties that are beyond our control. An extended period of
deterioration in outlook for the world economy could reduce the overall demand for our services and could also adversely affect our ability to
obtain financing on terms acceptable to us or at all.
Any reductions in drilling activity by our customers may not be uniform across different geographic regions. Locations where costs of drilling
and production are relatively higher, such as Arctic or deepwater locations, may be subject to greater reductions in activity. Such reductions in
high cost regions may lead to the relocation of drilling units, concentrating drilling units in regions with relatively fewer reductions in activity
leading to greater competition.
If our lenders and other debt holders are not confident that we are able to employ our assets, we may be unable to secure replacement or additional
financing, or amendments to existing debt documents, on terms acceptable to us or at all.
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We are in ongoing negotiations with our lenders to obtain certain amendments to our credit facilities, and the outcome of our amendment
request process and our related contingency planning efforts is uncertain and could adversely affect our business and liquidity.
We are currently engaged in discussions with our secured lenders regarding potential amendments to our credit facilities to provide operational
flexibility and additional near-term liquidity by, among other things, converting certain interest payments under our credit facilities to payment-
in-kind (“PIK”) interest and deferring certain scheduled amortization payments (or increasing the aggregate amount of such payments that may
be converted to loans payable at the final scheduled maturity date of the relevant facility pursuant to the amortization conversion election
provisions contained in the facility agreements). We have also requested that our lenders consent to an extension of the periods during which
we are first required to comply with the net leverage and debt service coverage financial covenants in our facility agreements because we currently
anticipate that we will not be able to meet these requirements when such covenants begin to be tested at the end of Q1 2021.
We cannot guarantee that we will be able to obtain our lenders' consent with respect to any of our amendment requests on acceptable terms or
at all. Any amendment to our credit facilities that we enter into may contain more restrictive covenants or other terms that could further exacerbate
certain risks associated with our leveraged capital structure. If we are unable to obtain some or all of our requested amendments on acceptable
terms or at all, we may not be able to satisfy our financial obligations under our credit facilities, which may result in possible defaults on and
acceleration of such indebtedness, and we may exacerbate, and/or be unable to manage or mitigate, certain risks associated with our leveraged
capital structure. If our amendment requests relating to our net leverage and debt service coverage financial covenants are not successful, then
non-compliance with such covenants could trigger certain increases to our interest expense obligations in certain future periods when such
covenants begin to be tested at the end of Q1 2021 (potentially further exacerbating, among other things, liquidity-related risks) and/or, with
respect to covenant test dates occurring after 2021, lead to a default under the terms of those facility agreements under certain circumstances.
We have also forecasted that we will not be able to meet the requirements under our ongoing liquidity financial covenant contained in the facility
agreements during certain periods occurring after the twelve-month period following the date of this report. If our amendment requests for certain
liquidity enhancing measures are not successful, including with respect to the conversion of certain interest payments to PIK and the deferral of
certain scheduled amortization payments then there is an increased risk that we will breach these liquidly requirements sooner than currently
anticipated after such twelve-month period following the date of this report. Failure to comply with such liquidity requirements could result in
a default under the terms of our facility agreements if we are unable to obtain a waiver or amendment from our lenders for such non-compliance.
For more information, please see “-We may not have sufficient liquidity to meet our obligations as they fall due or have the ability to raise new
capital or refinance or amend existing indebtedness on acceptable terms” and “-The covenants in our debt agreements impose operating and
financial restrictions on us that could significantly impact our ability to operate our business and a breach of which could result in a default under
the terms of these agreements, which could accelerate our repayment of funds that we have borrowed.”
There is inherent uncertainty in the outcome of this amendment request process, and therefore we are also preparing certain contingency plans
in the event a consensual agreement is not reached with respect to one or more of our amendment requests.
We may not have sufficient liquidity to meet our obligations as they fall due or have the ability to raise new capital or refinance existing
indebtedness on acceptable terms, all of which could adversely affect our business and financial condition.
As at December 31, 2019, we had $6,759 million in principal amount of interest-bearing debt (excluding related party debt of $314 million).
This includes our 12% (4% payable in cash and 8% PIK secured notes due 2025 (the “Senior Secured Notes”) issued in connection with our
Chapter 11 Proceedings, of which $476 million in principal (including capitalized PIK interest) amount was outstanding as at December 31,
2019. Our debt is secured by, among other things, liens on our drilling units, investments in affiliates and available cash. As at December 31,
2019, we had $5,662 million in principal amount of debt outstanding under our secured credit facilities, which will start to mature in 2022.
Our substantial indebtedness could have significant adverse consequences for an investment in us and on our business, financial condition and
future prospects, including the following:
• we may not be able to satisfy our financial obligations under our indebtedness and our contractual and commercial commitments,
which may result in possible defaults on and acceleration of such indebtedness;
• we may not be able to obtain financing in the future for working capital, capital expenditures, acquisitions, debt service requirements
•
or other purposes;
less leveraged competitors could have a competitive advantage because they have lower debt service requirements and, as a result,
we may not be better positioned to withstand economic downturns;
• we may be less able to take advantage of significant business opportunities and to react to changes in market or industry conditions
than our competitors and our management's discretion in operating our business may be limited; and
other factors described below.
•
Our outstanding indebtedness and potential future indebtedness could adversely affect our business (including future prospects) and liquidity
position, since a substantial portion of our cash flow from operations will be dedicated to the payment of interest and principal and will not be
available for other purposes. Similarly, the fact that our debt is secured by our assets means that we are restricted in our ability to use these assets
or their proceeds for debt service or other corporate purposes.
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Our debt service is anticipated to be primarily comprised of interest through at least Q1 2021 because our facility agreements contain certain
provisions that allow us to elect to defer and convert up to $500 million in the aggregate of scheduled amortization payments under certain of
our credit facilities. We have already elected to use a portion of this capacity with respect to the first scheduled amortization installments under
our credit facilities occurring in Q1 2020. We intend to continue exercising this option for each subsequent scheduled amortization payment date
until such capacity is fully utilized; however, we cannot guarantee that we will be able to satisfy the conditions set forth in the facility agreements
in order to be able to do so. Please also see “-We are in ongoing negotiations with our lenders to obtain certain amendments to our credit facilities,
and the outcome of our amendment request process and our related contingency planning efforts is uncertain and could adversely affect our
business and liquidity.” Furthermore, any exercise of the amortization conversion election described above and the terms of any amendments
to our facility agreements could ultimately have the effect of increasing our total debt service costs for these credit facilities, which could further
exacerbate certain risks associated with our substantial leverage.
We also have provided guarantees over certain debt facilities of our affiliates and related companies. If our affiliates or related companies are
unable to meet their obligations under such facilities, the lenders could look to us to meet such liabilities. For more information, please see “-
We have suffered, and may continue to suffer, losses through our investments in other companies in the offshore drilling and oilfield services
industry, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.”
Our ability to meet our debt service obligations and to fund planned expenditures will be dependent upon, among other things, our future
performance, which will be subject to, and our substantial indebtedness may make us more vulnerable to, prevailing economic conditions
(including increases in interest rates), industry cycles, other industry conditions, and financial, business, regulatory and other factors affecting
our operations, many of which are beyond our control. Our future cash flows may be insufficient to meet all our debt obligations and contractual
commitments, and any insufficiency could negatively impact our business. To the extent that we are unable to repay our indebtedness as it
becomes due or at maturity (including as a result of any acceleration thereof), we may need to refinance or restructure our debt, raise new debt,
reduce or delay capital expenditures, sell assets, repay the debt with the proceeds from equity offerings, or take other actions. We cannot assure
you that any of these actions could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments
on our outstanding indebtedness and to fund our other liquidity needs. Also, the terms of existing or future debt agreements may restrict us from
pursuing any of these actions. Furthermore, reducing or delaying capital expenditures or selling assets could impair future cash flows and our
ability to service our debt in the future.
If for any reason we are unable to meet our debt service and repayment obligations under our debt agreements, we would be in default under
the terms of the agreements governing such indebtedness, which may allow creditors at that time to declare all such indebtedness then outstanding
to be due and payable. This would likely in turn trigger cross-acceleration or cross-default rights among our other debt agreements. Under these
circumstances, if the amounts outstanding under our existing and future debt agreements were to be accelerated, or were the subject of foreclosure
actions, we cannot assure you that our assets would be sufficient to repay in full the money owed to our lenders or to our other debt holders.
Furthermore, if our assets are foreclosed upon, we will not have any income-producing assets left, and as such, we may not be able to generate
any cash flow in the future.
The covenants in our debt agreements impose operating and financial restrictions on us that could significantly impact our ability to operate
our business and a breach of which could result in a default under the terms of these agreements, which could accelerate our repayment of
funds that we have borrowed.
Our credit facility agreements and the indenture governing the Senior Secured Notes impose, and future financial obligations may impose,
operating and financial restrictions on us. These restrictions may prohibit or otherwise limit our ability to fund our operations or capital needs
or to undertake certain other business activities without consent of the requisite debt holders, which in turn may adversely affect our financial
condition. These restrictions include:
executing other financing arrangements;
incurring or guaranteeing additional indebtedness;
creating or permitting liens on our assets;
selling our drilling units or the shares of our subsidiaries;
•
•
•
•
• making investments;
•
•
•
• making capital expenditures.
changing the general nature of our business;
paying dividends to our shareholders or making other restricted payments;
changing the management and/or ownership of the drilling units; and
These restrictions may affect our ability to compete effectively with our competitors, to the extent that they are subject to less onerous restrictions.
The interests of our lenders and other debt holders may be different from ours and we may not be able to obtain their consent when beneficial
for our business, which may impact our performance or our ability to obtain replacement or additional financing. In addition, the profile of our
debt holders has changed since emergence from the Chapter 11 Proceedings, with the replacement of certain relationship banks by debt holders
whose focus may be shorter-term in nature or different. The new profile of our debt holders may make it more difficult for us to obtain consents
from our debt holders when beneficial to our business or to obtain replacement or additional financing.
The different rankings in the capital structure of our lenders and other debt holders and the collateral arrangements which they benefit from in
relation to different assets and the consequential complex intercreditor arrangements that exist mean that the interests of our debt holders will
not always be aligned, which may make it more difficult for us to obtain their consents when beneficial to our business or to obtain replacement
or additional financing.
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Following emergence from Chapter 11 Proceedings on the Effective Date, with exception of minimum liquidity requirements, we are exempt
from financial covenants until Q1 2021. Thereafter, in addition to minimum liquidity requirements, we are required to maintain and satisfy
certain financial ratios and covenants relating to net leverage and debt service coverage.
The time that we spent subject to Chapter 11 Proceedings has utilized some of the period for which we were able to negotiate financial covenant
flexibility and reduced the period available for the Group to operate outside of Chapter 11 Proceedings to reach a position of compliance with
the financial covenants when they do apply.
We currently anticipate that we will not be able to meet the net leverage and debt service financial coverage covenants in our debt agreements
when they begin to apply in 2021. We are in discussions with our lenders to either obtain a waiver or amendment of these financial covenant
requirements. If we are unable to comply with the net leverage and debt service coverage covenants in our debt agreements between Q1 2021
and Q4 2021, this will lead to an interest margin increase of up to 100 bps in the form of PIK interest; however, this does not constitute an event
of default. Thereafter, if we are unable to comply with any of these restrictions and covenants, and we are unable to obtain a waiver or amendment
from our lenders for such non-compliance, a default could occur under the terms of those debt agreements. We have also forecasted that we will
not be able to meet the requirements under our ongoing liquidity financial covenant contained in the facility agreements during certain periods
occurring after the twelve-month period following the date of this report. If our amendment requests for certain liquidity enhancing measures
are not successful, including with respect to the conversion of certain interest payments to PIK and the deferral of certain scheduled amortization
payments then there is an increased risk that we will breach these liquidly requirements sooner than currently anticipated after such twelve-
month period following the date of this report. Failure to comply with such liquidity requirements could result in a default under the terms of
our facility agreements if we are unable to obtain a waiver or amendment from our lenders for such non-compliance. Any future debt agreement
or amendment to any existing debt agreement we enter into may contain similar or more restrictive operating and financial covenants. We cannot
guarantee that we would be able to obtain our lenders' waiver or consent with respect to any such non-compliance on acceptable terms or at all.
If a default occurs under these agreements, lenders could terminate their commitments to lend, accelerate the outstanding loans, declare all
amounts borrowed due and payable and/or exercise other enforcement rights. Events beyond our control, including changes in the economic
and business conditions in the markets in which we operate, may affect our ability to comply with these financial ratios and other covenants.
Our debt agreements contain cross-default provisions (or, in certain instances, cross-acceleration provisions), meaning that if we are in default
under one of our debt agreements, amounts outstanding under our other debt agreements may also be in default, accelerated and become due
and payable. Our drilling units also serve as security under certain of our debt agreements. If our lenders were to foreclose their liens on our
drilling units in the event of a default, this may impair our ability to continue our operations or generate any cash flow in the future. As at
December 31, 2019, we had $6,759 million of interest-bearing debt secured by, among other things, liens on our drilling units.
If any of the aforementioned events occurs, our assets may be insufficient to repay all our outstanding indebtedness in full, and we may be unable
to find alternative financing. Even if we could obtain alternative financing, that financing might not be on terms that we consider favorable or
acceptable. Moreover, in connection with any further waivers of or amendments to our credit facilities that we may obtain, our lenders may
impose additional operating and financial restrictions on us or modify the terms of our existing credit facilities. Any of these events may further
restrict our ability to pay dividends, repurchase our common shares, make capital expenditures or incur additional indebtedness.
In addition, the failure of certain of our affiliated or related companies to service their debt requirements and comply with the provisions contained
in their debt agreements may lead to an event of default under such agreements, which may have a material adverse effect on us. If a default
occurs under the debt agreements of certain of our affiliated or related companies, the lenders and our other debt holders could accelerate the
outstanding borrowings and declare all amounts outstanding due and payable. In this case, if such entities are unable to obtain a waiver or an
amendment to the applicable provisions of the debt agreements, or do not have enough cash on hand to repay the outstanding borrowings, the
lenders and other secured debt holders may, among other things, foreclose their liens on the drilling units and other assets securing the loans and
other secured debt, if applicable, or seek repayment of such debt from such entities.
Certain of our affiliated or related companies may be unable to service their debt requirements and comply with the provisions contained
in their loan agreements.
The failure of certain of the Company’s affiliated or related companies to service their debt requirements and comply with the provisions contained
in their debt agreements may lead to an event of default under such agreements, which may have a material adverse effect on the Group. Such
affiliated and related companies include (i) Asia Offshore Drilling (“AOD”), (ii) certain subsidiaries of SFL Corporation Ltd (“Ship Finance”),
and (iii) certain subsidiaries of Seabras Sapura.
If a default occurs under the debt agreements of our affiliated or related companies, the lenders and other debt holders could accelerate the
outstanding borrowings and declare all amounts outstanding due and payable. In this case, if such entities are unable to obtain a waiver or an
amendment to the applicable provisions of the debt agreements, or do not have enough cash on hand to repay the outstanding borrowings, the
lenders and other secured debt holders may, among other things, foreclose their liens on the drilling units and other assets securing the loans and
other secured debt, if applicable, or seek repayment of such debt from such entities.
We have provided guarantees over certain debt facilities of our affiliates and related companies. If our affiliates or related companies are unable
to meet their obligations outlined above, the lenders could look to us to meet such liabilities. Some examples are outlined in the following
paragraphs. If any of these events occur, we may not be able to satisfy our obligations under the guarantees or support agreements described
above. For more information, please see “-We may not have sufficient liquidity to meet our obligations as they fall due or have the ability to
raise new capital or refinance existing indebtedness on acceptable terms, all of which could adversely affect our business and financial condition.”
We have provided guarantees over AOD’s $210 million senior secured debt as we have in respect of the bank facilities of other members of the
Group and may not have sufficient funds to repay lenders in full if they seek to enforce the guarantees.
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We have an outstanding financial guarantee over one of Seabras Sapura’s senior secured credit facility agreements that was used to partially
fund the acquisition of the pipe-laying support vessel Sapura Esmeralda. As a condition to the lenders making the loan available to Seabras
Sapura, we provided a sponsor guarantee, on a joint and several basis with our joint venture partner, Sapura Energy. The total amount guaranteed
by the joint venture partners as at December 31, 2019 was $146 million. If Seabras Sapura is unable to meet its obligations under the above
references credit facilities, the lenders could look to us to meet such liabilities.
We also consolidate certain subsidiaries of Ship Finance into our Consolidated Financial Statements as variable interest entities or VIEs. To the
extent that the VIEs default under their indebtedness and their debt becomes classified as current in their financial statements, we would in turn
mark such indebtedness as current in our Consolidated Financial Statements. The characterization of the indebtedness in our Consolidated
Financial Statements as current may, among other things, adversely impact our compliance with the covenants contained in our existing and
future debt agreements.
Our debt agreements also contain cross-default and cross-acceleration provisions that may be triggered if we fail to comply with our obligations
under the guarantees or support agreements described above. Such cross-defaults and cross-accelerations, as applicable, could result in the
acceleration of the maturity of the debt under our agreements and our lenders or other secured debt holders may foreclose upon any collateral
securing that debt, including our drilling units and other assets, even if such default was subsequently cured. In the event of such acceleration
and foreclosure, we will not have sufficient funds or other assets to satisfy all our obligations.
A number of our affiliates or related companies are joint ventures, to which we may have funding obligations. Our partners in these joint ventures
may have different objectives or strategies or different financial positions from us and this may affect how these joint ventures perform, how
they are supported, their compliance with the financing and contractual arrangements to which they are subject and our interests in and cash
flows from them. In addition, affiliates or related companies that we do not control may take actions that we would not have taken or fail to take
action which we would have taken.
The occurrence of any of the events described above would have a material adverse effect on our business and may impair our ability to continue
as a going concern.
If Mermaid International Ventures exercises its Put Option, we may be required to issue Seadrill common shares, which would dilute our
shareholders’ current ownership interests.
In connection with the bankruptcy process, our Predecessor executed a Transaction Support Agreement (“TSA”) on April 4, 2018 with a minority
shareholder, Mermaid International Ventures (“Mermaid”), of one of our subsidiaries, Asia Offshore Drilling Limited (“AOD”). The purpose of
the TSA was to obtain unanimous approval of the AOD board of directors (which included Mermaid) 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 provides a framework for a monetization event for Mermaid in the form of an option to sell the shares it owns in AOD to Seadrill for
fair value subject to a $125 million price ceiling (“Put Option”). The Put Option generates a redemption feature for the non-controlling interest
held by Mermaid that is outside the control of Seadrill. The rights under the Put Option may be exercised through September 30, 2020, subject
to certain limited short-term extensions. Consideration from Seadrill, should Mermaid exercise the Put Option, is up to $50 million in cash,
with the remainder (if any) in Seadrill common shares. Refer to Note 27 - “Redeemable non-controlling interest” to the Consolidated Finance
Statements included herein for further information.
The Put Option process formally will commence, if at all, when Mermaid issues a notice requesting a valuation of Mermaid’s AOD shares (the
“Valuation Notice”) agreed upon by Seadrill and Mermaid or, if needed, a valuation of the AOD shares determined by an expert appointed by
an arbitrator. After receipt of the requested valuation, Mermaid may issue a notice to Seadrill that Mermaid is exercising its Option Right (the
“Option Notice”). Seadrill must purchase Mermaid’s shares in AOD no later than fifteen calendar days from receipt of the Option Notice.
The table below illustrates the estimated value of Mermaid’s AOD shares assuming a range of possible rig values, including drilling contracts:
Value per drilling unit, including drilling contract (in
millions)
Estimated value of Mermaid's AOD shares (33.76% of
estimated value of AOD equity in total) (in millions)
$60
$20
$70
$30
$80
$40
$90
$50
$100
$60
The value ultimately agreed upon by Seadrill and Mermaid or, if needed, the valuation of the shares determined by an expert appointed by an
arbitrator may differ from the values reflected in the table above. Any obligation to Mermaid to issue Seadrill common shares will increase the
number of our common shares issued and outstanding, which may depress the price of our common shares and cause our shareholders to
experience dilution in their respective percentage ownership in us.
Furthermore, any issuance of shares to Mermaid could result in significant ownership of Seadrill by one entity, which could increase uncertainty
regarding the future direction of the Company. A significant shareholder may make it difficult to approve certain transactions even if they are
supported by other shareholders, which may have an adverse effect on the trading price of our common shares. These factors could have a
material adverse effect on us.
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Our customers may seek to cancel or renegotiate their contracts to include unfavorable terms such as unprofitable rates, particularly in the
circumstance that operations are suspended or interrupted.
During current or worsened market conditions, some of our customers may seek to terminate their agreements with us. Some of our customers
have the right to terminate their drilling contracts without cause upon the payment of an early termination fee. The general principle is that such
early termination fee shall compensate us for lost revenues less operating expenses for the remaining contract period; however, in some cases,
such payments may not fully compensate us for the loss of the drilling contract.
Under certain circumstances our contracts may permit customers to terminate contracts early without the payment of any termination fees, as a
result of non-performance, periods of downtime or impaired performance caused by equipment or operational issues, or sustained periods of
downtime due to force majeure events beyond our control. In addition, national oil company customers may have special termination rights by
law. During periods of challenging market conditions, we may be subject to an increased risk of our customers seeking to repudiate their contracts,
including through claims of non-performance. Our customers may seek to renegotiate their contracts with us using various techniques, including
threatening breaches of contract and applying commercial pressure, resulting in lower dayrates or the cancellation of contracts with or without
any applicable early termination payments.
Reduced dayrates in our customer contracts and cancellation of drilling contracts (with or without early termination payments) may adversely
affect our performance and lead to reduced revenues from operations.
Our contract backlog for our fleet of drilling units may not be realized.
As of December 31, 2019, our contract backlog was approximately $2.5 billion. The contract backlog presented in this annual report on Form
20-F and our other public disclosures is only an estimate. The actual amount of revenues earned and the actual periods during which revenues
are earned will be different from the contract backlog projections due to various factors, including shipyard and maintenance projects, downtime
and other events within or beyond our control. In addition, we or our customers may seek to cancel or renegotiate our contracts for various
reasons, including adverse conditions, such as the current environment, resulting in lower dayrates. In some instances, there is an option for a
customer to terminate a drilling contract prematurely for convenience on payment of an early termination fee. However, this fee may not
adequately compensate us for the loss of this drilling contract. Our inability, or the inability of our customers, to perform under our or their
contractual obligations may have a material adverse effect on our financial position, results of operations and cash flows.
We may not be able to renew or obtain new and favorable contracts for our drilling units whose contracts have expired or have been terminated.
During the previous period of high utilization and high dayrates, which we now believe ended in early 2014, industry participants ordered the
construction of new drilling units, which resulted in an over-supply and caused, in conjunction with deteriorating industry conditions, a subsequent
decline in utilization and dayrates when the new drilling units entered the market. A relatively large number of the drilling units currently under
construction have not been contracted for future work, and a number of units in the existing worldwide fleet are currently off-contract.
As at December 31, 2019, we had 17 current or future contracted units and 18 idle units (of which two are "warm stacked" and 16 are "cold
stacked"). Of the contracted units we expect five to become available in 2020, three in 2021, and nine thereafter. Our ability to renew contracts
or obtain new contracts will depend on our customers and prevailing market conditions, which may vary among different geographic regions
and types of drilling units.
The over-supply of drilling units will be exacerbated by the entry of newbuild rigs into the market, many of which are without firm drilling
contracts. The supply of available uncontracted units has intensified price competition as scheduled delivery dates occur and contracts terminate
without renewal, reducing dayrates as the active fleet grows. Customers may opt to contract older rigs in order to reduce costs which could
adversely affect our ability to obtain new drilling contracts due to our newer fleet.
In addition, as our fleet of drilling units becomes older, any competitive advantage of having a modern fleet may be reduced to the extent that
we are unable to acquire newer units or enter into newbuilding contracts as a result of financial constraints. For as long as there is an oversupply
of drilling rigs, it may be more difficult for older rigs to secure extensions or new contract awards.
If we are unable to secure contracts for our drilling units upon the expiration of our existing contracts, we may continue to idle or stack our units.
When idled or stacked, drilling units do not earn revenues, but continue to require cash expenditures for crews, fuel, insurance, berthing and
associated items. As at December 31, 2019 we had 18 units either “warm stacked,” which means the rig is kept operational and ready for
redeployment, and maintains most of its crew, or “cold stacked,” which means the rig is stored in a harbor, shipyard or a designated offshore
area, and the crew is reassigned to an active rig or dismissed. Please see “- Our drilling contracts contain fixed terms and day-rates, and consequently
we may not fully recoup our costs in the event of a rise in expenses, including operating and maintenance costs” for more information.
If we are not able to obtain new contracts in direct continuation of existing contracts, or if new contracts are entered into at dayrates substantially
below the existing dayrates or on terms otherwise less favorable compared to existing contract terms, our revenues and profitability could be
adversely affected. We may also be required to accept more risk in areas other than price to secure a contract and we may be unable to push this
risk down to other contractors or be unable or unwilling at competitive prices to insure against this risk, which will mean the risk will have to
be managed by applying other controls. This could lead to us being unable to meet our liabilities in the event of a catastrophic event on one of
our rigs. Any of the events described above could impair our ability to generate sufficient cash flow to meet our debt service obligations, capital
expenditure and other obligations. For more information, please see “-We may not have sufficient liquidity to meet our obligations as they fall
due or have the ability to raise new capital or refinance existing indebtedness on acceptable terms, all of which could adversely affect our business
and financial condition.”
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The market value of our drilling units may decrease.
The market values of drilling units have been trending lower as a result of the continued decline in the price of oil, which has impacted the
spending plans of our customers and utilization of the global fleet. If the offshore drilling industry suffers further adverse developments in the
future, the fair market value of our drilling units may decrease further. Upon emergence from the Chapter 11 Proceedings, our assets, including
drilling units, were recognized at fair value. The fair market value of the drilling units that we currently own, or may acquire in the future, may
increase or decrease depending on a number of factors, including:
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the general economic and market conditions affecting the offshore contract drilling industry, including competition from other offshore
contract drilling companies;
the types, sizes and ages of drilling units;
the supply and demand for drilling units;
the costs of newbuild drilling units;
the prevailing level of drilling services contract dayrates;
governmental or other regulations; and
technological advances.
If drilling unit values fall significantly, we may have to record an impairment adjustment in our Consolidated Financial Statements, which could
adversely affect our financial results and condition. Additionally, if we sell one or more of our drilling units at a time when drilling unit prices
have fallen and before we have recorded an impairment adjustment to our Consolidated Financial Statements, the sale price may be less than
the drilling unit’s carrying value in our Consolidated Financial Statements, resulting in a loss on disposal and a reduction in earnings and cause
us to breach the covenants in our finance agreements. For more information, see “-The current downturn in activity in the oil and gas drilling
industry has had and is likely to continue to have an adverse impact on our business and results of operations.”
Our business and operations involve numerous operating hazards, and in the current market we are increasingly required to take additional
contractual risk in our customer contracts and we may not be able to procure insurance to adequately cover potential losses.
Our operations are subject to hazards inherent in the drilling industry, such as blowouts, reservoir damage, loss of production, loss of well control,
lost or stuck drill strings, equipment defects, punch-throughs, cratering, fires, explosions and pollution. Contract drilling and well servicing
requires the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers
and third parties. These hazards can cause 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, investigations and other proceedings by regulatory authorities which may involve
fines and other sanctions, and suspension of operations. Our offshore fleet is also subject to hazards inherent in marine operations, either while
on-site or during mobilization, such as capsizing, sinking, grounding, collision, damage from severe weather (which may be more acute in certain
areas where we operate) and marine life infestations. Operations may also be suspended because of machinery breakdowns, abnormal drilling
conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. We customarily provide contract indemnity
to our customers for claims that could be asserted by us relating to damage to or loss of our equipment, including rigs and claims that could be
asserted by us or our employees relating to personal injury or loss of life.
Damage to the environment could also result from our operations, particularly through spillage of fuel, lubricants or other chemicals and substances
used in drilling operations or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil
and gas companies.
Our insurance policies and contractual rights to indemnity may not adequately cover losses, and we do not have insurance coverage or rights to
indemnity for all risks. Consistent with standard industry practice, our customers generally assume, and indemnify us against certain risks, for
example, well control and subsurface risks, and we generally assume, and indemnify against, above surface risks (including spills and other
events occurring on our rigs). Subsurface risks indemnified by our customers generally include risks associated with the loss of control of a well,
such as blowout or cratering or uncontrolled well-flow, the cost to regain control of or re-drill the well and associated pollution. However, there
can be no assurances that these customers will be willing or financially able to indemnify us against these risks under our contracts. The terms
of our drilling contracts vary based on negotiation, applicable local laws and regulations and other factors, and in some cases, customers may
seek to cap indemnities or narrow the scope of their coverage, reducing our level of contractual protection.
In addition, a court may decide that certain indemnities in our current or future contracts are not enforceable. For example, in a decision in a
case related to the fire and explosion that took place on the unaffiliated Deepwater Horizon Mobile Offshore Drilling Unit in the Gulf of Mexico
in April 2010, or the Deepwater Horizon Incident (to which we were not a party), a U.S. District Court invalidated certain contractual indemnities
under a drilling contract governed by U.S. law. Further, pollution and environmental risks generally are not totally insurable. If a significant
accident or other event occurs that is not fully covered by our insurance or an enforceable or recoverable indemnity from a customer, the
occurrence could adversely affect our performance.
The amount recoverable under insurance may also be less than the related impact on enterprise value after a loss or not cover all potential
consequences of an incident and include annual aggregate policy limits. As a result, we retain the risk through self-insurance for any losses in
excess of these limits. Any such lack of reimbursement may cause us to incur substantial costs.
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We could decide to retain more risk through self-insurance in the future. This self-insurance results in a higher risk of losses, which could be
material, which are not covered by third-party insurance contracts. Specifically, we have at times in the past elected to self-insure for physical
damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico due to the substantial costs associated with such coverage.
Although we currently insure a limited part of this windstorm risk pursuant to a policy for physical damage to rigs and equipment caused by
named windstorms in the U.S. Gulf of Mexico with a combined single limit of $100 million in the annual aggregate, this policy is subject to
certain exclusions and limitations and may not be sufficient to cover future losses caused by such storms. In addition, if we elect to self-insure
such risks again in the future and such windstorms cause significant damage to any rig and equipment we have in the U.S. Gulf of Mexico, it
could have a material adverse effect on our financial position, results of operations and cash flows.
No assurance can be made that we will be able to maintain adequate insurance in the future at rates that we consider reasonable, or that we will
be able to obtain insurance against certain risks.
We rely on a small number of customers and our results of operations could be materially adversely affected if any of our major customers
fail to compensate us for our services.
Our contract drilling business is subject to the risks associated with having a limited number of customers for our services. For the twelve months
ended December 31, 2019, our five largest customers, Total, Saudi Aramco, Northern Drilling, ConocoPhillips and Equinor, accounted for
approximately 67% of our revenues. In addition, mergers among oil and gas exploration and production companies will further reduce the number
of available customers, which would increase the ability of potential customers to achieve pricing terms favorable to them. Our results of
operations could be materially adversely affected if any of our major customers fail to compensate us for our services or take actions outlined
above. Please see “-Our customers may seek to cancel or renegotiate their contracts to include unfavorable terms such as unprofitable rates,
particularly in the circumstance that operations are suspended or interrupted” for more information.
We are subject to risks of loss resulting from non-payment or non-performance by our customers and certain other third parties. Some of these
customers and other parties may be highly leveraged and subject to their own operating and regulatory risks. If any key customers or other parties
default on their obligations to us, our financial results and condition could be adversely affected. Any material non-payment or non-performance
by these entities, other key customers or certain other third parties could adversely affect our financial position, results of operations and cash
flows.
Our drilling contracts contain fixed terms and day-rates, and consequently we may not fully recoup our costs in the event of a rise in expenses,
including reactivation, operating and maintenance costs.
Our operating costs are generally related to the number of units in operation and the cost level in each country or region where the units are
located. A significant portion of our operating costs may be fixed over the short term.
The majority of our contracts have dayrates that are fixed over the contract term. To mitigate the effects of inflation on revenues from term
contracts, most of our long-term contracts include escalation provisions. These provisions allow us to adjust the dayrates based on stipulated
external cost indices, including wages, insurance and maintenance costs. However, actual cost increases may result from events or conditions
that do not cause correlative changes to the applicable indices. Furthermore, certain indices are updated semi-annually, and therefore may be
outdated at the time of adjustment. The adjustments are typically performed on a semi-annual or annual basis. For these reasons, the timing and
amount awarded as a result of such adjustments may differ from our actual cost increases, which could adversely affect our financial performance.
Some of our long-term contracts contain rate adjustment provisions based on market dayrate fluctuations rather than cost increases. In such
contracts, the dayrate could be adjusted lower during a period when costs of operation rise, which could adversely affect our financial performance.
In addition, our contracts typically contain provisions for either fixed or dayrate compensation during mobilization. These rates may not fully
cover our costs of mobilization, and mobilization may be delayed, increasing our costs, without additional compensation from the customer, for
reasons beyond our control.
In connection with new assignments, we might incur expenses relating to preparation for operations under a new contract. Expenses may vary
based on a number of factors including the scope and length of such required preparations, whether the relevant unit is idle or stacked and
reactivation is required, and the duration of the contractual period over which such expenditures are amortized.
Equipment maintenance costs fluctuate depending upon the type of activity that the unit is performing and the age and condition of the equipment,
as well as the applicable environmental, safety and maritime regulations and standards. Our operating expenses and maintenance costs depend
on a variety of factors, including crew costs, provisions, equipment, insurance, maintenance and repairs, and shipyard costs, many of which are
beyond our control.
In situations where our drilling units incur idle time between assignments, the opportunity to reduce the size of our crews on those drilling units
is limited, as the crews will be engaged in preparing the unit for its next contract. When a unit faces longer idle periods, reductions in costs may
not be immediate as some of the crew may be required to prepare drilling units for stacking and maintenance in the stacking period. Should units
be idle for a longer period, we will seek to redeploy crew members who are not required to maintain the drilling unit to active rigs, to the fullest
extent possible. However, there can be no assurance that we will be successful in reducing our costs in such cases.
Operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues. Operating revenues may fluctuate
as a function of changes in supply of offshore drilling units and demand for contract drilling services. This could adversely affect our revenue
from operations. For more information please see “-The success and growth of our business depend on the level of activity in the offshore oil
and gas industry generally, and the drilling industry specifically, which are both highly competitive and cyclical, with intense price competition,”
“-Our customers may seek to cancel or renegotiate their contracts to include unfavorable terms such as unprofitable rates, particularly in the
circumstance that operations are suspended or interrupted” and “-Our contract backlog for our fleet of drilling units may not be realized.”
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Consolidation and governmental regulation of suppliers may increase the cost of obtaining supplies or restrict our ability to obtain needed
supplies.
We rely on certain third parties to provide supplies and services necessary for our offshore drilling operations, including, but not limited to,
drilling equipment suppliers, catering and machinery suppliers. Recent mergers have reduced the number of available suppliers, resulting in
fewer alternatives for sourcing key supplies. With respect to certain items, such as blow-out preventers or “BOPs” and drilling packages, we are
dependent on the original equipment manufacturer for repair and replacement of the item or its spare parts. Such consolidation, combined with
a high volume of drilling units under construction, may result in a shortage of supplies and services, thereby increasing the cost of supplies and/
or potentially inhibiting the ability of suppliers to deliver on time. These cost increases or delays could have a material adverse effect on our
results of operations, resulting in rig downtime, and delays in the repair and maintenance of our drilling rigs.
We may be unable to obtain, maintain, and/or renew permits necessary for our operations or experience delays in obtaining such permits
including the class certifications of rigs.
The operation of our drilling units will require certain governmental approvals, the number and prerequisites of which cannot be determined
until we identify the jurisdictions in which we will operate on securing contracts for the drilling units. Depending on the jurisdiction, these
governmental approvals may involve public hearings and costly undertakings on our part. We may not obtain such approvals or such approvals
may not be obtained in a timely manner. If we fail to secure the necessary approvals or permits in a timely manner, our customers may have the
right to terminate or seek to renegotiate their drilling contracts to our detriment.
Every offshore drilling unit is a registered marine vessel and must be “classed” by a classification society to fly a flag. The classification society
certifies that the drilling unit is “in-class,” signifying that such drilling unit has been built and maintained in accordance with the rules of the
classification society and complies with applicable rules and regulations of the drilling unit’s country of registry and the international conventions
of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances
of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
Our drilling units are certified as being “in class” by the American Bureau of Shipping, or ABS, Det Norske Veritas and Germanisher Lloyd, or
DNV GL, and the relevant national authorities in the countries in which our drilling units operate. If any drilling unit loses its flag status, does
not maintain its class and/or fails any periodical survey or special survey, the drilling unit will be unable to carry on operations and will be
unemployable and uninsurable, which could cause us to be in violation of certain covenants in certain of our debt agreements. Any such inability
to carry on operations or be employed could have a material adverse impact on the results of operations. Please see “Item 8. Financial Information-
Legal Proceedings-Seabras Sapura joint venture” for more information.
The international nature of our operations involves additional risks including foreign government intervention in relevant markets, for
example in Brazil.
We operate in various regions throughout the world. As a result of our international operations, we may be exposed to political and other
uncertainties, particularly in less developed jurisdictions, including risks of:
terrorist acts, armed hostilities, war and civil disturbances;
acts of piracy, which have historically affected ocean-going vessels;
abduction, kidnapping and hostage situations;
significant governmental influence over many aspects of local economies;
the seizure, nationalization or expropriation of property or equipment;
uncertainty of outcome in foreign court proceedings;
the repudiation, nullification, modification or renegotiation of contracts;
limitations on insurance coverage, such as war risk coverage, in certain areas;
political unrest;
foreign and U.S. monetary policy and foreign currency fluctuations and devaluations;
the inability to repatriate income or capital;
complications associated with repairing and replacing equipment in remote locations;
import-export quotas, wage and price controls, and the imposition of trade barriers;
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• U.S., European Union and foreign sanctions or trade embargoes;
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receiving a request to participate in an unsanctioned foreign boycott under U.S. law;
compliance with various jurisdictional regulatory or financial requirements;
compliance with and changes to taxation;
other forms of government regulation and economic conditions that are beyond our control;
legal and economic systems that are not as mature or predictable as those in more developed countries, which may lead to greater
uncertainty in legal and economic matters; and
government corruption.
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In addition, international contract drilling operations are subject to various laws and regulations of the countries in which we operate, including
laws and regulations relating to:
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the equipping and operation of drilling units;
exchange rates or exchange controls;
the repatriation of foreign earnings;
oil and gas exploration and development;
the taxation of offshore earnings and the earnings of expatriate personnel; and
the use and compensation of local employees and suppliers by foreign contractors.
Some foreign governments favor or effectively require (i) the awarding of drilling contracts to local contractors or to drilling rigs owned by their
own citizens, (ii) the use of a local agent or (iii) foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
These practices may adversely affect our ability to compete in those regions. It is difficult to predict what government regulations may be enacted
in the future that could adversely affect the international drilling industry. The actions of foreign governments, including initiatives by OPEC,
may adversely affect our ability to compete. Failure to comply with applicable laws and regulations, including those relating to sanctions and
export restrictions, may subject us to criminal sanctions or civil remedies, including fines, the denial of export privileges, injunctions or seizures
of assets.
In the years ended December 31, 2019, 2018 and 2017, 10%, 22% and 17%, respectively, of our revenues were derived from our Brazilian
operations. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and
regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures,
changes in interest rates, changes in tax policies, changes in legislation, wage controls, price controls, currency devaluations, capital controls
and limits on imports of goods and services. Changes to fiscal and monetary policy, the regulatory environment of our industry, and legislation
could impact our performance.
The Brazilian markets have experienced heightened volatility in recent years due to the uncertainties derived from the ongoing investigations
being conducted by the Office of the Brazilian Federal Prosecutor, the Brazilian Federal Police, the Brazilian Securities Commission (Comissão
de Valores Mobiliários), the Securities and Exchange Commission, the U.S. Department of Justice, and other Brazilian and foreign public
authorities, including the largest such investigation known as Lava Jato, and the impact that such investigations have on the Brazilian economy
and political environment. Numerous elected officials, public servants and executives and other personnel of large and state-owned companies
have been subject to investigation, arrest, criminal charges and other proceedings in connection with allegations of political corruption, including
the acceptance of bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction
companies, among others. The profits of these kickbacks allegedly financed the political campaigns of political parties that were unaccounted
for or not publicly disclosed and served to personally enrich the recipients of the bribery scheme. Individuals who have had commercial
arrangements with us have been identified in the Lava Jato investigations and the investigations by the Brazilian authorities are ongoing. The
outcome of certain of these investigations is uncertain, but they have already had an adverse impact on the business, image and reputation of
the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether such allegations will lead
to further political and economic instability or whether new allegations against government officials or executives will arise in the future. We
also cannot predict the outcome of any such allegations on the Brazilian economy, and the Lava Jato investigation could adversely affect our
business and operations. In addition, conservative presidential candidate Jair Bolsonaro assumed office on January 1, 2019. Uncertainty about
the ability of the Bolsonaro administration to adopt and implement new policies may reduce investor and market confidence and we are unable
to predict the political and economic direction of Brazil in coming years.
These and other developments in Brazil’s political conditions, economy and government policies may, directly or indirectly, adversely affect
our business, financial condition and results of operations.
Compliance with, and breach of, the complex laws and regulations governing international trade could be costly, expose us to liability and
adversely affect our operations.
Our business in the offshore drilling industry is affected by laws and regulations relating to the energy industry and the environment in the
geographic areas where we operate.
Accordingly, we are directly affected by the adoption of laws and regulations that, for economic, environmental or other policy reasons, curtail
exploration and development drilling for oil and gas. For example, on December 20, 2016, the United States President invoked a law to ban
offshore oil and gas drilling in large areas of the Arctic and the Atlantic Seaboard. While the current administration has since attempted to lift
the ban and open certain of those areas to oil and gas drilling, the President’s legal authority to do so has been challenged and as a result it is
difficult to predict if and when such areas may be made available for future exploration activities. A ban on new drilling in Canadian Arctic
waters was announced simultaneously. We may be required to make significant capital expenditures or operational changes to comply with
governmental laws and regulations. It is also possible that these laws and regulations may, in the future, add significantly to our operating costs
or significantly limit drilling activity.
Import activities are governed by unique customs laws and regulations in each of the countries of operation. Moreover, many countries, including
the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and
reporting obligations.
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The laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex
and constantly changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our
operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which are outside our control and some of
which may result from the failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled
operational downtime. Any failure to comply with applicable legal and regulatory trading obligations could also result in criminal and civil
penalties and sanctions, such as fines, imprisonment, debarment from government contracts, the seizure of shipments, and the loss of import
and export privileges.
Offshore drilling in certain areas, including arctic areas, has been curtailed and, in certain cases, prohibited because of concerns over protecting
the environment.
New laws or other governmental actions that prohibit or restrict offshore drilling or impose additional environmental protection requirements
that result in increased costs to the oil and gas industry, in general, or to the offshore drilling industry, in particular, could adversely affect our
performance.
The amendment or modification of existing laws and regulations or the adoption of new laws and regulations curtailing or further regulating
exploratory or development drilling and production of oil and gas could have a material adverse effect on our business, results of operations or
financial condition. Future earnings may be negatively affected by compliance with any such new legislation or regulations.
We are subject to complex environmental laws and regulations that can adversely affect the cost, manner or feasibility of doing business.
Our operations are subject to numerous international, national, state and local laws and regulations, treaties and conventions in force in international
waters and the jurisdictions in which our drilling units operate or are registered, which can significantly affect the ownership and operation of
our drilling units. These requirements include, but are not limited to:
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conventions under the auspices of the United Nation’s International Maritime Organization (“IMO”);
the International Convention for the Prevention of Pollution from Ships of 1973, as from time to time amended (“MARPOL”);
the International Convention on Civil Liability for Oil Pollution Damage of 1969, as from time to time amended (“CLC”);
the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”), the International
Convention for the Safety of Life at Sea of 1974, as from time to time amended (“SOLAS”);
the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (the “ISM Code”);
the IMO International Convention on Load Lines of 1966, as from time to time amended, the International Convention for the Control
and Management of Ships’ Ballast Water and Sediments in February 2004 (the “BWM Convention”);
EU Directive 2013/30 on the Safety of Offshore Oil and Gas Operations;
the U.S. Oil Pollution Act of 1990 (“OPA”);
requirements of the U.S. Coast Guard (“USCG”);
the U.S. Environment Protection Agency (“EPA”);
the U.S. Comprehensive Environmental Response;
Compensation and Liability Act (“CERCLA”)
the U.S. Maritime Transportation Security Act of 2002 (“MTSA”); and
the U.S. Outer Continental Shelf Lands Act and certain regulations of the EU.
Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or implementation of
operational changes and may affect the resale value or useful lifetime of our drilling units. These costs could have a material adverse effect on
our business, results of operations, cash flows and financial condition. A failure to comply with applicable laws and regulations may result in
administrative and civil penalties, criminal sanctions or the suspension or termination of our operations. Because such conventions, laws, and
regulations are often revised, we cannot predict the ultimate cost of complying with them or the impact thereof on the resale prices or useful
lives of our rigs. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase the cost
of our doing business and which may materially adversely affect our operations.
Environmental laws often impose strict liability for the remediation of spills and releases of oil and hazardous substances, which could subject
us to liability without regard to whether we were negligent or at fault. Under OPA, for example, owners, operators and bareboat charterers are
jointly and severally strictly liable for the discharge of oil within the 200-mile exclusive economic zone around the United States. An oil or
chemical spill, for which we are deemed a responsible party, could result in us incurring significant liability, including fines, penalties, criminal
liability and remediation costs for natural resource damages under other federal, state and local laws, as well as third-party damages, which could
have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, the 2010 explosion of the
Deepwater Horizon well and the subsequent release of oil into the Gulf of Mexico, or other similar events, may result in further regulation of
the shipping industry, and modifications to statutory liability schemes, thus exposing us to further potential financial risk in the event of any
such oil or chemical spill.
We and, in certain circumstances, our customers are required by various governmental and quasi-governmental agencies to obtain certain permits,
licenses and certificates with respect to our operations, and satisfy insurance and financial responsibility requirements for potential oil (including
marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks, such insurance is
subject to exclusions and other limits, and there can be no assurance that such insurance will be sufficient to cover all such risks or that any
claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition.
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Although our drilling units are separately owned by our subsidiaries, under certain circumstances a parent company and all of the unit-owning
affiliates in a group under common control engaged in a joint venture could be held liable for damages or debts owed by one of the affiliates,
including liabilities for oil spills under OPA or other environmental laws. Therefore, it is possible that we could be subject to liability upon a
judgment against us or any one of our subsidiaries.
Our drilling units could cause the release of oil or hazardous substances. Any releases may be large in quantity, above our permitted limits or
occur in protected or sensitive areas where public interest groups or governmental authorities have special interests. Any releases of oil or
hazardous substances could result in fines and other costs to us, such as costs to upgrade our drilling rigs, clean up the releases and comply with
more stringent requirements in our discharge permits, as well as subject us to third party claims for damages, including natural resource damages.
Moreover, these releases may result in our customers or governmental authorities suspending or terminating our operations in the affected area,
which could have a material adverse effect on our business, results of operations and financial condition.
If we are able to obtain from our customers some degree of contractual indemnification against pollution and environmental damages in our
contracts, such indemnification may not be enforceable in all instances or the customer may not be financially able to comply with its indemnity
obligations in all cases, and we may not be able to obtain such indemnification agreements in the future. In addition, a court may decide that
certain indemnities in our current or future contracts are not enforceable.
The insurance coverage we currently hold may not be available in the future, or we may not obtain certain insurance coverage. Even if insurance
is available and we have obtained the coverage, it may not be adequate to cover our liabilities, or our insurance underwriters may be unable to
pay compensation if a significant claim should occur. Any of these scenarios could have a material adverse effect on our business, results of
operations and financial condition.
Failure to comply with international anti-corruption legislation, including the U.S. Foreign Corrupt Practices Act 1977 or the U.K. Bribery
Act 2010, could result in fines, criminal penalties, damage to our reputation and drilling contract terminations.
We currently operate, and historically have operated, our drilling units in a number of countries throughout the world, including some with
developing economies. We interact with government regulators, licensors, port authorities and other government entities and officials. Also, our
business interaction with national oil companies as well as state or government-owned shipbuilding enterprises and financing agencies puts us
in contact with persons who may be considered to be “foreign officials” under the U.S. Foreign Corrupt Practices Act of 1977 or the FCPA and
the Bribery Act 2010 of the United Kingdom or the U.K. Bribery Act.
In order to effectively compete in some foreign jurisdictions, we utilize local agents and/or establish entities with local operators or strategic
partners. All of these activities may involve interaction by our agents with government officials. Even though some of our agents and partners
may not themselves be subject to the FCPA, the U.K. Bribery Act or other anti-bribery laws to which we may be subject, if our agents or partners
make improper payments to government officials or other persons in connection with engagements or partnerships with us, we could be investigated
and potentially found liable for violations of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which could
have a material adverse effect on our business and results of operation.
We are subject to the risk that we or our affiliated companies or their respective officers, directors, employees and agents may take actions
determined to be in violation of anti-corruption laws, including the FCPA and the U.K. Bribery Act. Any such violation could result in substantial
fines, disgorgement, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect our
business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do
business. Furthermore, detecting, investigating and resolving actual or alleged violations is expensive and can consume significant time and
attention of our senior management.
If our drilling units are located in countries that are subject to, or targeted by, economic sanctions, export restrictions, or other operating
restrictions imposed by the United States, European Union or other governments, our reputation and the market for our debt and common
shares could be adversely affected.
The U.S., European Union or and other governments may impose economic sanctions against certain countries, persons and other entities that
restrict or prohibit transactions involving such countries, persons and entities. U.S. sanctions in particular are targeted against countries (such
as Russia, Venezuela, Iran and others) that are heavily involved in the petroleum and petrochemical industries, which includes drilling activities.
U.S., European Union and other economic sanctions change frequently and enforcement of economic sanctions worldwide is increasing.
In 2010, the United States enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which expanded the
scope of the former Iran Sanctions Act. Among other things, CISADA expands the application of sanctions to non-U.S. companies such as ours
and introduced limits on such companies and persons that do business or trade with Iran when such activities relate to the investment, supply or
export of refined petroleum or petroleum products. On August 10, 2012, the U.S. signed into law the Iran Threat Reduction and Syria Human
Rights Act of 2012, or the Iran Threat Reduction Act, which places further restrictions on the ability of non-U.S. companies to do business or
trade with Iran and Syria. Perhaps the most significant provision in the Iran Threat Reduction Act is that prohibitions in the existing Iran sanctions
applicable to U.S. persons will now apply to any foreign entity owned or controlled by a U.S. person. Another major provision in the Iran Threat
Reduction Act is that issuers of securities must disclose in their annual and quarterly reports filed with the Commission after February 6, 2013
if the issuer or “any affiliate” has “knowingly” engaged in certain activities involving Iran during the timeframe covered by the report. At this
time, we are not aware of any activities conducted by us or by any affiliate, which is likely to trigger such a disclosure requirement. On January 2,
2013, the U.S. signed into law the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”), as a part of the National Defense Authorization
Act for Fiscal Year 2013. Among other measures, IFCA authorizes broad sanctions on certain activities related to Iran’s energy, shipping, and
shipbuilding sectors.
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On July 14, 2015, the P5+1 and the European Union (“E.U.”) announced that they reached a landmark agreement with Iran titled the Joint
Comprehensive Plan of Action Regarding the Islamic Republic of Iran’s Nuclear Program, or the JCPOA, to significantly restrict Iran’s ability
to develop and produce nuclear weapons for 10 years while simultaneously easing sanctions directed toward non-U.S. persons for conduct
involving Iran, but taking place outside of U.S. jurisdiction and not involving U.S. persons. On January 16, 2016, or the Implementation Day,
the United States joined the E.U. and the U.N. in lifting a significant number of their nuclear-related sanctions on Iran following an announcement
by the International Atomic Energy Agency, or the IAEA, that Iran had satisfied its respective obligations under the JCPOA.
On May 8, 2018, the U.S. announced that it would be withdrawing from the JCPOA. On August 6, 2018, the U.S. issued Executive Order 13846
which reimposed certain sanctions on Iran effective as of that date and set the reimposition of additional sanctions on Iran effective November 5,
2018. On November 5, 2018, following a wind-down period, the U.S. completed the reimposition of nuclear-related sanctions against Iran that
it had previously lifted in connection with the JCPOA. Since that time the U.S. has issued additional Executive Orders imposing sanctions with
respect to Iran.
The Office of Foreign Assets Control (“OFAC”) acted several times over the past year to add Iranian individuals and entities to its list of Specially
Designated Nationals whose assets are blocked and with whom U.S. persons are generally prohibited from dealing, including re-adding on
November 5, 2018, hundreds of individuals and entities that had previously been delisted in connection with the JCPOA.
In August 2017, the U.S. passed the “Countering America’s Adversaries Through Sanctions Act” (Public Law 115-44) (“CAATSA”), which
authorizes imposition of new sanctions on Iran, Russia, and North Korea. The CAATSA sanctions with respect to Russia create heightened
sanctions risks for companies operating in the oil and gas sector, including companies that are based outside of the United States. OFAC sanctions
targeting Venezuela have likewise increased in the past year, and any new sanctions targeting Venezuela could further restrict our ability to do
business in such country. On January 28, 2019, OFAC added the Venezuelan state-owned oil company, Petróleos de Venezuela, S.A. (“PdVSA”),
to its List of Specially Designated Nationals and Blocked Persons, increasing the sanctions risk for companies operating in the oil sector.
Subsequently, on August 5, 2019, the U.S. issued Executive Order 13884 which further increased sanctions on Venezuela and blocked the entire
Government of Venezuela.
In addition to the sanctions against Iran, Russia, and Venezuela, subject to certain limited exceptions, U.S. law continues to restrict U.S. owned
or controlled entities from doing business with Cuba and various U.S. sanctions have certain other extraterritorial effects that need to be considered
by non-U.S. companies. Moreover, any U.S. persons who serve as officers, directors or employees of our subsidiaries would be fully subject to
U.S. sanctions. It should also be noted that other governments are more frequently implementing and enforcing sanctions regimes.
From time to time, we may enter into drilling contracts with countries or government-controlled entities that are subject to sanctions and embargoes
imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism where entering into such contracts
would not violate U.S. law, or may enter into drilling contracts involving operations in countries or with government-controlled entities that are
subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism.
However, this could negatively affect our ability to obtain investors. In some cases, U.S. investors would be prohibited from investing in an
arrangement in which the proceeds could directly or indirectly be transferred to or may benefit a sanctioned entity. Moreover, even in cases
where the investment would not violate U.S. law, potential investors could view such drilling contracts negatively, which could adversely affect
our reputation and the market for our shares. We do not currently have any drilling contracts or plans to initiate any drilling contracts involving
operations in countries or with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S. government and/
or identified by the U.S. government as state sponsors of terrorism.
Certain parties with whom we have entered into contracts may be or may be affiliated with persons or entities that are, the subject of sanctions
imposed by the United States, the E.U. or other international bodies as a result of the annexation of Crimea by Russia in March 2014 and the
subsequent conflict in eastern Ukraine, or malicious cyber-enabled activities. If we determine that such sanctions require us to terminate existing
contracts or if we are found to be in violation of such applicable sanctions, our results of operations may be adversely affected, or we may suffer
reputational harm. Such sanctions may prevent us from performing some or all of our obligations under any potential drilling contracts with
Rosneft, which could impact our future revenue, contract backlog and results of operations, and adversely affect our business reputation. We
may also lose business opportunities to companies that are not required to comply with these sanctions.
As stated above, we believe that we are in compliance with all applicable economic sanctions and embargo laws and regulations and intend to
maintain such compliance. However, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain
laws may be unclear and may be subject to changing interpretations. Rapid changes in the scope of global sanctions may also make it more
difficult for us to remain in compliance. Any violation of applicable economic sanctions could result in civil or criminal penalties, fines,
enforcement actions, legal costs, reputational damage, or other penalties and could result in some investors deciding, or being required, to divest
their interest, or not to invest, in our shares. Additionally, some investors may decide to divest their interest, or not to invest, in our shares simply
because we may do business with companies that do business in sanctioned countries. Moreover, our drilling contracts may violate applicable
sanctions and embargo laws and regulations as a result of actions that do not involve us, or our drilling rigs, and those violations could in turn
negatively affect our reputation. Investor perception of the value of our shares may also be adversely affected by the consequences of war, the
effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
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The economic effects of “Brexit” may affect relationships with existing and future customers and could have an adverse impact on our
business and results of operations.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the E.U., commonly referred to as “Brexit,” and negotiations
remain ongoing to determine the future terms of the U.K.’s relationship with the E.U. The formal notification to the European Council required
under Article 50 of the Treaty on European Union was made on March 29, 2017, triggering a two-year period during which the terms of exit are
to be negotiated. This period has been extended on several occasions, most recently to January 31, 2020. The Withdrawal Agreement Bill was
passed by the U.K. House of Commons on January 9, 2020 and, subject to scrutiny by the U.K. House of Lords, the Withdrawal Agreement Bill
approved an 11-month transition period starting on January 31, 2020 in which the U.K. will cease to be a member of the E.U., but will continue
to follow the E.U.’s rules and contribute to its budget. In the event a full trade deal is not reached between the U.K. and E.U. by the December 31,
2020 deadline and there is no further extension, trade relations between the U.K. and the E.U. will be governed by any terms agreed within this
period or by the World Trade Organization Rules. The impact on our business as a result of Brexit will depend, in part, on the outcome of tariff,
trade, regulatory and other negotiations and on the ultimate manner and timing of the U.K.’s withdrawal from the E.U.
As a result of the referendum, the global markets and currencies have been adversely impacted, including a sharp decline in the value of the
U.K. pounds sterling as compared to the U.S. dollar. A potential devaluation of the local currencies of our international customers relative to the
U.S. dollar may impair the purchasing power of our international customers and could cause international customers to decrease drilling contracts
or cancel drilling contracts completely.
Brexit may also lead to legal uncertainty and potentially divergent laws and regulations as the U.K. determines which E.U. laws to retain, and
those laws and regulations may be cumbersome, difficult or costly in terms of compliance. Any of these effects of Brexit, among others, could
adversely affect our business and results of operations.
We have suffered, and may continue to suffer, losses through our investments in other companies in the offshore drilling and oilfield services
industry, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We currently hold investments in several other companies in our industry that own/operate offshore drilling rigs with similar characteristics to
our fleet of rigs or deliver various other oilfield services. These investments include equity interests in Seadrill Partners, SeaMex, Sonadrill,
Gulfdrill, Archer and Seabras Sapura. In addition, we have provided subordinated loans to Seamex and Seabras Sapura and have various
intercompany arrangements with Seadrill Partners, Seamex, Sonadrill and Gulfdrill. These arrangements include management and administrative
services agreements pursuant to which we provide Seadrill Partners, Seamex and Sonadrill with certain management and administrative services
charged primarily on a cost-plus mark-up basis.
As at December 31, 2019, the carrying value of our equity investments in these companies was $400 million. In addition, we had loan and trade
receivables due from related parties with a carrying value of $704 million. Please see Note 15 – Marketable securities, Note 18 – Investment in
associated companies, and Note 31 – Related party transactions for further details.
The market value of our equity interest in these companies has been, and may continue to be, volatile and has fluctuated, and may continue to
fluctuate, in response to changes in oil and gas prices and activity levels in the offshore oil and gas industry. If we sell our equity interest in an
investment at a time when the value of such investment has fallen, we may incur a loss on the sale or an impairment loss being recognized,
ultimately leading to a reduction in earnings. Furthermore, Seadrill Partners ceased paying distributions in January 2020, and our equity interest
in, claims against, and contractual arrangements with Seadrill Partners may be impaired to the extent Seadrill Partners is unable to refinance its
significant debt obligations or seeks to restructure them in or out of court.
In current market conditions, we may consider entering into joint venture arrangements where each joint venture partner bareboat charters their
rigs into the joint venture entity. Through such a structure, we would seek to manage and operate all joint venture rigs and enable the Group to
access additional markets, increase presence in a particular market or secure drilling contracts from counterparties who may only be willing to
grant those drilling contracts pursuant to or as part of implementing a joint venture with us. However, any financial return from drilling contracts
entered into in respect of our rig will be diluted to the shareholding percentage we hold in the joint venture entity and financial success of the
joint venture will depend on the management fee rates we are able to agree with our joint venture partner.
During the years ended December 31, 2019 and 2017 we recognized charges of $302 million and $841 million respectively relating to certain
of our investments due to declining dayrates and future market expectations for dayrates in the sector. Please see “Note 11 - Impairment loss on
investments in associated companies to our Consolidated Financial Statements” for more information.
We may recognize impairments on long-lived assets, including goodwill and other intangible assets, or recognize impairments on our equity
method investments.
As described in the risk factor above, we have previously recognized impairments on our marketable securities and investments in associated
companies.
If any of our strategic equity investments decline in value and remain below cost for an extended period, we may be required to write down our
investment. We have a 35% interest in the common units of Seadrill Partners, which was delisted from the NYSE on December 11, 2019. To
the extent Seadrill Partners is unable to refinance its significant debt obligations, which include debt maturities in the second half of 2020 and
the first quarter of 2021, or seeks to restructure them in or out of court, our equity interest in, claims against, and contractual arrangements with
Seadrill Partners may be impaired. Any such impairment would negatively impact the value of our business, our operations, and/or liquidity.
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Our ability to operate our drilling units in the U.S. Gulf of Mexico could be impaired by governmental regulation, particularly in the aftermath
of the moratorium on offshore drilling in the U.S. Gulf of Mexico, and new regulations adopted as a result of the investigation into the
Macondo well blowout.
In the aftermath of the Deepwater Horizon Incident (in which we were not involved), various governmental agencies, including the U.S.
Department of the Interior, U.S. Bureau of Safety and Environmental Enforcement, or the BSEE and its predecessor, the U.S. Bureau of Ocean
Energy Management or BOEM, and the U.S. Occupational Safety and Health Administration, issued new and revised regulations and guidelines
governing safety and environmental management, occupational injuries and illnesses, financial assurance requirements, inspection programs
and other well control measure relating to our drilling rigs.
In order to obtain drilling permits, operators must submit applications that demonstrate compliance with the enhanced regulations, which require
independent third-party inspections, certification of well design and well control equipment and emergency response plans in the event of a
blowout, among other requirements. Operators have previously had, and may in the future have, difficulties obtaining drilling permits in the
U.S. Gulf of Mexico.
In addition, the oil and gas industry has adopted new equipment and operating standards, such as the American Petroleum Institute Standard 53
relating to the design, maintenance, installation and testing of well control equipment. Current and pending regulations, guidelines and standards
for safety, environmental and financial assurance such as the above and any other new guidelines or standards the U.S. government or industry
may issue (including relating to the Deepwater Horizon Incident or the other catastrophic events involving pollution from oil exploration and
development activities) or any other steps the U.S. government or industry may take relating to our business activities, could disrupt or delay
operations, increase the cost of operations, increase out-of-service time or reduce the area of operations for drilling rigs in U.S. and non-U.S.
offshore areas.
As new standards and procedures are being integrated into the existing framework of offshore regulatory programs, there may be increased costs
associated with regulatory compliance and delays in obtaining permits for other operations such as re-completions, workovers and abandonment
activities.
We are not able to predict the likelihood, nature or extent of additional rulemaking or when the interim rules, or any future rules, could become
final. The current and future regulatory environment in the U.S. Gulf of Mexico could impact the demand for drilling units in the U.S. Gulf of
Mexico in terms of overall number of rigs in operations and the technical specification required for offshore rigs to operate in the U.S. Gulf of
Mexico. Additional governmental regulations concerning licensing, taxation, equipment specifications, training requirements or other matters
could increase the costs of our operations, and escalating costs borne by our customers, along with permitting delays, could reduce exploration
and development activity in the U.S. Gulf of Mexico and, therefore, reduce demand for our services. In addition, insurance costs across the
industry have increased as a result of the Deepwater Horizon Incident and, in the future, certain insurance coverage is likely to become more
costly, and may become less available or not available at all. We cannot predict the potential impact of new regulations that may be forthcoming,
nor can we predict if implementation of additional regulations might subject us to increased costs of operating and/or a reduction in the area of
operation in the U.S. Gulf of Mexico. As such, our cash flow and financial position could be adversely affected if our ultra-deepwater semi-
submersible drilling rigs and ultra-deepwater drillships operating in the U.S. Gulf of Mexico were subject to the risks mentioned above.
In addition, hurricanes have from time to time caused damage to a number of drilling units and production facilities unaffiliated to us in the Gulf
of Mexico. The BOEM and the BSEE, have in recent years issued more stringent guidelines for tie-downs on drilling units and permanent
equipment and facilities attached to outer continental shelf production platforms, moored drilling unit fitness, as well as other guidelines and
regulations in an attempt to increase the likelihood of the survival of offshore drilling units during a hurricane. Implementation of new guidelines
or regulations that may apply to our drilling units may subject us to increased costs and limit the operational capabilities of our drilling units.
Failure to obtain or retain highly skilled personnel, and to ensure they have the correct visas and permits to work in the locations in which
they are required, could adversely affect our operations.
We require highly skilled personnel in the right locations to operate and provide technical services and support for our business.
Competition for skilled and other labor required for our drilling operations has increased in recent years as the number of rigs activated or added
to worldwide fleets has increased, and this may continue to rise. Notwithstanding the general downturn in the drilling industry, in some regions,
such as Brazil and Western Africa, the limited availability of qualified personnel in combination with local regulations focusing on crew
composition, are expected to further increase the demand for qualified offshore drilling crews, which may increase our costs. These factors could
further create and intensify upward pressure on wages and make it more difficult for us to staff and service our rigs. Such developments could
adversely affect our financial results and cash flow. Furthermore, as a result of any increased competition for qualified personnel, or as a result
of our Chapter 11 Proceedings, we may experience a reduction in the experience level of our personnel, which could lead to higher downtime
and more operating incidents.
Our ability to operate worldwide, depends on our ability to obtain the necessary visas and work permits for our personnel to travel in and out
of, and to work in, the jurisdictions in which we operate. Governmental actions in some of the jurisdictions in which we operate may make it
difficult for us to move our personnel in and out of these jurisdictions by delaying or withholding the approval of these permits. If we are not
able to obtain visas and work permits for the employees we need for operating our rigs on a timely basis, or for third-party technicians needed
for maintenance or repairs, we might not be able to perform our obligations under our drilling contracts, which could allow our customers to
cancel the contracts. Please see “-Our customers may seek to cancel or renegotiate their contracts to include unfavorable terms such as unprofitable
rates, particularly in the circumstance that operations are suspended or interrupted” for more information.
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Labor costs and our operating restrictions that apply could increase following collective bargaining negotiations and changes in labor laws
and regulations.
Some of our employees are represented by collective bargaining agreements. The majority of these employees work in Brazil, Mexico, Nigeria,
Norway and the United Kingdom. In addition, some of our contracted labor works under collective bargaining agreements. As part of the legal
obligations in some of these agreements, we are required to contribute certain amounts to retirement funds and pension plans and are restricted
in our ability to dismiss employees. In addition, many of these represented individuals are working under agreements that are subject to salary
negotiation. These negotiations could result in higher personnel costs, other increased costs or increased operating restrictions that could adversely
affect our financial performance.
Interest rate fluctuations could affect our earnings and cash flow.
In order to finance our growth, we have incurred significant amounts of debt. Our secured credit facilities have floating interest rates. As such,
following our emergence from Chapter 11 Proceedings, significant movements in interest rates could have an adverse effect on our earnings and
cash flow. We had previously managed our exposure to interest rate fluctuations through interest rate swaps that effectively fixed a part of our
floating rate debt obligations. These swaps were terminated on September 13, 2017 as a result of entering Chapter 11. However, on May 11,
2018 we entered into an agreement to hedge part of our interest rate risk, through the purchase of an interest rate cap. Please see “ITEM 11 -
Quantitative and qualitative disclosures about market risk” for further details of our use of derivatives to mitigate exposures to interest rate risk.
As of December 31, 2019, the total outstanding principal amount of our floating rate debt amounted to $5,662 million. We have entered into
interest rate cap agreements to cap the interest rate for $4,500 million of this debt.
If we are unable to effectively manage our interest rate exposure through interest rate derivatives in the future, any increase in market interest
rates would increase our interest rate exposure and debt service obligations, which would exacerbate the risks associated with our leveraged
capital structure.
In addition, in July 2017 the United Kingdom Financial Conduct Authority (the “FCA”), announced that it would phase out LIBOR as a benchmark
by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. Most
of our credit and loan facilities are linked to LIBOR. When LIBOR ceases to exist, we may need to amend our credit and loan facilities based
on a new standard that is established, if any. Uncertainty as to the nature of LIBOR’s phase-out and alternative reference rates or disruption in
the financial market could also have a material adverse effect on our financial condition, results of operations and cash flows.
Fluctuations in exchange rates and the non-convertibility of currencies could result in losses to us.
As a result of our international operations, we are exposed to fluctuations in foreign exchange rates due to revenues being received and operating
expenses paid in currencies other than U.S. dollars. Accordingly, we may experience currency exchange losses if we have not adequately hedged
our exposure to a foreign currency, or if revenues are received in currencies that are not readily convertible. As our foreign exchange exposure
primarily relates to foreign denominated cash and working capital balances, and we do not currently expect these exposures to cause a significant
amount of fluctuations to our net income, we do not currently hedge our foreign currency exchange exposure. Although 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, it is
no guarantee that our future operating results will be adversely impacted by fluctuations in currency exchange rates. We may also be unable to
collect revenues because of a shortage of convertible currency available in the country of operation, controls over currency exchange or controls
over the repatriation of income or capital.
We use the U.S. dollar as our functional currency because the majority of our revenues and expenses are denominated in U.S. dollars. Accordingly,
our reporting currency is also U.S. dollars. We do, however, earn revenues and incur expenses in other currencies such as Norwegian kroner,
U.K. pounds sterling, Brazilian real, Nigerian naira and Angolan Kwanza and there is a risk that currency fluctuations could have an adverse
effect on our statements of operations and cash flows. In addition, Brexit, or similar events in other jurisdictions, can impact global markets,
which may have an adverse impact on our business and operations as a result of changes in currency, exchange rates, tariffs, treaties and other
regulatory matters.
A change in tax laws in any country in which we operate could result in higher tax expense.
We conduct our operations through various subsidiaries in countries throughout the world. Tax laws, regulations and treaties are highly complex
and subject to interpretation. Consequently, we are subject to changing tax laws, regulations and treaties in and between the countries in which
we operate, including treaties between the United States and other nations. Our income tax expense is based upon our interpretation of the tax
laws in effect in various countries at the time that the expense was incurred. A change in these tax laws, regulations or treaties, including those
in and involving the United States, or in the interpretation thereof, or in the valuation of our deferred tax assets, which is beyond our control,
could result in a materially higher tax expense or a higher effective tax rate on our worldwide earnings.
In addition, the United States enacted major tax reform legislation in December 2017. This is likely to continue to have a material impact on the
amount of overall U.S. tax expense of the Group due to reduced effective tax deductions for certain payments our U.S. operating companies
make to non-U.S. rig owners and other group and affiliated companies.
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A loss of a major tax dispute or a successful tax challenge to our operating structure, intercompany pricing policies or the taxable presence
of our subsidiaries in certain countries could result in a higher taxes on our worldwide earnings, which could result in a significant negative
impact on our earnings and cash flows from operations.
Our tax returns are subject to review and examination. We do not recognize the benefit of income tax positions we believe are more likely than
not to be disallowed upon challenge by a tax authority. If any tax authority successfully challenges our operational structure, intercompany
pricing policies or the taxable presence of our subsidiaries in certain countries; or if the terms of certain Double Tax Treaties are interpreted in
a manner that is adverse to our structure; or if we lose a material tax dispute in any country, our taxes on our worldwide earnings could increase
substantially and our earnings and cash flows from operations could be materially adversely affected. For additional information on tax assessments
and claims issued, refer to Note 12 - “Taxation” of the Consolidated Financial Statements included within this report.
A change in laws and regulations in any country in which we operate could have a negative impact on our business
During 2017, the E.U. Economic and Financial Affairs Council released a list of non-cooperative jurisdictions for tax purposes. The stated aim
of the list, and accompanying report, was to promote good governance worldwide in order to maximize efforts to prevent tax fraud and tax
evasion. Bermuda was not on the list of non-cooperative jurisdictions, but did feature in the report as having committed to address concerns
relating to economic substance by December 31, 2018. In accordance with that commitment, Bermuda enacted the Economic Substance Act
2018 (the “ESA”) in December 2018. The ESA requires each registered entity to maintain a substantial economic presence in Bermuda and
provides that a registered entity that carries on a relevant activity complies with economic substance requirements if (i) it is directed and managed
in Bermuda, (ii) its core income-generating activities (as may be further prescribed) are undertaken in Bermuda with respect to the relevant
activity, (iii) it maintains adequate physical presence in Bermuda, (iv) it has adequate full time employees in Bermuda with suitable qualifications
and (v) it incurs adequate operating expenditure in Bermuda in relation to the relevant activity. A registered entity that carries on a relevant
activity is obliged under the ESA to file a declaration with the Bermuda Registrar of Companies on an annual basis containing certain information.
At present, the impact of the ESA is still unclear and it is difficult to predict the nature and effect of these requirements on the Company and its
subsidiaries incorporated in Bermuda. We have undertaken an evaluation and continue to monitor the potential effect ESA will have on the
Company and its Bermuda subsidiaries. For additional information on litigation matters that we are currently involved in, please see “ITEM 8.
Financial Information-A. Consolidated Statements and Other Financial Information-Legal Proceedings.”
Climate change and the regulation of greenhouse gases could have a negative impact on our business.
Due to concern over the risk of climate change, a number of countries, the E.U. and the IMO have adopted, or are considering the adoption of,
regulatory frameworks to reduce greenhouse gas emissions in the shipping industry. For example, ships (including rigs and drillships) must
comply with IMO and E.U. regulations relating to the collection and reporting of data relating to greenhouse gas emissions. In April 2018, the
IMO adopted a strategy to, among other things, reduce the 2008 level of greenhouse gas emissions from the shipping industry by 50% by the
year 2050.
Other governmental bodies, such as the United States Environmental Protection Agency and the State of California also may regulate greenhouse
gas emissions from shipping in the future. The future of such regulations is difficult to predict because the requirements continue to evolve.
Compliance with existing regulations and changes in laws, regulations and obligations relating to climate change could increase our costs to
operate and maintain our assets, and might also require us to install new emission controls, acquire allowances or pay taxes related to our
greenhouse gas emissions, or administer and manage a greenhouse gas emissions program. Any passage of climate control legislation or other
regulatory initiatives by the IMO, the E.U., the United States or other countries in which we operate, or any treaty adopted at the international
level to succeed the Kyoto Protocol, which restricts emissions of greenhouse gases, could require us to make significant financial expenditures
which we cannot predict with certainty at this time.
Additionally, adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental
impact of climate change, may also adversely affect demand for our services. For example, increased regulation of greenhouse gases or other
concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for the use of alternative
energy sources. In addition, parties concerned about the potential effects of climate change have directed their attention at sources of funding
for energy companies, which has resulted in certain financial institutions, funds and other sources of capital, restricting or eliminating their
investment in or lending to oil and gas activities. Any material adverse effect on the oil and gas industry relating to climate change concerns
could have a significant adverse financial and operational impact on our business and operations.
Finally, the impacts of severe weather, such as hurricanes, monsoons and other catastrophic storms, resulting from climate change could cause
damage to our equipment and disruption to our operations and cause other financial and operational impacts, including impacts on our major
customers.
Acts of terrorism, piracy, cyber-attack, political and social unrest could affect the markets for drilling services, which may have a material
and adverse effect on our results of operations.
Acts of terrorism, piracy, and political and social unrest, brought about by world political events or otherwise, have caused instability in the
world’s financial and insurance markets in the past and may occur in the future. Such acts could be directed against companies such as ours.
Our drilling operations could also be targeted by acts of sabotage carried out by environmental activist groups.
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We rely on information technology systems and networks in our operations and administration of our business. Our drilling operations or other
business operations could be targeted by individuals or groups seeking to sabotage or disrupt our information technology systems and networks,
or to steal data. A successful cyber-attack could materially disrupt our operations, including the safety of our operations, or lead to an unauthorized
release of information or alteration of information on our systems. Any such attack or other breach of our information technology systems could
have a material adverse effect on our business and results of operations.
In addition, acts of terrorism and social unrest could lead to increased volatility in prices for crude oil and natural gas and could affect the markets
for drilling services and result in lower dayrates. Insurance premiums could also increase and coverage may be unavailable in the future. Increased
insurance costs or increased costs of compliance with applicable regulations may have a material adverse effect on our results of operations.
We may be subject to litigation, arbitration, other proceedings and regulatory investigations that could have an adverse effect on us.
We are currently involved in various litigation and arbitration matters, and we anticipate that we will be involved in dispute matters from time
to time in the future. The operating and other hazards inherent in our business expose us to disputes, including personal injury disputes,
environmental and climate change litigation, contractual disputes with customers, intellectual property and patent disputes, tax or securities
disputes, regulatory investigations and maritime lawsuits, including the possible arrest of our drilling units. We cannot predict, with certainty,
the outcome or effect of any claim or other dispute matters, or a combination of these. If we are involved in any future disputes, or if our positions
concerning current disputes are found to be incorrect, there may be an adverse effect on our business, financial position, results of operations
and available cash, because of potential negative outcomes, the costs associated with asserting our claims or defending such lawsuits or
proceedings, and the diversion of management’s attention to these matters.
We may also be subject to significant legal costs in defending these actions, which we may or may not be able to recoup depending on the results
of such claim. For additional information on litigation matters that we are currently involved in, please see Note 34 - “Commitments and
Contingencies” to the Consolidated Financial Statements included within this report.
We cannot guarantee that the use of our drilling units will not infringe the intellectual property rights of others.
The majority of the intellectual property rights relating to our drilling units and related equipment are owned by our suppliers. In the event that
one of our suppliers becomes involved in a dispute over an infringement of intellectual property rights relating to equipment owned by us, we
may lose access to repair services or replacement parts or could be required to cease using some equipment. In addition, our competitors may
assert claims for infringement of intellectual property rights related to certain equipment on our drilling units and we may be required to stop
using such equipment and/or pay damages and royalties for the use of such equipment. The consequences of these technology disputes involving
our suppliers or competitors could adversely affect our financial results and operations. We have indemnity provisions in some of our supply
contracts to give us some protection from the supplier against intellectual property lawsuits. However, we cannot make any assurances that these
suppliers will have sufficient financial standing to honor their indemnity obligations or guarantee that the indemnities will fully protect us from
the adverse consequences of such technology disputes. We also have provisions in some of our client contracts to require the client to share some
of these risks on a limited basis, but we cannot provide assurance that these provisions will fully protect us from the adverse consequences of
such technology disputes. For information on certain intellectual property litigation that we are currently involved in, please see Note 34 -
“Commitments and Contingencies” to the Consolidated Financial Statements included within this report.
We depend on directors who are associated with affiliated companies, which may create conflicts of interest.
Our largest shareholder is Hemen Holding Limited, or Hemen. Three of our directors also serve as directors of other companies affiliated with
Hemen. Our directors owe fiduciary duties to both us and other related parties and may have conflicts of interest in matters involving or affecting
us and our customers. Please see “ITEM 6. Directors, Senior management and Employees - C. Board Practices” for more information.
We have agreed to market certain rigs of our affiliated entity, NOL, which may create conflicts of interest.
We executed an agreement with NODL for the commercial management of certain of the rigs acquired by our affiliated entity, NODL, which
subsequently novated its rights and obligations to NOL.
To date, we have entered into drilling contracts in respect of certain NOL units directly with customers with back-to-back arrangements in place
between us and NOL to allocate risk and liability back to NOL commensurate with the structure. Ultimately, we are exposed to the creditworthiness
of NOL, to the extent that we have an exposure to the customer under the drilling contract and seek recovery under the back-to-back arrangements.
We earn an incentivized management fee from NOL that is intended to reward us for the services we provide and the risks that we are exposed
to as well as providing a right of first refusal for purchase of the unit. We currently have stacked rigs that were available but not competitive
from a technical or cost perspective with the NOL units that secured drilling contracts through us.
We may be restricted from granting long-term contracts as a result of the Omnibus Agreement with Seadrill Partners.
We have entered into an omnibus agreement with Seadrill Partners, or the Omnibus Agreement, in connection with its initial public offering,
which may restrict our ability to, among other things, acquire, own, operate or contract for certain drilling units operating under drilling contracts
of five or more years, unless we offer to sell such drilling units to Seadrill Partners. These restrictions could harm our business and adversely
affect our financial position and results of operations and ability to implement our growth strategy. For additional information, please see “ITEM
7. Major Shareholders and Related Party Transactions - B. Related Party Transactions-Seadrill Partners-Omnibus Agreement with Seadrill
Partners.”
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If we fail to comply with requirements relating to internal control over financial reporting our business could be harmed and our common
stock price could decline.
Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require that we assess
our internal control over financial reporting annually. The rules governing the standards that must be met for management to assess its internal
control over financial reporting are complex. They require significant documentation, testing, and possible remediation of any significant
deficiencies in and / or material weaknesses of internal controls in order to meet the detailed standards under these rules. Although we have
evaluated our internal control over financial reporting as effective as of December 31, 2019, in future fiscal years, we may encounter unanticipated
delays or problems in assessing our internal control over financial reporting as effective or in completing our assessments by the required dates.
In addition, we cannot assure you that our independent registered public accountants will attest that internal control over financial reporting is
effective in future fiscal years.
If we are unable to maintain effective internal controls over financial reporting and disclosure controls, investors may lose confidence in our
reported financial information, which could lead to a decline in the price of common shares, limit our ability to access the capital markets in the
future, and require us to incur additional costs to improve our internal control over financial reporting and disclosure control systems and
procedures. Further, if lenders and other debt financing sources lose confidence in the reliability of our financial statements, it could have a
material adverse effect on our ability to secure replacement or additional financing, or amendments to existing debt documents, on terms acceptable
to us or at all.
Public health threats, such as the recent coronavirus, or COVID-19, outbreak could have an adverse effect on our operations and financial
results.
Public health threats, such as Ebola, influenza, the Zika virus, forms of Coronavirus such as SARS or COVID-19, and other highly communicable
diseases or viruses, outbreaks of which have from time to time occurred in various parts of the world in which we operate, could adversely
impact our operations, and the operations of our customers. For example, the recent outbreak of COVID- 19 has been declared by the World
Health Organization as a pandemic and has spread across the globe to many countries in which we do business and is impacting worldwide
economic activity. Public health threats in any area, including areas where we do not operate, could disrupt international transportation and
supply chains. Our crews generally work on a rotation basis, with a substantial portion relying on international air transport for rotation. Although
we have not had significant issues to date as a result of COVID-19, any disruptions could impact the cost of rotating our crews, and possibly
impact our ability to maintain a full crew on all rigs at a given time. In addition, it is not possible at this time to estimate the impact that COVID-19
could have on our business. The continued spread of COVID-19, the measures taken by the governments of countries affected, actions taken to
protect employees, and the impact of the pandemic on various business activities in affected countries and any other public health threats and
related consequences could adversely affect our financial condition, results of operations and cash flows.
Data protection and regulations related to privacy, data protection and information security could increase our costs, and our failure to
comply could result in fines, sanctions or other penalties, which could materially and adversely affect our results of operations, as well as
have an impact on our reputation.
We are subject to regulations related to privacy, data protection and information security in the jurisdictions in which we do business. As privacy,
data protection and information security laws are interpreted and applied, compliance costs may increase, particularly in the context of ensuring
that adequate data protection and data transfer mechanisms are in place.
In recent years, there has been increasing regulatory enforcement and litigation activity in the areas of privacy, data protection and information
security in the U.S. and in various countries in which we operate. In addition, legislators and/or regulators in the U.S., the E.U. and other
jurisdictions in which we operate are increasingly adopting or revising privacy, data protection and information security laws that could create
compliance uncertainty and could increase our costs or require us to change our business practices in a manner adverse to our business. For
example, the E.U. and U.S. Privacy Shield framework was designed to serve as an appropriate safeguard in relation to international transfers of
personal data from the EEA to the U.S. However, this self-certification faces a number of legal challenges and is subject to annual review. This
has resulted in some uncertainty and obligations to look at other appropriate safeguards to protect the security and confidentiality of personal
data in the context of cross-border data transfers. Moreover, compliance with current or future privacy, data protection and information security
laws could significantly impact our current and planned privacy, data protection and information security related practices, our collection, use,
sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. Our failure
to comply with privacy, data protection and information security laws could result in fines, sanctions or other penalties, which could materially
and adversely affect our results of operations and overall business, as well as have an impact on our reputation. For example, the General Data
Protection Regulations (EU) 2016/679 (the “GDPR”), as supplemented by any national laws (such as in the U.K., the Data Protection Act 2018)
and further implemented through binding guidance from the European Data Protection Board, came into effect on May 25, 2018. The GDPR
expanded the scope of the EU data protection law to all foreign companies processing personal data of EEA individuals and imposed a stricter
data protection compliance regime, including the introduction of administrative fines for non-compliance up to 4% of global total annual
worldwide turnover or €20 million (whichever is higher), depending on the type and severity of the breach, as well as the right to compensation
for financial or non-financial damages claimed by any individuals under Article 82 GDPR and the reputational damages that our business may
be facing as a result of any personal data breach or violation of the GDPR.
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Risks Relating to Our Common Shareholders
The price of the Shares may be volatile or may decline regardless of our operating performance, and investors may not be able to resell the
Shares at or above their initial purchase price.
The market price for the Shares may be volatile and may fluctuate significantly in response to a number of factors, most of which we cannot
control, including, among others:
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announcements concerning 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;
fluctuations in the market value of our drilling units and the amount of debt we can incur under certain covenants in its current and
future debt financing agreements;
general and industry-specific economic conditions;
changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations;
additions or departures of key members of management;
any increased indebtedness we incur in the future;
speculation or reports by the press or investment community with respect to Seadrill or Seadrill Partners, or the industry in general;
announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or
capital commitments;
changes or proposed changes in laws or regulations affecting the oil and gas industry or enforcement of these laws and regulations,
or announcements relating to these matters; and
general market, political and economic conditions, including any such conditions and local conditions in the markets in which we
operate.
These and other factors may lower the market price of the Shares, regardless of our actual operating performance. In the event of a drop in the
market price of the Shares, investors could lose a substantial part or all of its investment in the Shares. In addition, the stock markets have
experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many
companies. Shareholders may initiate securities class action litigation following periods of market volatility. If we were to become involved in
securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from the business,
which could have a negative effect on the results of operations and thus the price for the Shares.
The market price of our common shares has fluctuated widely and may fluctuate widely in the future.
The market price of our common shares has fluctuated widely and may continue to do so as a result of many factors, such as actual or anticipated
fluctuations in our operating results, the outcome of our amendment negotiations with lenders under our credit facilities, changes in financial
estimates by securities analysts, economic and regulatory trends, general market conditions, rumors and other factors, many of which are beyond
our control. Further, there may be no continuing active or liquid public market for our common shares. If an active trading market for our common
shares does not continue, the price of our common shares may be more volatile and it may be more difficult and time consuming to complete a
transaction in our common shares, which could have an adverse effect on the realized price of our common shares. In addition, an adverse
development in the market price for our common shares could negatively affect our ability to issue new equity to fund our activities.
If we cannot meet the continued listing requirements of the NYSE and/or the OSE, such stock exchange may delist our common share.
On March 26, 2020, we received written notification from the NYSE that we are not in compliance with the continued listing standard set forth
in Section 802.01C of the NYSE Listed Company Manual (“Section 802.01C”). As of March 24, 2020, the average closing price of our common
share was less than $1.00 per share over a consecutive 30 trading-day period (the “Notice”).
Pursuant to Section 802.01C, we can regain compliance with the minimum share price requirement if, during the six-month cure period following
receipt of the Notice, on the last trading-day of any calendar month, Seadrill common share has a closing share price and a 30 trading-day average
closing share price of at least $1.00. In the event that at the expiration of the six-month cure period, both a $1.00 closing share price on the last
trading day of the cure period and a $1.00 average closing share price over the 30 trading-day period ending on the last trading day of the cure
period are not attained, the NYSE will commence suspension and delisting procedures with respect to Seadrill’s common share. We intend to
inform the NYSE that we will cure the price condition, if necessary, by seeking shareholder approval of a share consolidation no later than our
next annual meeting, and implementing such action, if necessary, promptly after shareholder approval. In this instance, the price condition will
be deemed cured if the price promptly exceeds $1.00 per share, and the price remains above the level for at least the following 30 trading days.
The NYSE has confirmed that the six-month cure period requirement does not apply if we decide to take an action that requires shareholder
approval, as long as the action is implemented promptly after the annual general meeting.
The NYSE’s continued listing standards also provide that a listed company will be considered to be below compliance if its average closing
share price reaches an "abnormally low" level or if market capitalization over a consecutive 30 trading-day period is less than $15 million (which
rule is currently waived until June 30, 2020). If our average market capitalization over a consecutive 30 trading-day period falls below $15
million thereafter or reaches an abnormally low level, the NYSE will initiate suspension and delisting procedures.
Further, in the event that we file for or announce an intention to file for bankruptcy protection, the NYSE continued listing standards permit the
NYSE, in its sole discretion, to seek immediate suspension and delisting of our securities.
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Our common share also has a secondary listing on the OSE. If our common share ceases to be listed on the NYSE, the OSE listing would change
to be a primary listing, subject to our compliance with continued listing standards.
A delisting of our common share from the NYSE and/or the OSE could negatively impact us because it could: (i) reduce the liquidity and market
price of our common share, (ii) reduce the number of investors willing to hold or acquire our common share, which could negatively impact our
ability to raise equity financing, (iii) limit our ability offer and sell freely tradable securities, thereby preventing us from accessing the public
capital markets, (iv) impair our ability to provide equity incentives to our employees and (v) lead to a default under one or more of our credit
facilities under certain circumstances. Certain of our credit facilities include a covenant requiring our common share to be listed on the NYSE
or the OSE or, in certain cases another internationally recognized stock exchange; thus, if our common share were to be delisted from both the
NYSE and the OSE and not listed on another internationally recognized exchange permitted under such credit facilities, we could be in default
under such facilities. Given the cross-default and cross-acceleration provisions in our other debt agreements, we could be in default under those
other debt agreements as well, with the result that some or all of our indebtedness could be declared immediately due and payable (or accelerated
after the expiration of any applicable grace period), and we may not have sufficient assets available to satisfy our obligations.
Receipt of the Notice by Seadrill, on the other hand, is not a violation of the terms of, and does not constitute a default or event of default under,
any of our debt obligations, and is not anticipated to impact the Company’s current discussions with our secured lenders regarding potential
amendments to our credit facilities. The Notice also has no immediate impact on the listing of Seadrill’s common share, which will continue to
be listed and traded on the NYSE during the applicable cure period under the symbol “SDRL,” subject to our compliance with other continued
listing requirements set forth in the NYSE Listed Company Manual but will have an added designation of “.BC” to indicate the status of the
common shares as below compliance with the NYSE continued listing standards. The “.BC” indicator will be removed at such time as Seadrill
is deemed compliant.
The issuance of share-based awards may dilute investors’ holding of the Shares.
An aggregate of 11.1 million of the Shares are reserved for issuance for grant to our employees pursuant to awards under the Employee Incentive
Plan in accordance with the Plan. The exercise of equity awards, including any share options that we may grant in the future, could have an
adverse effect on the market for the Shares, including the price that an investor could obtain for their Shares. Investors may experience dilution
in the net tangible book value of their investment upon the exercise of any share options that may be granted or issued pursuant to the employee
incentive plan in the future.
Substantial sales of or trading in the Shares could occur, which could cause the share price to be adversely affected.
A limited number of holders own a substantial portion of the Shares, which may be traded on the NYSE or the OSE if such Shares are freely
tradable or covered by an effective registration statement. Certain Shares became freely tradable immediately following the Debtors’ emergence
from Chapter 11 Proceedings and up to 76,359,119 of our common shares may be sold pursuant to a resale registration statement that we are
required to maintain pursuant to a registration rights agreement with certain investors. Some of the creditors who received Shares in connection
with the Plan may sell these shares for any number of reasons. We cannot predict what effect, if any, future sales of the Shares, or the availability
of Shares for future sales, will have on their market price. Sales of substantial amounts of the Shares in the public market, or the perception that
such sales could occur, may adversely affect the market price of the Shares, making it more difficult for holders to sell their Shares at a time and
price that they deem appropriate. In addition, investment firms that are party to certain put and call agreements may hedge their positions by
trading the Shares. The sale of significant amounts of the Shares, substantial trading in the Shares, hedging activities or the perception in the
market that any of these activities will occur, may adversely affect the market price of the Shares. Sales of Shares could also impair our ability
to raise capital, should we wish to do so, which may cause the share price to decline.
We may pay little or no dividends on the Shares.
The payment of any future dividends to the Company’s shareholders will depend on decisions that will be made by the Board of Directors and
will depend on then existing conditions, including the Company’s operating results, financial conditions, contractual and financing restrictions,
corporate law restrictions, capital agreements, the applicable laws of Bermuda and business prospects. The Company may pay little or no
dividends for the foreseeable future.
In addition, since we are a holding company with no material assets other than the shares of our subsidiaries through which we conduct our
operations, our ability to pay dividends will depend on our subsidiaries distributing to us their earnings and cash flow. Furthermore, our debt
documents may prohibit or otherwise limit our and our subsidiaries’ ability to pay dividends and distributions without consent of the requisite
debt holders. For more information, see “-The covenants in our debt agreements impose operating and financial restrictions on us that could
significantly impact our ability to operate our business and a breach of which could result in a default under the terms of these agreements, which
could accelerate our repayment of funds that we have borrowed.” We suspended the payment of dividends in November 2014, and we cannot
predict when, or if, dividends will be paid in the future.
U.S. tax authorities may treat us as a “passive foreign investment company” for U.S. federal income tax purposes, which may have adverse
tax consequences for U.S. shareholders.
A foreign corporation will be treated as a “passive foreign investment company” or PFIC, for U.S. federal income tax purposes if either (1) at
least 75% of its gross income for any taxable year consists of certain types of “passive income” or (2) at least 50% of the average value of the
corporation’s assets produce or are held for the production of those types of “passive income.” For purposes of these tests, “passive income”
includes dividends, interest and gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties
that are received from unrelated parties in connection with the active conduct of a trade or business. For the purposes of these tests, income
derived from the performance of services does not constitute “passive income.” As discussed further below, U.S. shareholders of a PFIC are
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subject to certain adverse U.S. federal income tax consequences including a disadvantageous U.S. federal income tax regime with respect to
distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
Based on the current and anticipated valuation of our assets, including goodwill, and composition of our income and assets, we intend to take
the position that we will not be treated as a PFIC for U.S. federal income tax purposes for our current taxable year or in the foreseeable future.
Our position is based on valuations and projections regarding our assets and income. While we believe these valuations and projections to be
accurate, such valuations and projections may not continue to be accurate. Moreover, the determination as to whether we are a PFIC for any
taxable year is based on the application of complex U.S. federal income tax rules, which are subject to differing interpretations, and is not
determinable until after the end of such taxable year. Further, we have not sought a ruling from the United States Internal Revenue Service, or
IRS, on this matter, the IRS or a court could disagree with our position. In addition, although we intend to conduct our affairs in a manner to
avoid, to the extent possible, being classified as a PFIC with respect to any taxable year, the nature of our operations may change in the future,
and if so, we may not be able to avoid PFIC status in the future.
If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders may face adverse U.S. federal income tax
consequences. Under the PFIC rules, unless those shareholders make an election available under the United States Internal Revenue Code of
1986, as amended, or the Code (which election could itself have adverse consequences for such shareholders, as discussed below under “Item
10. Additional Information-E. Taxation”), such shareholders would be liable to pay U.S. federal income tax at the then prevailing income tax
rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of the common shares, as if the excess
distribution or gain had been recognized ratably over the shareholder’s holding period of the common shares. In the event that our shareholders
face adverse U.S. federal income tax consequences as a result of investing in shares of our common stock, this could adversely affect our ability
to raise additional capital through the equity markets. See “ITEM 10. Additional Information - E. Taxation” for a more comprehensive discussion
of the U.S. federal income tax consequences to U.S. shareholders if we are treated as a PFIC.
Investors are encouraged to consult their own tax advisers concerning the overall tax consequences of the ownership and disposition of the
common shares arising in an investor’s particular situation under U.S. federal, state, local or foreign law.
Because we are a foreign corporation, you may not have the same rights that a shareholder in a U.S. corporation may have.
We are incorporated under the laws of Bermuda, and substantially all of our assets are located outside of the United States. In addition, our
directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents
are located outside the United States. As a result, it may be difficult or impossible for you to effect service of process on these individuals in the
United States or to enforce in the United States judgments obtained in U.S. courts against us or our directors and officers based on the civil
liability provisions of applicable U.S. securities laws.
In addition, you should not assume that courts in the countries in which we are incorporated or where our assets are located (1) would enforce
judgments of U.S. courts obtained in actions against us based upon the civil liability provisions of applicable U.S. securities laws or (2) would
enforce, in original actions, liabilities against us based on those laws.
We are permitted to adopt certain home country practices in relation to corporate governance, which may afford you less protection.
As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ
significantly from the NYSE corporate governance listing standards. These practices may afford less protection to shareholders than they would
enjoy if we complied fully with corporate governance listing standards.
As a foreign private issuer listed on the NYSE, we are subject to corporate governance listing standards of the NYSE. However, rules permit a
foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in Bermuda,
which is our home country, may differ significantly from corporate governance listing standards. Concurrently, we comply with certain NYSE
corporate governance listing standards by following certain home country practices. Therefore, our shareholders may be afforded less protection
than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers.
Certain shareholders have the right to appoint directors to the Board of Directors and their interests may not coincide with other investors’
interests.
Provided that certain circumstances exist, certain of our shareholders are entitled to appoint directors to the Board of Directors pursuant to the
Bye-Laws. For example, Hemen currently is entitled to appoint four directors (including the Chairman) to the Board of Directors, two of which
must be independent directors and unrelated to Hemen. Each independent director is required to satisfy the independence rules under the United
States Securities Exchange Act of 1934 (the “U.S. Securities Exchange Act”), the NYSE and the OSE. As a result of these appointment rights,
Hemen, Centerbridge and the Commitment Parties are able to influence the composition of the Board of Directors and Hemen may consequently
have influence with respect to the Company’s management, business plans and policies, including the appointment and removal of its officers.
The interests of Hemen, Centerbridge and the Commitment Parties may not coincide with other investors’ interests, and their director designees
may make decisions other investors disagree with. Please see Section 15.14.2.2 “Election and removal of Directors” for more information on
the director appointment procedure.
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Our bye-laws limit shareholders’ ability to bring legal action against its officers and directors.
Our bye-laws contain a broad waiver by the shareholders of any claim or right of action, both individually and on behalf of the Company, against
any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take
any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer
or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves
fraud or dishonesty.
Investors may not be able to exercise their voting rights for Shares registered in a nominee account.
Beneficial owners of the Shares that are registered in a nominee account (such as through brokers, dealers or other third parties) may not be able
to vote such Shares unless their ownership is re-registered in their names with the Norwegian Central Securities Depository (“VPS”) prior to
the general meetings. We can provide no assurances that beneficial owners of the Shares will receive the notice of a general meeting in time to
instruct their nominees to either effect a re-registration of their Shares or otherwise vote their Shares in the manner desired by such beneficial
owners.
Risks Relating to Our Emergence from Bankruptcy
Because our Consolidated Financial Statements reflect fresh start accounting adjustments made upon emergence from bankruptcy, financial
information in our future financial statements will not be comparable to Seadrill’s financial information from prior periods.
Upon emergence from Chapter 11 Proceedings, on July 2, 2018, we adopted fresh start accounting in accordance with the provisions set forth
in ASC 852, Reorganizations. Adopting fresh start accounting results in a new financial reporting entity with no retained earnings or deficits
brought forward. Upon the adoption of fresh start accounting, our assets and liabilities were recorded at their fair values which differed materially
from the recorded values of our assets and liabilities as reflected in the Predecessor historical Consolidated Balance Sheets. Thus, our Consolidated
Balance Sheets and Statements of Operations are not comparable in many respects to Consolidated Balance Sheets and Statements of Operations
data for periods prior to adoption of fresh start accounting. You will not be able to compare information reflecting our post-emergence Consolidated
Financial Statements to information for periods prior to emergence from bankruptcy, without adjusting for fresh start accounting. The lack of
comparable historical information may discourage investors from purchasing our common shares. Additionally, the financial information
contained in this annual report on Form 20-F may not be indicative of future financial information.
We may be subject to claims that were not discharged in the bankruptcy proceedings, which could have a material adverse effect on our
results of operations and profitability.
Substantially all the material claims against the Debtors that arose prior to the date of the bankruptcy filing were addressed during the Chapter
11 Proceedings or were resolved in connection with the Plan and the order of the Bankruptcy Court confirming the Plan. However, we may be
subject to claims that were not discharged in the Chapter 11 Proceedings. Circumstances in which claims and other obligations that arose prior
to the bankruptcy filing that were not discharged primarily relate to certain actions by governmental units under police power authority, where
we have agreed to preserve a claimant’s claims, as well as, potentially, instances where a claimant had inadequate notice of the bankruptcy filing.
In addition, except in limited circumstances, claims against non-debtor subsidiaries, are generally not subject to discharge under the Bankruptcy
Code. To the extent any pre-filing liability remains, the ultimate resolution of such claims and other obligations may have a material adverse
effect on our results of operations, profitability and financial condition.
ITEM 4.
INFORMATION ON THE COMPANY
A.
HISTORY AND DEVELOPMENT OF THE COMPANY
1) Company Details
Seadrill Limited (formerly known as “New SDRL Limited”) or the ("Successor Company") was incorporated under the Laws of Bermuda on
March 14, 2018 with registration number 53439. Seadrill Limited has been the parent company of the group of companies collectively known
as Seadrill with effect from the Effective Date.
Seadrill Limited is an exempted company limited by shares and is listed under the Symbol "SDRL" on the New York Stock Exchange ("NYSE")
and the Oslo Stock Exchange ("OSE"). Its registered offices are located at Par-la-Ville Place, 4th Floor, 14 Par-la-Ville Road, Hamilton HM 08,
Bermuda and our telephone number is +1 (441) 295-6935.
Before the Effective Date, Seadrill's parent company was Seadrill Limited ("Old Seadrill Limited" or "Predecessor Company") which was a
company incorporated under the Laws of Bermuda on May 10, 2005 with registration number 36832. Old Seadrill Limited was an exempted
company limited by shares and was previously listed under the Symbol "SDRL" on the NYSE and OSE. It held the same registered offices and
telephone number as the Successor Company.
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2) Significant Developments for the Period from January 1, 2018 through and including December 31, 2019
In this section we have set out important events in the development of our business. This includes information concerning the nature and results
of any material reclassification, merger or consolidation of the company or any of its significant subsidiaries; acquisitions or dispositions of
material assets other than in the ordinary course of business; any material changes in the mode of conducting the business; material changes in
the types of products produced or services rendered; name changes; or the nature and results of any bankruptcy, receivership or similar proceedings
with respect to the company or significant subsidiaries. This section covers the period from the beginning of our last full financial year.
a) Chapter 11 Reorganization
This section provides an overview of the Chapter 11 Proceedings, and the transactions described herein and those contemplated by the Plan are
together referred to as the "Reorganization". The Predecessor Company and certain of its subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (the "Debtors"), whereas this section provides an overview of the Debtors'
restructuring and emergence from bankruptcy, reflecting the acceptance of the Second Amended Joint Chapter 11 Plan (as modified), as confirmed
by the Bankruptcy Court on 17 April 2018 (the "Plan"), by all classes entitled to vote and the confirmation of the Plan by the Bankruptcy Court
and pursuant to which the "Effective Date" (meaning the date of the Debtors' emergence from bankruptcy proceedings in accordance with the
terms and conditions of the Plan) of the Plan occurred on July 2, 2018. The description in this section is qualified in its entirety by reference to
the Plan. The terms of the Plan are more detailed than the description provided in this section, which may have omitted descriptions of items
that may be of interest to particular investors. Therefore, please carefully consider the actual provisions of the Plan for more complete information
about the transactions to be consummated in connection with the Debtors' emergence from bankruptcy.
i.
Introduction to the Reorganization
Prior to filing of the Chapter 11 Proceedings (as defined below), Old Seadrill Limited engaged in extensive discussions with its secured lenders,
certain holders of its unsecured bonds and potential new money investors regarding the terms of a comprehensive restructuring.
On September 12, 2017, Old Seadrill Limited entered into a restructuring support and lock-up agreement (the "RSA") with a group of bank
lenders, bondholders, certain other stakeholders, and new-money providers (collectively, the "Consenting Stakeholders"). Old Seadrill Limited's
consolidated subsidiaries North Atlantic Drilling Ltd. ("NADL") and Sevan Drilling, together with certain other of its consolidated subsidiaries
also entered into the RSA (together with Old Seadrill Limited the "Company Parties"). Ship Finance and three of its subsidiaries, which charter
three drilling units to the Company Parties, also executed the RSA. In connection with the RSA, the Company Parties entered into the "Investment
Agreement" under which Hemen Investments Limited, an affiliate of Old Seadrill Limited's largest shareholder Hemen Holding Ltd. and the
Commitment Parties, committed to provide $1.06 billion in new cash commitments, subject to certain terms and conditions (the "Capital
Commitment").
On September 12, 2017, to implement the transactions contemplated by the RSA and Investment Agreement, the Debtors commenced prearranged
reorganization proceedings (the "Chapter 11 Proceedings") under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Southern District of Texas Victoria Division. During the bankruptcy proceedings, the Debtors continued to operate their business as
debtors in possession. As a result of the Reorganization, the Plan equitized approximately $2.4 billion in unsecured bond obligations, more than
$1.0 billion in contingent newbuild obligations, substantial unliquidated guarantee obligations, and approximately $250 million in unsecured
interest rate and currency swap claims, while extending near term debt maturities, providing the Group with over $1.0 billion in new capital and
leaving employee, customer and ordinary trade claims largely unimpaired.
ii. Corporate Reorganization
The Plan provided for Seadrill Limited to serve as the ultimate parent holding company for Old Seadrill Limited's subsidiaries after the Debtors'
emergence from the Chapter 11 Proceedings. Seadrill Limited was initially formed as a wholly-owned subsidiary of Old Seadrill Limited and
had not conducted any material operations prior to the Effective Date. Following the Debtors' emergence from bankruptcy, the economic interests
in the existing shares of Old Seadrill Limited were extinguished, and Old Seadrill Limited was dissolved under Bermuda law. In accordance
with the Plan, the common shares of Seadrill Limited were issued to the parties entitled thereto under the Plan and under the Investment Agreement.
As part of the concurrent corporate reorganization, Seadrill Limited became the ultimate parent holding company of Old Seadrill Limited's
subsidiaries. The Plan was effective on July 2, 2018, and some of the information provided in this annual report therefore relates to Seadrill prior
to the Effective Date.
The corporate reorganization also included: (i) the formation of a new wholly-owned intermediate holding company ("IHCo") as a subsidiary
of Seadrill, (ii) and a new wholly-owned intermediate holding company ("RigCo") as a subsidiary of IHCo which holds interests in Seadrill's
rig-owning, rig-operating and management entities transferred to RigCo in the corporate reorganization, (iii) the formation of a new wholly-
owned intermediate holding company Seadrill New Finance Limited ("NSNCo"), as a subsidiary of IHCo for the purpose of issuing the "Senior
Secured Notes" (being the $880 million aggregate principal amount of 12% Senior Secured Notes due 2025 issued by NSNCo in connection
with the Reorganization, as further described below) and (iv) the formation of certain new wholly-owned intermediate holding companies as
subsidiaries of NSNCo for the purpose of holding interests in certain of the non-consolidated entities transferred to NSNCo by Old Seadrill
Limited in the corporate reorganization.
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iii. The Plan
The Debtors filed a proposed plan of reorganization and disclosure statement with the Bankruptcy Court on September 12, 2017, as well as a
disclosure statement relating to the proposed plan of reorganization. Subsequent to September 12, 2017, the Debtors negotiated with their various
creditors, including an ad hoc group of holders of unsecured bonds (the "Ad Hoc Group") and certain newbuild ship yards with which the
Debtors had contractual relationships to build new rigs. On 26 February 2018, the Debtors announced a global settlement with various creditors,
including the Ad Hoc Group, the official committee of unsecured creditors (the "Committee") and other major creditors in its Chapter 11 cases,
including Samsung and DSME, two of the Debtors' newbuild shipyards, and an affiliate of Barclays Bank PLC ("Barclays"), another holder of
unsecured bonds. In connection with the global settlement, the Debtors entered into an amendment to the RSA and an amendment to the Investment
Agreement. The amendments to the RSA and Investment Agreement provided for inclusion of the Ad Hoc Group and Barclays into the Capital
Commitment as Commitment Parties, increased the Capital Commitment to $1.08 billion, increased recoveries for general unsecured creditors
under the Plan, an agreement regarding the allowed claim of the newbuild shipyards and an immediate cessation of all litigation and discovery
efforts in relation to the Plan as well as the Debtors' rejection and recognized termination of the newbuild contracts. The Investment Agreement,
as amended, provided for certain milestones for the Debtors' restructuring: (1) the Bankruptcy Court entered an order confirming the Plan on
April 17, 2018 (the "Confirmation Date") and (2) the effective date of the Plan had to occur within 90 days of the Confirmation Date, and in
any event no later than August 8, 2018.
In connection with the global settlement, 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 (as modified) of Reorganization, as amended and supplemented. Reference is made to the Second Amended Joint Chapter 11
Plan (as modified) of Reorganization, in the form confirmed by the Bankruptcy Court, with any further amendments or supplements thereto, as
the Plan. The Plan became effective on July 2, 2018. Under the Plan and the terms of the Investment Agreement and the transactions contemplated
therein, the Commitment Parties to the Investment Agreement were issued certain common shares of Seadrill Limited and purchased additional
common shares of Seadrill Limited in connection with the completion of an equity rights offering to holders of claims against the Debtors.
Seadrill Limited also agreed to register its common shares for resale by the selling shareholders.
iv. Rights offering
Pursuant to the Plan and an order of the Bankruptcy Court, a set of rights offering procedures were approved. As a result, eligible holders of
general unsecured claims against the Debtors were offered the right to participate in (i) a rights offering of up to $119.4 million in principal
amount of the Senior Secured Notes (the "Notes Rights Offering") and the corresponding pro rata portion of 57.5% of common shares in Seadrill
Limited were issued to holders who participated in the Notes Rights Offering and (ii) a rights offering of up to $48.1 million in value of common
shares in Seadrill Limited (the "Equity Rights Offering").
The Equity Rights Offering was directed to eligible holders of General Unsecured Claims (as defined in the Plan), who either (i) were located
in the United States or (ii) were located outside the United States and who satisfied one of the following criteria (a) they were located in a member
state of the European Economic Area (EEA); (b) they were located in the United Kingdom and were qualified (i) to make an investment in
Seadrill Common Shares under the applicable laws of the EEA (ii) satisfied certain criteria under the laws of the United Kingdom; or (c) were
located in a different jurisdiction, and under the laws of that jurisdiction were entitled to subscribe for and purchase the Seadrill Common Shares,
in each case without the need for any registration or similar filing by Seadrill Limited. The subscription period for the Equity Rights Offering
commenced on May 7, 2018 and ended on 5:00 pm New York City Time on June 8, 2018. The subscription right to participate in the Equity
Rights Offering could not be separated from the related General Unsecured Claims, hence the only way to transfer the subscription rights was
to transfer the related General Unsecured Claims. The holders of General Unsecured Claims could purchase up to 2.700 Seadrill Common Shares
for each USD 1,000 in allowed amount of its claims in aggregate in the Equity Rights Offering. The subscription price for Seadrill Common
Shares in the Equity Rights Offering was $8.421 per share. Holders of General Unsecured Claims who were not entitled to participate in the
Equity Rights Offering, were eligible to receive a cash payment in the amount of $30 per $1,000 of the allowed amount of their claim.
The Senior Secured Notes and the Seadrill Common Shares were acquired by the Commitment Parties under the Investment Agreement and
were reduced to the extent the Note Rights and Equity Rights were exercised in the Notes Rights Offering and the Equity Rights Offering,
respectively. The Commitment Parties did not participate in the Notes Rights Offering nor the Equity Rights Offering, in accordance with the
terms of the Investment Agreement.
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v.
Issuance and distribution of the new shares under the Plan and Investment Agreement
The following table sets forth the allocation of common shares issued on the Effective Date, subject to the terms and conditions of the Plan:
Prior to
dilution by
Primary
Structuring
Fee and the
shares
reserved under
the Employee
Incentive Plan
Percentage
Prior to
dilution by the
shares
reserved under
the Employee
Incentive Plan
Number of
shares
Fully diluted
23,750,000
25.00 %
23.75 %
21.38 %
54,625,000
14,250,000
1,900,000
475,000
95,000,000
5,000,000
100,000,000
11,111,111
111,111,111
57.50 %
15.00 %
2.00 %
0.50 %
100.00%
-
-
-
-
54.63 %
14.25 %
1.90 %
0.47 %
95.00%
5.00 %
100.00%
49.16 %
12.82 %
1.71 %
0.43 %
85.50%
4.50 %
90.00%
-
-
10.00 %
100.00%
Recipient of Common Shares
Commitment Parties (in exchange for cash paid pursuant to the
Investment Agreement) and Equity Rights Offering Subscribers
Recipients of Senior Secured Notes (including Commitment
Parties and Notes Rights Offering Subscribers)
Holders of General Unsecured Claims
Former Holders of Old Seadrill Limited Equity and Seadrill
Limited 510(b) Claimants
Fees to Select Commitment Parties
All creditors, excluding Primary Structuring Fee
Hemen (on account of Primary Structuring Fee)
Total, prior to dilution by shares reserved under the
Employee Incentive Plan
Reserved for the Employee Incentive Plan
Total, fully diluted
vi. Senior Secured Notes
In accordance with the terms and conditions of the Investment Agreement, the Commitment Parties purchased the full principal amount of the
Senior Secured Notes for $880 million in cash, less the principal amount purchased by participants in the Notes Rights Offering, and on the
Effective Date, NSNCo issued $880 million in principal amount of Senior Secured Notes. As described above, Seadrill Limited issued
approximately 57.5% of the common shares in Seadrill (prior to dilution by the Primary Structuring Fee and the shares reserved under the
employee incentive plan) on a pro rata basis to the purchasers of the Senior Secured Notes.
In November 2018, we redeemed $121 million of principal and $5 million of accrued interest on our Senior Secured Notes. 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 accrued payment-in-kind and cash interest on the notes prior to purchase.
b) Acquisitions or disposals of material assets
In April 2018, we entered into a settlement and release agreement, subject to Bankruptcy Court approval, with Jurong in respect of the West
Rigel. The sale completed, and the proceeds were received on May 9, 2018. Per the terms of the Senior Secured Notes, we were required to
redeem a proportion of the principal and interest outstanding on the notes using our share of the West Rigel sale proceeds. We used the proceeds
to make a mandatory redemption of $121 million of principal and $5 million of accrued interest on November 1, 2018.
c) Other significant developments
In May 2018, we purchased an interest rate cap for $68 million to mitigate our exposure to future increases in LIBOR on our floating rate debt.
The capped rate against the 3-month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023. The principal amount
covered by the cap as at December 31, 2019 is $4.5 billion.
In July 2018, Seadrill Partners, received approximately $248 million relating to the West Leo early termination litigation award, of which $204
million was recognized as revenue in Seadrill Partners' Statement of Operations for the second quarter ended June 30, 2018. Seadrill Partners
is an associated company in which we hold an investment (see ITEM 4C "Organizational Structure").
In October 2018, we completed a transaction that fully extinguished the sponsor guarantees given by Seadrill Limited and Sapura Energy Berhad
for the benefit of the lenders of certain debt facilities of the Seabras Sapura joint venture. Seadrill Limited’s guarantee obligations were previously
released, discharged and terminated as part of the Chapter 11 proceedings and under the terms of the October 31 transaction, the lenders confirmed
that they had no outstanding claims against Seadrill Limited in respect of its guarantees and released and discharged Sapura Energy Berhad’s
guarantees. In return for the release and discharge of both sponsors’ guarantees, the lenders under the debt facilities received, amongst other
things, cross-collateralization of the debt facilities, a prepayment from the joint venture, an increase in margin and a consent fee.
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In November 2018 and January 2019, we recovered a total of $47 million from a $48 million overdue receivable that was fully provided against
in the Predecessor company. This was recognized as other operating income in our 2018 and 2019 Successor periods.
In December 2018, we reached an amicable agreement with Transocean over alleged patent infringement of the Transocean dual activity patent.
Under the terms of the settlement, Seadrill and Seadrill Partners have entered into a global license agreement with Transocean of the dual activity
drilling method on our rigs covering alleged past infringements and future use.
In February 2019, we entered into an agreement to establish a 50:50 joint venture ("Sonadrill") with Sonangol. The joint venture will operate
four drillships, focusing on opportunities in Angolan waters. Each of the joint venture parties will bareboat charter two drillships into Sonadrill
and we will manage and operate all the units. Seadrill is also responsible for 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 charter and management
agreements for the Sonangol drilling unit, Libongos, became effective. The rig commenced its first drilling contract on October 10, 2019.
Contracts to acquire eight newbuild jack-up rigs from Dalian were terminated between October 2017 and March 2019. In March 2019, the
relevant Seadrill contracting parties commenced arbitration proceedings in London for all eight rigs to claim for the return of the paid installments
plus interest and further damages for losses. The Seadrill contracting parties have also filed claims for these amounts as part of the Dalian
insolvency proceedings in China, which commenced in January 2019. Dalian has stated that it has claims for damages in respect of each of the
rigs, but it has not quantified those damages. The arbitrations are currently not progressing by agreement of the parties, pending the insolvency
administrator's decision whether to accept or reject the Seadrill contracting parties' claims.
In August 2019, we 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 environment jack-up rigs, West Castor and West 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. In
November 2019 the first rig from the shipyard was delivered and the West Castor commenced its lease.
3) Capital expenditures
Our capital expenditures primarily relate to (i) upgrades to our existing drilling units and (ii) costs incurred on major maintenance projects. In
the year ended December 31, 2017 we additionally had significant capital expenditure for our newbuilding drilling unit program.
We have summarized capital expenditures for the periods covered by this annual report in the table below.
(In $ millions)
Successor
Predecessor
Summary of capital expenditures
Additions to newbuilding
Additions to drilling units and equipment
Payments for long-term maintenance
Total capital expenditure
4) Further information
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
(48)
(114)
(162)
—
(27)
(71)
(98)
(1)
(48)
(78)
(127)
(33)
(59)
(58)
(150)
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. You may find additional information on Seadrill on that site. The address of that site is http://www.sec.gov.
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B.
BUSINESS OVERVIEW
1) Introduction
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 and jack-up rigs for operations in shallow to ultra-deepwater 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, 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 35 drilling rigs and we manage and operate 20 rigs on behalf of Seadrill Partners, SeaMex,
Sonangol, Sonadrill and Northern Drilling.
We are recognized for providing high quality operations, in some of the most challenging sectors of offshore drilling. We employee 4,538
employees across the globe. We are incorporated in Bermuda, and have worldwide operations based on where activities are conducted in the
global oil and gas industry.
We operate through the following segments: (i) floaters; (ii) jack-up rigs; and (iii) other, as further explained below and in 5A - "Operating and
Financial Review".
2) Our Fleet
Our fleet is one of the youngest and most modern of all the major offshore drilling contractors. We currently own a fleet of 35 drilling units,
including seven drillships, 12 semi-submersible rigs and 16 jack-up rigs. We also have an option to purchase one semi-submersible rig. You may
find additional information on our drilling units and newbuilding in item 4D - "Property, Plant and Equipment".
We categorize the drilling units in our fleet as (i) floaters and (ii) jack-ups. This is further explained below.
a) Floaters
Our floaters segment encompasses our drillships and semi-submersible rigs.
i. Drillships:
Drillships are self-propelled ships equipped for drilling offshore in water depths ranging from 1,000 to 12,000 feet and are positioned over the
well through a computer-controlled thruster system. Drillships are suitable for drilling in remote locations because of their mobility and large
load-carrying capacity. Depending on country of operation, drillships operate with crews of 50 or more people.
ii. Semi-submersible drilling rigs:
Semi-submersibles are self-propelled drilling rigs consisting of an upper working and living quarters deck connected to a lower hull consisting
of columns and pontoons. Such rigs operate in a “semi-submerged” floating position, in which the lower hull is below the waterline and the
upper deck protrudes above the surface. The rig is situated over a wellhead location and remains stable for drilling in the semi-submerged floating
position, due in part to its wave transparency characteristics at the water line.
Semi-submersible rigs can be either moored or dynamically positioned. Moored semi-submersible rigs are positioned over the wellhead location
with anchors and typically operate in water depths ranging up to 1,500 feet. Dynamically positioned semi-submersible rigs are positioned over
the wellhead location by a computer-controlled thruster system and typically operate in water depths ranging from 1,000 to 12,000 feet. Depending
on country of operation, semi-submersible rigs generally operate with crews of 50 or more people.
b) Jack-Up Rigs
Jack-up rigs are mobile, self-elevating drilling platforms equipped with legs that are lowered to the seabed. A jack-up rig is mobilized to the drill
site with a heavy lift vessel or a wet tow. At the drill site, the legs are lowered until they penetrate the sea bed and the hull is elevated to an
approximate operational airgap of 50 to 100 feet depending on the expected environmental forces. After completion of the drilling operations,
the hull is lowered to floating draft, the legs are raised and the rig can be relocated to another drill site. Jack-ups are generally suitable for water
depths of 450 feet or less and operate with crews of 90 to 120 people.
3) Competitive Strengths
We believe that our competitive strengths include:
i. One of the largest offshore drilling contractors
Since our inception in 2005, we have developed into one of the world’s largest international offshore drilling contractors. While we are one of
the largest offshore drilling companies, we also have one of the youngest rig fleets in our industry, with an average fleet age of approximately
10 years.
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ii. Commitment to safety and the environment
We believe that the combination of quality drilling units and experienced and skilled employees allows us to provide our customers with safe
and effective operations. Quality assets and operational expertise allow us to establish, develop and maintain a position as a preferred provider
of offshore drilling services for our customers.
iii. Technologically advanced and young fleet
Our drilling units are among the most technologically advanced in the world. The majority of our rigs were built after 2007, which is among the
lowest average fleet age in the industry. Our modern fleet offers superior technical capabilities, operational flexibility and reliability are preferred
by customers and are winning most available opportunities. We believe, based on our proven operational track record and fleet composition,
that we will be better placed to secure new drilling contracts than some of our competitors with older, less advanced rig fleets.
iv. Strong and diverse customer relationships
We have strong relationships with our customers that we believe are based on our operational track record and quality of our fleet. Our customers
are oil super-majors, state-owned national oil companies and independent oil and gas companies.
4) Overall Strategy
During the current challenging period for the industry and to maintain our position as a leading offshore driller, our strategy includes being able
to deliver in the following key areas:
i.
Best Operations
We are a leading offshore deepwater drilling company and our key objective is to deliver the best operations possible - both in terms of utilization
and health, safety and environment. To do this, we leverage having one of the most modern fleets in the industry and our combination of
experienced and skilled employees across the organization. Using our strong operational record, we intend to maximize opportunities for new
drilling contracts and sustain a competitive cost structure, which we have been pursuing through our multi-year savings program.
ii. Right rigs
Our business model includes both floaters and jack-ups. Having the right rigs in these two segments allows us to offer a range of assets to suit
our customer needs, to work in various geographies and water depths, and to position ourselves for future growth in the industry.
iii. Strongest relationships
We have established strong and long-term relationships with key players in the industry and we will seek to deepen and strengthen these
relationships as part of our strategy. This involves identifying additional value-adding services for our existing customers and developing long-
term partnerships. By providing the best possible service to our customers, and be valued partners in their success.
iv. Leading organization
We are proud of our Seadrill culture and we recognize that our business is built on people. As part of our strategy, we aim to recruit, retain, and
develop the best people in the industry and to build an organization that adapts to business needs.
5) Markets
Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. We operate in a single,
global offshore drilling market, as our drilling rigs are mobile assets and are able to be moved according to prevailing market conditions. We
organize our business into the following segments: (i) floaters, (ii) jack-ups and (iii) other. You can find an analysis of our revenues and fixed
assets by operating segment and geography in Note 6 to the Consolidated Financial Statements included within this report.
The "floater" and "jack-up" segments are rig types as explained in section two above. Our "other" segment predominantly relates to the provision
of management services to third parties and related parties, in which we charge a management fee income for such services. Please refer to Note
31 to the Consolidated Financial Statements included within this report for more information on management and administrative services provided
to related parties.
6) Seasonality
In general, seasonal factors do not have a significant direct effect on our business. However, we have operations in certain parts of the world
where weather conditions during parts of the year could adversely impact the operational utilization of the rigs and our ability to relocate rigs
between drilling locations, and as such, limit contract opportunities in the short term. Such adverse weather could include the hurricane season
and loop currents for our operations in the Gulf of Mexico, the winter season in offshore Norway, West of the Shetlands and Canada, and the
monsoon season in Southeast Asia.
7) Customers
Our customers include oil super-majors, state-owned national oil companies and independent oil and gas companies. In addition, we provide
management services to certain affiliated entities. You can find an analysis of our most significant customers in Note 6 to the Consolidated
Financial Statements included within this report.
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8) Drilling contracts
In general, we contract our drilling units to oil and gas companies to provide offshore drilling services at an agreed dayrate for a fixed contract
term or on a well completion basis. Dayrates can vary, depending on the type of drilling unit and its capabilities, contract length, geographical
location, operating expenses, taxes and other factors such as prevailing economic conditions. We do not provide "turnkey" or other risk-based
drilling services to the customer. Instead, we provide a drilling unit and rig crews and charge the customer a fixed amount per day regardless of
the number of days needed to drill the well. The customer bears substantially all the ancillary costs of constructing the well and supporting
drilling operations, as well as most of the economic risk relative to the success of the well.
Where operations are interrupted or restricted due to equipment breakdown or operational failures, we do not generally receive dayrate
compensation for the period of the interruption in excess of contractual allowances. Furthermore, the dayrate we receive can be reduced in
instances of interrupted or suspended service due to, among other things, repairs, upgrades, weather, maintenance, force majeure or requested
suspension of services by the customer and other operating factors.
However, contracts normally allow for compensation when factors beyond our control, including weather conditions, influence the drilling
operations and, in some cases, for compensation when we perform planned maintenance activities. In some of our contracts, we are entitled to
cost escalation to compensate for industry specific cost increases as reflected in publicly available cost indexes.
We may receive lump sum or dayrate based fees for the mobilization of equipment and personnel or for capital additions and upgrades prior to
the start of drilling services. In some cases, we may also receive lump sum or dayrate based fees for demobilization upon completion of a drilling
contract.
Our contracts may generally be terminated by the customer in the event the drilling unit is destroyed or lost or if drilling operations are suspended
for an extended period because of a breakdown of major rig equipment, "force majeure" or upon the occurrence of other specified conditions.
Some contracts include provisions that allow the customer to terminate the contract without cause for a specified early termination fee.
A drilling unit may be "stacked" if it has no contract in place. Drilling units may be either warm stacked or cold stacked. When a rig is warm
stacked, the rig is idle but can deploy quickly if an operator requires its services. Cold stacking a rig involves reducing the crew to just a few
key individuals or removal of the entire crew and storing the rig in a harbor, shipyard or designated area offshore.
9) Competition
The offshore drilling industry is highly competitive, with market participants ranging from large multinational companies to small locally-owned
companies. The demand for offshore drilling services is driven by oil and gas companies’ exploration and development drilling programs. These
drilling programs are affected by oil and gas companies’ expectations regarding oil and gas prices, anticipated production levels, worldwide
demand for oil and gas products, the availability of quality drilling prospects, exploration success, availability of qualified rigs and operating
personnel, relative production costs, availability and lead time requirements for drilling and production equipment, the stage of reservoir
development and political and regulatory environments.
Oil and gas prices are volatile, which has historically led to significant fluctuations in expenditures by our customers for drilling services.
Variations in market conditions during cycles impact us in different ways, depending primarily on the length of drilling contracts in different
regions.
Offshore drilling contracts are generally awarded on a competitive bid basis or through privately negotiated transactions. In determining which
qualified drilling contractor is awarded a contract, the key factors are pricing, rig availability, technical specification, rig location, condition and
integrity of equipment, their record of operating efficiency, safety performance record, crew experience, reputation and industry standing and
customer relations.
Furthermore, competition for offshore drilling rigs is generally on a global basis, as rigs are highly mobile. However, the cost associated with
mobilizing rigs between regions is sometimes substantial, as entering a new region could necessitate upgrades of the unit and its equipment to
specific regional requirements. In particular, for rigs to operate in harsh environments, such as offshore Norway and Canada, as opposed to
benign environments, such as the Gulf of Mexico, West Africa, Brazil and Southeast Asia, more demanding weather conditions would require
more costly investment in the outfitting and maintenance of the drilling units.
For further information on current market conditions and global offshore drilling fleet, please see “Item 5D - Trend Information.”
10) Risk of Loss and Insurance
Our operations are subject to hazards inherent in the drilling of oil and gas wells, including blowouts and well fires, which could cause personal
injury, suspend drilling operations, or seriously damage or destroy the equipment involved. Offshore drilling contractors are also subject to
hazards particular to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Our rig insurance
package policy provides insurance coverage for physical damage to our rigs, loss of hire for our working rigs and third-party liability.
i.
Physical Damage Insurance
We purchase hull and machinery insurance to cover for physical damage to our drilling rigs. We retain the risk, through self-insurance, for the
deductibles relating to physical damage insurance on our drilling unit fleet; currently, a maximum of $5 million per occurrence.
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ii. Loss of Hire Insurance
We also have insurance to cover loss of revenue for our operational rigs (floaters and harsh environment jack-ups only) in the event of extensive
downtime caused by physical damage, where such damage is covered under our physical damage insurance. The loss of hire insurance has a
deductible period of up to 60 days after the occurrence of physical damage. Thereafter we are compensated for loss of revenue up to 290 days
per event and aggregated per year. The daily indemnity will vary from 75% to 100% of the contracted dayrate. We retain the risk related to loss
of hire during the initial 60-day period, as well as any loss of hire exceeding the number of days permitted under the insurance policy. If the
repair period for any physical damage exceeds the number of days permitted under the loss of hire policy, we will be responsible for the loss of
revenue in such a period.
iii. Protection and Indemnity Insurance
We also purchase Protection and Indemnity insurance (P&I) and excess liability insurance for personal injury liability for crew claims, non-crew
claims and third-party property damage including oil pollution from the drilling rigs to cover claims of up to $500 million and $900 million in
the United States per event and in the aggregate. We retain the risk for the deductible of up to $25,000 per occurrence relating to protection and
indemnity insurance or up to $500,000 for claims made in the United States.
iv. Windstorm Insurance
We have elected to place an insurance policy for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico
with a Combined Single Limit of $100 million in the annual aggregate, which includes loss of hire. We intend to renew our policy to insure a
limited part of this windstorm risk for a further period starting May 1, 2020 through April 30, 2021.
11) Environmental and Other Regulations in the Offshore Drilling Industry
Our operations are subject to numerous laws and regulations in the form of international treaties and maritime regimes, flag state requirements,
national environmental laws and regulations, navigation and operating permits requirements, local content requirements, and other national,
state and local laws and regulations in force in the jurisdictions in which our drilling units operate or are registered, which can significantly
affect the ownership and operation of our drilling units. See “Item 3. Key Information – D. Risk Factors – Risks Relating to Our Company and
Industry – Governmental laws and regulations, including environmental laws and regulations, may add to our costs, expose to us liability, or
limit our drilling activity.”
i.
Flag State Requirements
All our drilling units are subject to regulatory requirements of the flag state where the drilling unit is registered. The flag state requirements are
international maritime requirements and, in some cases, further interpolated by the flag state itself. These include engineering, safety and other
requirements related to the maritime industry. In addition, each of our drilling units must be “classed” by a classification society. The classification
society certifies that the drilling rig is “in-class,” signifying that such drilling rig has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of the flag state and the international conventions of which that
country is a member. Maintenance of class certification requires expenditure of substantial sums and can require taking a drilling unit out of
service from time to time for repairs or modifications to meet class requirements. Our drilling units must generally undergo class surveys annually
and a renewal survey once every five years. In addition, for some of the internationally-required class certifications, such as the Code for the
Construction and Equipment of Mobile Offshore Drilling Units (the “MODU Code”) certificate, the classification society will act on a flag
state’s behalf.
ii.
International Maritime Regimes
Applicable international maritime regime requirements include, but are not limited to, the International Convention for the Prevention of Pollution
from Ships (“MARPOL”), the International Convention on Civil Liability for Oil Pollution Damage of 1969 (the “CLC”), the International
Convention on Civil Liability for Bunker Oil Pollution Damage of 2001 (ratified in 2008), or the Bunker Convention, the International Convention
for the Safety of Life at Sea of 1974 (“SOLAS”), the International Safety Management Code for the Safe Operation of Ships and for Pollution
Prevention, or the ISM Code, MODU Code, and the International Convention for the Control and Management of Ships’ Ballast Water and
Sediments in February 2004 (the “BWM Convention”). These various conventions regulate air emissions and other discharges to the environment
from our drilling units worldwide, and we may incur costs to comply with these regimes and continue to comply with these regimes as they may
be amended in the future. In addition, these conventions impose liability for certain discharges, including strict liability in some cases. See Item
3 “Key Information - D. Risk Factors - Risks Relating to Our Company and Industry - We are subject to complex environmental laws and
regulations that can adversely affect the cost, manner or feasibility of doing business.”
The BWM Convention calls for a phased introduction of mandatory ballast water exchange requirements (beginning in 2009), to be replaced in
time with a requirement for mandatory ballast water treatment. The BWM Convention entered into force on September 8, 2017. Under its
requirements, only ballast water treatment will be accepted from the next International Oil Pollution Prevention renewal survey (after 8 September
2019). All Seadrill units considered in operational status are in full compliance with the staged implementation of the BWM Convention by
International Maritime Organization guidelines.
As of January 1, 2020, MARPOL Annex VI, Regulation 14, requires the sulphur content of any fuel used on board ships to be limited to 0.5%
m/m (percent by mass). The fuel we use is compliant to these regulations. Ships must either burn compliant fuel, or use an exhaust gas cleaning
system, which have fitting and upkeep costs.
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iii. Environmental Laws and Regulations
Applicable environmental laws and regulations include the U.S. Oil Pollution Act of 1990, ("OPA"), the Comprehensive Environmental Response,
Compensation and Liability Act, ("CERCLA"), the U.S. Clean Water Act, ("CWA"), the U.S. Clean Air Act, ("CAA"), the U.S. Outer Continental
Shelf Lands Act ("OCSLA"), the U.S. Maritime Transportation Security Act of 2002, (“MTSA"), European Union regulations, including the
EU Directive 2013/30 on the Safety of Offshore Oil and Gas Operations, and Brazil’s National Environmental Policy Law (6938/81),
Environmental Crimes Law (9605/98) and Federal Law (9966/2000) relating to pollution in Brazilian waters. These laws govern the discharge
of materials into the environment or otherwise relate to environmental protection. In certain circumstances, these laws may impose strict liability,
rendering us liable for environmental and natural resource damages without regard to negligence or fault on our part. Implementation of new
environmental laws or regulations that may apply to ultra-deepwater drilling units may subject us to increased costs or limit the operational
capabilities of our drilling units and could materially and adversely affect our operations and financial condition. See Item 3 “Key Information
- D. Risk Factors - Risks Relating to Our Company and Industry - We are subject to complex environmental laws and regulations that can
adversely affect the cost, manner or feasibility of doing business.”
iv. Safety Requirements
Our operations are subject to special safety regulations relating to drilling and to the oil and gas industry in many of the countries where we
operate. The United States undertook substantial revision of safety regulations applicable to our industry following the 2010 Deepwater Horizon
Incident, in which we were not involved. Other countries also have undertaken or are undertaking a review of their safety regulations related to
our industry. These safety regulations may impact our operations and financial results by adding to the costs of exploring for, developing and
producing oil and gas in offshore settings. For instance, in 2016, the BSEE published a final rule that sets more stringent design requirements
and operational procedures for critical well control equipment used in offshore oil and gas drilling and separately announced a risk-based
inspection program for offshore facilities. Also, in 2016, BOEM issued a final Notice to Lessees and Operators imposing more stringent
supplemental bonding procedures for the decommissioning of offshore wells, platforms and pipelines. These regulations, which may result in
additional costs for us, have since become the subject of additional review and possible revision by BSEE and BOEM and, as a result, we cannot
predict their impact on our future operations. The EU also has undertaken a significant revision of its safety requirements for offshore oil and
gas activities through the issue of the EU Directive 2013/30 on the Safety of Offshore Oil and Gas Operations. These other future safety and
environmental laws and regulations regarding offshore oil and gas exploration and development may increase the cost of our operations, lead
our customers to not pursue certain offshore opportunities and result in additional downtime for our drilling units. In addition, if material spill
events similar to the Deepwater Horizon Incident were to occur in the future, or if other environmental or safety issues were to cause significant
public concern, the United States or other countries could elect to, again, issue directives to cease drilling activities in certain geographic areas
for lengthy periods of time.
v. Navigation and Operating Permit Requirements
Numerous governmental agencies issue regulations to implement and enforce the laws of the applicable jurisdiction, which often involve lengthy
permitting procedures, impose difficult and costly compliance measures, particularly in ecologically sensitive areas, and subject operators to
substantial administrative, civil and criminal penalties or may result in injunctive relief for failure to comply. Some of these laws contain criminal
sanctions in addition to civil penalties.
vi. Local Content Requirements
Governments in some countries have become increasingly active in local content requirements on the ownership of drilling companies, local
content requirements for equipment utilized in our operations, and other aspects of the oil and gas industries in their countries. These regulations
include requirements for participation of local investors in our local operating subsidiaries in countries such as Angola and Nigeria. There are
currently also local content requirements in relation to drilling unit contracts in which we are participating in Brazil, although Brazil recently
lessened local content requirements for future projects. Although these requirements have not had a material impact on our operations in the
past, they could have a material impact on our earnings, operations and financial condition in the future.
vii. Other Laws and Regulations
In addition to the requirements described above, our international operations in the offshore drilling segment are subject to various other
international conventions and laws and regulations in countries in which we operate, including laws and regulations relating to the importation
of, and operation of, drilling units and equipment, currency conversions and repatriation, oil and gas exploration and development, taxation of
offshore earnings and earnings of expatriate personnel, the use of local employees and suppliers by foreign contractors and duties on the
importation and exportation of drilling units and other equipment. There is no assurance that compliance with current laws and regulations or
amended or newly adopted laws and regulations can be maintained in the future or that future expenditures required to comply with all such
laws and regulations in the future will not be material.
C.
ORGANIZATIONAL STRUCTURE
1) Consolidated Subsidiaries
A full list of our significant management, operating and rig-owning subsidiaries is shown in Exhibit 8.1. All subsidiaries are, indirectly or directly,
wholly-owned by us, except as follows:
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i.
Asia Offshore Drilling ("AOD")
We have a 66.24% interest in Asia Offshore Drilling, a group comprised of Asia Offshore Rig 1 Ltd, Asia Offshore Rig 2 Ltd, and Asia Offshore
Rig 3 Ltd which own the benign environment jack-up rigs AOD 1, AOD 2 and AOD 3. The remaining 33.76% interest is owned by Mermaid
Maritime Public Company Limited ("Mermaid").
ii. Ship Finance Variable Interest Entities
Between 2007 and 2013 we entered into sale and leaseback arrangements for the semi-submersible rigs West Taurus and West Hercules and the
jack-up rig West Linus. The counterparty to these arrangements was SFL Corporation Ltd ("Ship Finance"), who is a related party because our
largest shareholder, Hemen, has a significant interest in both us and Ship Finance. Ship Finance incorporated SFL Deepwater Ltd, SFL Hercules
Ltd, and SFL Linus Ltd for the sole purpose of owning and leasing the drilling units. Whilst these companies are wholly-owned subsidiaries of
Ship Finance, we consolidate them under the variable interest entity model because we are the primary beneficiary of the entities.
iii. Seadrill Nigeria Operations Limited
HH Global Alliance Investments Limited ("Heirs Holdings"), an unrelated party registered in Nigeria, owns a non-controlling interest in one of
our subsidiaries, Seadrill Nigeria Operations Limited, which holds a 10% interest in our drillship West Jupiter and previously supported the West
Jupiter's operations whilst it was under contract with Total in Nigeria. In February 2020, we paid $11 million to Heirs Holdings for an option
to buy the non-controlling interest at any point in the future for a $1 purchase price.
2) Investments in Non-Consolidated Entities
In addition to owning and operating our offshore drilling units through our subsidiaries, we also, from time to time, make investments in other
offshore drilling and oil services companies. We currently have the following significant equity investments:
i.
Seadrill Partners
Seadrill Partners is a Marshall Islands limited liability company that owns four drillships, four semi-submersible rigs and three tender rigs.
Seadrill Partners focuses on owning and operating offshore drilling rigs under long-term contracts with major oil companies. As of February 29,
2020, we own 46.6% of the outstanding limited liability interests of Seadrill Partners, which includes 35% of the outstanding common units and
100% of its subordinated units. We also own significant non-controlling interests in most of the operating and rig-owning subsidiaries of Seadrill
Partners. Seadrill Partners’ common units were traded on the NYSE under the symbol “SDLP”, before being suspended from trading on the
exchange in August 2019 as the market capitalization decreased below $15 million for a period of 30 consecutive days. On December 23, 2019,
the common units were delisted from the NYSE.
ii. SeaMex
SeaMex is a joint venture that owns and operates five jack-up drilling units located in Mexico under contract with Pemex. As of February 29,
2020, we have a 50% ownership stake in SeaMex. The remaining 50% interest is owned by an investment fund controlled by Fintech Investment
Limited, ("Fintech").
iii. Archer
Archer is a global oilfield service company that specializes in drilling and well services. As of February 29, 2020 we own 15.7% of the outstanding
common shares of Archer. We also own a convertible loan note that has a conversion right into equity of Archer.
iv. Seabras Sapura
Seabras Sapura is a group of related companies that own and operate six pipe-laying service vessels in Brazil. As of February 29, 2020, we have
a 50% ownership stake in each of these companies. The remaining 50% interest is owned by Sapura Energy Berhad ("Sapura Energy").
v. Gulfdrill
Gulfdrill is a joint venture that will manage and operate five premium jack-ups in Qatar with Qatargas. As of February 29, 2020, we have a 50%
ownership stake in Gulfdrill. The remaining 50% interest is owned by Gulf Drilling International ("GDI"). We will lease two of our jack-up
rigs to the joint venture, with the additional three units being leased from a third party shipyard. In November 2019 the first rig from the shipyard
was delivered and the West Castor commenced its lease.
vi. Sonadrill
Sonadrill is a joint venture that will operate four drillships focusing on opportunities in Angolan waters. As of February 29, 2020, we have a
50% ownership stake in Sonadrill. The remaining 50% interest is owned by Sonangol EP ("Sonangol"). Both Seadrill and Sonangol will bareboat
two units 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.
You can find further information on our investments in non-consolidated entities in Note 18 to the Consolidated Financial Statements included
in this report.
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D.
PROPERTY, PLANT AND EQUIPMENT
In this section, we provide details of our major categories of property, plant and equipment. We have categorized our assets as (i) drilling units,
(ii) newbuildings and (iii) office and equipment. You can find further information in the notes to the Consolidated Financial Statements included
in this report. Please refer to Note 19 for information on newbuildings, Note 20 for information on drilling units and Note 21 for information
on office and equipment.
1) Drilling units
The following tables, presented as of December 31, 2019, provide certain specifications for our operational drilling rigs. Unless otherwise noted,
the stated location of each rig indicates either the current drilling location, if the rig is operating, or the next operating location, if the rig is
mobilizing for a new contract.
a) Drillships (7)
Unit
Year built
West Navigator
West Gemini
West Tellus
West Neptune
West Jupiter
West Saturn
West Carina
2000
2010
2013
2014
2014
2014
2015
b) Semi-submersible Rigs (12)
Unit
Year built
West Alpha
West Venture
West Phoenix
West Hercules (i)
West Taurus (i)
West Eminence
West Orion
West Pegasus
West Eclipse
Sevan Driller
Sevan Brasil
Sevan Louisiana
1986
2000
2008
2008
2008
2009
2010
2011
2011
2009
2012
2013
Water
depth
(feet)
7,500
10,000
12,000
12,000
12,000
12,000
12,000
Water
depth
(feet)
2,000
2,600
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
Location as at December 31, 2019
Estimated month
of rig availability
Norway
Angola
Brazil
USA
Spain
Trinidad & Tobago
Malaysia
available
March 2021
November 2021
December 2020
available
available
July 2020
Location as at December 31, 2019
Estimated month
of rig availability
Norway
Norway
Norway
Norway
Norway
Spain
Malaysia
Norway
Namibia
Indonesia
Aruba
USA
available
available
October 2023
March 2021
available
available
available
available
available
available
available
June 2020
Drilling
depth
(feet)
35,000
35,000
40,000
40,000
40,000
40,000
40,000
Drilling
depth
(feet)
23,000
30,000
30,000
35,000
35,000
30,000
35,000
35,000
40,000
40,000
40,000
40,000
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c) Jack-up Rigs (16)
Unit
Year built
West Epsilon
West Prospero
West Vigilant
West Ariel
West Freedom
West Cressida
West Callisto
West Leda
West Elara
West Castor
West Telesto
West Tucana
AOD I (ii)
AOD II (ii)
AOD III (ii)
West Linus (i)
1993
2007
2008
2008
2009
2009
2010
2010
2011
2013
2013
2013
2013
2013
2013
2014
Water
depth
(feet)
400
Drilling
depth
(feet)
30,000
400
350
400
350
375
400
375
450
400
400
400
400
400
400
450
30,000
30,000
30,000
30,000
30,000
30,000
30,000
40,000
30,000
30,000
30,000
30,000
30,000
30,000
40,000
Location as at December 31, 2019
Estimated month
of rig availability
Norway
Malaysia
Malaysia
United Arab Emirates
Colombia
Thailand
Saudi Arabia
Malaysia
Norway
Suriname
Malaysia
Qatar
Saudi Arabia
Saudi Arabia
Saudi Arabia
Norway
available
available
available
available
available
available
December 2022
available
September 2027
March 2023
May 2023
April 2020
July 2022
May 2023
January 2023
December 2028
Our drilling units have been pledged as collateral for our borrowing facilities. Please refer to Note 22 to the Consolidated Financial Statements
included in this report for further details.
As of December 31, 2019, we wholly-owned all the drilling rigs in our fleet noted in the tables above, except as follows:
i.
The jack-up rig West Linus and the semi-submersible rigs West Hercules and West Taurus are owned by wholly-owned subsidiaries of Ship
Finance and leased to us under capital leases. We consolidate the Ship Finance rig owning entities for these rigs under the variable interest
model. Please see Note 35 to the Consolidated Financial Statements included in this report for further details of these arrangements.
ii. We own a 66.23% interest in the jack-up rigs AOD I, AOD II and AOD III. Please see ITEM 4C "Organizational Structure" for further
details.
2) Newbuildings
In addition to the drilling units above, we have an option to acquire the semi-submersible rig Sevan Developer. The following table sets out
details of this rig.
Unit
Rig type
Water
depth
(feet)
Drilling
depth
(feet)
Area of location
Status
Sevan Developer
Semi-submersible
10,000
40,000
Cosco Shipyard (China)
Under construction
The option to purchase the Sevan Developer expires on June 30, 2020. The rig will remain in China at the Cosco Shipyard during which time
we retain the right to market the rig and acquire the rig at the original contracted amount. The termination agreement gives Cosco a right to
terminate the contract at any time.
3) Office and Equipment
We lease offices and other properties in several locations including Stavanger and Oslo in Norway, Singapore, Houston in the United States,
Rio de Janeiro in Brazil, Dubai in the United Arab Emirates and Aberdeen, Liverpool and London in the United Kingdom. Our Consolidated
Balance Sheet includes office equipment, IT equipment and leasehold improvements held in these locations.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5.
OPERATING AND FINANCIAL REVIEW
In this section, we present management’s discussion and analysis of results of operations and financial condition. It should be read in conjunction
with our Consolidated Financial Statements and accompanying notes thereto included herein. You should also carefully read the following
sections of this annual report entitled “Cautionary Statement Regarding Forward-Looking Statements,” ITEM 3 - "Key Information—A. Selected
Financial Data", ITEM 3 - "Key Information—D. Risk Factors” and ITEM 4 - "Information on the Company”.
Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and are presented in U.S. dollars unless otherwise
indicated. We refer you to the notes to our Consolidated Financial Statements for a discussion of the basis on which our Consolidated Financial
Statements are prepared.
1) Introduction
We are an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry. For a detailed description of
our business please read ITEM 4B - "Business Overview".
2) Chapter 11 Reorganization and Application of Fresh Start Accounting
In this section we have provided a summarized description of our Chapter 11 Reorganization below, together with an overview of Fresh Start
Accounting which we applied on emergence from Chapter 11 on July 2, 2018. Please read ITEM 4A - "History and Development of the Company"
for a detailed description of the Chapter 11 Reorganization.
i. Chapter 11 Reorganization
Prior to the filing of Chapter 11 Proceedings (as defined below), we were engaged in extensive discussions with our secured lenders, certain
holders of our unsecured bonds and potential new money investors regarding the terms of a comprehensive restructuring. The objectives of the
restructuring were to build a bridge to a recovery and achieve a sustainable capital structure. To achieve this, we had proposed an extension to
our bank maturities, reduced debt amortization payments, amendments to financial covenants and raising of new capital.
On September 12, 2017, Old Seadrill Limited, certain of its subsidiaries (together "the Company Parties") and certain Ship Finance companies
entered into a restructuring support and lock-up agreement ("RSA") with a group of bank lenders, bondholders, certain other stakeholders, and
new-money providers. In connection with the RSA, the Company Parties entered into an "Investment Agreement" under which Hemen
Investments Limited, an affiliate of Old Seadrill Limited's largest shareholder Hemen Holding Ltd. and certain other commitment parties,
committed to provide $1.06 billion in new cash commitments, subject to certain terms and conditions (the "Capital Commitment").
On September 12, 2017, to implement the transactions contemplated by the RSA and Investment Agreement, Old Seadrill Limited and certain
of its subsidiaries (the "Debtors") commenced prearranged reorganization proceedings (the "Chapter 11 Proceedings") under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas Victoria Division. During the bankruptcy
proceedings, the Debtors continued to operate the business as debtors in possession.
After September 12, 2017, the Debtors negotiated with their various creditors and on February 26, 2018 announced a "Global Settlement",
following which there were amendments to the RSA and Investment Agreement. These amendments provided for, amongst other things, the
inclusion of certain other creditors as Commitment Parties, an increase of the Capital Commitment to $1.08 billion, increased recoveries for
general unsecured creditors under the Plan and an agreement regarding allowed claims from certain newbuild shipyards.
On February 26, 2018, the Debtors filed a proposed Second Amended Joint Chapter 11 Plan of Reorganization (the "Plan") with the Bankruptcy
Court. The Plan was confirmed by the Bankruptcy Court on April 17, 2018. The Plan became effective and the Debtors emerged from Chapter
11 Proceedings on July 2, 2018 (the "Effective Date").
The Plan extinguished approximately $2.4 billion in unsecured bond obligations, more than $1.0 billion in contingent newbuild obligations,
substantial unliquidated guarantee obligations, and approximately $250 million in unsecured interest rate and currency swap claims, while
extending near term debt maturities, providing Seadrill with over $1.0 billion in new capital and leaving employee, customer and ordinary trade
claims largely unimpaired.
ii. Application of Fresh Start Accounting
Upon emergence from Chapter 11 bankruptcy on July 2, 2018, we adopted fresh start accounting in accordance with the provisions set forth in
ASC 852, Reorganizations. Adopting fresh start accounting resulted in a new financial reporting entity with no retained earnings or deficits
brought forward. Upon the adoption of fresh start accounting, our assets and liabilities were recorded at their fair values which differ materially
from the recorded values of our assets and liabilities as reflected in the Predecessor historical Consolidated Balance Sheets. 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 as of December 31, 2018 and the related adjustments thereto were recorded in the Consolidated Statement of
Operations of the Predecessor as "Reorganization items" during the 2018 Predecessor period.
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Accordingly, our Consolidated Financial Statements for periods after July 2, 2018 are not and will not be comparable to the Predecessor
Consolidated Financial Statements prior to July 1, 2018. Our Consolidated Financial Statements and related footnotes are presented with a black
line division which delineates the lack of comparability between amounts presented on July 2, 2018 and dates prior. Our financial results for
future periods following the application of fresh start accounting will be different from historical trends and the differences may be material.
Refer to Note 5 – Fresh Start Accounting to our Consolidated Financial Statements included herein.
3) Changes to our fleet
The below table shows the number of operational drilling units included in our fleet for each of the periods covered by this report.
Operational drilling units
Drillships
Semi-submersible rigs
Total floaters
Jack-up rigs
Total operational units
Successor
Predecessor
December
31, 2019
7
December
31, 2018
7
December
31, 2017
7
12
19
16
35
12
19
16
35
12
19
16
35
The below table shows the number of newbuildings for each of the periods covered by this report.
Number of units
Drillships
Semi-submersible rigs
Total floaters
Jack-up rigs
Total operational units
Successor
Predecessor
December
31, 2019
—
December
31, 2018
—
December
31, 2017
4
1
1
—
1
1
1
2
3
2
6
8
14
Drillships decreased by four during 2018 due to the rejection and termination of the newbuild contracts for the West Dorado, West Draco, West
Aquila and the West Libra in accordance with the Global Settlement (described above). In return, the counterparties to these contracts, Samsung
Heavy Industries Co., Ltd. ("Samsung") and Daewoo Shipbuilding & Marine Engineering Co., Ltd ("DSME"), received an allowed claim and
became Commitment Parties to the Investment Agreement. At December 31, 2017, we recorded a liability of $1,064 million for the allowed
claim and impairment of $696 million against the newbuild assets we had previously recorded for those rigs.
On May 9, 2018, the semi-submersible newbuild, West Rigel, was sold by Jurong Shipyard Pte Ltd. ("Jurong") and we received a share of
proceeds totaling $126 million. We recorded a $2 million loss on disposal for this transaction at December 31, 2017.
Jack-up newbuild rigs decreased by six during 2018 due to terminations of Newbuild contracts between us and the Dalian Shipyard. The contracts
for the remaining two jack-up rigs from the Dalian shipyard, the West Dione and West Mimas, were terminated in February 2019 and April 2019,
respectively. Please refer to Note 34 - Commitments and Contingencies for further details.
We have an option to acquire the semi-submersible rig Sevan Developer. The option to purchase the Sevan Developer expires on June 30, 2020.
Please read "ITEM 4D. - Property, Plant and Equipment" for further information on our operational drilling units and newbuilds at December 31,
2019.
4) Contract backlog
Order Backlog includes all firm contracts at the maximum contractual operating dayrate multiplied by the number of days remaining in the firm
contract period. For contracts which include a market indexed rate mechanism we utilize the current applicable dayrate multiplied by the number
of days remaining in the firm contract period. Order Backlog excludes revenues for mobilization, demobilization and contract preparation or
other incentive provisions and excludes backlog relating to Non-Consolidated Entities.
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The contract backlog for our fleet was as follows as at the dates specified:
(In $ millions)
Contract backlog
Floaters
Jack-ups
Total
Successor
Predecessor
December
31, 2019
803
December
31, 2018
630
1,741
2,544
1,457
2,087
December
31, 2017
870
1,659
2,529
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 December 31, 2019 contract backlog to unwind over the following periods.
(In $ millions)
Contract backlog
Floaters
Jack-ups
Total
Total
803
1,741
2,544
2020
425
296
721
Successor
2021
136
287
423
2022
131
270
401
Thereafter
111
888
999
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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A.
RESULTS OF OPERATIONS
The year ended 2019, the 2018 Successor period, the 2018 Predecessor period and the year ended 2017
The tables included below set out financial information for the periods presented. The 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 or prior periods. We have therefore not made comparisons between accounting measures in
non-comparable periods. We have made comparisons for non-accounting driven performance indicators, where applicable.
(In $ millions)
Operating revenues
Operating expenses
Other operating items
Operating loss
Interest expense
Reorganization items
Other income and expense
Loss before income taxes
Income tax benefit / (expense)
Net loss
1) Operating revenues
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
Year
ended
December
31, 2019
1,388
(1,722)
39
(295)
(487)
—
(479)
(1,261)
39
(1,222)
541
(737)
21
(175)
(261)
(9)
(152)
(597)
(8)
(605)
Period
from
January
1, 2018
through
July 1,
2018
712
(918)
(407)
(613)
(38)
(3,365)
161
(3,855)
(30)
(3,885)
Year
ended
December
31, 2017
2,088
(1,902)
(914)
(728)
(285)
(1,337)
(686)
(3,036)
(66)
(3,102)
Total operating revenues consist of contract revenues, reimbursable revenues and other revenues. We have analyzed operating revenues between
these categories in the table below:
(In $ millions)
Contract revenues
Reimbursable revenues
Other revenues
Operating revenues
a) Contract revenues
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
469
26
46
541
Year
ended
December
31, 2019
997
264
127
1,388
Period
from
January
1, 2018
through
July 1,
2018
619
21
72
712
Year
ended
December
31, 2017
1,888
38
162
2,088
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.
(In $ millions)
Floaters
Jack-ups
Contract revenues
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
307
162
469
Year
ended
December
31, 2019
644
353
997
Period
from
January
1, 2018
through
July 1,
2018
437
182
619
Year
ended
December
31, 2017
1,283
605
1,888
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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.
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:
(Number)
Floaters
Jack-ups
Average number of rigs on contract
Floaters
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
7
8
15
Year
ended
December
31, 2019
7
9
16
Period
from
January
1, 2018
through
July 1,
2018
10
8
18
Year
ended
December
31, 2017
8
11
19
The average number of floaters on contract for the year ended 2019 was the same as for the 2018 Successor period. The West Carina and Sevan
Louisiana both operated in 2019 after periods of being idle. This was offset by the West Gemini being idle between August and November 2019
and the West Saturn completing its contract with Equinor in October 2019.
The average number of floaters on contract decreased by three between the 2018 Predecessor period and the 2018 Successor period primarily
due to the West Carina and Sevan Brazil completing their contracts with Petrobras in Brazil and the West Eclipse completing its contract with
ExxonMobil in Angola.
The average number of floaters on contract increased by two between the year ended 2017 and the 2018 Predecessor period primarily due to the
reactivation of the West Hercules which started work in the North Sea in April 2018 and the West Saturn commencing a new contract with Equinor
in Brazil in February 2018.
Jack-ups
The average number of jack-ups on contract increased by one between the year ended 2019 and the 2018 Successor period. The West Castor
returned to operations in March 2019 after being warm stacked since July 2018 and the West Tucana had a full year of operations after its
reactivation in October 2018. This was offset by a period of idle time on the West Cressida during the first half of 2019.
The average number of jack-ups on contract was unchanged between the 2018 Predecessor period and the 2018 Successor period as the West
Cressida and West Tucana started work on new contracts in July 2018 and October 2018 which was offset by West Castor completing its contract
in June 2018.
The average number of jack-ups on contract decreased by three between the year ended 2017 and the 2018 Predecessor period primarily due to
the West Tucana, West Cressida and West Ariel completing their contracts in 2017 and early 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 days for the reporting period. We have set out the average contractual dayrates for the periods presented in the below table:
(In $ thousands)
Floaters
Jack-ups
Floaters
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
231
Year
ended
December
31, 2019
245
106
106
Period
from
January
1, 2018
through
July 1,
2018
279
131
Year
ended
December
31, 2017
395
150
The average contractual dayrate for floaters increased by $14k per day between the year ended 2019 and 2018 Successor period. This was
primarily due to the West Phoenix and West Hercules operating at higher dayrates in 2019 compared to 2018.
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The average contractual dayrate for floaters decreased by $48k per day between the 2018 Predecessor and 2018 Successor periods primarily due
to the West Carina and West Eclipse completing legacy contracts for Petrobras and ExxonMobil, respectively in July 2018.
The average contractual dayrate for floaters decreased by $116k per day between the year ended 2017 and the 2018 Predecessor period primarily
due to the completion of legacy contracts on the West Neptune and West Gemini with LLOG and Total respectively, which were replaced with
lower dayrate contracts.
Jack-ups
The average contractual dayrate for jack-ups for the year ended 2019 was the same as for the 2018 Successor period. The West Elara earned a
higher dayrate on its contract with ConocoPhillips when it moved to a market-indexed rate. However, this was offset by the West Callisto and
AOD 1 securing long-term extensions at lower dayrates with Saudi Aramco.
The average contractual dayrate for jack-ups decreased by $25k per day between 2018 Predecessor and 2018 Successor periods due to the West
Elara and West Linus securing long-term contracts with ConocoPhillips at a lower dayrate for an interim period and the West Castor completing
its contract.
The average contractual dayrate for jack-ups decreased by $19k per day between the year ended 2017 and the 2018 Predecessor period primarily
due to the West Elara moving to a lower dayrate with ConocoPhillips in Norway and the West Tucana and West Ariel completing legacy contracts.
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 contractual
operating rate, such as planned downtime for maintenance. In such situations, economic utilization reduces below 100%.
Economic utilization for each of the periods presented in this report is set out in the below table:
(Percentage)
Floaters
Jack-ups
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
95%
Year
ended
December
31, 2019
92%
Period
from
January
1, 2018
through
July 1,
2018
95%
96%
99%
98%
Year
ended
December
31, 2017
97%
98%
The economic utilization for floaters has decreased for the year ended 2019 to 92%. This was primarily due to the operational downtime on the
Sevan Louisiana in early 2019 and planned maintenance activities on the West Neptune and West Tellus in the second half of the year.
Economic utilization has remained in the range of 95% to 99% for each of the other periods presented in this report.
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 year ended 2019 included revenue of $167 million for a contract to perform the first mobilization of the West
Mira and West Bollsta for Northern Drilling and $56 million for a contract to perform the first mobilization of the Libongos and Quenguela for
Sonangol.
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c) Other revenues
Other revenues include the following:
(In $ millions)
Related party management fees (i)
Other management fees (ii)
Leasing revenues (iii)
Amortization of unfavorable contracts (iv)
Early termination fees (v)
Other revenues
i.
Related party management fees
Successor
Predecessor
Year
ended
December
31,
2019
Period
from July
2, 2018
through
December
31, 2018
109
6
1
—
11
127
46
—
—
—
—
46
Period
from
January
1, 2018
through
July 1,
2018
43
—
—
21
8
72
Year
ended
December
31, 2017
110
1
—
43
8
162
Related party revenues represent income from management and technical support services provided to Seadrill Partners, SeaMex, Sonadrill and
Northern Drilling.
ii. Other management fees
Revenue from management services provided to third parties.
iii. Leasing revenues
Revenue earned on the charter of the West Castor to Gulfdrill.
iv. 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.
v. Early termination fees
The termination fee revenue in the year ended 2019 relates to the fees recognized for the West Jupiter and West Castor, the 2018 Predecessor
period and the year ended 2017 included early termination fee revenue for the West Pegasus and West Hercules, respectively.
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2) Operating expenses
Total operating expenses include vessel and rig operating expenses, amortization of intangibles, 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:
(In $ millions)
Vessel and rig operating expenses (i)
Depreciation (ii)
Amortization of intangibles (iii)
Reimbursable expenses
Selling, general and administrative expenses (iv)
Operating expenses
i.
Vessel and rig operating expenses
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
Year
ended
December
31, 2019
(770)
(426)
(134)
(262)
(130)
(1,722)
(357)
(236)
(58)
(24)
(62)
(737)
Period
from
January
1, 2018
through
July 1,
2018
(407)
(391)
—
(20)
(100)
(918)
Year
ended
December
31, 2017
(792)
(798)
—
(35)
(277)
(1,902)
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 2018 Predecessor and Successor periods
are therefore not comparable.
We have analyzed vessel and rig operating expenses by segment in the table below:
(In $ millions)
Floaters
Jack-ups
Other
Vessel and rig operating expenses
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
223
119
15
357
Year
ended
December
31, 2019
493
221
56
770
Period
from
January
1, 2018
through
July 1,
2018
239
158
10
407
Year
ended
December
31, 2017
480
286
26
792
Vessel and rig expenses for jack-ups in the 2018 Predecessor period included a bad debt expense of $48 million relating to an overdue receivable.
This receivable was not recognized as part of fresh start accounting in the 2018 Successor period. We subsequently recovered $21 million on
November 27, 2018 and a further $26 million on January 10, 2019 which is recognizable on receipt within "other operating income" (see section
3 below).
Excluding the effect of the one-time items discussed above, 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 incur one-time costs for activities such as preservation and severance
when we cold stack a rig. We also incur significant costs when re-activating a rig from cold stack, a proportion of which is expensed as incurred.
We have analyzed the average number of rigs by status and segment over the reporting period in the table below:
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(In $ millions)
Floaters
Operating
Warm stacked
Cold stacked
Average number of Floaters
Jack ups
Operating
Warm stacked
Cold stacked
Average number of Jack-ups
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
Year
ended
December
31, 2019
Period
from
January
1, 2018
through
July 1,
2018
Year
ended
December
31, 2017
7
2
10
19
9
1
6
16
7
3
9
19
8
1
7
16
10
—
9
19
8
3
5
16
8
2
9
19
11
—
5
16
For detail on the movement in operating rigs in each period presented, please refer to the above section "i. Average number of rigs on contract".
The number of cold stacked floaters was consistent in the year ended 2017, the 2018 predecessor period and the 2018 successor periods. The
number increased by one in the year ended 2019 as the West Eclipse went from warm stack to cold stack.
The number of cold stacked jack-up rigs was consistent between the year ended 2017 and 2018 predecessor periods. During the 2018 successor
the West Ariel went from warm stack to cold stack. The number of cold stacked rigs decreased by one between the 2018 successor period and
the year ended 2019 as the West Tucana became operational.
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 when we (i) applied fresh start accounting
on emergence from Chapter 11 and (ii) recorded long-lived asset impairments against the West Alpha, West Navigator and West Epsilon at June
30, 2018. The depreciation expense for the 2018 Successor period is therefore based on lower carrying values of drilling units and equipment
and is not comparable to the level of depreciation expense recorded in the Predecessor periods.
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 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.
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 in section 2 above, we changed the classification of certain support function costs for periods after emergence. Selling, general
and administrative expenses for the successor periods is therefore not comparable to the level of expense recorded in the predecessor periods.
3) Other operating items
Other operating items include impairments of long-lived assets, loss on sale of assets and other operating income. We have analyzed other
operating items between these categories in the below table:
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Table of Contents
(In $ millions)
Loss on impairment of long-lived assets (i)
Loss on sale of assets (ii)
Other operating income (iii)
Other operating items
i.
Impairment of long-lived assets
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
Year
ended
December
31, 2019
—
—
39
39
—
—
21
21
Period
from
January
1, 2018
through
July 1,
2018
(414)
—
7
(407)
Year
ended
December
31, 2017
(696)
(245)
27
(914)
In the year ended 2017, as part of the Chapter 11 re-organization, we terminated the newbuild contracts for the drillships West Draco, West
Dorado, West Aquila and West Libra and the shipyards, Samsung and DSME, received an allowed claim. As a result, we recorded a $696 million
non-cash impairment charge against the newbuild assets for these rigs. We also recorded a reorganization expense of $1,064 million for the
allowed claim (see section 5 below).
In the 2018 Predecessor period, we determined that the continuing downturn in the offshore drilling market was an indicator of impairment on
certain assets. Following an assessment of recoverability, we recorded an impairment charge of $414 million against three of our older rigs.
ii. Loss on sale of assets
The loss on sale of assets for the year ended 2017 was due to the sale of the West Triton, West Mischief and West Resolute to Shelf Drilling,
recognizing a loss on disposal of $166 million, and the derecognition of the Sevan Developer, following renegotiated terms with Cosco which
deemed us to have lost control of the asset, resulting in a $75 million loss.
iii. Other operating income
The below table summarizes the main components of other operating income for the periods presented.
(In $ millions)
Loss of hire insurance settlement (i)
Receipt of overdue receivable (ii)
Contingent consideration (iii)
Settlement with shipyard
Other operating items
i. Loss of hire insurance settlement
Successor
Predecessor
Year
ended
December
31,
2019
Period
from July
2, 2018
through
December
31, 2018
10
26
—
3
39
—
21
—
—
21
Period
from
January
1, 2018
through
July 1,
2018
—
—
7
—
7
Year
ended
December
31, 2017
—
—
27
—
27
Settlement of a claim on our loss of hire insurance policy following an incident on the Sevan Louisiana.
ii. Receipt of overdue receivable
Receipt of overdue receivables which had not been recognized as an asset as part of fresh start accounting.
iii. Contingent consideration
Amounts recognized for contingent consideration from the sales of the West Vela and West Polaris to Seadrill Partners in 2014 and 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 2018 Successor period and year ended 2019.
4) Interest expense
We have analyzed interest expense into the following components:
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Table of Contents
(In $ millions)
Cash and payment-in-kind interest on debt facilities (i)
Unwind of discount debt (ii)
Loan fee amortization (iii)
Capitalized interest (iv)
Interest expense
Successor
Predecessor
Year
ended
December
31,
2019
Period
from July
2, 2018
through
December
31, 2018
(440)
(47)
—
—
(237)
(24)
—
—
(487)
(261)
Period
from
January
1, 2018
through
July 1,
2018
(37)
—
(1)
—
(38)
Year
ended
December
31, 2017
(286)
—
(27)
28
(285)
i. Cash and payment-in-kind interest on debt facilities
We incur cash and payment-in-kind interest on our debt facilities. This is summarized in the table below.
(In $ millions)
Senior credit facilities and unsecured bonds
Less: adequate protection payments
Senior Secured Notes
Debt of consolidated variable interest entities
Cash and payment-in-kind interest
Successor
Predecessor
Year
ended
December
31,
2019
Period
from July
2, 2018
through
December
31, 2018
(327)
—
(66)
(47)
(440)
(162)
—
(50)
(25)
(237)
Period
from
January
1, 2018
through
July 1,
2018
(116)
104
—
(25)
(37)
Year
ended
December
31, 2017
(320)
81
—
(47)
(286)
We are charged interest on our senior credit facilities at LIBOR plus a margin. For periods after July 2, 2018, this margin increased by one
percentage point following the emergence from Chapter 11. There has also been an increase in LIBOR rates, which when combined with the
additional post-emergence margin, has led to an increased effective interest rate on our senior credit facilities in the year ended 2019.
During the period we were in Chapter 11 (September 12, 2017 to July 1, 2018), 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 (classified under
reorganization items - see section 5 below).
On emergence from Chapter 11 we issued $880 million of Senior Secured Notes. We incur 4% cash interest and 8% payment-in-kind interest
on these notes. On November 14, 2018 and April 10, 2019 there were two redemptions. After the two redemptions there was a remaining $476
million principal outstanding on the notes, which includes $18 million of accrued payment-in-kind interest on our Senior Secured Notes which
was compounded on July 15, 2019 and additional notes were issued.
Our Consolidated Balance Sheet includes approximately $0.6 billion 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 on those facilities.
ii. 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.
iii. Loan fee amortization
We amortize loan issuance costs over the expected term of the associated debt facility. We expensed capitalized loan issuance costs for debt
subject to compromise when we filed for Chapter 11 on September 12, 2017. No new debt facilities have been entered into since emerging from
Chapter 11.
iv. Capitalized interest
We capitalize the interest cost incurred to finance Newbuilds. This ceased when we filed for Chapter 11 on September 12, 2017. No Newbuild
finance has been entered into since emerging from Chapter 11.
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5) Reorganization items
We have analyzed reorganization items into the following components:
Successor
Predecessor
(In $ millions)
Professional and advisory fees
New investor commitment fees
Gain on liabilities subject to compromise
Fresh start valuation adjustments
Loss on Newbuilding global settlement claim
Loss on other pre-petition allowed claims
Write-off of debt issuance costs
Reversal of credit risk on derivatives
Interest income on surplus cash invested
Total reorganization items, net
Period
from July
2, 2018
through
December
31, 2018
(9)
Year
ended
December
31, 2019
—
Period
from
January
1, 2018
through
July 1,
2018
(187)
—
2,958
(6,142)
—
—
—
—
6
Year
ended
December
31, 2017
(66)
(53)
—
—
(1,064)
(3)
(66)
(89)
4
—
—
—
—
—
—
—
—
(9)
(3,365)
(1,337)
—
—
—
—
—
—
—
—
—
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 compromise 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.
You can find additional detail on reorganization items in Note 4 to the Consolidated Financial Statements included within this report.
6) Other income and expense
We have analyzed other income and expense into the following components:
(In $ millions)
Interest income (i)
Share in results from associated companies (ii)
Impairment of investments (iii)
(Loss)/ gain on derivative financial instruments (iv)
(Loss)/gain on debt extinguishment (v)
Impairment of convertible bond from related party (vi)
Foreign exchange loss (vii)
Loss on marketable securities (viii)
Other financial items (ix)
Other income and expense
i.
Interest Income
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
Year
ended
December
31, 2019
Period
from
January
1, 2018
through
July 1,
2018
Year
ended
December
31, 2017
69
(115)
(302)
(37)
(22)
(11)
(11)
(46)
(4)
(479)
40
(90)
—
(31)
—
—
(4)
(64)
(3)
(152)
19
149
—
(4)
—
—
—
(3)
—
161
60
174
(841)
11
19
—
(65)
—
(44)
(686)
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 and $4 million for the year ended 2017.
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ii. Share of results in associated companies
Share of results in 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 the recognition of basis differences between the book value of the drilling unit or pipe laying service vessel and contract intangible balances
recorded in the balance sheets of our equity method investees and the implied value of those assets reflected in the equity method investments
recorded in our Consolidated Balance Sheet. We unwind these basis differences over the lives of the associated assets and liabilities when
calculating our share of results of the equity method investments. Therefore, the share of results in associated companies for the 2018 Successor
period is not comparable to the share of results in associated companies recorded in the Predecessor company.
We have analyzed our share of results in associated companies by equity method investment below:
(In $ millions)
Seadrill Partners
Seamex
Sonadrill
Seabras Sapura
Archer
Share of results from associated companies
Successor
Predecessor
Period
from July
2, 2018
through
December
31, 2018
(102)
Year
ended
December
31, 2019
(124)
(19)
(1)
29
—
(115)
(12)
—
24
—
(90)
Period
from
January
1, 2018
through
July 1,
2018
99
4
—
46
—
149
Year
ended
December
31, 2017
104
—
—
80
(10)
174
The share of results from associated companies for the year ended 2019 reflects a share in after-tax profits of our investments in Seabras Sapura
joint venture offset by a share of losses in our investments in Seadrill Partners, SeaMex and Sonadrill. This includes a net expense for the unwind
of basis differences of $71 million. The results of Seadrill Partners included an income tax benefit of $36 million, which was primarily due to
the release of an uncertain tax position related to US tax reform.
The share in after tax loss of associated companies for the 2018 Successor period reflects a share in after-tax profits of our investments in Seabras
Sapura joint venture offset by a share of losses in our investments in Seadrill Partners and SeaMex. This includes a net expense for the unwind
of basis differences of $57 million. The results of Seadrill Partners included an income tax expense of $87 million, which was primarily due to
an uncertain tax position related to US tax reform.
The share in after-tax profit for 2018 Predecessor period reflected our share of the after-tax profit of each of our equity method investments. Our
share in the after-tax profit of Seadrill Partners included the benefit of a litigation ruling in the favor of Seadrill Partners. Seadrill Partners
recorded net income totaling approximately $220 million in June 2018 for this ruling.
The share of results from associated companies for the year ended 2017 reflected our share of the net income from Seadrill Partners, and Seabras
Sapura, offset by our share of the loss of Archer. From April 2017 onwards, we reclassified our investment in Archer from an equity method
investment to an investment in marketable security. Please see Note 15 of the enclosed financial statements for further details on this transaction.
iii. Impairment of investments
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.
As at December 31, 2017, the carrying value of the Seadrill Partners subordinated units was found to exceed the fair value by $82 million, and
the carrying value of the direct ownership interests in Seadrill Partners was found to exceed the fair value by $723 million. Additionally, the
carrying value of the investment in SeaMex was found to exceed the fair value by $36 million. The fair value was derived using a discounted
cash flow model. We recorded these impairments within “Loss on impairment of investments” in the Consolidated Statement of Operations.
iv. (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 (Refer to vi.).
We record both of these assets at fair value.
The loss on derivatives in the year ended 2019 of $37 million comprised a fair value loss on our interest rate cap derivatives due to a decrease
in forward interest rates.
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The loss on derivatives in the 2018 Successor period of $31 million comprised a fair value loss of $22 million on our interest rate cap derivatives
and a $9 million fair value loss on the conversion option associated with a convertible bond we hold in Archer. The fair value loss on the interest
rate cap was caused by a decrease in forward interest rates. The fair value loss on the Archer conversion option was caused by a decrease in
Archer's share price.
The loss on derivatives in the 2018 Predecessor period of $4 million comprised a fair value loss of $6 million on our interest rate cap derivatives
offset by a $2 million fair value gain on the conversation option on the Archer convertible bond.
The gain on derivatives in the year ended 2017 of $11 million related to net gains on the interest rate swap and cross currency swap agreements
that we previously used to mitigate exposures to interest rate risk and foreign exchange risk on our debt prior to filing for Chapter 11.
v. Net loss/ gain on debt extinguishment
On April 10, 2019, we repurchased $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.
On April 26, 2017, we converted $146 million, including accrued interest and fees, in subordinated loans provided to Archer into a $45 million
subordinated convertible bond. We recognized a gain on debt extinguishment equal to the difference between the fair value of the convertible
loan we received and the previous carrying value of the loan, accrued interest and fees that were extinguished. This was a gain of $19 million.
vi. Impairment of convertible bond from related party
At December 2019, we re-assessed the fair value of the convertible bond issued to us by Archer, who were in the process of refinancing their
debt facilities. For the purposes of the valuation, we assumed that the maturity date of the bond would be pushed out to 2024, as we anticipated
this would be required in order for Archer to refinance their bank borrowings to which the Seadrill bond is subordinate. The extension of the
maturity date on the bond led to a significant decrease in the bond’s fair value, which resulted in an other-than-temporary impairment against
our investment in the bond.
vii. Foreign exchange loss
Foreign exchange gains and losses relate to exchange differences on the settlement or revaluation of monetary balances denominated in currencies
other than the US Dollar. Prior to filing for Chapter 11 on September 12, 2017, our foreign exchange exposure was primarily driven by NOK
and SEK denominated unsecured bonds. These bonds were no longer revalued after we filed for Chapter 11 and were extinguished through the
Chapter 11 restructuring.
In May 2019, we placed a total of 330 million Brazilian Reais of collateral with BTG bank under a letter of credit arrangement, which generated
$3 million foreign exchange loss in the year ended 2019.
viii. Loss on marketable securities
The loss on marketable securities in the year ended 2019, the 2018 Successor and 2018 Predecessor periods reflect the changes in mark to market
movements in our investments in Seadrill Partners common units and our Archer shares.
We did not record a gain or loss on our investments in marketable securities, within income and expense, for the year-ended 2017. This was
because, for all periods before we adopted ASU 2016-10 on January 1, 2018, we recorded fair value gains and losses on marketable securities
in other comprehensive income until they were realized.
ix. Other financial items
Other financial items for the year ended 2017 primarily comprised pre-petition professional and advisory fees related to our reorganization (after
filing for Chapter 11 we classified such costs as reorganization items - see section 5 above).
7) Income tax expense
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.
B.
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 $6,759
million, which will start to mature in 2022 and $314 million under loan agreements with related parties as of December 31, 2019.
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Our liquidity requirements relate to servicing and repaying 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 have historically relied on our cash generated
from operations to meet our short-term liquidity needs. 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 following the date of this
report.
Our debt agreements contain cross-default provisions (or, in certain instances, cross-acceleration provisions), meaning that if we are in default
under one of our debt agreements, amounts outstanding under our other debt agreements may also be in default, accelerated and become due
and payable. In addition, we have provided guarantees over certain debt facilities of our affiliates and related companies, and the lenders under
such facilities could look to us to meet such liabilities if such affiliates and related companies are unable to meet their obligations. If any of these
events occur, we may not be able to satisfy our obligations and our ability to continue our operations or generate any cash flow in the future
could be impaired.
Since the fourth quarter of 2019, we have been engaged in discussions with our secured lenders regarding potential amendments to our credit
facilities to provide operational flexibility and additional near-term liquidity by, among other things, converting certain interest payments under
our credit facilities to payment-in-kind (“PIK”) interest and deferring certain scheduled amortization payments (or increasing the aggregate
amount of such payments that may be converted to loans payable at the final scheduled maturity date of the relevant facility pursuant to the
amortization conversion election provisions contained in the facility agreements). Our debt service is anticipated to be primarily comprised of
interest through at least Q1 2021 because our facility agreements contain certain provisions that allow us to elect to defer and convert up to $500
million in the aggregate of scheduled amortization payments under certain of our credit facilities. We have already elected to use a portion of
this capacity with respect to the first scheduled amortization installments under our credit facilities occurring in Q1 2020. We intend to continue
exercising this option for each subsequent scheduled amortization payment date until such capacity is fully utilized; however, we cannot guarantee
that we will be able to satisfy the conditions set forth in the facility agreements in order to be able to do so. We have also requested that our
lenders consent to an extension of the periods before which we are required to comply with the net leverage and debt service coverage financial
covenants in our facility agreements because we currently anticipate that we will not be able to meet these requirements when such covenants
begin to be tested at the end of Q1 2021. We have also forecasted that we will not be able to meet the requirements under our ongoing liquidity
financial covenant contained in the facility agreements during certain periods occurring after the twelve-month period following the date of this
report. If our amendment requests for certain liquidity enhancing measures are not successful, including with respect to the conversion of certain
interest payments to PIK and the deferral of certain scheduled amortization payments then there is an increased risk that we will breach these
liquidly requirements sooner than currently anticipated after such twelve-month period following the date of this report. Failure to comply with
such liquidity requirements could result in a default under the terms of our facility agreements if we are unable to obtain a waiver or amendment
from our lenders for such non-compliance.
Although lender discussions are well advanced and significant progress has been made, until such time as an agreement is reached, uncertainty
remains and therefore we are also preparing certain contingency plans. The Company's business operations remain unaffected by these amendment
negotiations and related contingency planning efforts, and the Company expects to meet its ongoing customer and business counterparty
obligations as they become due.
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, timing of accounts receivable collection, timing of payments for operating costs and other obligations. Our liquidity comprises cash
and cash equivalents. The below tables show cash and restricted cash balances for each period presented.
(In $ millions)
Unrestricted cash
Restricted cash
Cash and cash equivalents, including restricted
We have shown our sources and uses of cash by category of cash flow in the below table.
Successor
Predecessor
As at
December
31, 2019
1,115
242
1,357
As at
December
31, 2018
1,542
461
2,003
As at July 1,
2018
1,599
578
2,177
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(In $ millions)
Cash flows from operating activities (a)
Cash flows from investing activities (b)
Cash flows from financing activities (c)
Effect of exchange rate changes in cash and cash equivalents
Change in period
Successor
Predecessor
Year ended
December
31, 2019
(256)
Period from
July 2, 2018
through
December
31, 2018
(26)
Period from
January 1,
2018 through
July 1, 2018
(213)
(26)
(367)
3
(646)
61
(208)
(1)
(174)
149
887
(5)
818
This reconciles to the total cash and cash equivalents, including restricted, which is as follows:
(In $ millions)
Opening cash and cash equivalents, included restricted
Change in period
Closing cash and cash equivalents, included restricted
a) Cash flows from operating activities
Successor
Predecessor
Year ended
December
31, 2019
2,003
Period from
July 2, 2018
through
December
31, 2018
2,177
Period from
January 1,
2018 through
July 1, 2018
1,359
(646)
1,357
(174)
2,003
818
2,177
Cash flows from operating activities 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.
(In $ millions)
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities (1)
Net loss after adjustments
Payments for long-term maintenance
Distributions received from associated companies
Settlement of payment-in-kind interest on Senior Secured Notes
Changes in operating assets and liabilities
Cash flows from operating activities
Successor
Predecessor
Year ended
December
31, 2019
(1,222)
Period from
July 2, 2018
through
December
31, 2018
(605)
Period from
January 1,
2018 through
July 1, 2018
(3,885)
1,070
(152)
(114)
11
(39)
38
(256)
477
(128)
(71)
32
—
141
(26)
3,808
(77)
(78)
17
—
(75)
(213)
(1)
Includes depreciation, amortization, share of results of joint ventures and associates, impairment of investments, unrealized gains and losses
on derivatives, unrealized gains and losses on marketable securities, deferred tax expense and other non-cash items shown under the sub-
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 materially lower levels of spending for offshore exploration and
development. This has negatively affected our revenues, profitability and operating cash flows. During year ended December 31, 2019, the 2018
Successor period and the 2018 Predecessor period, 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
Cash flows from investing activities include purchases and sales of newbuildings, drilling units and equipment, investments in non-consolidated
entities and cash receipts from loans granted to related parties.
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Net cash flows from investing activities for the year ended 2019 were primarily generated by capital expenditures and a capital contribution into
the Sonadrill joint venture. This is offset by contingent consideration payments from Seadrill Partners and loan repayments received from our
joint venture, Seabras Sapura.
Net cash flows from investing activities for the 2018 Successor period were primarily generated by loan repayments from our joint venture
Seabras Sapura, contingent consideration payments from Sapura Energy from the sale of our Tender Rig business in 2014, and contingent
consideration payments from Seadrill Partners from sale of the drillship West Vela in 2015. These cash inflows were partly offset by capital
expenditures.
Net cash flows from investing activities for the 2018 Predecessor period were driven by our share of proceeds from the sale of the West Rigel,
contingent consideration payments from Seadrill Partners from the sale of the drillship West Vela and West Polaris 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
Cash flows from financing activities include proceeds from the issuance of new equity, proceeds from issuing debt and repayments of debt and
payment of debt issuance costs.
Net cash flows from financing activities for the year ended 2019 and the 2018 Successor period were driven by redemptions of Senior Secured
Notes and debt repayments within our Ship Finance VIEs.
Net cash flows from financing activities for the 2018 Predecessor period were mainly driven by proceeds from issue of Senior Secured Notes
and new equity on emergence from Chapter 11, offset by repayments of debt contained within our Ship Finance VIEs and debt fees paid on our
senior credit facilities.
3) Information on our borrowings
As at December 31, 2019, we had total outstanding borrowings under our external debt facilities of $6,759 million. This included senior secured
credit facility debt of $5,662 million, borrowings on our Senior Secured Notes of $476 million and debt held by consolidated variable interest
entities of approximately $621 million. In addition to our external debt facilities, we had interest bearing debt of $314 million under loan
agreements with related parties.
Our credit facilities, which will start to mature in 2022, amortize over a period, with a balloon payment at maturity. 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.
The Senior Secured Notes are secured by, among other things, our investments in Seadrill Partners, SeaMex, Seabras Sapura and Archer.
Please refer to Note 22 – "Debt" in the Consolidated Financial Statements included in this report for additional information on our debt facilities
as of December 31, 2019.
4) Capital commitments
We expect to incur capital expenditures for purchases in the ordinary course of business.
C.
RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We recognize the significant impact that technology is having on our industry and through adopting new technological advances, improving
connectivity and digitizing the way we operate, we have enhanced visibility over monitoring and managing our assets. Innovation remains at
the center of our strategy. For instance, research and development has enabled us to implement PLATO, an advanced data analytics platform
that monitors rig performance. The ability to draw insight from these large data sets help us to optimize our drilling performance for customers
and ensure care and maintenance of our equipment, without compromising on safety.
D.
TREND INFORMATION
The below table show the average oil price over the period 2015 to 2019. The Brent oil price at February 29, 2020 was $51.
Average Brent oil price ($/bbl)
2015
54
2016
45
2017
55
2018
71
2019
64
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Although we saw a stabilization in the oil and gas market in 2019, recent developments have created significant uncertainty on the industry’s
trajectory for 2020. The global impacts surrounding the COVID-19 outbreak are rapidly evolving and increasingly dynamic. In addition, recent
actions by certain members of OPEC and its partners have resulted in a substantial decline in the price of Brent oil, with a low of $22 per barrel
on March 30, 2020. We expect this volatility to continue and if the price of oil declines further and/or remains at a low price for an extended
period there could be a material adverse effect on our business, financial condition, and results of operations.
The below table shows the global number of rigs on contract and marketed utilization at December 31, 2019 and for each of the four preceding
years.
Contracted rigs
Harsh environment floater
Benign environment floater
Jack-up 1
Marketed utilization
Harsh environment floater
Benign environment floater
Jack-up 1
1 Jack-up rigs with water depth greater than 350 feet.
2015
2016
2017
2018
2019
45
196
180
93%
83%
83%
35
139
152
81%
71%
70%
30
120
154
83%
71%
70%
31
116
168
85%
73%
74%
35
119
204
87%
77%
86%
Floater
During 2019 there was an increase in the number of opportunities for floaters and net floater supply continued to decline which improved
utilization. Whilst we saw an overall improvement to marketed utilization, the subs-segments continued to recover at varying rates. The harsh
environment trended ahead due to high demand for high specification units relative to their supply. There was still excess supply of benign
environment units which slowed the recovery in this market. However, we saw pockets of strength for high-end ultra deepwater drillships with
marketed utilization trending ahead in this sub-segment.
Jack-up
There were positive trends in the jack-up market with utilization and dayrates improving. The market preference for premium units continued,
resulting in a bifurcation of rates and utilization for these assets. The demand and rates for premium assets led to newbuild units entering the
market. As newer rigs with high specifications enter the jack-up market, this will lead to the accelerated attrition of older units.
E.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements as at December 31, 2019 or 2018.
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F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
At December 31, 2019, we had the following contractual obligations and commitments:
(In $ millions)
Interest-bearing debt (1) (2) (3)
Related party interest-bearing debt
Total debt repayments
Pension obligations (4)
Operating lease obligations
Total contractual obligations
Payment due by period
Year Ended December 31,
2020
343
—
343
4
17
364
2021 - 2022
1,553
—
1,553
2023 - 2024
4,387
—
4,387
Thereafter
476
314
790
4
25
1,582
5
2
4,394
13
1
804
Total
6,759
314
7,073
26
45
7,144
(1) Debt principal repayments, excluding cash and payment-in-kind interest.
(2) The above table assumes that we will make amortization payments on our secured credit facilities from June 2020. Per the terms of our
senior secured credit facilities, we can elect to defer up to $500m of such amortization payments until 2021 through the initiation of new
loans. In December 2019, we made the election to defer $63 million of balances that would have otherwise have fallen due in March 2020.
This leaves a remaining $437 million to be deferred in future periods. If we defer the remaining balance then the amounts due in 2020 will
reduce to $48 million and the amounts due in 2021 will reduce to $1,412 million.
(3) Our secured credit facilities are subject to a minimum liquidity requirement for the Group, which is measured at RigCo Group level. If
breached, this would cause our debt obligations to become due prior to their contractual maturities. Refer to Note 22 - "Debt" of our
Consolidated Financial Statements included herein for further information.
(4) Pension obligations are the forecasted employer’s contributions to our defined benefit plans, expected to be made over the next ten years.
As of December 31, 2019 (Successor), $83 million, including penalties and interest, would have a favorable impact to the Company’s effective
tax rate if recognized.
Please refer to Note 34 - "Commitments and contingencies” of our Consolidated Financial Statements included herein for further information.
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G.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures about contingent assets and liabilities. We base these estimates and assumptions on
historical experience, available information and assumptions that we believe to be reasonable. Our critical accounting estimates are important
factors to our financial condition and results of operations, and require us to make subjective or complex assumptions or judgments about matters
that are uncertain. We believe that the following are the critical accounting estimates used in the preparation of our Consolidated Financial
Statements. In addition, there are other items in our Consolidated Financial Statements that require estimation. Our significant accounting policies
are discussed in Note 2 - "Accounting Policies" and Note 5 – "Fresh Start Accounting" to our Consolidated Financial Statements included herein.
1) 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 December 31, 2019 (Successor) and December 31, 2018 (Successor), the carrying amount of our drilling units was $6 billion
and $7 billion, representing 69% and 61% of our total assets, respectively.
a) 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 and jack-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. We re-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.
b) Impairment considerations
The carrying values of our long-lived assets are reviewed for impairment when certain triggering events or changes in circumstances indicate
that the carrying amount of an asset may no longer be recoverable. Asset impairment evaluations are, by nature, highly subjective. They involve
expectations about future cash flows generated by our assets and reflect management’s assumptions and judgments regarding future industry
conditions and their effect on future utilization levels, dayrates and costs. The use of different estimates and assumptions could result in significantly
different carrying values of our assets and could materially affect our results of operations. An impairment loss is recorded in the period in which
it is determined that the aggregate carrying amount is not recoverable.
With regard to our older drilling units which have relatively short remaining estimated useful lives, the results of impairment tests are particularly
sensitive to management’s assumptions. These assumptions include the likelihood of the unit obtaining a contract upon the expiration of any
current contract, and our intention for the drilling unit should no contract be obtained, including warm/cold stacking or scrapping. The use of
different assumptions in the future could potentially result in an impairment of older drilling units, which could materially affect our results of
operations. If market supply and demand conditions in the ultra-deepwater offshore drilling sector do not improve it is likely that we will be
required to impair certain drilling units.
c) Impairment recognized in the 2018 Predecessor period
In the 2018 Predecessor period, we determined that the continuing downturn in the offshore drilling market was an indicator of impairment on
certain assets. Following an assessment of recoverability, we recorded an impairment charge of $414 million against three non-modern drilling
rigs.
During the year ended December 31, 2019, the 2018 Successor period and the year ended December 31, 2017 we identified indicators that the
carrying value of our drilling units may not be recoverable. We assessed recoverability of our drilling units by first evaluating the estimated
undiscounted future net cash flows based on projected dayrates and utilizations of the units. The estimated undiscounted future net cash flows
were found to be greater than the carrying value of our drilling units. As a result, we did not need to proceed to assess the discounted cash flows
of our drilling units, and no impairment charges were recorded.
In the year ended 2017, as part of the Chapter 11 re-organization, we terminated the newbuild contracts for the drillships West Draco, West
Dorado, West Aquila and West Libra and the shipyards, Samsung and DSME, received an allowed claim. As a result, we recorded a $696 million
non-cash impairment charge against the newbuild assets for these rigs.
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2) Fair Value of Archer Convertible Bond
At each reporting period, we record the Archer bond at fair value in Seadrill’s balance sheet, with any gains or losses being recorded in OCI. At
fresh start, the value of the bond was $46 million and at December 2018 the value was $43 million. At December 2019, we re-assessed the fair
value of the convertible bond issued to us by Archer, who were in the process of refinancing their debt facilities. For the purposes of the valuation,
we assumed that the maturity date of the bond would be pushed out to 2024, as we anticipated this would be required in order for Archer to
refinance their bank borrowings to which the Seadrill bond is subordinate. The extension of the maturity date on the bond led to a significant
decrease in the bond’s fair value, which resulted in an other-than-temporary impairment of $11 million.
3) Impairment of investments in Seadrill Partners
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 18 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 the after-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.
a) Impairment considerations
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.
b) Impairment recognized in the year ended December 31, 2019
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 September 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.
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 to
pre-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 year ended December 31, 2019.
We have summarized the carrying value of our investments before and after this impairment review in the below table.
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Investment
Basis
Seadrill Partners subsidiaries - Subordinated units Equity method
Seadrill Partners subsidiaries - Common units
Fair value
Seadrill Partners subsidiaries - IDRs
Cost less impairment
Seadrill Partners - Direct ownership interests
Equity method
Total carrying value of our investments
September
30, 2019
Post-
impairment
September
30, 2019
Before-
impairment
As at
December
31, 2018
As at July 2,
2018
—
2
—
134
136
—
2
54
382
438
17
45
54
479
595
37
91
54
575
757
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 between 11.25-12.25%.
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.
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.
c) Impairment recognized in the year ended December 31, 2017
During 2017, the deteriorating market conditions in the oil and gas industry, as well as the supply and demand conditions in the industry we
operate, were indicators of impairment for our investments in Seadrill Partners. We have determined the length and severity of the deterioration
of market conditions to be representative of an "other than temporary" impairment. We have recognized an impairment of $805 million against
these investments within “Loss on impairment of investments” in our Consolidated Statement of Operations for the year ended December 31,
2017.
We derived the fair value using an income approach which discounts future free cash flows, or the ‘DCF’ model. The cash flows are estimated
over the remaining useful economic lives of the underlying assets but no longer than 30 years in total and discounted using a 9.75% estimated
market participant weighted average cost of capital.
The DCF model derived an enterprise value of the investments, after which associated debt was subtracted to provide equity values. The
assumptions used in the DCF model were derived from significant unobservable inputs (representative of Level 3 inputs for Fair Value
Measurement) and are based on management’s best judgments and assumptions available at the time of performing the impairment test. The
underlying assumptions and assigned probabilities of occurrence for utilization and dayrate scenarios were developed using a methodology that
examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability
considering the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and
inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at
the time of the assessment.
Management’s 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. Management’s assumptions involve uncertainties about future demand for
our services, dayrates, expenses and other future events, and management’s expectations may not be indicative of future outcomes. Significant
unanticipated changes to these assumptions could materially alter our analysis in testing an asset for potential impairment.
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To assess the investments accounted for using the cost method for impairment, the fair value was determined using a Monte Carlo simulation
method, or the Monte Carlo Model. The assumptions used in the Monte Carlo 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 considers
the cash distribution waterfall, historical volatility, estimated dividend yield and the share price of the common units. We employ significant
judgment in developing these estimates and assumptions.
4) Impairment of Investments in SeaMex
SeaMex is a joint venture that owns and operates five jack-up drilling units located in Mexico under contract with Pemex.
a) Impairment considerations
Each reporting period, we are required to consider whether there have been any indicators of ’other than temporary impairment’ (“OTTI”) of
our equity method investment. 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.
b) Impairment recognized in the year ended December 31, 2017
During 2017, the deteriorating market conditions in the oil and gas industry, as well as the supply and demand conditions in the industry we
operate, were indicators of impairment for our investment in SeaMex. We have determined the length and severity of the deterioration of market
conditions to be representative of an "other than temporary" impairment. We have recognized an impairment of $36 million against our investment
within “Loss on impairment of investments” in our Consolidated Statement of Operations for the year ended December 31, 2017.
We derived the fair value using an income approach which discounts future free cash flows, or the ‘DCF’ model. The cash flows are estimated
over the remaining useful economic lives of the underlying assets but no longer than 30 years in total and discounted using a 10.25% estimated
market participant weighted average cost of capital.
The DCF model derived an enterprise value of the investments, after which associated debt was subtracted to provide equity values. The
assumptions used in the DCF model were derived from significant unobservable inputs (representative of Level 3 inputs for Fair Value
Measurement) and are based on management’s best judgments and assumptions available at the time of performing the impairment test. The
underlying assumptions and assigned probabilities of occurrence for utilization and dayrate scenarios were developed using a methodology that
examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability
considering the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and
inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at
the time of the assessment.
Management’s 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. Management’s assumptions involve uncertainties about future demand for
our services, dayrates, expenses and other future events, and management’s expectations may not be indicative of future outcomes. Significant
unanticipated changes to these assumptions could materially alter our analysis in testing an asset for potential impairment.
5) Redeemable non-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 of non-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 the non-controlling interest in AOD at a price subject to the floor price (“Call
Option”). The Put Option generates a redemption feature for the non-controlling interest holder that is outside the control of Seadrill Limited.
To calculate the fair value of the non-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 the non-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, AOD II and AOD III.
We derived the fair value of the three drilling units using a DCF discounted using a weighted average cost of capital of 11% (2018: 11%) and
derived the fair value of the external debt facilities with a DCF using a weighted average cost of debt of 6% (2018: 6%).
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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 of pre-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 recent 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 12 – "Taxation" to our
Consolidated Financial Statements included herein for further information.
H.
SAFE HARBOR
Forward-looking information discussed in this Item 5 includes assumptions, expectations, projections, intentions and beliefs about future events.
These statements are intended as “forward-looking statements.” We caution that assumptions, expectations, projections, intentions and beliefs
about future events may and often do vary from actual results and the differences can be material. Please see “Cautionary Statement Regarding
Forward-Looking Statements” in this annual report.
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
DIRECTORS AND SENIOR MANAGEMENT
1) Board of Directors
The Board of Directors consists of seven individuals. The names and positions of the Directors as of February 29, 2020 are set out in the table
below.
Name
Birgitte Ringstad Vartdal
Birgit Aagaard-Svendsen
Glen Ole Rødland
Gunnar Winther Eliassen
Herman R. Flinder
Kjell-Erik Østdahl
Peter J. Sharpe
Position
Director
Director
Director and Chairman of the Board
Director
Director
Director
Director
Certain biographical information about each of our directors is set forth below.
Birgitte R. Vartdal serves as an independent director appointed by Hemen. Ms. Vartdal served as Chief Executive Officer of Golden Ocean
Management AS from May 2016 to November 2019 and previously served as Chief Financial Officer of Golden Ocean from June 2010 to April
2016. Ms. Vartdal currently serves on the board of Mowi ASA and as a member of the corporate assembly of Equinor ASA. She also previously
served as a director of Sevan Drilling Ltd (formerly Sevan Drilling ASA). In April 2020, Ms. Vartdal will join Statkraft AS as EVP European
Wind and Solar.
Ms. Vartdal holds a degree of Siv.Ing. (MSc) in Physics and Mathematics from the Norwegian University of Science and Technology (Nw.
NTNU) and an MSc in Financial Mathematics from Heriot-Watt University, Scotland.
Birgit Aagaard-Svendsen was appointed as an independent director on February 27, 2020. Ms. Aagaard-Svendsen has previously served as
CFO in the shipping company J. Lauritzen A/S and brings more than 25 years of board experience in public companies. Ms. Aagaard-Svendsen
has experience in different business segments including more than 25 years in shipping, 15 years related to offshore as well as 16 years of board
experience in Danske Bank. Ms. Aagaard-Svendsen currently serves as Audit Committee Chairman in Aker Solutions AS, DNVGL, Prosafe SE
as well as in West of England Ship Owners Mutual Insurance Association. In addition, Ms. Aagaard-Svendsen is the Deputy Chairman of
Copenhagen Malmö Port. From 2011 to 2015 she was Chairman of the Danish Committee on Corporate Governance.
Ms. Aagaard-Svendsen is a constructional engineer (Technical University of Denmark) and has a Graduate Diploma in Business Administration
(Copenhagen Business School, CBS). Ms. Aagaard-Svendsen has on an ongoing basis participated in Postgraduate Studies in Finance and
Strategy at Insead, IMD and IESE.
Glen Ole Rødland was appointed Director and Chairman of the Board on November 21, 2019. Mr Rødland is currently Chairman of Prosafe
and AqualisBraemar, and has 25 years' experience in shipping, oil and gas and other industries. He has extensive experience as an analyst and
in corporate finance from Investment Banking, Private Office and Private Equity, including DnB and Swedbank. Mr. Rødland obtained an MBA
and Postgraduate Studies in Finance completed at the Norwegian School of Economics and Business Administration (NHH) and UCLA.
Gunnar Winther Eliassen was appointed as Hemen Director on November 21, 2019. Mr. Eliassen has been employed by Seatankers Consultancy
Services since January 2016. Mr. Eliassen also serves as a Director of Seadrill Partners LLC, Golden Close Maritime Corp. Ltd. and Quintana
Energy Services Inc. Mr. Eliassen was also a Partner at Pareto Securities In. in New York and Oslo. Mr. Eliassen obtained an MBA in Finance
from the Norwegian School of Economics.
Herman R. Flinder was appointed as an independent director on February 27, 2020. Mr. Flinder is a co-founder of Norse Partners LLC and
Energy Investment Management LLC, which manage a portfolio of investments in oil service companies. Mr. Flinder serves on the boards of
Noram Drilling Company AS, Panther Fluids Management LLC and Wolf Downhole Motors LLC. Mr. Flinder was previously a managing
partner of Fearnley Offshore LLC in Houston and brings to the board 30 years of experience in the offshore industry, including chartering, sales
and purchase and corporate development. Mr. Flinder attended the Colorado School of Mines and the University of West Virginia, with a degree
in Geology and Engineering and an MBA.
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Kjell-Erik Østdahl serves as an independent director appointed by Hemen. Since 2016, Mr. Østdahl has been a senior advisor to Blackstone's
Private Equity Energy division in London. Prior to that, between 2014 to 2015, Mr. Østdahl worked in Norway as a senior partner at HitecVision,
a private equity investor focused on the upstream oil and gas industry. Prior to that, between 1990 and 2005, and again between 2007 to 2013,
Mr. Østdahl worked at Schlumberger and its subsidiary, WesternGeco, including working in France as EVP Operations and Support and Chief
Procurement, in the U.K. and Norway as VP Operations, General Manager, Marketing Manager, Business Development Manager and Local
Manager and in China and Indonesia as a Field Engineer. Between 2006 and 2007, Mr. Østdahl worked at Statoil as Chief Procurement Officer
(Norway). He holds and has held various non-executive directorships and advisory roles including: (a) as Chairman of Sekal (Norway) from
2015 to date, and of Atlantica Tender Drilling (U.S.A) from 2014 to 2016; and (b) as a board member of the Flux Group (Norway) from 2015
to 2016 and of Wirescan (Norway) from 2014 to 2015. Mr. Østdahl has also agreed to act as a director of Mime, a new independent E&P player
in the North Sea. Mr. Østdahl holds an MSc Electrical Engineering degree from NTNU Norwegian University of Science & Technology, Norway.
Peter J. Sharpe serves as an independent director appointed by Centerbridge. Mr. Sharpe has served as Director of Archer Limited since
November 2019. Mr. Sharpe retired from Shell in 2017 after holding a diverse range of Executive Management positions in international locations
over a period of 37 years. Mr. Sharpe served as Executive Vice President of Royal Dutch Shell for over 10 years, with responsibility for managing
Shell upstream investments in well construction and maintenance globally. Mr. Sharpe brings significant experience in all aspects of upstream
development, asset management, and major project delivery. Mr. Sharpe served as Chairman of SWMS Pte Ltd an independent Joint Venture
between Shell and CNPC from 2012 to 2017 and as a non-Executive director of Xtreme Drilling and Coil Services Corporation from 2008 to
2014. He brings to the Board expertise in strategic and operational risk management, supply chain management, organizational change and
monetization of technology. Mr. Sharpe received a Bachelor of Science degree from the University of Hull in 1980.
2) Senior Management
Our executive management team consists of the following four employees who are responsible for overseeing the management of our business
("Management"). The Board of Directors has organized the provision of management services through Seadrill Management Ltd. ("Seadrill
Management"), a subsidiary incorporated in the United Kingdom. The Board of Directors has defined the scope and terms of the services to be
provided by Seadrill Management. The Board of Directors must be consulted on all matters of material importance and/or of an unusual nature
and, for such matters, will provide specific authorization to personnel in Seadrill Management to act on its behalf.
The names of the members of Management as of February 29, 2020, and their respective positions, are presented in the table below:
Name
Anton Dibowitz
Stuart Jackson
Leif Nelson
Sandra Redding
Age
Position
48
60
45
43
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
General Counsel
Anton Dibowitz serves as the Chief Executive Officer of Seadrill Management and as the Company's Principal Executive Officer. Mr. Dibowitz
was appointed Chief Executive Officer of the Group in July 2017. Prior to this Mr. Dibowitz served as Executive Vice President of Seadrill
Management since June 2016, and as Chief Commercial Officer since January 2013. He has over 20 years drilling industry experience most
recently serving as Vice President of Marketing and prior to that as Commercial Director, Deepwater Western Hemisphere Division. Prior to
joining Seadrill, Mr. Dibowitz held various positions within tax, process reengineering and marketing at Transocean Ltd. and Ernst & Young
LLP. He is a Certified Public Accountant and a graduate of the University of Texas at Austin where he received a Bachelor's degree in Business
Administration, and Master's degrees in Professional Accounting (MPA) and Business Administration (MBA).
Stuart Jackson serves as the Chief Financial Officer of Seadrill Management and as the Company’s Principal Financial Officer and Principal
Accounting Officer. Mr. Jackson is an experienced finance executive with 20 years' experience in CFO roles at LSE, Nasdaq, OSE and AIM
listed companies, including offshore and oil field services experience having served as CFO for Bibby Offshore, CEONA Pte and Acergy SA.
Leif Nelson has served as Seadrill Management's Chief Operating Officer since July 2015. Mr. Nelson has over 18 years' experience in the
drilling industry most recently as the Group's Vice President Operations Performance. Prior to joining Seadrill, Mr. Nelson held various operational
positions for Transocean Ltd. Mr. Nelson is a graduate of the Colorado School of Mines and holds a BSc in Petroleum Engineering. Mr. Nelson
also sits on the board of the Well Control Institute.
Sandra Redding was appointed General Counsel & SVP in September 2019. Ms. Redding has approaching 20 years in-house legal experience
in the oil & gas sector including most recently serving as General Counsel of the Dubai government owned operator Dragon Oil. Ms. Redding
has also worked as in-house counsel to Gaz de France (now Engie) and RWE Dea (now Ineos) in the UK North Sea and across their international
portfolios. Ms. Redding is qualified to practice as a solicitor in England & Wales and in Queensland, Australia.
B.
COMPENSATION
1) Directors
During the year ended December 31, 2019 we paid an aggregate $1 million in directors’ fees to the current members of the Board of Directors
as shown in ITEM 6A - "Directors and Senior Management".
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In addition, certain members of our current Board of Directors received awards of restricted stock units ("RSUs") under our Employee Incentive
Plan in September 2018. For details of these awards please see ITEM 6E - "Share Ownership".
2) Senior Management
Senior management compensation currently includes base salary, performance bonus and awards under our Employee Incentive Plan. In addition,
members of management may participate in our retirement savings plans and are eligible to participate in benefit programs available to our UK
workforce generally including medical, life insurance and disability benefits. We believe that the compensation awarded to our management is
consistent with that of our peers and similarly situated companies in our industry.
During the year ended December 31, 2019, we paid an aggregate compensation of $8 million to our management, including $3 million attributed
to changes in our senior management team. In addition, we incurred compensation expense in the aggregate amount of $0.1 million for their
pension and retirement benefits.
Our management received awards of RSUs in September 2018 and performance shares ("PSUs") in April 2019 under our Employee Incentive
Plan. For details of these awards please see ITEM 6E - "Share Ownership".
The Chief Executive Officer, Chief Financial Officer and General Counsel have termination related payment clauses in their contracts. These
relate to terminations in the context of a "Change of Control Event" or terminations agreed due to "Good Reason" other than "Cause". "Cause"
is defined as one of the following: Gross misconduct; Serious breach of Contract; UK criminal offence; Fraud & corrupt practices relating to
the Bribery Act 2010 and ineligibility to work legally in the UK. All the above contracts are signed by the current incumbents. Other than the
listed termination related payment clauses, no employee, including members of Management, has entered into employment agreements which
provide for any special benefits upon termination of employment.
C.
BOARD PRACTICES
The Board of Directors is responsible for the overall management of the Company and may exercise all the powers of the Company not reserved
to the Company's shareholders by the Bye-Laws or Bermuda law.
1) Terms of office
The Bye-Laws provide that, as long as Hemen's ownership interest is equal to or exceeds 5% and its ownership percentage has not previously
fallen below 5%, the Board of Directors shall consist of not more than seven Directors, unless the Company's shareholders by Ordinary Resolution
(as such term is defined in the Bye-Laws) resolve otherwise and Hemen provides its prior written consent thereto. If Hemen's ownership interest
falls below 5%, the number of Directors shall be such number as the Company's shareholders by Ordinary Resolution may from time to time
determine. The Directors are either appointed by certain of the Company's shareholders pursuant to appointment rights set out in the Bye-Laws
or elected by the Company's shareholders at the annual general meeting or any special general meeting called for that purpose. The Company's
shareholders may authorize the Board of Directors to fill any vacancy in their number left unfilled at an annual general meeting or any special
general meeting called for that purpose. If there is a vacancy of the Board of Directors occurring as a result of the death, disability, disqualification
or resignation of any Director (other than an Investor Appointed Director (as defined in the Bye-Laws)), the Board of Directors has the power
to appoint a Director to fill the vacancy.
2) Directors' service contracts
The Directors are entitled to one months' notice of termination of their service agreements.
3) Board committees
Our Board of Directors has established an Audit Committee, a Compensation Committee and a Conflicts Committee, and may create such other
committees as the Board of Directors shall determine from time to time. Each of the standing committees of our Board of Directors has the
composition and responsibilities described below.
i.
Audit committee
The Board of Directors has established an Audit Committee among the members of the Board of Directors. The Audit Committee comprises
Birgit Aagaard-Svendsen (chair), Birgitte R. Vartdal and Kjell-Erik Østdahl. The Audit Committee is responsible for overseeing the quality and
integrity of the Company's Consolidated Financial Statements and its accounting, auditing and financial reporting practices; the Group's
compliance with legal and regulatory requirements; the independent auditor's qualifications, independence and performance; and the Group's
internal audit function.
ii. Compensation committee
The Board of Directors has established a Compensation Committee among the members of the Board of Directors. The Compensation Committee
comprises Peter J. Sharpe (chair), Herman Flinder and Glen Ole Rødland. The Compensation Committee is responsible for establishing and
reviewing the executive officer's and senior management's compensation and benefits.
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iii. Conflicts committee
The Board of Directors has established a Conflicts Committee among the members of the Board of Directors. The Conflicts Committee comprises
Kjell-Erik Østdahl (chair), Birgit Aagaard-Svendsen and Peter J. Sharpe. The primary purpose of the Conflicts Committee is to monitor and
make recommendations to the board in relation to potential conflicts of interest between the Company and any of its affiliates or related third
parties. The committee will also evaluate any conflicts of interest between a director and the Company.
D.
EMPLOYEES
The table below shows the development in the numbers of employees (including contracted-in staff) at December 31, 2019, 2018 and 2017.
Please note that those shown in the "Managed rigs" category below, represent employees who provide services for Seadrill Partners, Northern
Drilling and Sonadrill.
Total employees (including contracted-in staff)
As at
December 31,
2019
As at
December 31,
2018
As at
December 31,
2017
Operating segments:
Floaters
Jack-up rigs
Managed rigs
Corporate
Total employees
Geographical location:
Norway
Rest of Europe
North and Central America
South America
Asia Pacific
Africa and Middle East
Total employees
1,395
1,016
1,497
630
4,538
994
345
1,071
300
651
1,177
4,538
1,598
974
1,154
647
4,373
737
390
978
425
845
998
4,373
1,484
938
796
629
3,847
510
235
614
742
462
1,284
3,847
We employ people in a number of locations globally. In some locations, predominantly Angola, Nigeria, Norway and Brazil, employees and
contract labor are represented by collective bargaining agreements. As part of the legal obligations in some of these agreements, we are required
to contribute certain amounts to retirement and pension funds. In addition, many of these employees are working under agreements that are
subject to salary negotiation, which could result in higher personnel costs, other increased costs or increased operating restrictions that could
adversely affect our financial performance. We consider our relationships with the various unions to be stable.
E.
SHARE OWNERSHIP
As at February 29, 2020, members of the Board of Directors and members of Management had the following shareholding in the Company. Also
shown are their interests in unvested restricted stock units ("RSUs") and performance shares ("PSUs") awarded to them under the Employee
Incentive Plan. The RSU awards were made in September 2018 and the PSU awards were made in April 2019.
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Name
Birgitte Ringstad Vartdal
Birgit Aagaard-Svendsen
Position
Director
Director
Glen Ole Rødland
Director and Chairman
Gunnar Winther Eliassen
Herman R. Flinder
Kjell-Erik Østdahl
Peter J. Sharpe
Anton Dibowitz
Stuart Jackson
Leif Nelson
Sandra Redding
Director
Director
Director
Director
Management
Management
Management
Management
Number of $0.10 shares
1,701
—
—
10,000
—
1,701
1,701
15,846
—
8,807
—
Number of unvested
PSUs
—
Number of unvested
RSUs
47,457
—
—
—
—
—
—
297,339
120,218
92,677
—
—
—
—
—
47,457
47,457
60,038
—
33,417
—
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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
MAJOR SHAREHOLDERS
The following table presents certain information as of February 29, 2020, regarding the ownership of our common shares with respect to each
shareholder whom we know to beneficially own more than 5% of our outstanding common shares.
Shareholder
Hemen Holding Ltd
King Street Capital Management LP
Common Shares Held
Number
27,193,826
6,657,192
%
27.2%
6.7%
We had a total of 100,234,973 common shares outstanding as of February 29, 2020.
Our major shareholders have the same voting rights as our other shareholders. No corporation or foreign government owns more than 50% of
our outstanding common shares. We are not aware of any arrangements, the operation of which may at a subsequent date result in a change in
control of Seadrill.
B.
RELATED PARTY TRANSACTIONS
Please see Note 31 - "Related Party Transactions" of the Consolidated Financial Statements included within this report.
C.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8.
FINANCIAL INFORMATION
A.
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
1) Financial Statements
Please see the section of this Annual Report on Form 20-F entitled ITEM 18 - “Financial Statements.”
2) Legal Proceedings
Please see Note 34 - "Commitments and Contingencies" to the Consolidated Financial Statements included within this report.
3) Dividends
The payment of any future dividends to shareholders will depend upon decisions that will be at the sole discretion of the Board of Directors and
will depend on the then existing conditions, including Seadrill's operating results, financial condition, contractual restrictions, corporate law
restrictions, capital requirements, the applicable laws of Bermuda and business prospects. Under Bermuda law, a company may not declare or
pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that (a) it is, or would after the
payment be, unable to pay its liabilities as they become due; or (b) the realizable value of its assets would thereby be less than its liabilities.
Although the Board of Directors may consider the payment of dividends, there can be no assurance that any dividend will be paid, or if declared,
the amount of such dividend. The terms of our senior credit facilities and the agreements governing our subsidiary NSNCo's indebtedness under
the Senior Secured Notes may restrict our ability to declare or pay dividends. Further, as Seadrill Limited is a holding company with no material
assets other than the shares of its subsidiaries through which it conducts its operations, its ability to pay dividends will also depend on the
subsidiaries distributing their respective earnings and cash flow.
Seadrill Limited was incorporated on 14 March 2018 and has not paid any dividends since its incorporation. Old Seadrill Limited did not pay
dividends on its common shares since it suspended dividend distributions on November 26, 2014.
B.
SIGNIFICANT CHANGES
Not applicable.
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ITEM 9.
THE OFFER AND LISTING
A.
OFFER AND LISTING DETAILS
Shares of our common stock, par value $0.10 per share, have traded on the NYSE since July 3, 2018 and on the OSE since July 26, 2018 under
the trading symbol “SDRL”.
The NYSE listing is intended to be our primary listing and the OSE listing is intended to be our secondary listing.
B.
PLAN OF DISTRIBUTION
Not applicable.
C.
MARKETS
Our common shares currently trade on the NYSE and the OSE under the trading symbol “SDRL.”
D.
SELLING SHAREHOLDERS
Not applicable.
E.
DILUTION
Not applicable.
F.
EXPENSES OF THE ISSUE
Not applicable.
ITEM 10.
ADDITIONAL INFORMATION
A.
SHARE CAPITAL
Not applicable.
B.
MEMORANDUM OF ASSOCIATION AND BYE-LAWS
The Bye-Laws are referenced in the exhibits to this annual report on Form 20-F and has been incorporated by reference to Exhibit 3.2 of the
amended Registration Statement, filed on Form F-1 on July 18, 2018. Below is a summary of provisions of the Bye-Laws and certain aspects
of applicable Bermuda law. The Bye-Laws do not place more stringent conditions for the change of rights of holders than those required by the
Bermuda Companies Act.
1) Objective of the Company
The objective of the Company's business is unrestricted, meaning that the Company has the capacity of a natural person, and can carry out any
trade or business which, in the Board of Directors' opinion, can be advantageously carried out by the Company. Moreover, this means that the
Company's objectives are not specified in the Bye-Laws. The Company can therefore undertake activities without restriction on its capacity.
2) Board of Directors
i.
Proceedings of the Board of Directors
The Bye-Laws provide that, subject to the Bermuda Companies Act, the business of the Company shall be managed by the Board of Directors.
Generally, the Board of Directors may exercise the powers of the Company, except to the extent the Bermuda Companies Act or the Bye-Laws
reserve such power to the shareholders. Bermuda law permits individual or corporate directors and there is no requirement in the Bye-Laws or
Bermuda law that directors hold any of the Company's shares. There is also no requirement in the Bye-Laws or Bermuda law that the Directors
must retire at a certain age.
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The remuneration of the Directors is determined by the shareholders in a general meeting, by ordinary resolution. The Directors may also be
reimbursed for all reasonable travel, hotel and incidental expenses properly incurred by them in connection with the Company's business or in
discharge of their duties as Directors.
No physical meeting of the Board of Directors may take place in Norway or the United Kingdom. For any meeting of the Board of Directors or
any board committee held electronically, a majority of the Directors participating (including the Chairman) must be physically located outside
the United Kingdom, and the Board of Directors must use reasonable endeavors to ensure that the meeting is not deemed to be held in Norway.
Provided a Director discloses a direct or indirect interest in any contract or arrangement with the Company, as required by Bermuda law, such
Director is pursuant to the Bye-Laws entitled to vote in respect of any such contract or arrangement in which he or she is interested and shall be
considered in determining the quorum for the relevant board meeting. The Director must declare the nature of that interest, as required by the
Bermuda Companies Act, however, no such contract or proposed contract will be void or voidable by reason only that such Director voted on
it or was counted in the quorum of the relevant board meeting. Matters decided at a board meeting are determined by a majority of votes cast.
No Director (including the chairman of the Board of Directors (if any)) is entitled to a second or casting vote. In the case of an equality of votes,
the motion will be deemed to be lost.
ii. Election and removal of Directors
The Bye-Laws provide that, provided Hemen's Percentage Interest (as defined therein) is at least 5% (and has not previously fallen below 5%),
the Board of Directors shall not have more than seven directors unless the shareholders by Ordinary Resolution (as defined in the Bye-Laws)
determine otherwise and Hemen provides its prior written consent. In the event that Hemen's Percentage Interest falls below 5%, the number of
Directors shall be such number as the Company by Ordinary Resolution may determine from time to time.
Pursuant to the Bye-Laws, members of the Board of Directors are appointed as follows:
a)
b)
c)
provided that Hemen's Percentage Interest is equal to or exceeds 10% (and has not previously fallen below 10%), Hemen shall have
the right from the Plan Effective Date (as defined in the Bye-Laws) to: (i) appoint two persons as Hemen Directors (as defined in
the Bye-Laws), of whom one shall be the Chairman; and (ii) appoint two persons as Independent Nominees (as defined in the Bye-
Laws), provided that the other Directors are given reasonable opportunity to meet and consult with Hemen and such Independent
Nominees prior to their appointment to the Board of Directors;
provided that Hemen's Percentage Interest is equal to or exceeds 5% but is less than 10% (and has not previously fallen below 5%),
Hemen shall have the right from the Plan Effective Date to: (a) appoint one person as a Hemen Director, who shall be the Chairman;
and (b) appoint two persons as Independent Nominees, provided that the other Directors are given reasonable opportunity to meet
and consult with Hemen and such Independent Nominees prior to their appointment to the Board of Directors;
Hemen and Centerbridge shall have the right from the Plan Effective Date to appoint one Joint Designee Director (as defined in the
Bye-Laws). The New Commitment Parties (as defined in the Bye-Laws) shall have the right to suggest up to three candidates for
the position of Joint Designee Director, which candidates will be considered by Hemen, Centerbridge and the Select Commitment
Parties when determining the identity of the Joint Designee Director, provided that the New Commitment Parties will provide the
names of the suggested candidates to Hemen, Centerbridge and the Select Commitment Parties, not less than 10 Business Days (as
defined in the Bye-Laws) in advance of the proposed date of appointment of the Joint Designee Director in accordance with the Bye-
Laws. Prior to appointing the Joint Designee Director, Hemen, Centerbridge and the Select Commitment Parties will deliver written
notice of the proposed identity of the Joint Designee Director to the Ad Hoc Group (with separate notice to the outside legal counsel
of the Ad Hoc Group) and Barclays not less than three Business Days in advance of the proposed date of appointment of the Joint
Designee Director, and shall take into consideration any objections raised by the New Commitment Parties as to the identity of the
Joint Designee Director. Notwithstanding the foregoing, each of Hemen, and Centerbridge shall not unreasonably withhold its consent
to any appointment of such Joint Designee Director.
From and after such time as select shareholder groups cease to have the right to appoint their respective Director(s) or Independent Nominee,
as the case may be, such Directors shall be subject to re-election by Ordinary Resolution at each annual general meeting.
A Director may resign by providing notice in writing to the Company of such resignation. A Director other than an Investor Appointed Director
(as defined in the Bye-Laws), may be removed by the Shareholders in a general meeting, provided that the notice of any such general meeting
of shareholders convened for the purpose of removing a Director is given to the Director concerned. The notice must be served the Director not
less than 14 days before the meeting. The Director shall be entitled to attend the meeting and be heard on the motion for his or her removal. An
Investor Appointed Director may be removed by written notice delivered to the Company's registered office by the Investor(s) entitled to make
the appointment.
The majority of all the Directors, when taken together, shall not be resident in the United Kingdom.
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iii. Duties of Directors
The Bye-Laws provide that the Company's business is to be managed by the Board of Directors. Under Bermuda common law, members of the
board of directors of a Bermuda company owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the
company and exercise their powers and fulfill the duties of their office honestly. This duty includes the following elements:
•
•
•
•
a duty to act in good faith in the best interest of the company;
a duty not to make a personal profit from opportunities that arise from the officer of director;
a duty to avoid conflicts of interest; and
a duty to exercise powers for the purpose for which such powers were intended.
The Bermuda Companies Act imposes a duty on directors and officers of a Bermuda company to act honestly and in good faith with a view to
the best interests of the company, and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances. In addition, the Bermuda Companies Act imposes various duties on directors and officers of a company with respect to certain
matters of management and administration of the company. Directors and officers generally owe fiduciary duties to the company, and not to the
company's individual shareholders.
3) Share rights
The holders of Shares have no pre-emptive, redemption, conversion or sinking fund rights. The holders of Shares are entitled to one vote per
Share on all matters submitted to a vote of the holders of Shares.
In the event of the liquidation, dissolution or winding up of the Company, the holders of Shares are entitled to share equally and ratably in its
assets, if any, remaining after the payment of all the Company's debts and liabilities, subject to any liquidation preference on any issued and
outstanding preference shares.
i.
Variation of share rights
The Bye-Laws provide that, subject to the Bermuda Companies Act, the rights attached to any class of the shares issued, unless otherwise
provided for by the terms of issue of the relevant class, may be altered or abrogated either: (i) with the consent of the holders of not less than
75% of the issued shares of that class; or (ii) with the sanction of a resolution passed by a majority of 75% of the votes cast at a general meeting
of the relevant class of shareholders at which a quorum consisting of at least two persons holding or representing at least one-third of the issued
shares of the relevant class is present. However, if the Company or a class of shareholders only has one shareholder, one shareholder present in
person or by proxy shall constitute the necessary quorum, as specified in (i) and (ii). The Bye-Laws specify that the creation or issue of Shares
ranking equally with existing Shares will not, unless expressly provided by the terms of issue of existing Shares, vary the rights attached to
existing Shares.
ii. Voting rights
Under Bermuda law, the voting rights of Shareholders are regulated by the Bye-laws, except in certain circumstances provided in the Bermuda
Companies Act. At any general meeting, every holder of Shares present in person and every person holding a valid proxy shall have one vote
on a show of hands. On a poll, every such holder of Shares present in person or by proxy shall have one vote for every Share held. Unless a
different majority is required by law or by the Bye-Laws, resolutions to be approved by the holders of Shares require approval by a simple
majority of votes cast at a meeting at which a quorum is present.
Except where a greater majority is required by the Bermuda Companies Act or the Bye-Laws, any question proposed for the consideration of
the shareholders at a general meeting shall be decided by the affirmative votes of a majority of the votes cast in accordance with the provisions
of the Bye-Laws and in case of an equality of votes the chairman of such meeting shall not be entitled to a second or deciding vote and the
resolution shall fail.
4) Amendment of the memorandum of association and Bye-Laws
Bermuda law provides that the memorandum of association of a company may be amended in the manner provided for in the Bermuda Companies
Act, i.e. by a resolution passed at a general meeting of shareholders. The Bye-laws provide that the Bye-laws may be amended by the Board of
Directors but any such amendment shall only become operative to the extent that it has been confirmed by an Ordinary Resolution (as defined
in the Bye-laws). The Bye-Laws provide that as long as Hemen's Percentage Interest (as defined in the Bye-Laws) is at least 5%, Hemen's prior
written consent is required for any amendment that would modify or otherwise affect Hemen's right to appoint the Hemen Directors and/or the
Independent Nominees (as terms are defined in the Bye-Laws) or the right and powers of the Hemen Directors and/or the Independent Nominees
once appointed.
Under Bermuda law, the holders of an aggregate of not less than 20% in par value of the Company's issued share capital or any class thereof
have the right to apply to the Supreme Court of Bermuda for an annulment of any amendment of the memorandum of association adopted by
shareholders at any general meeting, other than an amendment which alters or reduces a company's share capital as provided in the Bermuda
Companies Act. Where such an application is made, the amendment becomes effective only to the extent that it is confirmed by the Supreme
Court of Bermuda. An application for an annulment of an amendment of the memorandum of association must be made within 21 days after the
date on which the resolution altering the Company's memorandum of association is passed and may be made on behalf of persons entitled to
make the application or by one or more of their numbers as they may appoint in writing for the purpose. No application may be made by
shareholders voting in favor of the amendment.
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5) General Meetings of shareholders
The annual general meeting of the Company shall be held once in every year at such time and place as the Board of Directors appoints. Pursuant
to Bermuda law, the Board of Directors may call for a special general meeting whenever they think fit, and the Board of Directors must call for
a special general meeting upon the request of shareholders holding not less than 10% of the paid-up capital of the Company carrying the right
to vote at general meetings. Bermuda law also requires that shareholders of a company are given at least five days' advance notice of a general
meeting, unless notice is waived. The Bye-Laws provide that the Board of Directors may convene an annual general meeting or a special general
meeting. General meetings of shareholders may not be held in Norway or the United Kingdom.
Under the Bye-Laws, at least seven days' notice of an annual general meeting must be given to each shareholder entitled to attend and vote
thereat, stating the date, place and time at which the meeting is to be held. At least seven days' notice of a special general meeting must be given
to each shareholder entitled to attend and vote thereat, stating the date, place and time and the general nature of the business to be considered at
the meeting. This notice requirement is subject to the ability to hold such meetings on shorter notice if such notice is agreed: (i) in the case of
an annual general meeting by all of the shareholders entitled to attend and vote at such meeting; or (ii) in the case of a special general meeting
by a majority in number of the shareholders entitled to attend and vote at the meeting holding not less than 95% in nominal value of the shares
entitled to attend and vote at such meeting. Pursuant to the Bye-Laws, the quorum required for a general meeting of shareholders is two or more
shareholders present in person or by proxy and entitled to vote (whatever the number of shares held by them).
The accidental omission to give notice of a general meeting to, or the non-receipt of a notice of a general meeting by, any person entitled to
receive notice does not invalidate the proceedings at that meeting.
Pursuant to the Bye-Laws, no Shareholder is entitled to attend any general meeting of shareholders unless the Shareholder has delivered to the
Company's registered office written notice of its intention to attend and vote in person or by proxy at least 48 hours before the time of the meeting
or the adjournment thereof.
6) Shareholders' proposals
Under Bermuda law, shareholders may, as set forth below and at their own expense (unless the company otherwise resolves), require the company
to: (i) give notice to all shareholders entitled to receive notice of the annual general meeting of any resolution that the shareholders may properly
move at the next annual general meeting; and/or (ii) circulate to all shareholders entitled to receive notice of any general meeting a statement
(of not more than one thousand words) in respect of any matter referred to in the proposed resolution or any business to be conducted at such
general meeting. The number of shareholders necessary for such a requisition is either: (i) any number of shareholders representing not less than
5% of the total voting rights of all shareholders entitled to vote at the meeting to which the requisition relates; or (ii) not less than 100 shareholders.
7) Dividend rights
Under Bermuda law, a company may not declare or pay a dividend or make a distribution out of the contributed surplus, if there are reasonable
grounds for believing that: (i) the Company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) that the
realizable value of its assets would thereby be less than its liabilities. Under the Bye-Laws, each common share is entitled to dividends if, as and
when dividends are declared by the Board of Directors, subject to any preferred dividend right of the holders of any preference shares.
Any cash dividend payable to holders of the shares listed on the NYSE will be paid to Computershare, the Company's transfer agent in the United
States for disbursement to those holders. Any cash dividends payable to holders of the Shares listed on the OSE will be paid to Nordea, the
Company's transfer agent in Norway for disbursement to those holders.
Pursuant to the Bye-Laws, any dividends, distributions or proceeds of share repurchases which remain unclaimed for three years from the date
of declaration of such dividend, distribution or proceeds of share repurchases will be forfeited and revert to the Company.
8) Transfer of Shares
The Bye-Laws provide that the Board of Directors may decline to register, and may require any registrar appointed by the Company to decline
to register, a transfer of a Share or any interest therein held through the VPS if such transfer would be likely, in the opinion of the Board of
Directors, to result in 50% or more of the issued share capital (or of the votes attaching all issued shares in the Company) being held or owned
directly or indirectly by persons resident for tax purposes in Norway. A failure to notify the Company of such correction or change can lead to
the Shareholder's entitlement to vote, exercise other rights attaching to the Shares or interests therein being sold at the best price reasonably
obtainable in all the circumstances. Furthermore, if such holding of 50% or more by individuals or legal persons resident for tax purposes in
Norway or connected to a Norwegian business activity, the Bye-Laws require the Board of Directors to make an announcement through the
OSE, and the Board of Directors and the registrar appointed by the Company are then entitled to dispose of Shares or interests therein to bring
such holding by an individual or legal person resident for tax purposes in Norway or connected to a Norwegian business below 50%, the Shares
or interests therein to be sold being firstly those held by holders who failed to comply with the above notification requirement, and thereafter
those that were acquired most recently by the Shareholders.
Notwithstanding anything else to the contrary in the Bye-Laws, shares that are listed or admitted to trading on an Appointed Stock Exchange
may be transferred in accordance with the rules and regulations of such exchange. All transfers of uncertificated Shares shall be made in accordance
with and be subject to the facilities and requirements of the transfer of title to Shares in that class by means of the VPS or any other relevant
system concerned and, subject thereto, in accordance with any arrangements made by the Board of Directors in accordance with the Bye-Laws.
The Board of Directors may in its absolute discretion, refuse to register the transfer of a Share that is not fully paid. The Board of Directors may
also refuse to recognize an instrument of transfer of a Share unless it is accompanied by the relevant Share certificate (if one has been issued)
and such other evidence of the transferor's right to make the transfer as the Board of Directors shall reasonably require. Pursuant to the Bye-
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Laws, if the Board of Directors is of the opinion that a transfer may breach any law or requirement of any authority or any stock exchange or
quotation system upon which any of the Company's common Shares are listed (from time to time), then registration of the transfer shall be
declined until the Board of Directors receives satisfactory evidence that no such breach would occur. Subject to these restrictions and any other
restrictions in the Bye-Laws and to the Bermuda Companies Act and applicable United States laws (including, without limitation, the U.S.
Securities Act and related regulations), a holder of Shares may transfer the title to all or any of his Shares by completing an instrument of transfer
in the usual common form or in such other form as the Board of Directors may approve. The instrument of transfer must be signed by the
transferor and, in the case of a Share that is not fully paid, the transferee. The Board of Directors may also implement arrangements in relation
to the evidencing of title to and the transfer of uncertified shares.
In accordance with Bermuda law, share certificates are only issued in the names of companies, partnerships or individuals. In the case of a
shareholder acting in a special capacity (for example as a trustee), certificates may, at the request of the shareholder, record the capacity in which
the shareholder is acting. Notwithstanding such recording of any special capacity, the Company is not bound to investigate or see to the execution
of any such trust. The Company will take no notice of any trust applicable to any of the Shares, whether or not the Company has been notified
of such trust.
9) Disclosure of material interest
The Bye-Laws provide that, where the requirements of the OSE require any person acquiring or disposing of an interest in the Shares to give
notification of such change in interest, such person must immediately notify the registrar appointed by the Company of the acquisition or disposal
and of its resulting interest, following which, the registrar appointed by the Company will notify the OSE. If a person fails to provide such
notification, the Board of Directors shall require the registrar appointed by the Company to serve the person with notice, requiring compliance
with the notification requirements and inform him or her that pending such compliance the registered holder of the Shares shall have suspended
its entitlement to vote, exercise other rights attaching to the Shares and receive payment of income or capital.
10) Amalgamations and mergers
The amalgamation or merger of a Bermuda company with another company or corporation (other than certain affiliated companies) requires the
amalgamation or merger agreement to be approved by the company's board of directors and by its shareholders. Unless the bye-laws provide
otherwise, the approval of 75% of the shareholders voting at such meeting is required to approve the amalgamation or merger agreement, and
the quorum for such meeting must be two persons holding or representing more than one-third of the issued shares of the company. The Bye-
Laws provide that any such amalgamation or merger must be approved by the affirmative vote of at least a majority of the votes cast at a general
meeting of the Company at which the quorum shall be two shareholders present in person or by proxy and entitled to vote (whatever the number
of shares held by them).
Under Bermuda law, in the event of an amalgamation or merger of a Bermuda company with another company or corporation, a shareholder of
the Bermuda company who did not vote in favor of the amalgamation or merger and who is not satisfied that fair value has been offered for such
shareholder's shares may, within one month of notice of the relevant general meeting of shareholders, apply to the Supreme Court of Bermuda
to appraise the fair value of those shares.
11) Shareholder suits
Class actions and derivative actions are generally not available to shareholders under Bermuda law. The Bermuda courts, however, would
ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the
act complained of is alleged to be beyond the corporate power of the company or is illegal, or would result in the violation of the company's
memorandum of association or Bye-Laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute
a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company's shareholders
than that which actually approved it.
When the affairs of a company are being conducted in a manner which is oppressive or prejudicial to the interests of some part of the shareholders,
one or more shareholders may apply to the Supreme Court of Bermuda, which may make such order as it sees fit, including an order regulating
the conduct of the company's affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the
company.
The Bye-Laws contain a provision by virtue of which the Shareholders waive any claim or right of action that they have, both individually and
on the Company's behalf, against any director or officer in relation to any action or failure to take action by such director or officer, except in
respect of any fraud or dishonesty of such director or officer.
12) Capitalization of profits and reserves
Pursuant to the Bye-Laws, the Board of Directors may (i) capitalize any amount for the time being standing to the credit of the Company's share
premium or other reserve accounts or any amount credited to the Company's profit and loss account or otherwise available for distribution by
applying such sum in paying up unissued shares to be allotted as fully paid bonus shares pro-rata to the shareholders; or (ii) capitalize any amount
for the time being standing to the credit of a reserve account or amounts otherwise available for dividend or distribution by applying such amounts
in full, partly paid or nil paid shares of those shareholders who would have been entitled to such sums if they were distributed by way of dividend
or distribution.
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13) Access to books and records and dissemination of information
Members of the general public have the right to inspect the public documents of a company available at the office of the Bermuda Registrar of
Companies. These documents include the Company's memorandum of association (including its objects and powers) and certain alterations to
the Company's memorandum of association. The members of the Company have the additional right to inspect the Bye-Laws, minutes of general
meetings and the Company's audited financial statements (unless such requirement is waived in accordance with the Bye-Laws and the Bermuda
Companies Act), which must be presented to the annual general meeting. The register of members of the Company is also open to inspection
by Shareholders and by members of the general public without charge. Except when the register of members is closed under the provisions of
the Bermuda Companies Act, the register of members of a company shall during business hours (subject to such reasonable restrictions as the
company may impose so that not less than two hours in each day be allowed for inspection) be open for inspection by members of the general
public without charge. A company may on giving notice by advertisement in an appointed newspaper close the register of members for any time
or times not exceeding in the whole thirty days in a year.
Subject to the provisions of the Bermuda Companies Act, a company is required to maintain its register of members in Bermuda. A company
with its shares listed on an Appointed Stock Exchange or which has had its shares offered to the public pursuant to a prospectus filed in accordance
with the Bermuda Companies Act, or which is subject to the rules or regulations of a competent regulatory authority, may keep in any place
outside Bermuda, one or more branch registers after giving written notice to the Bermuda Registrar of Companies of the place where each such
register is to be kept. Any branch register of members established by the aforementioned is subject to the same rights of inspection as the register
of members of the company in Bermuda. Any member of the public may require a copy of the register of members or any part thereof which
must be provided within 14 days of a request on payment of the appropriate fee prescribed in the Bermuda Companies Act.
A company is required to keep a register of directors and officers at its registered office and such register must during business hours (subject
to such reasonable restrictions as the company may impose, so that not less than two hours in each day be allowed for inspection) be open for
inspection by members of the public without charge. Any member of the public may require a copy of the register of directors and officers, or
any part of it, on payment of the appropriate fee prescribed in the Bermuda Companies Act. A company is also required to file with the Bermuda
Registrar of Companies a list of its directors to be maintained on a register, which register will be available for public inspection subject to such
conditions as the Bermuda Registrar of Companies may impose and on payment of such fee as may be prescribed.
Where a company, the shares of which are listed on an Appointed Stock Exchange, sends its summarized financial statements to its members
pursuant to section 87A of the Bermuda Companies Act, a copy of the full financial statements (as well as the summarized financial statements)
must be made available for inspection by the public at the company's registered office. Bermuda law does not, however, provide a general right
for shareholders to inspect or obtain copies of any other corporate records.
In addition, the Bye-Laws require that the Company provide each of the Investors (as defined in the Bye-Laws) certain financial reports and
other information, unless such Investor notifies the Company otherwise, and provide certain investors with certain additional inspection rights
and access to Management.
14) Winding-up
A company may be wound up by the Bermuda court on application presented by the company itself, its creditors (including contingent or
prospective creditors) or its contributories. The Bermuda court has authority to order winding up in a number of specified circumstances including
where it is, in the opinion of the Bermuda court, just and equitable to do so.
A company may be wound up voluntarily when the members so resolve in general meeting, or, in the case of a limited duration company, when
the period fixed for the duration of the company by its memorandum expires, or the event occurs on the occurrence of which the memorandum
provides that the company is to be dissolved. In the case of a voluntary winding up, the company shall, from the commencement of the winding
up, cease to carry on its business, except so far as may be required for the beneficial winding up thereof.
Where, on a voluntary winding up, a majority of directors make a statutory declaration of solvency, the winding up will be deemed a "members'
voluntary winding up". In any case where such declaration has not been made, the winding up will be deemed a "creditors' voluntary winding
up".
In the case of a members' voluntary winding up of a company, the company in general meeting must appoint one or more liquidators within the
period prescribed by the Bermuda Companies Act for the purpose of winding up the affairs of the company and distributing its assets. If the
liquidator is at any time of the opinion that the company will not be able to pay its debts in full in the period stated in the directors' declaration
of solvency, he is obliged to summon a meeting of creditors and lay before the meeting a statement of the assets and liabilities of the company.
As soon as the affairs of the company are fully wound up via a members' voluntary winding up, the liquidator must make up an account of the
winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon call a general
meeting of the company for the purposes of laying before it the account, and giving any explanation thereof. This final general meeting shall be
called by advertisement in an appointed newspaper, published at least one month before the meeting. Within one week after the meeting the
liquidator shall notify the Bermuda Registrar of Companies that the company has been dissolved and the Registrar shall record that fact in
accordance with the Bermuda Companies Act.
In the case of a creditors' voluntary winding up of a company, the company must call a meeting of the creditors of the company to be summoned
for the day, or the next day following the day, on which the meeting of the members at which the resolution for voluntary winding up is to be
proposed is held. Notice of such meeting of creditors must be sent at the same time as notice is sent to members. In addition, the company must
cause a notice to appear in an appointed newspaper on at least two occasions.
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The creditors and the members at their respective meetings may nominate a person to be liquidator for the purposes of winding up the affairs of
the company and distributing the assets of the company, provided that if the creditors and the members nominate different persons, the person
nominated by the creditors shall be the liquidator. If no person is nominated by the creditors, the person (if any) nominated by the members shall
be liquidator. The creditors at the creditors' meeting may also appoint a committee of inspection consisting of not more than five persons.
If a creditors' voluntary winding up continues for more than one year, the liquidator is required to summon a general meeting of the company
and a meeting of the creditors at the end of each year and must lay before such meetings an account of his acts and dealings and of the conduct
of the winding up during the preceding year.
As soon as the affairs of the company are fully wound up via a creditors' voluntary winding up, the liquidator must make up an account of the
winding up, showing how the winding up has been conducted and the property of the company has been disposed of, and thereupon call a general
meeting of the company and a meeting of the creditors for the purposes of laying the account before the meetings, and giving any explanation
thereof. Each such meeting shall be called by advertisement in an appointed newspaper, published at least one month before the meeting. Within
one week after the date of the meetings, or if the meetings are not held on the same date, after the date of the later meeting, the liquidator is
required to send to the Bermuda Registrar of Companies a copy of the account and make a return to him in accordance with the Bermuda
Companies Act. The company will be deemed to be dissolved on the expiration of three months from the registration by the Bermuda Registrar
of Companies of the account and the return. However, a Bermuda court may, on the application of the liquidator or of some other person who
appears to the court to be interested, make an order deferring the date at which the dissolution of the company is to take effect for such time as
the court thinks fit.
15) Indemnification of Directors and officers
Section 98 of the Bermuda Companies Act provides generally that a Bermuda company may indemnify its directors, officers and auditors against
any liability which by virtue of any rule of law would otherwise be imposed on them in respect of any negligence, default, breach of duty or
breach of trust, except in cases where such liability arises from fraud or dishonesty of which such director, officer or auditor may be guilty in
relation to the company. Section 98 further provides that a Bermuda company may indemnify its directors, officers and auditors against any
liability incurred by them in defending any proceedings, whether civil or criminal, in which judgment is awarded in their favor or in which they
are acquitted or granted relief by the Supreme Court of Bermuda pursuant to section 281 of the Bermuda Companies Act.
The Company has adopted provisions in the Bye-Laws that provide that the Company shall indemnify its officers and directors of their actions
and omissions to the fullest extent permitted by Bermuda law. The Bye-Laws provide that the Shareholders shall waive all claims or rights of
action that they might have, individually or in right of the Company, against any of the Company's directors or officers for any act or failure to
act in the performance of such director's or officer's duties, except in respect of any fraud or dishonesty of such director or officer. Section 98A
of the Bermuda Companies Act permits the Company to purchase and maintain insurance for the benefit of any officer or director in respect of
any loss or liability attaching to him in respect of any negligence, default, breach of duty or breach of trust, whether or not the Company may
otherwise indemnify such officer or director.
16) Compulsory acquisition of shares held by minority Shareholders
An acquiring party is generally able to acquire compulsorily the common shares of a minority shareholder of a Bermuda company in the following
ways:
By procedure under the Bermuda Companies Act known as a "scheme of arrangement". A scheme of arrangement could be affected by obtaining
the agreement of the company and of holders of common shares, representing in the aggregate a majority in number and at least 75% in value
of the common shareholders present and voting at a court ordered meeting held to consider the scheme of arrangement. The scheme of arrangement
must then be sanctioned by the Bermuda Supreme Court. If a scheme of arrangement receives all necessary agreements and sanctions, upon the
filing of the court order with the Bermuda Registrar of Companies, all holders of common shares could be compelled to sell their common shares
under the terms of the scheme of arrangement.
If the acquiring party is a company it may compulsory acquire all the shares of the target company, by acquiring pursuant to a tender offer 90%
of the shares or class of shares not already owned by, or by a nominee for, the acquiring party (the offeror), or any of its subsidiaries. If an offeror
has, within four months after the making of an offer for all the shares or class of shares not owned by, or by a nominee for, the offeror, or any
of its subsidiaries, obtained the approval of the holders of 90% or more of all the shares to which the offer relates, the offeror may, at any time
within two months beginning with the date on which the approval was obtained, required by notice any non-tendering shareholder to transfer
its shares on the same terms as the original offer. In those circumstances, non-tendering shareholders will be compelled to sell their shares unless
the Supreme Court of Bermuda (on application made within a one-month period from the date of the offeror's notice of its intention to acquire
such shares) orders otherwise.
Where the acquiring party or parties hold not less than 95% of the shares or class of shares of the company, such holder(s) may, pursuant to a
notice given to the remaining shareholders or class of shareholders, acquire the shares of such remaining shareholders or class of shareholders.
When this notice is given, the acquiring party is entitled and bound to acquire the shares of the remaining shareholders on the terms set out in
the notice, unless a remaining shareholder, within one month of receiving such notice, applies to the Supreme Court of Bermuda for an appraisal
of the value of their shares. This provision only applies where the acquiring party offers the same terms to all holders of shares whose shares
are being acquired.
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17) Certain provisions of Bermuda law
The Company has been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation
allows the Company to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on its ability to transfer
funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to United States residents who are holders
of its common shares. The Bermuda Monetary Authority has given its consent for the issue and free transferability of all its common shares from
and/or to non-residents and residents of Bermuda for exchange control purposes, provided its shares remain listed on an Appointed Stock
Exchange, which includes the NYSE and the OSE. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a
guarantee by the Bermuda Monetary Authority as to the Company's performance or creditworthiness. Accordingly, in giving such consent or
permissions, the Bermuda Monetary Authority shall not be liable for the financial soundness, performance or default of the Company's business
or for the correctness of any opinions or statements expressed in this report. Certain issues and transfers of common shares involving persons
deemed resident in Bermuda for exchange control purposes require the specific consent of the Bermuda Monetary Authority.
In accordance with Bermuda law, share certificates are only issued in the names of companies, partnerships or individuals. In the case of a
shareholder acting in a special capacity (for example as a trustee), certificates may, at the request of the shareholder and if the Board of Directors
so determines, record the capacity in which the shareholder is acting. Notwithstanding such recording of any special capacity, the Company is
not bound to investigate or see to the execution of any such trust. Except as ordered by a court of competent jurisdiction or as required by law
or the Bye-Laws, the Company will take no notice of any trust applicable to any of its common shares, whether or not it has been notified of
such trust.
C.
MATERIAL CONTRACTS
Attached as exhibits to this annual report are the contracts we consider to be both material and not in the ordinary course of business. Other than
these contracts, we have no material contracts other than those entered in the ordinary course of business.
D.
EXCHANGE CONTROLS
The Bermuda Monetary Authority, or the BMA, must give permission for all issuances and transfers of securities of a Bermuda exempted
company like ours, unless the proposed transaction is exempted by the BMA’s written general permissions. We have received general permission
from the BMA to issue any unissued common shares and for the free transferability of our common shares as long as our common shares are
listed on an “appointed stock exchange.” Our common shares are listed on the OSE and the NYSE, each of which is an “appointed stock
exchange.” Our common shares may therefore be freely transferred among persons who are residents and non-residents of Bermuda.
Although we are incorporated in Bermuda, we are classified as a non-resident of Bermuda for exchange control purposes by the BMA. Other
than transferring Bermuda Dollars out of Bermuda, there are no restrictions on our ability to transfer funds into and out of Bermuda or to pay
dividends to U.S. residents who are holders of Common Shares or other non-residents of Bermuda who are holders of our common shares in
currency other than Bermuda Dollars.
We will take no notice of any trust applicable to any of our shares or other securities whether or not we had notice of such trust.
As an “exempted company,” we are exempt from Bermuda laws which restrict the percentage of share capital that may be held by non-Bermudians,
but as an exempted company, we may not participate in certain business transactions including: (i) the acquisition or holding of land in Bermuda
(except that required for its business and held by way of lease or tenancy for terms of not more than 21 years) without the express authorization
of the Bermuda legislature; (ii) the taking of mortgages on land in Bermuda to secure an amount in excess of $50,000 without the consent of
the Minister of Economic Development of Bermuda; (iii) the acquisition of any bonds or debentures secured on any land in Bermuda except
bonds or debentures issued by the Government of Bermuda or by a public authority in Bermuda; or (iv) the carrying on of business of any kind
in Bermuda, except in so far as may be necessary for the carrying on of its business outside Bermuda or under a license granted by the Minister
of Economic Development of Bermuda.
The Bermuda government actively encourages foreign investment in “exempted” entities like us that are based in Bermuda but do not operate
in competition with local business. In addition to having no restrictions on the degree of foreign ownership, we are subject neither to taxes on
our income or dividends nor to any exchange controls in Bermuda. In addition, there is no capital gains tax in Bermuda, and profits can be
accumulated by us, as required, without limitation. There is no income tax treaty between the United States and Bermuda pertaining to the
taxation of income other than applicable to insurance enterprises.
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E.
TAXATION
The following is a discussion of the material Bermuda, United States federal income and other tax considerations with respect to us and holders
of common stock. This discussion does not purport to deal with the tax consequences of owning common stock to all categories of investors,
some of which, such as dealers in securities, investors whose functional currency is not the United States Dollar and investors that own, actually
or under applicable constructive ownership rules, 10% or more of our common stock, may be subject to special rules. This discussion deals only
with holders who hold the common stock as a capital asset, generally for investment purposes. Shareholders are encouraged to consult their own
tax advisors concerning the overall tax consequences arising in their own particular situation under United States federal, state, local or foreign
law of the ownership of common stock.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds common stock, the U.S. federal income tax
treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. Partners of partnerships
holding the common stock are encouraged to consult their own tax advisers.
Bermuda and Other Non-U.S. Tax Considerations
As at the date of this annual report, whilst Seadrill is resident in Bermuda, we are not subject to taxation under the laws of Bermuda. Distributions
we receive from our subsidiaries also are not subject to any Bermuda tax. As at the date of this annual report, there is no Bermuda income,
corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, or estate duty or inheritance tax payable by non-residents of
Bermuda in respect of capital gains realized on a disposition of our common stock or in respect of distributions they receive from us with respect
to our common stock. This discussion does not, however, apply to the taxation of persons ordinarily resident in Bermuda. Bermuda shareholders
should consult their own tax advisors regarding possible Bermuda taxes with respect to dispositions of, and distributions on, our common stock.
We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended, an assurance that, in
the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the
nature of estate duty or inheritance, the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures
or other obligations, until March 31, 2035. This assurance is subject to the proviso that it is not to be construed to prevent the application of any
tax or duty to such persons as are ordinarily resident in Bermuda or to prevent the application of any tax payable in accordance with the provisions
of the Land Tax Act 1967. The assurance does not exempt us from paying import duty on goods imported into Bermuda. In addition, all entities
employing individuals in Bermuda are required to pay a payroll tax and there are other sundry taxes payable, directly or indirectly, to the Bermuda
government. We and our subsidiaries incorporated in Bermuda pay annual government fees to the Bermuda government.
Bermuda currently has no tax treaties in place with other countries in relation to double-taxation or for the withholding of tax for foreign tax
authorities.
Dividends distributed by Seadrill Limited out of Bermuda
Currently, there is no withholding tax payable in Bermuda on dividends distributed from Seadrill Limited to its shareholders.
Taxation of rig owning entities
A number of our drilling rigs are owned in tax-free jurisdictions such as Bermuda or Liberia. There is no taxation of the rig owners’ income in
these jurisdictions. The remaining drilling rigs are owned in jurisdictions with income or tonnage taxation of the rig owners’ income, being
Hungary, Norway and Singapore. There may also be income tax in certain other jurisdictions where rigs are owned by, or allocated to, local
branches.
Please also see the section below entitled “Taxation in country of drilling operations.”
Taxation in country of drilling operations
Income derived from drilling operations is generally taxed in the country where these operations take place. The taxation of income derived
from drilling operations could be based on net income, deemed income, withholding taxes and/or other bases, depending upon the applicable
tax legislation in each country of operation. Some countries levy withholding taxes on bareboat charter payments (internal rig rent), branch
profits, crew, dividends, interest and management fees.
Drilling operations can be carried out by locally incorporated companies, foreign branches of operating companies or foreign branches of the
rig owning entities. We elect the appropriate structure with due regard to the applicable legislation of each country where the drilling operations
occur.
Taxation may also extend to the rig owning entity in some of the countries where the drilling operations are performed. Some countries have
introduced new laws and rules since the commencement of certain drilling contracts, which may affect, or have affected, the position of the
group, potentially leading to additional tax on rig owners. The group considers the applicability of these to individual companies and contracts
based on the relevant facts and circumstances.
Net income
Net income corresponds to gross income derived from the drilling operations less tax-deductible costs (i.e. operating costs, crew, insurance,
management fees and capital costs (internal bareboat fee; tax depreciation; interest costs) incurred in relation to those operations). In addition
to net income tax, withholding tax on branch profits, dividends, internal bareboat fees, among other items, may also be levied.
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Net income taxation for an international drilling contractor is complex, and pricing of internal transactions (e.g., rig sales; bareboat fees; services)
will allocate overall taxable income between the relevant countries. We apply Organization for Economic Cooperation and Development, or
OECD, Transfer Pricing Guidelines as a basis to arrive at pricing for internal transactions. OECD Transfer Pricing Guidelines describe various
methods to price internal services on terms believed by us to be no less favorable than are available from unaffiliated third parties. However,
some tax authorities could disagree with our transfer pricing methods and disputes may arise regarding the correct pricing.
Deemed income tax
Deemed income tax is normally calculated based on gross turnover, which can include or exclude reimbursables and often reflects an assumed
profit ratio, multiplied by the applicable corporate tax rate. Some countries will also levy withholding taxes on the distribution of dividend and/
or branch profits at the deemed tax rate.
Withholding and other taxes
Some countries base their taxation solely on withholding tax on gross turnover. In addition, some countries levy stamp duties, training taxes or
similar taxes on the gross turnover.
Customs duties
Customs duties are generally payable on the importation of drilling rigs, equipment and spare parts into the country of operation, although several
countries provide exemption from such duties for the temporary importation of drilling rigs. Such exemption may also apply to the temporary
importation of equipment.
Taxation of other income
Other income related to crewing, management fees and technical services will generally be taxed in the country where the service provider is
resident, although withholding tax and/or income tax may also be imposed in the country where the drilling operations take place.
Dividends and other investment income will be taxable in accordance with the legislation of the country where the company holding the investment
is resident. For companies resident in Bermuda, there is currently no tax on these types of income.
Some countries levy withholding taxes on outbound dividends and interest payments.
Capital gains taxation
In respect of drilling rigs located in Bermuda, Liberia, Singapore and Hungary, no capital gains tax is payable in these countries upon the sale
or disposition of a rig. However, some countries may impose a capital gains tax or a claw-back of tax depreciation (on a full or partial basis)
upon the sale of a rig during or attributable to such time as the rig is operating within such country, or within a certain time after completion of
such drilling operations, or when the rig is exported after completion of such drilling operations.
Other taxes
Our operations may be subject to sales taxes, value added taxes, or other similar taxes in various countries.
Taxation of shareholders
Taxation of shareholders will depend upon the jurisdiction where the shareholder is a tax resident. Shareholders should seek advice from their
tax adviser to determine the taxation to which they may be subject based on the shareholder’s circumstances.
United States Federal Income Tax Considerations
The following are the material United States federal income tax consequences to us of our activities and to U.S. Holders and Non-U.S. Holders,
each as defined below, of the ownership of our common stock. This discussion does not purport to deal with the tax consequences of owning
common stock to all categories of investors, some of which, such as dealers in securities, banks, financial institutions, tax-exempt entities,
insurance companies, pension funds, US expatriates, real estate investment trusts, regulated investment companies, investors holding common
stock as part of a straddle, hedging or conversion transaction, investors subject to the alternative minimum tax, investors who acquired their
common stock pursuant to the exercise of employee stock options or otherwise as compensation, investors whose functional currency is not the
United States Dollar and investors that own, actually or under applicable constructive ownership rules, 10% or more of our common stock, may
be subject to special rules. The following discussion of United States federal income tax matters is based on the United States Internal Revenue
Code of 1986, as amended, or the Code, judicial decisions, administrative pronouncements, and existing and proposed regulations issued by the
United States Department of the Treasury, or the Treasury Regulations, all of which are subject to change, possibly with retroactive effect. The
discussion below is based, in part, on the description of our business in this annual report and assumes that we conduct our business as described.
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United States Federal Income Taxation of U.S. Holders
As used herein, the term “U.S. Holder” means a beneficial owner of common stock that is (1) a U.S. citizen or resident for U.S. federal income
tax purposes, (2) U.S. corporation or other U.S. entity taxable as a corporation, (3) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (4) a trust if a court within the United States is able to exercise primary jurisdiction over the administration
of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust.
If an entity or arrangement treated as a partnership holds our common stock, the tax treatment of a partner will generally depend upon the status
of the partner and upon the activities of the partnership. If you are a partner in a partnership holding our common stock, you are encouraged to
consult your tax adviser.
Distributions
Subject to the discussion of PFICs below, any distributions made by us with respect to our common stock to a U.S. Holder will generally constitute
dividends, which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our
current or accumulated earnings and profits, as determined under United States federal income tax principles. Distributions in excess of our
earnings and profits will be treated first as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in his common stock on a
dollar-for-dollar basis and thereafter as capital gain. Because we are not a United States corporation, U.S. Holders that are corporations will not
be entitled to claim a dividend received deduction with respect to any distributions they receive from us. Dividends paid with respect to our
common stock will generally be treated as “passive category income” or, in the case of certain types of U.S. Holders, “general category income”
for purposes of computing allowable foreign tax credits for United States foreign tax credit purposes.
Dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate, or a “U.S. Individual Holder” will generally be treated
as “qualified dividend income” that is taxable to such U.S. Individual Holders at preferential tax rates provided that (1) the common stock is
readily tradable on an established securities market in the United States (such as the NYSE, on which our common stock is traded); (2) we are
not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (which, as discussed below, we are
not and do not anticipate being in the future); (3) the U.S. Individual Holder has owned the common stock for more than 60 days in the 121-day
period beginning 60 days before the date on which the common stock becomes ex-dividend; and (4) the U.S. Individual Holder is not under an
obligation to make related payments with respect to positions in substantially similar or related property. There is no assurance that any dividends
paid on our common stock will be eligible for these preferential rates in the hands of a U.S. Individual Holder. Any dividends paid by us which
are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Individual Holder.
Special rules may apply to any “extraordinary dividend,” generally, a dividend paid by us in an amount which is equal to or in excess of 10%
of a shareholder’s adjusted tax basis (or fair market value in certain circumstances) in a share of common stock. If we pay an “extraordinary
dividend” on our common stock that is treated as “qualified dividend income,” then any loss derived by a U.S. Individual Holder from the sale
or exchange of such common stock will be treated as long-term capital loss to the extent of such dividend.
Sale, Exchange or other Taxable Disposition of Common Stock
Assuming we do not constitute a PFIC for any taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange
or other taxable disposition of our common stock in an amount equal to the difference between the amount realized by the U.S. Holder from
such sale, exchange or other taxable disposition and the U.S. Holder’s tax basis in such stock. Such gain or loss will be treated as long-term
capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital
gain or loss will generally be treated as United States source income or loss, as applicable, for United States foreign tax credit purposes. A U.S.
Holder’s ability to deduct capital losses is subject to certain limitations.
3.8% Tax on Net Investment Income
Certain U.S. Holders, including individuals, estates, or, in certain cases, trusts, will generally be subject to a 3.8% tax on the lesser of (1) the
U.S. Holder’s net investment income for the taxable year and (2) the excess of the U.S. Holder’s modified adjusted gross income for the taxable
year over a certain threshold (which in the case of individuals is between $125,000 and $250,000). A U.S. Holder’s net investment income will
generally include distributions made by us which constitute a dividend for U.S. federal income tax purposes and gain realized from the sale,
exchange or other taxable disposition of our common stock. This tax is in addition to any income taxes due on such investment income.
If you are a U.S. Holder that is an individual, estate or trust, you are encouraged to consult your tax advisors regarding the applicability of the
3.8% tax on net investment income to the ownership and disposition of our common stock.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special United States federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a PFIC for United
States federal income tax purposes. In general, a foreign corporation will be treated as a PFIC with respect to a United States shareholder, if, for
any taxable year in which such shareholder holds stock in such foreign corporation, either:
•
•
at least 75% of the corporation’s gross income for such taxable year consists of passive income (e.g. dividends, interest, capital gains
and rents derived other than in the active conduct of a rental business); or
at least 50% of the average value of the assets held by the corporation during such taxable year produce, or are held for the production
of, passive income.
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For purposes of determining whether a foreign corporation is a PFIC, it will be treated as earning and owning its proportionate share of the
income and assets, respectively, of any of its subsidiary corporations in which it owns, directly or indirectly, at least 25% of the value of the
subsidiary’s stock.
Income earned by a foreign corporation in connection with the performance of services would not constitute passive income. By contrast, rental
income would generally constitute “passive income” unless the foreign corporation is treated under specific rules as deriving its rental income
in the active conduct of a trade or business or is received from a related party.
Based on the current and anticipated valuation of our assets, including goodwill, and composition of our income and assets, we intend to take
the position that we will not be treated as a PFIC for U.S. federal income tax purposes for our current taxable year or in the foreseeable future.
Our position is based on valuations and projections regarding our assets and income. While we believe these valuations and projections to be
accurate, such valuations and projections may not continue to be accurate. Moreover, as we have not sought a ruling from the Internal Revenue
Service, or IRS, on this matter, the IRS or a court could disagree with our position. In addition, although we intend to conduct our affairs in a
manner to avoid, to the extent possible, being classified as a PFIC with respect to any taxable year, the nature of our operations may change in
the future, and if so, we may not be able to avoid PFIC status in the future.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different United States
federal income taxation rules depending on whether the U.S. Holder makes an election to treat us as a “Qualified Electing Fund,” which election
we refer to as a “QEF election.” As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark-to-market” election
with respect to our common stock, as discussed below. In addition, if we were to be treated as a PFIC for any taxable year a U.S. Holder would
be required to file an annual report with the United States Internal Revenue Service, or the IRS, for that year with respect to such U.S. Holder’s
common stock.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election, which U.S. Holder we refer to as an “Electing Holder,” the Electing Holder must report each year
for United States federal income tax purposes his pro rata share of our ordinary earnings and our net capital gain, if any, for our taxable year
that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing
Holder. The Electing Holder’s adjusted tax basis in the common stock would be increased to reflect taxed but undistributed earnings and profits.
Distributions of earnings and profits that had been previously taxed would result in a corresponding reduction in the adjusted tax basis in the
common stock and would not be taxed again once distributed. An Electing Holder would generally recognize capital gain or loss on the sale,
exchange or other disposition of our common stock. A U.S. Holder would make a QEF election with respect to any taxable year during which
we are a PFIC by filing a valid IRS Form 8621 with his United States federal income tax return. If we were aware that we or any of our subsidiaries
were to be treated as a PFIC for any taxable year, we would, if possible, provide each U.S. Holder with all necessary information in order to
make the QEF election described above. If we were to be treated as a PFIC, a U.S. Holder would be treated as owning his proportionate share
of stock in each of our subsidiaries which is treated as a PFIC and a separate QEF election would be necessary with respect to each subsidiary. It
should be noted that we may not be able to provide such information if we did not become aware of our status as a PFIC in a timely manner.
Taxation of U.S. Holders Making a “Mark-to-Market” Election
Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate, our stock is treated as “marketable stock,” a U.S.
Holder would be allowed to make a “mark-to-market” election with respect to our common stock, provided the U.S. Holder completes and files
a valid IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. The “mark-to-market” election will not
be available for any of our subsidiaries. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable
year the excess, if any, of the fair market value of the common stock at the end of the taxable year over such holder’s adjusted tax basis in the
common stock. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis
in the common stock over its fair market value at the end of the taxable year, but only to the extent of the net amount previously included in
income as a result of the mark-to-market election. A U.S. Holder’s tax basis in his common stock would be adjusted to reflect any such income
or loss amount. Gain realized on the sale, exchange or other disposition of our common stock would be treated as ordinary income, and any loss
realized on the sale, exchange or other disposition of the common stock would be treated as ordinary loss to the extent that such loss does not
exceed the net mark-to-market gains previously included as ordinary income by the U.S. Holder. It should be noted that the mark-to-market
election would likely not be available for any of our subsidiaries which are treated as PFICs.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark-to-market”
election for that year, whom we refer to as a “Non-Electing Holder,” would be subject to special rules with respect to (1) any excess distribution
(i.e., the portion of any distributions received by the Non-Electing Holder on our common stock in a taxable year in excess of 125% of the
average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s
holding period for the common stock), and (2) any gain realized on the sale, exchange or other disposition of our common stock. Under these
special rules:
•
•
the excess distribution or gain would be allocated ratably over the Non-Electing Holders’ aggregate holding period for the common
stock;
the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxed as ordinary income;
and
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•
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable
class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting
tax attributable to each such other taxable year.
These penalties would not apply to a pension or profit-sharing trust or other tax-exempt organization that did not borrow funds or otherwise
utilize leverage in connection with its acquisition of our common stock. If a Non-Electing Holder, who is an individual, dies while owning our
common stock, such Non-Electing Holder’s successor generally would not receive a step-up in tax basis with respect to such common stock.
United States Federal Income Taxation of “Non-U.S. Holders”
A beneficial owner of our common stock that is not a U.S. Holder or partnership is referred to herein as a “Non-U.S. Holder.”
Dividends on Common Stock
Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax on dividends received from us with respect
to our common stock, unless that income is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States.
If the Non-U.S. Holder is entitled to the benefits of a United States income tax treaty with respect to those dividends, that income is subject to
United States federal income tax only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States.
Sale, Exchange or Other Disposition of Common Stock
Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax on any gain realized upon the sale, exchange
or other taxable disposition of our common stock, unless:
•
•
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States. If the Non-U.S. Holder
is entitled to the benefits of a United States income tax treaty with respect to that gain, that gain is subject to United States Federal
Income tax only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States; or
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition
and other conditions are met.
If a Non-U.S. Holder is engaged in a United States trade or business for United States federal income tax purposes, the income from the common
stock, including dividends and the gain from the sale, exchange or other taxable disposition of the common stock that is effectively connected
with the conduct of that United States trade or business will generally be subject to United States federal income tax in the same manner as
discussed in the previous section relating to the United States federal income taxation of U.S. Holders. In addition, if the Non-U.S. Holder is a
corporation, the Non-U.S. Holder’s earnings and profits that are attributable to the effectively connected income, subject to certain adjustments,
may be subject to an additional United States federal branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable
United States income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, and other taxable distributions, made by us to you within the United States will be subject to information reporting
requirements. Such payments will also be subject to backup withholding if paid to a U.S. Individual Holder who:
•
•
•
fails to provide an accurate taxpayer identification number;
is notified by the IRS that he has failed to report all interest or dividends required to be shown on his United States federal income tax
returns; or
in certain circumstances, fails to comply with applicable certification requirements.
Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status
on an applicable IRS Form W-8.
If a Non-U.S. Holder sells his common stock to or through a United States office of a broker, the payment of the proceeds is subject to both
United States backup withholding and information reporting unless the Non-U.S. Holder certifies that he is a non-United States person, under
penalties of perjury, or otherwise establishes an exemption. If a Non-U.S. Holder sells his common stock through a non-United States office of
a non-United States broker and the sales proceeds are paid to the Non-U.S. Holder outside the United States, then information reporting and
backup withholding generally will not apply to that payment. However, United States information reporting requirements, but not backup
withholding, will apply to a payment of sales proceeds, even if that payment is made to a Non-U.S. Holder outside the United States, if the Non-
U.S. Holder sells his common stock through a non-United States office of a broker that is a United States person or has some other connection
to the United States.
Backup withholding is not an additional tax. Rather, a taxpayer generally may obtain a refund of any amounts withheld under backup withholding
rules that exceed the taxpayer’s United States federal income tax liability by properly filing a refund claim with the IRS.
Individuals who are U.S. Holders (and to the extent specified in the applicable Treasury Regulations, certain individuals who are non-U.S.
Holders and certain U.S. entities) who hold “specified foreign financial assets” (as defined in section 6038D of the Code and the applicable
Treasury Regulations) are required to file IRS Form 8938 (Statement of Specified Foreign Financial Assets) with information relating to each
such asset for each taxable year in which the aggregate value of all such assets exceeds $75,000 at any time during the taxable year or $50,000
on the last day of the taxable year. Specified foreign financial assets would include, among other assets, our common stock, unless the common
stock were held through an account maintained with certain financial institutions. Substantial penalties apply to any failure to timely file IRS
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Form 8938, unless the failure is shown to be due to reasonable cause and not due to willful neglect. Additionally, the statute of limitations on
the assessment and collection of U.S. federal income tax with respect to a taxable year for which the filing of IRS Form 8938 is required may
not close until three years after the date on which IRS Form 8938 is filed. U.S. Holders and Non-U.S. Holders are encouraged to consult their
own tax advisers regarding their reporting obligations under section 6038D of the Code.
Other Tax Considerations
In addition to the tax consequences discussed above, we may be subject to tax in one or more other jurisdictions where we conduct activities. The
amount of any such tax imposed upon our operations may be material.
F.
DIVIDENDS AND PAYING AGENTS
Not applicable.
G.
STATEMENT BY EXPERTS
Not applicable.
H.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Exchange Act. In accordance with these requirements we file reports and other information
with the Commission. These materials, including this annual report on Form 20-F and the accompanying exhibits, may be inspected and copied
at the public reference facilities maintained by the Commission at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates from the
Public Reference Section of the Commission at its principal office in Washington, D.C. The Commission maintains a website (http://www.sec.gov.)
that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission.
In addition, documents referred to in this annual report on Form 20-F may be inspected at our principle executive offices at Par-la-Ville Place,
14 Par-la-Ville Road, Hamilton HM 08, Bermuda and at the offices of Seadrill Management Ltd., at Building 11, Chiswick Business Park, 566
Chiswick High Road, London, W4 5YS, United Kingdom.
I.
SUBSIDIARY INFORMATION
Not applicable.
ITEM 11.
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 from non-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 interest rate swap agreements, currency option contracts and
foreign currency contracts is represented by the fair value of contracts with a positive fair value at the end of each period, reduced by the effects
of master netting agreements, adjusted for counterparty non-performance credit risk assumptions. It is our policy to enter into master netting
agreements with the counterparties to derivative financial instrument contracts, which give us the legal right to discharge all or a portion of
amounts owed to a counterparty by offsetting them against amounts that the counterparty owes to us.
Concentration of risk
There is also 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, including affiliated companies. For details on the customers with greater than 10%
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of contract revenues, refer to Note 6 - Segment information. For details on amounts due from affiliated companies, refer to Note 31 - Related
Party transactions.
Foreign exchange risk
As is customary in the oil and gas industry, a majority 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 exposures primarily relate to foreign denominated cash and working capital balances. We do not expect these remaining
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 therefore we do not apply hedge accounting. The capped rate against the 3-
month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023.
We have set out our exposure to interest rate risk on our net debt obligations at December 31, 2019 (Successor) in the table below:
(In $ millions)
Senior Credit Facilities
Ineffective portion of interest rate cap 1
Debt contained within VIEs
Debt exposed to interest rate fluctuations
Less: Cash and Restricted Cash
Net debt exposed to interest rate fluctuations 2
Principal
Hedging
instruments
5,662
—
621
6,283
(1,357)
4,926
(4,500)
4,320
—
(180)
—
(180)
Total
1,162
4,320
621
6,103
(1,357)
4,746
Impact of 1%
increase in rates
12
43
6
61
(14)
47
1 The 3-month LIBOR rate as at December 31, 2019 was 1.91%. At this date, the interest cap would mitigate 4% of the impact of a theoretical
1% point increase in LIBOR.
2 The $476 million of Senior Secured Notes are a fixed rate debt instrument and are therefore excluded from the above table.
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
DEBT SECURITIES
Not applicable.
B.
WARRANTS AND RIGHTS
Not applicable.
C.
OTHER SECURITIES
Not applicable.
D.
AMERICAN DEPOSITARY SHARES
Not applicable.
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PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15.
CONTROLS AND PROCEDURES
A.
Disclosure Controls and Procedures
Our Management, with participation from the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Exchange Act as of December 31, 2019.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the evaluation date.
B.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f)
promulgated under the Exchange Act.
Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed
by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Board, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
•
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance
with generally accepted accounting principles, and that the Company's receipts and expenditures are being made only in accordance
with authorizations of Company's management and directors; and
Provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Our Management, with the participation of the Chief Executive Officer and the Chief Financial Officer, assessed the effectiveness of the design
and operation of our internal control over financial reporting pursuant to Rule 13a-15 of the Exchange Act as of December 31, 2019.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control- Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Management reviewed the
results of its assessment with the Audit Committee of our Board of Directors. On the basis of this evaluation, Management concluded that, as
of December 31, 2019, the Company’s internal control over financial reporting was effective.
C.
Attestation Report of the Registered Public Accounting Firm
The independent registered public accounting firm that audited the Consolidated Financial Statements, PricewaterhouseCoopers LLP, has issued
an attestation report on the effectiveness of our internal control over financial reporting as at December 31, 2019, appearing under Item 18
"Financial Statements", and such report is incorporated herein by reference.
D.
Changes in Internal Control over Financial Reporting
There were no changes in these internal controls during the period covered by this annual report that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
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ITEM 16.
RESERVED
Not applicable.
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors has determined that Birgitte Vartdal and Birgit Aagaard-Svendsen, are independent Directors as defined by the NYSE
and are audit committee financial experts as defined by the SEC. See Item 6A - "Directors and Senior Management" for a description of their
relevant experience.
ITEM 16B.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all entities controlled by us and its employees, directors, officers and agents of ours. We will
provide any person, free of charge, a copy of our Code of Ethics upon written request to our registered office.
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our principal accountant for the fiscal years ended December 31, 2019 and 2018 was PricewaterhouseCoopers LLP in the United Kingdom.
The following table sets forth the fees related to audit and other services provided by the principal accountants and their affiliates.
(in $)
Audit fees (1)
Audit-related fees (2)
Taxation fees (3)
All other fees (4)
Total
Successor
Predecessor
Year ended
December
31,
2019
3,308,694
100,330
—
17,269
3,426,293
Period from
July 2, 2018
through
December
31, 2018
4,035,949
252,108
—
—
4,288,057
Period from
January 1,
2018
through
July 1, 2018
1,484,600
—
—
—
1,484,600
(1) Audit fees represent professional services rendered for the audit of our annual Consolidated Financial Statements and services provided by
the principal accountant in connection with statutory and regulatory filings or engagements.
(2) Audit-related fees consist of assurance and related services rendered by the principal accountant related to the performance of the audit or
review of our Consolidated Financial Statements which have not been reported under Audit fees above.
(3) Taxation fees represent fees for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning.
(4) All other fees include services other than audit fees, audit-related fees and taxation fees set forth above, primarily including assistance in
the preparation of financial statement for subsidiaries.
Audit Committee’s Pre-Approval Policies and Procedures
Our Board has adopted pre-approval policies and procedures in compliance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X that require
the Board to approve the appointment of our independent auditor before such auditor is engaged and approve each of the audit and non-audit-
related services to be provided by such auditor under such engagement by us. All services provided by the principal auditor in 2019, 2018
(Successor) and 2018 (Predecessor) were approved by the Board pursuant to the pre-approval policy.
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F.
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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ITEM 16G.
CORPORATE GOVERNANCE
U.S. companies listed on the NYSE are subject to the "NYSE Corporate Governance: A Practical Guide" which has been published by the NYSE
and is available at nyse.com/cgguide. As a foreign private issuer, we are exempt from certain requirements of the NYSE that are applicable to
U.S. listed companies, including certain corporate governance practices. Set out below is a list of the significant differences between our corporate
governance practices and the NYSE standards applicable to listed U.S. companies.
i.
Independence of Directors
The NYSE requires that a U.S. listed company maintain a majority of independent directors. Under Bermuda law, we are not required to have
a board of directors comprised of a majority of directors meeting the independence standards described in NYSE rules. However, our Board of
Directors currently has a majority of independent directors, with five of the seven members being independent under the NYSE's standards for
independence applicable to a foreign private issuer.
ii. Executive Sessions
The NYSE requires that non-management directors meet regularly in executive sessions without management. The NYSE also requires that all
independent directors meet in an executive session at least once a year. Historically, non-management directors regularly held executive sessions
without management. We expect this to continue in the future.
iii. Nominating/Corporate Governance Committee.
The NYSE requires that a listed U.S. company have a nominating/corporate governance committee of independent directors and a committee
charter specifying the purpose, duties and evaluation procedures of the committee. As permitted under Bermuda law, we do not currently have
a nominating or corporate governance committee.
iv. Corporate Governance Guidelines.
The NYSE requires that a listed U.S. company adopts and discloses corporate governance guidelines. The guidelines must address, among other
things, director qualification standards, director responsibilities, director access to management and independent advisers, director compensation,
director orientation and continuing education, management succession and an annual performance evaluation. We are not required to adopt such
guidelines under Bermuda law, however our current bye-laws include certain matters concerning corporate governance.
Additional Information Concerning Corporate Governance Required by the OSE Continuing Obligations
i.
Internal Control and Risk Management
Information concerning the main elements of our internal control and risk management systems associated with the financial reporting process
has been provided in "Item 15. Controls and Procedures".
ii. Board of Directors and Board Committees
The composition of our Board of Directors is set out in "Item 6. Directors, Senior Management and Employees", as is information pertaining to
our Audit Committee, Compensation Committee and Conflicts Committee.
iii. Appointment of Board Members
Our current bye-laws regulate the process of appointing Board Members. Reference is made to "Item 6. Directors, Senior Management and
Employees", subsection "C. Board Practices" for information on specific rights concerning Terms of Office, the number of Board Members
required in the Board of Directors and appointment procedures. Our current bye-laws have been included under "Item 10. Additional Information",
subsection "B. Memorandum of Association and Bye-laws", and set out the full regulation of the procedures for the appointment of Board
Members.
iv. Authorization to Acquire Treasury Shares
Pursuant to our current bye-laws, the Company has the power to purchase its own shares (treasury shares) for cancellation, as well as to hold
such shares as treasury shares. The Board of Directors may exercise all powers of the Company to purchase or acquire its own shares, whether
for cancellation or to be held as treasury shares in accordance with Bermuda law.
ITEM 16H.
MINE SAFETY DISCLOSURE
Not applicable.
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PART III
ITEM 17. FINANCIAL STATEMENTS
See “Item 18. Financial Statements” below.
ITEM 18.
FINANCIAL STATEMENTS
Our Consolidated Financial Statements, together with the reports from PricewaterhouseCoopers LLP thereon, are filed as a part of this Annual
Report, beginning on page F-1.
Pursuant to Rule 3-09, the Consolidated Financial Statements and the Management ICFR Report of Seadrill Partners LLC have been filed as a
part of this Annual Report, beginning on page A-1.
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ITEM 19.
EXHIBITS
Exhibit
Number
1.1
1.2
1.3
1.4
2.1
2.2
2.3
2.4
2.5
2.6
4.1
4.2
8.1
11.1
12.1
12.2
13.1
13.2
Description
Memorandum of Association of New SDRL Limited (incorporated by reference to Exhibit 3.1 of the amended Registration Statement,
filed on Form F-1 on July 18, 2018)
Bye-Laws of Seadrill Limited (incorporated by reference to Exhibit 3.2 of the amended Registration Statement, filed on Form F-1 on
July 18, 2018)
Certificate of Incorporation on Name Change delivered July 2, 2018 (incorporated by reference to Exhibit 3.3 of the amended
Registration Statement, filed on Form F-1 on July 18, 2018)
Certificate of Deposit of Memorandum of Increase of Share Capital delivered July 3, 2018 (incorporated by reference to Exhibit 3.4 of
the amended Registration Statement, filed on Form F-1 on July 18, 2018)
Second Amended Joint Chapter 11 Plan (as modified) of Reorganization, as confirmed by the Bankruptcy Court on April 17, 2018
(incorporated by reference to Exhibit 2.1 of the amended Registration Statement, filed on Form F-1 on July 18, 2018).
Specimen Certificate evidencing common shares (incorporated by reference to Exhibit 4.1 of the amended Registration Statement, filed
on Form F-1 on July 18, 2018)
Registration Rights Agreement (incorporated by reference to Exhibit 4.2 of the amended Registration Statement, filed on Form F-1 on
July 18, 2018)
Investment Agreement (incorporated by reference to Exhibit 10.3 to Seadrill Limited’s report on Form 6-K, filed on September 13,
2017).
Amendment, Assignment and Joinder Agreement in Respect of Investment Agreement (incorporated by reference to Exhibit 10.2 to
Seadrill Limited’s report on Form 6-K, filed on February 26, 2018).
Seadrill Limited Employee Incentive Plan (incorporated by reference to Exhibit 4.6 of the Form S-8 filed on August 29, 2018)
Omnibus Agreement among Seadrill Limited, Seadrill Partners LLC, Seadrill Member LLC, Seadrill Operating LP, Seadrill Operating
GP LLC, and Seadrill Capricorn Holdings LLC, dated October 24, 2012 (incorporated by reference to Seadrill Limited’s annual report
on Form 20-F, filed on April 21, 2015).
Transaction Service Agreement
Subsidiaries of the Company
Code of Ethics
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended
Certification of the Principal Executive Officer pursuant to 18 USC Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification of the Principal Financial Officer pursuant to 18 USC Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
15.1
Seadrill Limited consent of independent registered public accounting firm
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Schema Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Seadrill agrees to furnish to the SEC upon request any instrument with respect to long-term debt that Seadrill has not filed as an exhibit pursuant to the exemption provided
by the general instructions to Item 19 of Form 20-F.
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The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this Annual Report on its behalf.
SIGNATURES
Seadrill Limited
(Registrant)
Date: April 2, 2020
By:
Name: Anton Dibowitz
Title: Chief Executive Officer of Seadrill Management Ltd
(Principal Executive Officer of Seadrill Limited)
Table of Contents
Seadrill Limited
Index to Consolidated Financial Statements
Consolidated Financial Statements of Seadrill Limited
Index to Consolidated Financial Statements of Seadrill Limited
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP
Consolidated Statements of Operations for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through
December 31, 2018 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31,
2017 (Predecessor)
Consolidated Statements of Comprehensive Loss for the year ended December 31, 2019 (Successor), the period from July 2, 2018
through December 31, 2018 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended
December 31, 2017 (Predecessor)
Consolidated Balance Sheets as at December 31, 2019 (Successor) and 2018 (Successor)
Consolidated Statements of Cash Flows for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through
December 31, 2018 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31,
2017 (Predecessor)
Consolidated Statements of Changes in Shareholders' Equity for the year ended December 31, 2019 (Successor), the period from July
2, 2018 through December 31, 2018 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended
December 31, 2017 (Predecessor)
Notes to Consolidated Financial Statements
F-1
F-2
F-5
F-6
F-7
F-8
F-10
F-11
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Seadrill Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Seadrill Limited and its subsidiaries (Successor) (the “Company”) as of
December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and
cash flows for the year ended December 31, 2019 and for the period from July 2, 2018 to December 31, 2018, including the related notes
(collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting
as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the year ended December 31, 2019 and for the period
from July 2, 2018 to December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis of Accounting
As discussed in Note 1 to the consolidated financial statements, the United States Bankruptcy Court for the Southern District of Texas Victoria
Division confirmed the Company's Second Amended Joint Chapter 11 Plan of Reorganization (the "plan") on April 17, 2018. Confirmation of
the plan resulted in the discharge of all claims against the Company that arose before September 12, 2017 and substantially alters or terminates
rights and interests of equity security holders as provided for in the plan. The plan was substantially consummated on July 2, 2018 and the
Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of July
2, 2018.
Change in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of January
1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Emphasis of Matter
As discussed in Note 22 to the consolidated financial statements, the Company is in negotiations with its lenders to restructure its debt.
Management’s plans regarding this matter are also described in Note 22.
F-2
Table of Contents
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Uxbridge, United Kingdom
April 2, 2020
We have served as the Company’s or its predecessor auditor since 2013.
F-3
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Seadrill Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, comprehensive loss, changes in shareholders’ equity and cash flows
of Seadrill Limited and its subsidiaries (Predecessor) (the “Company”) for the period from January 1, 2018 to July 1, 2018 and for the year ended
December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the period from January
1, 2018 to July 1, 2018 and for the year ended December 31, 2017 in conformity with accounting principles generally accepted in the United
States of America.
Basis of Accounting
As discussed in Note 1 to the consolidated financial statements, the Company filed a petition on September 12, 2017 with the United States
Bankruptcy Court for the Southern District of Texas Victoria Division for reorganization under the provisions of Chapter 11 of the Bankruptcy
Code. The Company’s Second Amended Joint Chapter 11 Plan of Reorganization was substantially consummated on July 2, 2018 and the
Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Uxbridge, United Kingdom
March 28, 2019
We have served as the Company’s or its predecessor auditor since 2013.
F-4
Table of Contents
Seadrill Limited
CONSOLIDATED STATEMENTS OF OPERATIONS
for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor), the period
from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor)
(In $ millions, except per share data)
Successor
Predecessor
Year ended
December 31,
2019
Notes
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
Operating revenues
Contract revenues
Reimbursable revenues
Other revenues
Total operating revenues
Operating expenses
Vessel and rig operating expenses
Reimbursable expenses
Depreciation
Amortization of intangibles
Selling, general and administrative expenses
Total operating expenses
Other operating items
Impairment of long lived assets
Loss on disposals
Other operating income
Total other operating items
Operating loss
Financial and other non-operating items
Interest income
Interest expense
Loss on impairment of investments
Share in results from associated companies (net of tax)
(Loss)/gain on derivative financial instrument
Impairment of convertible bond from related party
Net (loss)/gain on debt extinguishment
Foreign exchange loss
Loss on marketable securities
Reorganization items, net
Other financial and non-operating items
Total financial and other non-operating items
Loss before income taxes
Income tax benefit/(expense)
Net loss
Net loss attributable to the parent
Net loss attributable to the non-controlling interest
Net (loss)/gain attributable to the redeemable non-
controlling interest
Basic loss per share (U.S. dollar)
Diluted loss per share (U.S. dollar)
*
8 *
*
*
*
*
*
9
*
10 *
11
18
*
15
4
*
12
997
264
127
1,388
(770)
(262)
(426)
(134)
(130)
(1,722)
—
—
39
39
469
26
46
541
(357)
(24)
(236)
(58)
(62)
(737)
—
—
21
21
(295)
(175)
69
(487)
(302)
(115)
(37)
(11)
(22)
(11)
(46)
—
(4)
(966)
(1,261)
39
(1,222)
(1,219)
(1)
(2)
(12.18)
(12.18)
40
(261)
—
(90)
(31)
—
—
(4)
(64)
(9)
(3)
(422)
(597)
(8)
(605)
(602)
(2)
(1)
(6.02)
(6.02)
619
21
72
712
(407)
(20)
(391)
—
(100)
(918)
(414)
—
7
(407)
(613)
19
(38)
—
149
(4)
—
—
—
(3)
(3,365)
—
(3,242)
(3,855)
(30)
(3,885)
(3,881)
(6)
2
(7.71)
(7.71)
1,888
38
162
2,088
(792)
(35)
(798)
—
(277)
(1,902)
(696)
(245)
27
(914)
(728)
60
(285)
(841)
174
11
—
19
(65)
—
(1,337)
(44)
(2,308)
(3,036)
(66)
(3,102)
(2,973)
(129)
—
(5.89)
(5.89)
* Includes transactions with related parties. Refer to Note 31 "Related party transactions". See accompanying notes that are an integral
part of these Consolidated Financial Statements.
F-5
Table of Contents
Seadrill Limited
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor), the period
from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor)
(In $ millions)
Net loss
Other comprehensive (loss)/income, net of tax:
Unrealized gain on marketable securities
Change in fair value of debt component of Archer convertible bond
Actuarial (loss)/gain relating to pensions
Unrealized gain on interest rate swaps in VIEs and subsidiaries
Share of other comprehensive loss from associated
companies
Other comprehensive (loss)/income:
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(1,222)
(605)
(3,885)
(3,102)
—
3
(1)
—
(8)
(6)
—
(3)
1
—
(5)
(7)
—
—
—
—
—
—
14
—
(3)
2
(8)
5
Total comprehensive loss for the period
(1,228)
(612)
(3,885)
(3,097)
Comprehensive loss attributable to the parent
(1,225)
(609)
(3,881)
Comprehensive loss attributable to the non-controlling interest
Comprehensive (loss)/income attributable to the redeemable non-
controlling interest
(1)
(2)
(2)
(1)
(6)
2
(2,976)
(121)
—
See accompanying notes that are an integral part of these Consolidated Financial Statements.
F-6
Table of Contents
Seadrill Limited
CONSOLIDATED BALANCE SHEETS
As at December 31, 2019 (Successor) and 2018 (Successor)
(In $ millions)
Successor
Successor
December 31,
2019
December 31,
2018
Notes
1,115
1,542
14
15
16
31
17
18
20
14
12
21
31
17
22
31
23
22
31
12
23
27
25
26
135
11
173
181
158
1,773
389
6,401
107
4
23
523
59
7,506
9,279
343
86
19
322
770
6,280
239
12
128
6,659
57
10
3,496
(13)
(1,851)
1,642
151
1,793
9,279
461
57
208
177
322
2,767
800
6,659
—
18
29
539
36
8,081
10,848
33
82
39
310
464
6,881
222
87
121
7,311
38
10
3,491
(7)
(611)
2,883
152
3,035
10,848
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivables, net
Amount due from related parties - current
Other current assets
Total current assets
Non-current assets
Investment in associated companies
Drilling units
Restricted cash
Deferred tax assets
Equipment
Amount due from related parties - non-current
Other non-current assets
Total non-current assets
Total assets
LIABILITIES, REDEEMABLE NON-CONTROLLING INTEREST AND EQUITY
Current liabilities
Debt due within one year
Trade accounts payable
Amounts due to related parties - current
Other current liabilities
Total current liabilities
Non-current liabilities
Long-term debt
Long-term debt due to related parties
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Commitments and contingencies (see note 34)
Redeemable non-controlling interest
EQUITY
Common shares of par value US$0.10 per share: $0.10 per share: 138,880,000 shares authorized and
100,234,973 issued at December 31, 2019 (US$0.10 per share: 111,111,111 shares authorized and
100,000,000 issued at December 31, 2018)
Additional paid in capital
Accumulated other comprehensive loss
Retained loss
Total Shareholder's equity
Non-controlling interest
Total equity
Total liabilities, redeemable non-controlling interest and equity
See accompanying notes that are an integral part of these Consolidated Financial Statements.
F-7
Table of Contents
Seadrill Limited
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor), the period
from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor)
(In $ millions)
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(1,222)
(605)
(3,885)
(3,102)
426
—
134
115
302
5
—
—
37
—
236
—
58
90
—
—
—
—
31
—
(61)
(22)
—
36
—
11
22
46
—
—
—
(3)
11
(114)
(39)
35
4
(1)
13
(43)
(3)
(12)
45
(256)
—
23
—
—
—
64
—
—
—
(3)
32
(71)
—
64
(31)
12
21
7
54
(20)
34
(26)
391
—
(21)
(149)
—
3
—
(7)
4
414
—
—
—
—
—
—
3
(2,977)
6,142
6
(1)
17
(78)
—
29
4
42
(23)
(13)
(42)
(62)
(10)
(213)
798
27
(43)
(174)
841
7
245
(27)
(76)
696
7
59
—
(10)
—
(19)
—
—
—
1,274
(2)
39
(58)
—
167
(9)
(66)
(107)
(42)
(44)
93
(75)
399
Cash Flows from Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation
Amortization of deferred loan charges
Amortization of unfavorable and favorable contracts
Share of results from associated companies
Impairment of investments
Share-based compensation expense
Loss on disposals
Contingent consideration realized
Unrealized loss/(gain) related to derivative financial instruments
Loss on impairment of long-lived assets
Deferred tax (benefit)/expense
Unrealized foreign exchange gain on long-term debt
Amortization of discount on debt
Gain on derecognition of investment in associated company
Impairment of convertible bond from related party
Net loss/(gain) on debt extinguishment
Unrealized loss on marketable securities
Non-cash gain on liabilities subject to compromise
Fresh start valuation adjustments
Other re-organization items
Other
Other cash movements in operating activities
Distributions received from associated companies
Payments for long-term maintenance
Settlement of payment-in-kind interest on Senior Secured Notes
Changes in operating assets and liabilities, net of effect of acquisitions
and disposals
Trade accounts receivable
Trade accounts payable
Prepaid expenses/accrued revenue
Deferred revenue
Related party receivables
Related party payables
Other assets
Other liabilities
Net cash (used in)/provided by operating activities
F-8
Table of Contents
Seadrill Limited
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor), the period
from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor)
(In $ millions)
Cash Flows from Investing Activities
Additions to newbuildings
Additions to drilling units and equipment
Refund of yard installments
Contingent consideration received
Settlement of West Mira
Sale of rigs and equipment
Buyout of guarantee
Investment in associated companies
Payments received from loans granted to related parties
Net cash (used in)/provided by investing activities
Cash Flows from Financing Activities
Proceeds from debt
Repayments of secured credit facilities
Redemption of Senior Secured Notes
Debt fees paid
Repayments of debt to related party
Proceeds from issuance of shares
Net cash (used in)/provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents, including
restricted cash
Cash and cash equivalents, including restricted cash, at beginning of the
year
Cash and cash equivalents, including restricted cash, at the end of
year
Supplementary disclosure of cash flow information
Interest paid, net of capitalized interest
Taxes paid
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
(48)
—
32
—
—
—
(25)
15
(26)
—
(34)
(333)
—
—
—
(367)
3
(646)
2,003
1,357
(391)
(36)
—
(27)
—
65
—
—
—
—
23
61
—
(83)
(121)
(4)
—
—
(208)
(1)
(174)
2,177
2,003
(178)
(16)
(1)
(48)
—
48
—
126
—
—
24
149
875
(153)
—
(35)
—
200
887
(5)
818
1,359
2,177
(38)
(22)
(33)
(59)
25
95
170
122
(28)
—
66
358
—
(754)
—
(53)
(39)
—
(846)
5
(84)
1,443
1,359
(264)
(119)
See accompanying notes that are an integral part of these Consolidated Financial Statements.
F-9
Table of Contents
Seadrill Limited
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 2019 (Successor), the period from January 1, 2018 through July 1, 2018 (Predecessor), the period from July 2, 2018
through December 31, 2018 (Successor) and the year ended December 31, 2017 (Predecessor)
(In $ millions)
Common
shares
Additional
paid in
capital
Contributed
surplus
Accumulated
other
comprehensive
income/(loss)
Retained
Earnings
Total
equity
before
NCI
Non-
controlling
interest
53
—
5
—
—
58
(31)
—
—
—
—
—
—
27
(27)
—
—
—
—
—
(7)
(7)
—
(6)
—
—
3,198
9,521
—
—
—
7
5
—
(2,973)
(2,973)
225
31
(59)
7
—
(43)
127
(3,881)
(3,593)
3,593
—
—
—
(9)
(602)
—
(611)
(1,219)
—
(21)
—
6,560
—
(59)
7
9
(43)
127
(3,881)
2,720
(2,720)
—
3,501
3,501
(9)
(602)
(7)
2,883
(1,219)
(6)
(21)
5
542
—
—
(14)
(129)
399
—
(25)
—
—
43
(150)
(6)
261
(107)
154
—
154
—
(2)
—
152
(1)
—
—
—
Total
equity
10,063
7
5
(14)
(3,102)
6,959
—
(84)
7
9
—
(23)
(3,887)
2,981
(2,827)
154
3,501
3,655
(9)
(604)
(7)
3,035
(1,220)
(6)
(21)
5
(13)
(1,851)
1,642
151
1,793
Balance at December 31, 2016
(Predecessor)
Share-based compensation charge
Other comprehensive income
Distributions to non-controlling interests
Net loss
Balance at December 31, 2017
(Predecessor)
ASU 2016-01 - Financial Instruments
ASU 2016-16 - Income Taxes
ASU 2016-09 - Revenue from contracts
Share-based compensation charge
Reclassification of non-controlling interest
Revaluation of redeemable non-controlling
interest
Net loss
Balance at July 1, 2018 (Predecessor)
Cancellation of Predecessor equity
Balance at July 1, 2018 (Predecessor)
Issuance of Successor common stock
Balance at July 2, 2018 (Successor)
Revaluation of redeemable non-controlling
interest
Net Loss
Other comprehensive loss
Balance at December 31, 2018
(Successor)
Net Loss
Other comprehensive loss
Fair Value adjustment AOD Redeemable NCI
Share-based compensation charge
Balance at December 31, 2019
(Successor)
1,008
3,306
1,956
—
—
—
—
7
—
—
—
—
—
—
—
1,008
3,313
1,956
—
—
—
—
—
—
—
1,008
(1,008)
—
10
10
—
—
—
10
—
—
—
—
10
—
—
—
9
—
—
—
3,322
(3,322)
—
3,491
3,491
—
—
—
3,491
—
—
—
5
3,496
—
—
—
—
—
—
—
1,956
(1,956)
—
—
—
—
—
—
—
—
—
—
—
—
See accompanying notes that are an integral part of these Consolidated Financial Statements.
F-10
Table of Contents
Note 1 – General information
Seadrill Limited
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2019 we owned and operated 35 offshore drilling units and
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, as well as benign and harsh environments. We also provide management services to our related parties Seadrill Partners,
SeaMex, Northern Drilling and Sonadrill.
As used herein, the term "Predecessor" refers to the financial position and results of operations of Seadrill Limited prior to, and including, July
1, 2018. This is also applicable to terms "we", "our", "Group" or "Company" in context of events prior to, and including, July 1, 2018. As used
herein, the term "Successor" refers to the financial position and results of operations of Seadrill Limited (previously "New Seadrill") after July
1, 2018. This is also applicable to terms "Seadrill Limited", "we", "our", "Group" or "Company" in context of events after July 1, 2018.
The use herein of such terms as "Group", "organization", "we", "us", "our" and "its", or references to specific entities, is not intended to be a
precise description of corporate relationships.
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 the
group’s interest in associated entities. Investments in companies in which we control, or directly or indirectly holds 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.
Basis of consolidation
The Consolidated Financial Statements include the revenue, expenses, assets and liabilities of our principal holding company, our majority
owned and controlled subsidiaries and certain variable interest entities (“VIE”s) in which we are deemed to be the primary beneficiary. Subsidiaries,
even if fully owned, would be excluded from the Consolidated Financial Statements if we are not deemed to be the primary beneficiary as
assessed under the variable interest model. All intercompany balances and transactions have been eliminated on consolidation.
A VIE is defined as a legal entity where either (a) the total equity at risk is not sufficient to permit the entity to finance its activities without
additional subordinated support; (b) equity interest holders as a group lack either (i) the power to direct the activities of the entity that most
significantly impact on its economic success, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected
residual returns of the entity; or (c) the voting rights of some investors in the entity are not proportional to their economic interests and the
activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. U.S. GAAP requires a
VIE to be consolidated by its primary beneficiary, being the interest holder, if any, which has both (1) the power to direct the activities of the
entity which most significantly impact on the entity’s economic performance, and (2) the right to receive benefits or the obligation to absorb
losses from the entity which could potentially be significant to the entity. We evaluate our subsidiaries, and any other entities in which we hold
a variable interest, in order to determine whether we are the primary beneficiary of the entity, and where it is determined that we are the primary
beneficiary we consolidate the entity. We have certain investments in the common stock or in-substance common stock of associated companies.
Refer to Note 2 – Accounting policies for further information on our equity investments.
Bankruptcy accounting
As set out in Note 4 - Chapter 11 Proceedings, we operated as a debtor-in-possession from September 12, 2017 to July 2, 2018. During this
period, we prepared our Consolidated Financial Statements under Accounting Standards Codification 852, Reorganizations ("ASC 852"). ASC
852 required that the financial statements distinguished transactions and events that were directly associated with the reorganization from the
ongoing operations of the business. Accordingly, certain expenses, gains and losses that were realized or incurred in the bankruptcy proceedings
were recorded in “Reorganization items" on our Consolidated Statements of Operations. In addition, ASC 852 required changes in the accounting
and presentation of significant items on the Consolidated Balance Sheets, particularly liabilities. Pre-petition obligations that may have been
impacted by the Chapter 11 reorganization process were classified on the Consolidated Balance Sheets within "Liabilities subject to compromise".
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Fresh Start Reporting
Upon emergence from bankruptcy on July 2, 2018 (the "Effective Date"), in accordance with ASC 852 related to fresh start reporting, Seadrill
Limited became a new entity for financial reporting purposes. Upon adoption of fresh start reporting, our assets and liabilities were recorded at
their fair values. We elected to apply fresh start reporting effective July 2, 2018 (the “Convenience Date”) to coincide with the timing of our
normal third quarter reporting period. We evaluated and concluded that events between July 1, 2018 and July 2, 2018 were immaterial and use
of an accounting convenience date was appropriate. The fair values of our assets and liabilities differed materially from the recorded values of
our assets and liabilities as reflected in the Predecessor historical Consolidated Balance Sheets. 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 as of December 31, 2018 and the related adjustments thereto were recorded in the Consolidated Statement of Operations of the Predecessor
as "Reorganization items", with the related predominantly deferred tax effects through "Income tax expense", during the period from January
1, 2018 through July 1, 2018.
Accordingly, our Consolidated Financial Statements subsequent to July 2, 2018 are not and will not be comparable to the Predecessor Consolidated
Financial Statements prior to the Convenience Date. Our Consolidated Financial Statements and related footnotes are presented with a black
line division which delineates the lack of comparability between amounts presented on July 2, 2018 and dates prior. Our financial results for
future periods following the application of fresh start accounting will be different from historical trends and the differences may be material.
Out of period adjustment
The financial statements for the period from January 1, 2018 through July 1, 2018 (Predecessor) include an income tax expense of $18 million
due to an adjustment in the income tax charge for a subsidiary related to prior years. We considered the effect of this prior period correction not
to be material in the context of the overall results for the period from January 1, 2018 through July 1, 2018 (Predecessor), the year ended December
31, 2017 (Predecessor), or to any previously reported quarterly or annual financial statements.
Note 2 – Accounting policies
The accounting policies set out below have been applied consistently to all periods in these Consolidated Financial Statements, unless otherwise
noted.
Use of estimates
Preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Foreign currencies
The majority of our revenues and expenses are denominated in U.S. dollars and therefore the majority of our subsidiaries use U.S. dollars as
their functional currency. Our reporting currency is also U.S. dollars. For subsidiaries that maintain their accounts in currencies other than U.S.
dollars, we use the current method of translation whereby the Statement of Operations are translated using the average exchange rate for the
period and the assets and liabilities are translated using the year-end exchange rate. Foreign currency translation gains or losses on consolidation
are recorded as a separate component of other comprehensive income in shareholders' equity.
Transactions in foreign currencies are translated into U.S. dollars at the rates of exchange in effect at the date of the transaction. Foreign currency
assets and liabilities are translated using rates of exchange at the balance sheet date. Gains and losses on foreign currency transactions are included
in the Consolidated Statements of Operations.
Related parties
Parties are related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other
party in making financial and operating decisions. Parties are also related if they are subject to common control or common significant influence.
Refer to Note 31 – Related Party Transactions.
Revenue from contracts with customers
The activities that primarily drive the revenue earned from our drilling contracts include (i) providing a drilling rig and the crew and supplies
necessary to operate the rig, (ii) mobilizing and demobilizing the rig to and from the drill site and (iii) performing rig preparation activities and/
or modifications required for the contract. Consideration received for performing these activities may consist of dayrate drilling revenue,
mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue. We account for these integrated services as
a single performance obligation that is (i) satisfied over time and (ii) comprised of a series of distinct time increments.
We recognize consideration for activities that correspond to a distinct time increment within the contract term in the period when the services
are performed. We recognize consideration for activities that are (i) not distinct within the context of our contracts and (ii) do not correspond to
a distinct time increment, ratably over the estimated contract term.
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We determine the total transaction price for each individual contract by estimating both fixed and variable consideration expected to be earned
over the term of the contract. The amount estimated for variable consideration may be constrained and is only included in the transaction price
to the extent that it is probable that a significant reversal of previously recognized revenue will not occur throughout the term of the contract.
When determining if variable consideration should be constrained, we consider whether there are factors outside of our control that could result
in a significant reversal of revenue as well as the likelihood and magnitude of a potential reversal of revenue. We re-assess these estimates each
reporting period as required. Refer to Note 7 - Revenue from Contracts with Customers.
Dayrate drilling revenue - Our drilling contracts generally provide for payment on a dayrate basis, with higher rates for periods when the drilling
unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate invoices billed to
the customer are typically determined based on the varying rates applicable to the specific activities performed on an hourly basis. Such dayrate
consideration is allocated to the distinct hourly increment it relates to within the contract term, and therefore, recognized in line with the contractual
rate billed for the services provided for any given hour.
Mobilization revenue - We may receive fees (on either a fixed lump-sum or variable dayrate basis) for the mobilization of our rigs. These activities
are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall performance
obligation and recognized ratably over the expected term of the related drilling contract. We record a contract liability for mobilization fees
received, which is amortized ratably to contract drilling revenue as services are rendered over the initial term of the related drilling contract.
Demobilization revenue - We may receive fees (on either a fixed lump-sum or variable dayrate basis) for the demobilization of our rigs.
Demobilization revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract inception
and recognized over the term of the contract. In most of our contracts, there is uncertainty as to the likelihood and amount of expected demobilization
revenue to be received. For example, the amount may vary dependent upon whether or not the rig has additional contracted work following the
contract. Therefore, the estimate for such revenue may be constrained, as described above, depending on the facts and circumstances pertaining
to the specific contract. We assess the likelihood of receiving such revenue based on past experience and knowledge of the market conditions.
Revenues related to reimbursable expenses - We generally receive reimbursements from our customers for the purchase of supplies, equipment,
personnel services and other services provided at their request in accordance with a drilling contract or other agreement. Such reimbursable
revenue is variable and subject to uncertainty, as the amounts received and timing thereof are highly dependent on factors outside of our influence.
Accordingly, reimbursable revenue is fully constrained and not included in the total transaction price until the uncertainty is resolved, which
typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and
record the associated revenue at the gross amount billed to the customer, at a point in time, as “Reimbursable revenues” in our Consolidated
Statements of Operations.
Local taxes - In some countries, the local government or taxing authority may assess taxes on our revenues. Such taxes may include sales taxes,
use taxes, value-added taxes, gross receipts taxes and excise taxes. We generally record tax-assessed revenue transactions on a net basis.
Deferred contract expenses - Certain direct and incremental costs incurred for upfront preparation, initial mobilization and modifications of
contracted rigs represent costs of fulfilling a contract as they relate directly to a contract, enhance resources that will be used in satisfying our
performance obligations in the future and are expected to be recovered. Such costs are deferred and amortized ratably to contract drilling expense
as services are rendered over the initial term of the related drilling contract.
Other revenues
Other revenues consist of related party revenues, external management fees, and early termination fees. Refer to Note 8 – Other revenues.
Management fees - Revenues related to operation support and management services provided to Seadrill Partners, Seamex, Sonadrill & Northern
Drilling. This includes both related and non-related companies.
Early termination fees - Other revenues also include amounts recognized as early termination fees under drilling contracts which have been
terminated prior to the contract end date. Contract termination fees are recognized daily as and when any contingencies or uncertainties are
resolved.
Vessel and Rig Operating Expenses
Vessel and rig operating expenses are costs associated with operating a drilling unit that is either in operation or stacked and include the
remuneration of offshore crews and related costs, rig supplies, insurance costs, expenses for repairs and maintenance and costs for onshore
support personnel. We expense such costs as incurred.
On emergence, we classified certain costs as "vessel and rig operating expenses" that are directly attributable to rig activities and had previously
been classified as "selling, general and administrative expenses" in our Consolidated Statements of Operations.
Mobilization and demobilization expenses
We incur costs to prepare a drilling unit for a new customer contract and to move the rig to a new contract location. We capitalize the mobilization
and preparation costs for a rig's first contract as a part of the rig value and recognize them as depreciation expense over the expected useful life
of the rig (i.e. 30 years). For subsequent contracts, we defer these costs over the expected contract term (see deferred contract costs above),
unless we don't expect the costs to be recoverable, in which case we expense them as incurred.
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We incur costs to transfer a drilling unit to a safe harbor or different geographic area at the end of a contract. We expense such demobilization
costs as incurred. We also expense any costs incurred to relocate drilling units that are not under contract.
Repairs, maintenance and periodic surveys
Costs related to periodic overhauls of drilling units are capitalized and amortized over the anticipated period between overhauls, which is generally
five years. Related costs are primarily yard costs and the cost of employees directly involved in the work. We include amortization costs for
periodic overhauls in depreciation expense. Costs for other repair and maintenance activities are included in vessel and rig operating expenses
and are expensed as incurred.
Income taxes
Seadrill is a Bermudan company that has subsidiaries and affiliates in various jurisdictions. Currently, Seadrill and our Bermudan subsidiaries
and affiliates are not required to pay taxes in Bermuda on ordinary income or capital gains as they qualify as exempt companies. Seadrill and
our subsidiaries and affiliates have received written assurance from the Minister of Finance in Bermuda that we will be exempt from taxation
until March 2035. Certain subsidiaries operate in other jurisdictions where taxes are imposed. Consequently, income taxes have been recorded
in these jurisdictions when appropriate. Our income tax expense is based on our income and statutory tax rates 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 operations are conducted and
income is earned. Refer to Note 12 – Taxation.
The determination and evaluation of our annual group income tax provision involves interpretation of tax laws in various jurisdictions in which
we operate and requires significant judgment and use of estimates and assumptions regarding significant future events, such as amounts, timing
and 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, 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.
Income tax expense consists of taxes currently payable and changes in deferred tax assets and liabilities calculated according to local tax rules.
We recognize the income tax effects of intercompany sales or transfers of assets, other than inventory, in the Consolidated Statement of Operations
as income tax expense (or benefit) in the period of sale or transfer occurs.
Deferred tax assets and liabilities are based on temporary differences that arise between carrying values used for financial reporting purposes
and amounts used for taxation purposes of assets and liabilities and the future tax benefits of tax loss carry forwards.
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. The amount of deferred tax provided is based upon the expected
manner of settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date. The impact of tax law
changes is recognized in periods when the change is enacted.
Loss per share
Basic loss per share (“LPS”) is calculated based on the loss for the period available to common stockholders divided by the weighted average
number of shares outstanding. Diluted loss per share includes the effect of the assumed conversion of potentially dilutive instruments such as
our restricted stock units. The determination of dilutive loss per share may require us to make adjustments to net loss and the weighted average
shares outstanding. Refer to Note 13 – Loss per share.
Current and non-current classification
Generally, assets and liabilities (excluding deferred taxes and liabilities subject to compromise) are classified as current assets and liabilities
respectively if their maturity is within one year of the balance sheet date. In addition, we classify any derivative financial instruments whose
fair value is a net liability as current.
Generally, assets and liabilities are classified as non-current assets and liabilities respectively if their maturity is beyond one year of the balance
sheet date. In addition, we classify loan fees based on the classification of the associated debt principal and we classify any derivatives financial
instruments whose fair value is a net asset as current.
Cash and cash equivalents
Cash and cash equivalents consist of cash, bank deposits and highly liquid financial instruments with maturities of three months or less.
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Restricted cash
Restricted cash consists of bank deposits which are subject to restrictions due to legislation, regulation or contractual arrangements. Restricted
cash amounts with maturities longer than one year are classified as non-current assets. Refer to Note 14 – Restricted cash.
Receivables
Receivables, including accounts receivable, are recorded in the balance sheet at their nominal amount less an allowance for doubtful accounts.
We establish reserves for doubtful accounts on a case-by-case basis when it is unlikely that required payments of specific amounts will occur.
In establishing these reserves, we consider the financial condition of the customer as well as specific circumstances related to the receivable
such as customer disputes. Receivable amounts determined as being unrecoverable are written off. Interest income on receivables is recognized
as earned. Refer to Note 16 – Accounts receivable & Note 31 – Related party transactions.
Contract assets and liabilities
Accounts receivables (see above) are recognized when the right to consideration becomes unconditional based upon contractual billing schedules.
If we are required to recognize revenue ahead of this point, we categorize the balance as a contract asset. Contract asset balances consist primarily
of demobilization revenues which have been recognized during the period but are contingent on future demobilization activities.
Contract liabilities include payments received for mobilization as well as rig preparation and upgrade activities which are allocated to the overall
performance obligation and recognized ratably over the initial term of the contract.
Equity investments
Investments in common stock are accounted for using the equity method of accounting if the investment gives us the ability to exercise significant
influence, but not control over, the investee. Significant influence is generally deemed to exist if our ownership interest in the voting stock of
the investee is between 20% and 50%, although other factors such as representation on the investee’s Board of Directors and the nature of
commercial arrangements are also considered. We classify our other equity investments either as "Marketable Securities" or "Investments in
Associated Companies" depending on their nature. We classify our share of earnings or losses from our equity method investments in the
Consolidated Statements of Operations as “Share in results from associated companies". We record gains or losses on investments held fair value
as "Loss on Marketable Securities". Refer to Note 15 – Marketable securities and Note 18 – Investment in associated companies.
We analyze our equity method investments for impairment at each reporting period to evaluate whether an event or change in circumstances has
occurred in that period that may have a significant adverse effect on the value of the investment. We record an impairment charge for other-than-
temporary declines in value when the value is not anticipated to recover above the cost within a reasonable period after the measurement date,
unless there are mitigating factors that indicate impairment may not be required. If an impairment charge is recorded, subsequent recoveries in
value are not reflected in earnings until sale of the equity method investee occurs.
All other equity investments, which consist of investments that do not gives us the ability to exercise significant influence as well as investments
in equity instruments other than common stock, are accounted for at fair value, if readily determinable. If we can’t readily ascertain the fair
value, we record the investment at cost less impairment. We perform a qualitative impairment analysis for our equity investments recorded at
cost at each reporting period to evaluate whether an event or change in circumstances has occurred in that period that indicates that the investment's
is impaired. If an event or change in circumstances has occurred in that period that indicates that the investment's is impaired, then we record
an impairment charge for the difference between the estimated fair value of the investment and its carrying amount.
For periods before we adopted ASU 2016-01, we reviewed our marketable securities for other-than-temporary impairment at each reporting
date. Refer to Note 11 - Impairment loss on investments in associated companies for details.
Newbuildings
Generally, the carrying value of drilling units under construction (“Newbuildings”) represents the accumulated costs at the balance sheet date.
Cost components usually include payments for yard installments and variation orders, construction supervision, equipment, spare parts, capitalized
interest, costs related to first time mobilization and commissioning costs. During construction, capitalized interest of newbuildings is based on
accumulated expenditures for the applicable project at our current rate of borrowing. The amount of interest expense capitalized in an accounting
period is determined by applying the interest rate (“the capitalization rate”) to the average amount of accumulated expenditures for the asset
during the period. We don't capitalize amounts beyond the actual interest expense incurred in the period.
We ceased capitalization of interest on newbuildings when we operated as a debtor-in-possession as interest payments made during bankruptcy
proceedings were treated as adequate protection payments. On emergence from Chapter 11, the Newbuildings carrying value was adjusted to a
fair value of nil. In addition, we have not capitalized interest since emergence as work on our Newbuild projects had substantially ceased. Refer
to Note 5 – Fresh Start Accounting and Note 19 – Newbuildings.
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Drilling units
Rigs, vessels and related equipment are recorded at historical cost less accumulated depreciation. The cost of these assets, less estimated residual
value is depreciated on a straight-line basis over their estimated remaining economic useful lives. The estimated residual value is taken to be
offset by any decommissioning costs that may be incurred. The estimated economic useful life of our floaters and, jack-up rigs, when new, is
30 years. The direct and incremental costs of significant capital projects, such as rig upgrades and reactivation projects, are capitalized and
depreciated in accordance with the nature of the investment. Significant investments that are deemed to increase an asset’s value for its remaining
useful life are capitalized and depreciated over the remaining life of the asset. Refer to Note 20 – Drilling units.
Drilling units recognized through a business combination or through the application of fresh start accounting are measured at fair value as of
the date of acquisition or the date of emergence, respectively. Cost of property and equipment sold or retired, with the related accumulated
depreciation and write-downs are removed from the Consolidated Balance Sheet, and resulting gains or losses are included in the Consolidated
Statement of Operations.
Assets held for sale
Assets are classified as held for sale when all of the following criteria are met: Management, having the authority to approve the action, commits
to a plan to sell the asset (disposal group), the asset is available for immediate sale in its present condition subject only to terms that are usual
and customary for sales of such assets, an active program to locate a buyer and other actions required to complete the plan to sell the asset
(disposal group) have been initiated, the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed
sale, within 1 year. The term probable refers to a future sale that is likely to occur, the asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value and actions required to complete the plan indicate that it is unlikely that significant changes to the
plan will be made or that the plan will be withdrawn.
Equipment
Equipment is recorded at historical cost less accumulated depreciation and is depreciated over its estimated remaining useful life. The estimated
economic useful life of equipment, when new, is between 3 and 5 years depending on the type of asset. Refer to Note 21 – Equipment.
Leases
Lessee - When we enter into a new contract, or modify an existing contract, we identify whether that contract has a finance or operating lease
component. We do not have, nor expect to have any leases classified as finance leases. At the lease commencement date, we measure and
recognize a lease liability and a right of use ("ROU") asset in the financial statements. The lease liability is measured at the present value of the
lease payments not yet paid, discounted using the estimated incremental borrowing rate ("IBR") at lease commencement. The ROU asset is
measured at the initial measurement of the lease liability, plus any lease payments made to the lessor at or before the commencement date, minus
any lease incentives received, plus any initial direct costs incurred by us.
After the commencement date, we will adjust the measurement of the lease liability by the amount of payments made in the period as well as
the unwinding of the discount over lease term using the interest method. After commencement date, we will subsequently adjust the measurement
of the ROU asset by amortizing the ROU asset by the amount required to keep total lease expense including interest constant (straight-line over
the lease term).
Absent an impairment of the ROU asset, the single lease cost is calculated so that the remaining cost of the lease is allocated over the remaining
lease term on straight-line basis. Seadrill will determine whether a ROU asset is impaired and shall recognize any impairment loss in accordance
with the company policy on impairment of long-lived assets. If a ROU asset is determined to be impaired, then it will be measured at its carrying
amount immediately after the impairment less any accumulated amortization. After a ROU asset has been impaired, we will unwind the remaining
asset on a straight-line basis over the remaining lease term.
Lessor - When we enter into a new contract, or modify an existing contract, we identify whether that contract has a sales-type, direct financing
or operating lease. We do not have, nor expect to have any leases classified as sales-type or direct financing. For our operating lease, the underlying
asset remains on the balance sheet and we record periodic depreciation expense and lease revenue.
Impairment of long-lived assets
We review the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be appropriate. We first assess recoverability of the carrying value of the asset by estimating the undiscounted
future net cash flows expected to result from the asset, including eventual disposal. If the undiscounted future net cash flows are less than the
carrying value of the asset, then we compare the carrying value of the asset with the discounted future net cash flows, using a relevant weighted-
average cost of capital. The impairment loss to be recognized during the period, will be the amount which the carrying value of the asset exceeds
the discounted future net cash flows.
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Other intangible assets and liabilities
Intangible assets and liabilities were recorded at fair value on the date of emergence less accumulated amortization. The amounts of these assets
and liabilities less the estimated residual value, if any, is generally amortized on a straight-line basis over the estimated remaining economic
useful life or contractual period. For periods after emergence we have applied a new accounting policy to classify amortization of these intangible
assets and liabilities within operating expenses. Our intangible assets include favorable and unfavorable drilling contracts and management
services contracts. Refer to Note 17 – Other assets. Our intangible liabilities include unfavorable drilling contracts and unfavorable leasehold
improvements. Refer to Note 23 – Other liabilities.
Prior to emergence, we classified the amortization of these intangible assets or liabilities within other revenues.
Derivative financial instruments and hedging activities
None of our derivative financial instruments have been formally designated as a hedging instruments, and therefore are recorded at fair value.
Changes in fair value are recorded as a gain or loss as a separate line item within "financial items" in the Consolidated Statements of Operations.
Refer to Note 32 – Financial instruments and risk management and Note 33 - Fair values of financial instruments.
Trade payables
Trade payables are recorded in the balance sheet to recognize a liability to a supplier for a good or service they have provided us.
Deferred charges
Loan related costs, including debt issuance, arrangement fees and legal expenses, are capitalized and presented in the balance sheet as a direct
deduction from the carrying amount of the related debt liability, amortized over the term of the related loan and the amortization is included in
interest expense. On emergence from Chapter 11, our loan costs were reduced to nil and we recorded a discount against our debt to reduce its
carrying value to equal its fair value. The debt discount will be unwound over the remaining terms of the debt facilities. Refer to Note 5 – Fresh
Start Accounting and Note 10 – Interest expense.
Debt
We have financed a significant proportion of the cost of acquiring our fleet of drilling units through the issue of debt instruments. At the inception
of a term debt arrangement, or whenever we make the initial drawdown on a revolving debt arrangement, we will incur a liability for the principal
to be repaid. On emergence from Chapter 11, we issued new debt instruments and the carrying values of our third-party debt liabilities were
adjusted to fair value. Refer to Note 5 – Fresh start accounting and Note 22 – Debt for more information on our debt instruments.
Pension benefits
We have several defined benefit pension plans, defined contribution pension plans and other post-employment benefit obligations which provide
retirement, death and early termination benefits. We record the service cost, as “Vessel and rig operating expenses” or as "Selling, general and
administrative expenses" in our Consolidated Statements of Operations depending on the whether or not the related employee's role is directly
attributable to rig activities. We record the actuarial gains and losses in the Consolidated Statements of Operations when the net cumulative
unrecognized actuarial gains or losses for each individual plan at the end of the previous reporting year exceed 10 percent of the higher of the
present value of the defined benefit obligation and the fair value of plan assets at that date. These actuarial gains and losses are recognized over
the expected remaining working lives of the employees participating in the plans. Otherwise, recognition of actuarial gains and losses is included
in other comprehensive income. Refer to Note 30 - Pension benefits for more information on the accounting for these pension benefits / pension
expense.
Loss contingencies
We recognize a loss contingency in the Consolidated Balance Sheets where we have a present legal or constructive obligation as a result of a
past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and a reliable estimate of the amount
can be made. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Refer to Note 34 – Commitments
and contingencies.
Treasury shares
Treasury shares are recognized at cost as a component of equity. We record the nominal value of treasury shares purchased as a reduction in
share capital. The amount paid in excess of the nominal value is treated as a reduction of additional paid-in capital. On emergence from Chapter
11, we no longer had any treasury shares.
Share-based compensation
Since emerging from Chapter 11, we have made several awards under our employee benefit plan (see Note 29 – Share based compensation).
We record an accounting charge equal to the fair value of awards that are expected to vest. The expense is classified as compensation cost and
recognized ratably over the vesting period. The offsetting entry is recorded directly to equity.
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Note 3 - Recent Accounting Standards
1) Recently adopted accounting standards
We adopted the following accounting standard updates ("ASUs") in the year:
a) ASU 2016-02 Leases (also 2018-10, 2018-11, 2018-20, 2019-01 & 2019-10)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The update requires an entity to recognize right-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 (from a lessor perspective) 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 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 a right-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.
b) Other accounting standard updates
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:
•
•
ASU 2018-07 Compensation - Stock compensation (Topic 718)
ASU 2018-16 Derivatives and Hedging (Topic 815)
2) Recently issued accounting standards
We have kept abreast of recently issued ASUs by the FASB that we have not yet adopted but which could affect our Consolidated Financial
Statements and related disclosures in future periods:
a) ASU 2016-13 - Financial Instruments - Measurement of Credit Losses (Also 2019-04, 2019-05, 2019-10 & 2019-11)
In June 2016, the FASB issued ASU 2016-13, 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 to estimate expected lifetime credit losses (CECL model) on financial assets ranging from short term trade accounts receivable to
long-term financings and modifies the impairment model for available-for-sale debt securities. In April 2019, the FASB issued ASU 2019-04,
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 ASU 2019-05, 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. The 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 process of evaluating the impact of this standard update. Financial assets held by us subject to evaluation under the CECL model
include our external trade receivables and related party receivables (See Note 31 for details). Our external customers are international oil
companies, national oil companies and large independent oil companies with high credit standing and with whom we have had a low incidence
of bad debt expense. Therefore we do not expect this guidance to create any significant reserve on our external receivables. We are however
expecting to establish an allowance on our loans and trade receivables due from related parties under the new guidance to reflect the current
financial position of the counterparties. We estimate that we will record an initial reserve in the range of $75 - $135 million, which will be booked
in a credit loss allowance account as an offset to equity. The allowance will be reassessed quarterly with any adjustment to the reserve recorded
as credit loss expense in the P&L.
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b) ASU 2018-13 Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, 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. The guidance
is expected to result in the following additional disclosures; 1) The changes in unrealized gains and losses for the period included in other
comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; 2) The range and weighted average
of significant unobservable inputs used to develop Level 3 fair value measurements; 3) For recurring fair value measurements categorized within
Level 3 of the fair value hierarchy, a reconciliation from the opening balances to the closing balances for each class of assets and liabilities,
except for derivative assets and liabilities, which may be presented net. We continue to evaluate the impact of this standard update on our
consolidated financial statements and related disclosures.
c) ASU 2018-14 Compensation - Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20):
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.
d) ASU 2018-15 Intangibles
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): 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.
e) ASU 2018-17 Consolidation: Targeted Improvements to Related Party Guidance for Variable Interest Entities
In October 2018, the FASB issued ASU 2018-17, 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.
f) ASU 2019-08 Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606)
In November 2019, the FASB issued ASU 2019-08. The amendments in this Update require that an entity measure and classify share-based
payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is
required to be measured on the basis of the grant-date fair value of the share-based payment award in accordance with Topic 718, not as a
reduction of transaction price at contract inception under ASC 606. 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.
g) ASU 2019-12 Income Taxes (Topic 740) - Simplifying the accounting for income taxes
In December 2019, the FASB issued ASU 2019-12. The amendments in this Update simplify the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other
areas of Topic 740 by clarifying and amending existing guidance. 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.
h) Other accounting standard updates issued by the FASB
As of February 29, 2019, the FASB have issued several further updates not included above. We do not currently expect any of these updates to
affect our Consolidated Financial Statements and related disclosures either on transition or in future periods.
Note 4 - Chapter 11 Proceedings
In this note we have provided an overview of our Chapter 11 Reorganization and related transactions.
F-19
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Overview
Prior to the filing of Chapter 11 Proceedings (as defined below), we were engaged in extensive discussions with our secured lenders, certain
holders of our unsecured bonds and potential new money investors regarding the terms of a comprehensive restructuring. The objectives of the
restructuring were to build a bridge to a recovery and achieve a sustainable capital structure. To achieve this, we had proposed an extension to
our bank maturities, reduced debt amortization payments, amendments to financial covenants and raising of new capital.
On September 12, 2017, Old Seadrill Limited, certain of its subsidiaries (together "the Company Parties") and certain Ship Finance companies
entered into a restructuring support and lock-up agreement ("RSA") with a group of bank lenders, bondholders, certain other stakeholders, and
new-money providers. In connection with the RSA, the Company Parties entered into an "Investment Agreement" under which Hemen
Investments Limited, an affiliate of Old Seadrill Limited's largest shareholder Hemen Holding Ltd. and certain other commitment parties,
committed to provide $1.06 billion in new cash commitments, subject to certain terms and conditions (the "Capital Commitment").
On September 12, 2017, to implement the transactions contemplated by the RSA and Investment Agreement, Old Seadrill Limited and certain
of its subsidiaries (the "Debtors") commenced prearranged reorganization proceedings (the "Chapter 11 Proceedings") under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas Victoria Division. During the bankruptcy
proceedings, the Debtors continued to operate the business as debtors in possession.
After September 12, 2017, the Debtors negotiated with their various creditors and on February 26, 2018 announced a "Global Settlement",
following which there were amendments to the RSA and Investment Agreement. These amendments provided for, amongst other things, the
inclusion of certain other creditors as Commitment Parties, an increase of the Capital Commitment to $1.08 billion, increased recoveries for
general unsecured creditors under the Plan and an agreement regarding allowed claims from certain newbuild shipyards.
On February 26, 2018, the Debtors filed a proposed Second Amended Joint Chapter 11 Plan of Reorganization (the "Plan") with the Bankruptcy
Court. The Plan was confirmed by the Bankruptcy Court on April 17, 2018. The Plan became effective and the Debtors emerged from Chapter
11 Proceedings on July 2, 2018 (the "Effective Date").
The Plan extinguished approximately $2.4 billion in unsecured bond obligations, more than $1.0 billion in contingent newbuild obligations,
substantial unliquidated guarantee obligations, and approximately $250 million in unsecured interest rate and currency swap claims, while
extending near term debt maturities, providing Seadrill with over $1.0 billion in new capital and leaving employee, customer and ordinary trade
claims largely unimpaired.
Key terms of the Plan of Reorganization
As set out above, the Plan was confirmed by the Bankruptcy Court on April 17, 2018 and became effective when the Debtors emerged from
Chapter 11 Proceedings on July 2, 2018. The Plan provided for, among other things, that:
There was a corporate reorganization whereby Seadrill Limited became the ultimate parent holding company of Old Seadrill Limited's
subsidiaries.
The Commitment Parties and subscribers to an equity rights offering subscribed for a total 23,750,000 shares in Seadrill Limited for
aggregate consideration of $200 million.
The Commitment Parties and subscribers to a notes rights offering subscribers purchased a total $880 million principal amount of
New Secured Notes and were issued 54,625,000 shares in Seadrill Limited for an aggregate consideration of $880 million.
The holders of general unsecured claim were issued 14,250,000 shares in Seadrill Limited.
The former holders of Old Seadrill Limited Equity and certain other claimants were issued 1,900,000 shares in Seadrill Limited.
Certain Commitment Parties received a fee of 475,000 shares in Seadrill Limited and Hemen received a fee of 5,000,000 shares in
Seadrill Limited.
An employee incentive plan was implemented (the “Employee Incentive Plan”) which reserved an aggregate of 10% of the Seadrill
Limited Shares, for grants to be made from time to time to Seadrill employees and other parties.
This is summarized in the below table:
Recipient of Common Shares
Commitment Parties (in exchange for cash paid pursuant to the
Investment Agreement) and Equity Rights Offering Subscribers
Prior to
dilution by
Primary
Structuring
Fee and the
shares
reserved under
the Employee
Incentive Plan
Percentage
Prior to
dilution by the
shares
reserved under
the Employee
Incentive Plan
Number of
shares
Fully diluted
23,750,000
25.00 %
23.75 %
21.38 %
F-20
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Recipient of Common Shares
Recipients of Senior Secured Notes (including Commitment
Parties and Notes Rights Offering Subscribers)
Holders of General Unsecured Claims
Former Holders of Old Seadrill Limited Equity and Seadrill
Limited 510(b) Claimants
Fees to Select Commitment Parties
All creditors, excluding Primary Structuring Fee
Hemen (on account of Primary Structuring Fee)
Total, prior to dilution by shares reserved under the
Employee Incentive Plan
Reserved for the Employee Incentive Plan
Total, fully diluted
Reorganization items
Number of
shares
54,625,000
14,250,000
1,900,000
475,000
95,000,000
5,000,000
100,000,000
11,111,111
111,111,111
Prior to
dilution by
Primary
Structuring
Fee and the
shares
reserved under
the Employee
Incentive Plan
Percentage
Prior to
dilution by the
shares
reserved under
the Employee
Incentive Plan
57.50 %
15.00 %
2.00 %
0.50 %
100.00%
-
-
-
-
Fully diluted
49.16 %
12.82 %
1.71 %
0.43 %
85.50%
4.50 %
90.00%
54.63 %
14.25 %
1.90 %
0.47 %
95.00%
5.00 %
100.00%
-
-
10.00 %
100.00%
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:
(In $ millions)
Professional and advisory fees
New investor commitment fees
Loss on Newbuilding global settlement claim
Loss on other pre-petition allowed claims
Gain on liabilities subject to compromise
Fresh start valuation adjustments
Write-off of debt issuance costs
Reversal of credit risk on derivatives
Interest income on surplus cash invested
Total reorganization items, net
i. Advisory and professional fees
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
—
—
—
—
—
—
—
—
—
(9)
(187)
—
—
—
—
—
—
—
—
—
—
—
2,958
(6,142)
—
—
6
(66)
(53)
(1,064)
(3)
—
—
(66)
(89)
4
(9)
(3,365)
(1,337)
Professional and advisory fees incurred for post-petition Chapter 11 expenses. Professional and advisory expenses have been incurred post-
emergence but relate to our Chapter 11 filing.
ii. New investor commitment fees
Commitment fee of 5% of the committed funds agreed under the terms of the investment agreement.
F-21
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iii. Loss on Newbuilding global settlement claim
Under the Bankruptcy Code, the Debtors had the right to reject certain contracts, subject to the approval of the Bankruptcy Court and certain
other conditions. Subject to certain exceptions, this rejection relieves the debtor from performing its future obligations under the contract but
entitles the counterparty to assert a pre-petition general unsecured claim for damages. As part of the Global Settlement Agreement, it was agreed
that the Debtors would reject and terminate the newbuild contracts for the drillships West Dorado, West Libra, West Aquila and West Libra. In
return the newbuild shipyards Samsung and DSME received an allowed claim for $1,064 million. In addition to the re-organization expense
shown above, we also recorded a non-cash impairment charge against these Newbuild assets of $696 million at December 31, 2017. Refer to
Note 19 - Newbuildings for further details.
iv. Gain on liabilities subject to compromise
On emergence from Chapter 11 we settled our liabilities subject to compromise in accordance with the Plan. This includes settlement on our
unsecured bonds, Newbuild global settlement claim (see above) and interest rate and cross-currency interest rate swaps. Refer to Note 5 – Fresh
Start Accounting for further information.
v. Fresh start valuation adjustments
On emergence from Chapter 11, our assets and liabilities were recorded at fair value in accordance with ASC 852 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 as of December 31, 2018 (Successor) and the related adjustments thereto were recorded in the Consolidated
Statement of Operations in the Predecessor. Refer to Note 5 – Fresh Start Accounting for further information.
vi. Write-off of debt issuance costs
On filing for Chapter 11, $66 million of unamortized debt issuance costs on the impaired secured credit facilities and unsecured bonds were
expensed.
vii. Reversal of credit risk on derivatives
The filing for Chapter 11 triggered an event of default under our derivative agreements, and therefore our interest rate and cross-currency interest
rate swaps were held at a terminated value. As such, any credit risk adjustment on these arrangements was taken to the Consolidated Statement
of Operations.
viii. Interest income on surplus cash invested
Interest income recognized on cash held within entities that had filed for Chapter 11.
Note 5 – Fresh Start Accounting
Fresh Start Accounting
Upon emergence from bankruptcy, we applied fresh start accounting to our 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 2, 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 as of December 31, 2018 and the related adjustments thereto were recorded in the Consolidated
Statement of Operations of the Predecessor as "Reorganization items" during the period from January 1, 2018 through July 1, 2018. 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 2, 2018 (the “Successor”) will not be comparable with the Consolidated Financial Statements prior to that date.
Reorganization Value
Reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate to the amount a willing
buyer would pay for the assets immediately after restructuring. Under fresh start accounting, we are required to allocate the reorganization value
to individual assets based on their estimated fair values.
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 the mid-point of this range
of estimated distributable values. This was approximately $11.0 billion. Fair values are inherently subject to significant uncertainties and
contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions, valuations, and financial projections
will be realized, and actual results could vary materially.
F-22
Table of Contents
Valuation of Drilling Units
Our principal assets comprise our fleet of drilling units. With the assistance of valuation experts, we determined a fair value of these drilling
units based primarily on an income approach utilizing a discounted cash flow analysis. We established an estimate of future cash flows for the
period ranging from emergence to the end of life for each rig and discounted the estimated future cash flows to present value. The expected cash
flows used in the discounted cash flows were derived from earnings forecasts and assumptions regarding growth and margin projections.
A discount rate of 11.4% was estimated based on an after-tax weighted average cost of capital ("WACC") reflecting the rate of return that would
be expected by a market participant. The WACC also takes into consideration a company specific risk premium reflecting the risk associated
with the overall uncertainty of the financial projects used to estimate future cash flows. We used a replacement cost approach to value capital
spares and other property plant, and equipment.
Valuation of Equity Method Investments
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 as follows:
Investment
Seadrill Capricorn Holdings LLC
Seadrill Operating LP
Seadrill Deepwater Drillship Ltd
Seabras Sapura Holding
Seabras Sapura Participacoes
SeaMex
WACC
11.4%
12.0%
12.0%
14.3%
13.7%
12.7%
The discounted cash flow model derived an enterprise value of the investments, after which associated net debt was subtracted to provide equity
values. The implied valuation of the direct ownership interests in Seadrill Partners derived from the discounted cash flow model was crosschecked
against the market price of Seadrill Partners’ common units. Due to the significant influence we have on Seadrill Partners, there is an implied
significant influence premium, which represents the additional value we would place over and above the market price of Seadrill Partners in
order to maintain this significant influence. This is similar in thought to an implied control premium. We have evaluated the difference by
reviewing the implied control premium as compared to other market transactions within the industry. We deem the implied control premium to
be reasonable in the context of the data considered.
Valuation of debt
We recorded third party and related party debt obligations at a fair value of $7.3 billion which we determined using an income approach. We are
amortizing the difference between the $7.6 billion face amount and the fair value recorded in fresh start accounting over the life of the debt. We
estimated the fair value of the debt using Level 2 inputs.
For further information on fresh start accounting, please refer to the Seadrill Limited Annual Report on Form 20-F for the year ended December
31, 2018.
Reconciliation of distributable value to fair value of Successor common stock
The following table reconciles the distributable value to the estimated fair value of Successor common stock as at the Effective Date:
(In $ millions)
Distributable value
Less: non-controlling interest
Less: fair value of debt
Less: fair value of other non-operating liabilities
Add: fair value of tax attributes
Fair value of Successor common stock issued upon emergence
Shares issued and outstanding on July 2, 2018
Per share value
F-23
As at July 2,
2018
11,056
(154)
(7,301)
(108)
8
3,501
100.0
35.01
Table of Contents
Reorganization value and distributable value were estimated using numerous projections and assumptions that are inherently subject to significant
uncertainties and resolution of contingencies that are beyond our control. Accordingly, the estimates set forth herein are not necessarily indicative
of actual outcomes, and there can be no assurance that the estimates, projections or assumption will be realized.
The following table reconciles the distributable value to the estimated reorganization value as at the Effective Date:
(In $ millions)
Distributable value
Add: other working capital liabilities
Add: other non-current operating liabilities
Add: fair value of tax attributes
Add: redeemable non-controlling interest
Total reorganization value
Consolidated Balance Sheet
As at July 2,
2018
11,056
478
57
8
30
11,629
The adjustments included in the following Consolidated Balance Sheet reflect the effects of the consummation of the transactions contemplated
by the Reorganization Plan (reflected in the column “Reorganization Adjustments”) as well as fair value adjustments as a result of the adoption
of fresh start accounting (reflected in the column “Fresh Start Adjustments”). The explanatory notes highlight methods used to determine fair
values or other amounts of the assets and liabilities as well as significant assumptions or inputs.
(In $ millions)
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivable, net
Amount due from related parties - current
Other current assets
Total current assets
Investment in associated companies
Newbuildings
Drilling units
Deferred tax assets
Equipment
Amount due from related parties - non-current
Assets held for sale - non-current
Other non-current assets
Total assets
LIABILITIES AND EQUITY
Current liabilities
Debt due within one year
Trade accounts payable
Amounts due to related parties - current
Other current liabilities
Total current liabilities
Liabilities subject to compromise
Long-term debt
Long-term debt due to related parties
Deferred tax liabilities
Predecessor
Company
Reorganization
Adjustments
Fresh Start
Adjustments
Successor
Company
As of July 1, 2018
809
409
121
272
181
247
2,039
1,615
249
12,531
8
35
565
—
3
17,045
90
96
4
229
419
9,050
856
294
105
F-24
790 (a)
169 (a)
—
—
—
—
959
—
—
—
—
—
—
—
—
959
—
17 (b)
4 (c)
100 (d)
121
(9,050) (e)
6,292 (f)
—
—
—
—
—
—
14 (l)
181 (m)
195
(687) (n)
(249) (o)
(5,734) (p)
—
(6) (q)
11 (r)
—
95 (s)
1,599
578
121
272
195
428
3,193
928
—
6,797
8
29
576
—
98
(6,375)
11,629
(33) (t)
—
—
32 (u)
(1)
—
(104) (t)
(94) (v)
(6) (w)
57
113
8
361
539
—
7,044
200
99
Table of Contents
(In $ millions)
Other non-current liabilities
Total non-current liabilities
Redeemable non-controlling interest
Equity
Predecessor common shares
Predecessor additional paid-in capital
Predecessor contributed surplus
Predecessor accumulated other comprehensive
income
Predecessor (loss)/retained earnings
Successor common shares
Successor contributed surplus
Total Shareholders' equity
Non-controlling interest
Total equity
Total liabilities and equity
Reorganization Adjustments:
Predecessor
Company
Reorganization
Adjustments
Fresh Start
Adjustments
As of July 1, 2018
57
1,312
25
1,008
3,316
1,956
41
(146)
—
—
6,175
64
6,239
17,045
3 (b)
6,295
—
(1,008) (g)
(3,322) (g)
6 (h)
(1,956) (g)
—
7,110 (i)
10 (j)
2,860 (j)
3,700
(107) (k)
3,593
959
2 (x)
(202)
5 (y)
—
—
—
(41) (z)
(6,964) (z)
—
631 (aa)
(6,374)
197 (bb)
(6,177)
(6,375)
(a) Adjustments to cash and cash equivalents including the following:
Cash and Cash Equivalents
(In $ millions)
Proceeds from debt commitment (1)
Proceeds from equity commitment
Payment to newbuild counterparty members
Amendment consent fees to senior secured creditors
Funding of the escrow account for Senior Secured Notes collateral
Payment of closing fees for the debt commitment
Payment new commitment parties fee
Payment to the bank coordinating committee
Change in cash and cash equivalents
Successor
Company
62
7,405
30
—
—
—
—
—
10
3,491
3,501
154
3,655
11,629
875
200
(18)
(26)
(227)
(9)
(1)
(4)
790
(1)
Pursuant to the Investment Agreement, on the Effective Date we received cash of $875 million for the issuance of Senior Secured Notes,
consisting of $880 million par value notes net of $5 million pre-issuance accrued interest.
Restricted Cash
(In $ millions)
Funding of the escrow account per terms of Senior Secured Notes
Payment of post confirmation accrued professional fees in connection with emergence
Payment of success fees incurred upon emergence
Distribution from the cash pool to general unsecured claims
Payment of unsecured creditor committee advisor fees
Change in restricted cash
227
(31)
(22)
(2)
(3)
169
(b) Reflects the reinstatement of trade accounts payable and other non-current liabilities included as part of liabilities subject to compromise
(c) Reflects the reinstatement of amounts due to related party included as part of liabilities subject to compromise.
(d) Reflects the adjustment to other current liabilities upon emergence:
F-25
Table of Contents
Other current liabilities upon emergence
(In $ millions)
Success fees accrued upon emergence
Undistributed cash pool balance for general unsecured claims on emergence
Cash payment made for post confirmation accrued professional fees in connection with emergence
Reinstatement of other current liabilities as part of liabilities subject to compromise
Amendment fees on SFL loans accrued upon emergence
Change in other liabilities
(e)
Liabilities subject to compromise were settled as follows in accordance with the Plan:
Gain on liabilities subject to compromise
(In $ millions)
Senior undersecured or impaired external debt
Unsecured bonds
Newbuild claims
Accrued interest payable
Derivatives previously recorded at fair value
Accounts payable and other liabilities
Amount due to related party
Liabilities subject to compromise
Less: Distribution from cash pool to holders of general unsecured claims on emergence
Less: Undistributed cash pool balance for holders of general unsecured claims on emergence
Less: Payment to newbuild counterparty members
Less: Fair value of equity issued to holders of general unsecured claims
Less: Reinstatement of amount due to related party
Less: Reinstatement of trade accounts payable
Less: Reinstatement of senior undersecured or impaired external debt
Less: Recognition of adequate protection payments on senior undersecured or impaired external debt
Gain on settlement of liabilities subject to compromise
28
35
(31)
64
4
100
5,266
2,334
1,064
49
249
84
4
9,050
(2)
(35)
(17)
(498)
(4)
(84)
(5,266)
(186)
2,958
(f)
Increase in long-term debt includes reinstatement of certain liabilities subject to compromise as well as the issuance of Senior Secured
Notes. The net increase reflects the following:
(In $ millions)
Reinstated Senior undersecured or impaired external debt
Recognition of adequate protection payments
Lender consent fee
Total reinstated senior secured credit facilities
Issuance of Senior Secured Notes
Capitalized pre-issuance interest for Senior Secured Notes for 8% paid-in kind
Debt issuance cost in related to the issuance of the Senior Secured Notes
Discount on Senior Secured Notes for the pre-issuance interest paid upon emergence (4% cash interest of $5 million and
8% paid-in kind interest of $10 million)
Net increase in long-term debt
5,266
186
(26)
5,426
880
10
(9)
(15)
6,292
(g) Reflects the cancellation of Predecessor Company common stock, contributed surplus, and additional paid in capital to retained earnings
(h) Represents the unamortized stock compensation recognized upon cancellation of the Predecessor Company common stock, contributed
surplus, and additional paid in capital.
(i) Reflects the change in predecessor retained (loss)/earnings
F-26
Table of Contents
(In $ millions)
Gain on settlement of liabilities subject to compromise
Cancellation of predecessor common stock, contributed surplus, and additional paid in capital
Recognition of unamortized stock compensation expense upon cancellation of the Predecessor Company common
stock, contributed surplus, and additional paid in capital
Fair value of Successor Common Shares issued upon emergence
Success fees incurred upon emergence
New Commitment Parties, bank coordinating committee, and unsecured creditor committee advisor fees
Elimination of NADL and Sevan non-controlling interest
Total change in predecessor retained (loss)/earnings
2,958
6,286
(6)
(2,176)
(51)
(8)
107
7,110
(j) Reflects the issuance of 23,750,000 shares of common stock at a per share price of $8.42 in connection with the equity commitment, 55
million shares of common stock with estimated fair value of $35.01 per share issued in connection with the debt commitment, 14 million
shares of common stock issued to the holders of general unsecured claims at an estimated fair value of $35.01 per share, 2 million shares
of common stock issued to former holders of Predecessor equity at an estimated fair value of $35.01 per share, and 5 million shares of
common stock issued for structuring fees to the select commitment parties and Hemen at an estimated fair value of $35.01 per share.
(k) As determined in the Plan, NADL and Sevan became wholly owned subsidiaries and the non-controlling interests of NADL and Sevan
were eliminated.
Fresh Start Adjustments
(l) Adjustment to record the current portion of the contingent consideration receivable from Seadrill Partners related to the West Vela with
the fair value of $14 million.
(m) Adjustment to write-off $9 million of current deferred mobilization costs to fair value, which is offset by recording the fair value of certain
favorable drilling contracts of $190 million. The value was based on the contracted rates compared to the prevailing market rates.
(n) Adjustment to decrease the carrying value of the investments in associated companies to their estimated fair values determined using a
discounted cash flow analysis utilizing the assumption noted above the Valuation of Equity Method Investments.
(o) Adjustment to record the newbuildings at fair value based on the value derived from an income approach compared to the current contractual
obligations remaining to be paid.
(p) Adjustment to the drilling units to record the fair value of the rigs and capital spares utilizing a combination of income-based and market-
based approaches. The discount rate of 11.4% was used for the discounted cash flow analysis under the income-based approach. A cost-
based approach was utilized to determine the fair value for the capital spares.
(q) Adjustment to record equipment at fair value based on a cost approach.
(r) Adjustment to record the non-current portion of the contingent consideration receivable from Seadrill Partners related to the West Vela
and West Polaris with the fair value of $17 million. This amount is offset with a $3 million reduction on the recoverability of the receivable
due from Seabras Participacoes and $2 million adjustment to record the embedded conversion option component of the Archer convertible
debt instrument at the emergence date fair value.
(s) Adjustment to write-off $2 million of deferred mobilization cost and $1 million of unamortized favorable contracts to fair value. These
are offset by recording the fair value of certain favorable drilling and management service contracts of $98 million. The value was based
on the contracted rates compared to the prevailing market rates.
(t) Fair value adjustment to record discount of $188 million on the senior secured credit facilities and Ship Finance loans. This reduction is
offset by a $51 million write-off of discounts on the Senior Secured Notes, unamortized debt issuance cost and lender consent fees.
(In $ millions)
As at July 2, 2018
Carrying value after reorganization adjustments
Adjustments to record debt at fair value:
Write-off of unamortized debt issuance costs
Write-off of discounts for pre-issuance accrued interest settled
upon issuance of Senior Secured Notes (4% cash interest of $5
million and 8% paid-in kind interest of $10 million)
Fair value adjustment to record discount on the senior secured
credit facilities and Ship Finance Loans
Estimated fair value of debt at emergence
Senior Secured
Notes
866
9
15
—
890
Senior
Secured Credit
Facilities
5,636
26
—
(155)
5,507
Ship Finance
Loans
736
1
—
(33)
704
Total
7,238
—
36
15
(188)
7,101
(u) Adjustment to write-off $27 million, primarily related to deferred mobilization revenue, for which we have determined to have no future
performance obligations. These are offset by recording the fair value of certain unfavorable drilling contracts of $59 million. The value
was based on the contracted rates compared to the prevailing market rates.
(v) Adjustment to reflect a fair value discount on the loans due to related parties. The value was based on an income approach using level 2
inputs.
F-27
Table of Contents
(w) Adjustments to the deferred tax liabilities as a result of applying fresh start accounting.
(x) Adjustment to write-off $7 million of deferred mobilization revenue, for which we have determined to have no future performance
obligations, offset by the fair value of certain unfavorable drilling contracts of $9 million. The value was based on the contracted rates
compared to prevailing market rates.
(y) Adjustment to record redeemable non-controlling interest to the emergence date fair value.
(z) Reflects the fresh start accounting adjustment to reset retained (loss) earnings and accumulated other comprehensive income.
(aa) Reflects the increase in fair value of the 24 million shares of common stock issued in connection with the equity commitment from $8.42
to $35.01 per share.
(bb) Adjustment to record the non-controlling interest in the Ship Finance VIEs and Seadrill Nigeria Operations Limited to fair value.
Note 6 – 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 in mid-, deep- and ultra-deep waters;
2.
Jack-up rigs: Services encompassing drilling, completion and maintenance of offshore exploration and production wells. The drilling
contracts relate to jack-up rigs for operations in harsh and benign environments in shallow waters; 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
(In $ millions)
Floaters
Jack-up rigs
Other
Total
Depreciation
(In $ millions)
Floaters
Jack-up rigs
Total
Successor
Predecessor
Year ended
December
31,
2019
686
362
340
1,388
Period from
July 2, 2018
through
December
31, 2018
322
167
52
541
Period from
January 1,
2018
through
July 1, 2018
482
193
37
712
Year ended
December
31,
2017
1,387
617
84
2,088
Successor
Predecessor
Year ended
December
31,
2019
346
80
426
Period from
July 2, 2018
through
December
31, 2018
190
46
236
Period from
January 1,
2018
through
July 1, 2018
298
93
391
Year ended
December
31,
2017
601
197
798
F-28
Table of Contents
Amortization of intangibles
(In $ millions)
Floaters
Jack-ups
Total
Operating profit/(loss) - net loss
(In $ millions)
Floaters
Jack-up Rigs
Other
Operating loss
Unallocated items:
Total financial items and other
Loss before income taxes
Drilling assets - Total assets
Total assets by operating segment are as follows:
(In $ millions)
Floaters
Jack-up Rigs
Total Drilling Units and Newbuildings
Unallocated items:
Investments in Associated companies
Marketable securities
Cash and restricted cash
Other assets
Total
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
106
28
134
37
21
58
—
—
—
—
—
—
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(340)
23
22
(295)
(966)
(1,261)
(161)
(16)
2
(175)
(422)
(597)
(446)
(167)
—
(613)
(622)
(112)
6
(728)
(3,242)
(3,855)
(2,308)
(3,036)
Successor
Successor
December
31, 2019
December
31, 2018
5,297
1,104
6,401
389
11
1,357
1,121
9,279
5,508
1,151
6,659
800
57
2,003
1,329
10,848
F-29
Table of Contents
Drilling units - Capital expenditures (1)
Capital expenditure by operating segment are as follows:
(In $ millions)
Floaters
Jack-ups
Total
(1) The successor periods include additions to equipment
Geographic segment data
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
139
23
162
74
24
98
93
24
117
128
22
150
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 presents our revenues and fixed assets by geographic area:
Revenues
(In $ millions)
Norway
Nigeria
Brazil
Saudi Arabia
United States
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
469
198
137
130
74
117
108
91
78
34
82
105
188
79
30
219
193
358
159
291
Angola
Others (1)
Total Revenue
(1) Other countries represent countries in which we operate that individually had revenues representing less than 10% of total revenues earned
2,088
1,388
215
165
482
386
712
128
100
541
84
29
for any of the periods presented.
Fixed assets – drilling units (1)
Drilling unit fixed assets by geographic area are as follows:
(In $ millions)
Norway
Malaysia
USA
Spain
Brazil
Others (2)
Total
Successor
Successor
December
31, 2019
1,818
805
644
615
332
2,187
6,401
December
31, 2018
1,326
1,070
658
875
688
2,042
6,659
(1) Asset locations at the end of a period are not necessarily indicative of the geographic distribution of the revenues or operating profits
generated by such assets during such period.
F-30
Table of Contents
(2) Other countries represent 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
In the years ended December 31, 2019, the period from July 2, 2018 through December 31, 2018 (Successor), the period from January 1, 2018
through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor), we had the following customers with total revenues
greater than 10% in any of the years presented:
Total
Equinor
Northern Drilling
ConocoPhillips
Saudi Aramco
Petrobras
LLOG
ExxonMobil
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
18%
16%
12%
11%
10%
7%
4%
—%
24%
7%
—%
13%
14%
10%
6%
—%
19%
5%
—%
8%
11%
23%
4%
10%
23%
4%
—%
6%
8%
17%
14%
7%
Note 7 - Revenue from Contracts with Customers
The following table provides information about receivables, contract assets and contract liabilities from our contracts with customers:
(In $ millions)
Accounts receivable, net
Current contract assets (1)
Non-current contract assets (1)
Current contract liabilities (deferred revenues) (1)
Non-current contract liabilities (deferred revenues) (1)
Successor
December 31,
2019
Successor
December 31,
2018
173
—
—
(20)
(9)
208
1
—
(12)
(9)
(1) Current contract assets and liabilities balances are included in “Other current assets” and “Other current liabilities,” respectively in our
Consolidated Balance Sheets as of December 31, 2019 (Successor).
F-31
Table of Contents
Significant changes in the contract assets and the contract liabilities balances during the period from January 1, 2018 through July 1, 2018
(Predecessor) and period from July 2, 2018 through December 31, 2018 (Successor) are as follows:
(In $ millions)
Net contract liability at January 1, 2018 (Predecessor)
Amortization of revenue that was included in the beginning contract liability balance
Cash received, excluding amounts recognized as revenue
Cash received against the beginning contract asset balance
Contract assets recognized during the period
Net contract liability at July 1, 2018 (Predecessor)
Fresh start adjustments
Net contract asset at July 2, 2018 (Successor)
Cash received, excluding amounts recognized as revenue
Cash received against the beginning contract asset balance
Contract assets recognized during the period
Net contract liability at December 31, 2018 (Successor)
Contract
Assets
Contract
Liabilities
Net Contract
Balances
7
—
—
(7)
9
9
—
9
—
(9)
1
1
(55)
25
(2)
—
—
(32)
32
—
(21)
—
—
(21)
(48)
25
(2)
(7)
9
(23)
32
9
(21)
(9)
1
(20)
Significant changes in the contract assets and the contract liabilities balances during the year ended December 31, 2019 (Successor) are as
follows:
(In $ millions)
Net contract liability at January 1, 2019 (Successor)
Amortization of revenue that was included in the beginning contract liability balance
Cash received, excluding amounts recognized as revenue
Cash received against the beginning contract asset balance
Contract assets recognized during the period
Net contract liability at December 31, 2019 (Successor)
Contract
Assets
Contract
Liabilities
Net Contract
Balances
1
—
—
(1)
—
—
(21)
14
(22)
—
—
(29)
(20)
14
(22)
(1)
—
(29)
Deferred revenue - The deferred revenue balance of $20 million reported in "Other current liabilities" at December 31, 2019 (Successor) is
expected to be realized within the next twelve months and $9 million reported in "Other non-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 December 31, 2019.
The actual timing of recognition of such amounts may vary due to factors outside of our control.
Note 8 – Other revenues
Other revenues consist of the following:
(In $ millions)
Related party management fees
Other management fees
Leasing revenues
Amortization of unfavorable contracts
Early termination fees
Total other revenues
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
109
6
1
—
11
127
46
—
—
—
—
46
43
—
—
21
8
72
110
1
—
43
8
162
F-32
Table of Contents
Related party revenues
Related party revenues relate to management support and administrative services provided during the year to Seadrill Partners, SeaMex, Northern
Drilling and Sonadrill. Refer to Note 31 - Related party transactions for more information.
Other management fees
Revenue from management services provided to third parties.
Leasing revenues
Revenue earned on the charter of the West Castor to Gulfdrill.
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 and the application of
fresh start accounting, we classified the amortization of these intangible assets or liabilities within other revenues. For the periods after emergence
from Chapter 11 and the application of fresh start accounting, we have applied a new accounting policy, which is to classify amortization of
these intangible assets and liabilities within operating expenses. The unfavorable contract values in the Predecessor periods arose from our
acquisition of Sevan Drilling Limited.
Early termination fees
The termination fee revenue in the year ended December 31, 2019 relates to the fees recognized for the West Jupiter and West Castor, the period
from January 1, 2018 through July 1, 2018 relates to the fees recognized for the West Pegasus and the termination revenue in 2017 relates to the
West Hercules.
Note 9 – Other operating items
Other operating items consist of the following:
(In $ millions)
Impairment of long lived assets (i)
Loss on disposals (ii)
Other operating income (iii)
Total other operating items
i. Impairment of long lived assets
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
—
39
39
—
—
21
21
(414)
—
7
(407)
(696)
(245)
27
(914)
In the year ended December 31, 2017 (Predecessor), as part of the Chapter 11 reorganization, we terminated the newbuild contracts for the
drillships West Draco, West Dorado, West Aquila and West Libra and the shipyards, Samsung and DSME, received an allowed claim. As a result,
we recorded a $696 million non-cash impairment charge against the newbuild assets for these rigs. We also recorded a reorganization expense
of $1,064 million for the allowed claim.
In the period from January 1, 2018 through July 1, 2018 (Predecessor), we determined that the continuing downturn in the offshore drilling
market was an indicator of impairment on certain assets. Following an assessment of recoverability, we recorded an impairment charge of $414
million against three of our older rigs.
F-33
Table of Contents
We derived the fair value of the rigs using an income approach based on updated projections of future dayrates, contract probabilities, economic
utilization, capital and operating expenditures, applicable tax rates and asset lives. The cash flows were estimated over the remaining useful
economic lives of the assets and discounted using an estimated market participant weighted average cost of capital of 11.4%. To estimate these
fair values, we were required to use various unobservable inputs including assumptions related to the future performance of our rigs as explained
above. We based all estimates on information available at the time of performing the impairment test.
ii. Loss on disposals
There were no loss on asset disposals in the years ended December 31, 2019 (Successor) or 2018 (Successor). There was a loss on disposal for
the year ended December 31, 2017 (Predecessor) which comprised the following:
(In $ millions)
Sale of West Triton
Sale of West Mischief
Sale of West Resolute
Disposal of Sevan Developer contract
Sale of West Rigel
Other
Total for year ended December 31, 2017 (Predecessor)
1) Sale of West Triton, West Mischief and West Resolute
Net proceeds/
recoverable
amount
Book value
on
disposal
75
75
75
—
126
—
351
109
146
136
75
128
2
596
Loss
(34)
(71)
(61)
(75)
(2)
(2)
(245)
On April 29, 2017 we reached an agreement with Shelf Drilling to sell the West Triton, West Mischief and West Resolute for a total consideration
of $225 million. The West Triton and West Resolute were delivered in May 2017, whilst the West Mischief was delivered in September 2017.
The sale resulted in a loss on disposal of $166 million.
2) Disposal of Sevan Developer contract
In October 2014, Sevan entered an agreement with Cosco to defer the delivery date of the Sevan Developer for twelve months with four subsequent
options to extend the date for further periods of six months, until October 2017. On October 30, 2015, April 15, 2016 and October 15, 2016 three
of the options were enacted, with $26.3 million, or 5% of the contract price, plus associated costs, refunded to Sevan on each occasion.
On April 27, 2017, the final delivery deferral agreement for the Sevan Developer was deferred to May 31, 2017 to finalize negotiations. As an
agreement was not reached, the remaining installment of $26.3 million was refunded to Sevan, taking the delivery installment back to the $526.0
million contract price.
In July 2017, Sevan and Cosco agreed to defer the Sevan Developer delivery period until June 30, 2020. The contract amendment included a
contract termination clause for Cosco and therefore it was deemed that Sevan had lost control of the asset and therefore derecognized the newbuild
asset, which was held at $620 million, construction obligation held at $526 million, and accrued interest and other liabilities held at $19 million,
resulting in a net loss on disposal of $75 million.
3) West Rigel settlement agreement
On April 5, 2018, we entered into a settlement and release agreement, subject to Bankruptcy Court approval, with Jurong in respect of the West
Rigel whereby we agreed that the share of sale proceeds from the sale of the West Rigel by Jurong would be $126 million. We recognized a $2
million loss on disposal in the year ended December 31, 2017, reflecting the share of sales proceeds as the value of the asset held for sale.
On May 9, 2018 the West Rigel was sold by Jurong and we received a share of proceeds totaling $126 million.
F-34
Table of Contents
iii. Other operating income
(In $ millions)
Loss of hire insurance settlement (a)
Receipt of overdue receivable (b)
Contingent consideration (c)
Settlement with shipyard
Total other operating income
a) Loss of hire insurance settlement
Successor
Predecessor
Year
ended
December
31,
2019
Period
from July
2, 2018
through
December
31, 2018
10
26
—
3
39
—
21
—
—
21
Period
from
January
1, 2018
through
July 1,
2018
—
—
7
—
7
Year
ended
December
31, 2017
—
—
27
—
27
Settlement of a claim on our loss of hire insurance policy following an incident on the Sevan Louisiana.
b) Receipt of overdue receivable
Receipt of overdue receivables which had not been recognized as an asset as part of fresh start accounting.
c) Contingent consideration
Amounts recognized for contingent consideration from the sales of the West Vela and West Polaris to Seadrill Partners in 2014 and 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 2018 Successor period and year ended 2019.
Note 10 – Interest expense
Interest expense consists of the following:
(In $ millions)
Cash and payment-in-kind interest on debt facilities
Unwind of discount debt
Loan fee amortization
Capitalized interest
Interest expense
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(440)
(47)
—
—
(237)
(24)
—
—
(487)
(261)
(37)
—
(1)
—
(38)
(286)
—
(27)
28
(285)
1) Cash and payment-in-kind interest on debt facilities
We incur cash and payment-in-kind interest on our debt facilities. This is summarized in the table below.
(In $ millions)
Senior credit facilities and unsecured bonds
Less: adequate protection payments
Senior Secured Notes
Debt of consolidated variable interest entities
Cash and payment-in-kind interest
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(327)
—
(66)
(47)
(440)
(162)
—
(50)
(25)
(237)
(116)
104
—
(25)
(37)
(320)
81
—
(47)
(286)
F-35
Table of Contents
We are charged interest on our senior credit facilities at LIBOR plus a margin. For periods after July 2, 2018, this margin increased by one
percentage point following the emergence from Chapter 11. There has also been an increase in LIBOR rates, which when combined with the
additional post-emergence margin, has led to an increased effective interest rate on our senior credit facilities in the year ended 2019.
During the period we were in Chapter 11 (September 12, 2017 to July 1, 2018), 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 emergence from Chapter 11 we issued $880 million of Senior Secured Notes. We incur 4% cash interest and 8% payment-in-kind interest
on these notes. On November 14, 2018 and April 10, 2019 there were two redemptions. After the two redemptions there was a remaining $476
million principal outstanding on the notes, which includes $18 million of accrued payment-in-kind interest on our Senior Secured Notes which
was compounded on July 15, 2019 and additional notes were issued.
Our Consolidated Balance Sheet includes approximately $0.6 billion 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 on those facilities.
2) 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.
3) Loan fee amortization
We amortize loan issuance costs over the expected term of the associated debt facility. We expensed capitalized loan issuance costs for debt
subject to compromise when we filed for Chapter 11 on September 12, 2017. No new debt facilities have been entered into since emerging from
Chapter 11.
4) Capitalized interest
We capitalize the interest cost incurred to finance Newbuilds. This ceased when we filed for Chapter 11 on September 12, 2017. No Newbuild
finance has been entered into since emerging from Chapter 11.
Note 11 – Impairment loss on investments in associated companies
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 and (ii) whether there has been an impairment of investments held at cost less impairment. 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.
We have recognized the following impairments on investments in associated companies:
(In $ millions)
Impairments of Investment in associated companies and joint ventures
(refer to Note 18)
Seadrill Partners - Direct ownership investments
Seadrill Partners - Subordinated units
Seadrill Partners - Seadrill member interest and IDRs
SeaMex Limited
Total impairment of investments in associated companies and joint
ventures
Total impairment of investments
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
248
—
54
—
302
302
—
—
—
—
—
—
—
—
—
—
—
—
723
82
—
36
841
841
F-36
Table of Contents
Impairment loss recognized for the year ended December 31, 2019 (Successor)
1) Seadrill Partners
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 the NYSE in August 2019 as the market capitalization decreased below $15 million for
a period of 30 consecutive days. We 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.
Having identified an indicator of OTTI, we were required to value our investments in Seadrill Partners to calculate the impairment. At the time
of the impairment review, we calculated the fair value of our investments in Seadrill Partners direct interests and IDRs to be $134 million and
nil, compared to pre-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 year ended December 31, 2019.
We valued our investments in the direct interests using an income approach which discounted future free cash flows (“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 between 11.25-12.25%. 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 cash flows 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. 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.
We valued our IDR investments 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.
Impairment loss recognized for the year ended December 31, 2017 (Predecessor)
1) Seadrill Partners
In 2017, there was a sustained decrease in the trading price of Seadrill Partners common units, which we determined to be an indicator of other
than temporary impairment against our equity method investments in Seadrill Partners. We therefore performed an impairment test at December
31, 2017. The findings of the review were that (i) the carrying value of the subordinated units exceeded the fair value by $82 million, and the
carrying value of the direct ownership interests exceeded the fair value by $723 million. We recognized this impairment of the investments
within “Loss on impairment of investments” in the Consolidated Statement of Operations.
The fair value of these investments were derived using a DCF model. 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 weighted average cost of capital of
9.75%. The DCF model derived an enterprise value of the investments, after which associated debt was subtracted to provide equity values.
The assumptions used in the DCF model were derived from significant unobservable inputs (representative of level 3 inputs for fair value
measurement) and were based on management’s judgments and assumptions available at the time of performing the impairment test. We employed
significant judgment in developing these estimates and assumptions.
2) SeaMex Limited - Impairment of investment in Joint Venture
The deteriorating market conditions in the oil and gas industry and supply and demand conditions in the offshore drilling sector in which SeaMex
operates was considered to be an indicator of impairment. We determined the length and severity of the deterioration of market conditions to be
representative of an other than temporary impairment. As such we measured and recognized an other than temporary impairment of the investment
in SeaMex as at December 31, 2017.
The fair value was derived using a DCF model. The estimated future free cash flows associated with the investment were primarily based on
expectations around applicable day rates, drilling unit utilization, operating costs, capital and long-term maintenance expenditures and applicable
tax rates. 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 10.25%. The DCF model derived an enterprise value
of the investments, after which associated debt was subtracted to provide equity values. The carrying value of the investment was found to exceed
the fair value by $36 million. We have recognized this impairment of the investments within "Loss on impairment of investments" in the
Consolidated Statement of Operations.
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Table of Contents
Note 12 – Taxation
Income taxes consist of the following:
(In $ millions)
Current tax (benefit)/expense:
Bermuda
Foreign
Deferred tax (benefit)/expense:
Bermuda
Foreign
Total tax (benefit)/expense
Effective tax rate
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
22
—
(61)
(39)
3.1%
—
30
—
(22)
8
—
34
—
(4)
30
—
56
—
10
66
(1.3)%
(0.8)%
(2.2)%
The effective tax rate for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018
(Successor) and the period from January 1, 2018 through July 1, 2018 (Predecessor) was 3.1%, (1.3)% and (0.8)% respectively. For the year
ended December 31, 2017 (Predecessor) the rate was (2.2)%.
We are incorporated in Bermuda, where a tax exemption has been granted until 2035. Other jurisdictions in which we and our subsidiaries operate
are taxable based on rig operations. A loss in one jurisdiction may not be offset against taxable income in another jurisdiction. Thus, we may
pay tax within some jurisdictions even though it might have losses in others.
The income taxes for the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor), the
period from January 1, 2018 through July 1, 2018 (Predecessor) and the year ended December 31, 2017 (Predecessor) differed from the amount
computed by applying the Bermudan statutory income tax rate of 0% as follows:
(In $ millions)
Income taxes at statutory rate
Effect of change on unrecognized tax benefits
Effect of unremitted earnings of subsidiaries
Effect of taxable income in various countries
Total tax (benefit)/expense
Deferred income taxes
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
(6)
(17)
(16)
(39)
—
49
(10)
(31)
8
—
12
—
18
30
—
(5)
3
68
66
Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. The net deferred tax assets/(liabilities) consist of the following:
F-38
Table of Contents
Deferred tax assets:
(In $ millions)
Pensions and stock options
Provisions
Net operating losses carried forward
Gross deferred tax assets
Valuation allowance
Deferred tax assets, net of valuation allowance
Deferred tax liabilities:
(In $ millions)
Property, plant and equipment
Unremitted Earnings of Subsidiaries
Intangibles
Gross deferred tax liabilities
Net deferred tax liability
Successor
December 31,
2019
2
30
259
291
(255)
36
Successor
December 31,
2018
4
28
263
295
(254)
41
Successor
December 31,
2019
30
10
4
44
(8)
Successor
December 31,
2018
49
27
34
110
(69)
As at December 31, 2019 (Successor), deferred tax assets related to net operating loss (“NOL”) carry forwards was $259 million (December 31,
2018 (Successor): $263 million), which can be used to offset future taxable income. NOL carry forwards which were generated in various
jurisdictions, include $249 million (December 31, 2018 (Successor): $257 million) that will not expire and $10 million (December 31, 2018
(Successor): $6 million) that will expire between 2021 and 2039 if unutilized.
As at December 31, 2019 (Successor), deferred tax liability related to intangibles from the application of fresh start accounting was $4
million (December 31, 2018 (Successor): $34 million).
We establish a valuation allowance for deferred tax assets when it is more likely than not that the benefit from the deferred tax asset will not be
realized. The amount of deferred tax assets considered realizable could increase or decrease in the near-term if our estimates of future taxable
income change. Our valuation allowance consists of $259 million on NOL carry forwards as at December 31, 2019 (Successor) (December 31,
2018 (Successor): $242 million).
Uncertain tax positions
As at December 31, 2019 (Successor), we had a total amount of unrecognized tax benefits of $89 million excluding interest and penalties of
which $65 million was included in other non-current liabilities, and $24 million was presented as a reduction of deferred tax assets. The changes
to our balance related to unrecognized tax benefits were as follows:
(In $ millions)
Balance at the beginning of the period
Increases as a result of positions taken in prior periods
Increases as a result of positions taken during the current period
Decreases as a result of positions taken in prior periods
Decreases as a result of positions taken in the current period
Decreases due to settlements
Balance at the end of the period
Successor
Predecessor
Year ended
December
31,
2019
132
8
29
(34)
—
(46)
89
Period from
July 2, 2018
through
December
31, 2018
61
69
18
(9)
—
(7)
132
Period from
January 1,
2018
through
July 1, 2018
55
7
1
(2)
—
—
61
Year ended
December
31,
2017
44
23
—
(9)
—
(3)
55
F-39
Table of Contents
Accrued interest and penalties totaled $18 million and $26 million as of December 31, 2019 (Successor) and December 31, 2018 (Successor)
respectively and were included in "Other liabilities" on our Consolidated Balance Sheets. We recognized expenses of $7 million, $11 million
and $3 million during the year ended December 31, 2019 (Successor), the period from July 2, 2018 through December 31, 2018 (Successor)
and the period from January 1, 2018 through July 1, 2018 (Predecessor), respectively ($10 million expense recognized in the year ended
December 31, 2017 (Predecessor)), related to interest and penalties for unrecognized tax benefits on the income tax expense line in the
accompanying Consolidated Statement of Operations.
As of December 31, 2019 (Successor), $83 million of our unrecognized tax benefits, including penalties and interest, would have a favorable
impact to the Company’s effective tax rate if recognized.
The decrease in our unrecognized tax benefits was primarily related to recognizing the U.S. position following a guidance from the U.S.
Department of Treasury. The liability for the U.S. unrecognized tax benefit was originally recorded in the fourth quarter of 2018.
Tax returns and open years
We are subject to taxation in various jurisdictions. 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
Sheets, Statements of Operations or Cash Flows. During the year ended December 31, 2019, the Company posted approximately $83 million
collateral with a financial institution in order to continue the appeal against certain tax years. The collateral is included in "Restricted Cash" on
our Consolidated Balance Sheets.
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 will be filed in the U.S. court. An adverse outcome on these proposed assessments could result in
a material adverse impact on our Consolidated Balance Sheets, Statements of Operations or Cash Flows.
The following table summarizes the earliest tax years that remain subject to examination by other major taxable jurisdictions in which we operate.
Jurisdiction
Angola
Nigeria
United States
Norway
Brazil
Note 13 – Loss per share
Earliest Open
Year
2015
2014
2016
2015
2008
The computation of basic loss per share (“LPS”) is based on the weighted average number of shares outstanding during the period. Diluted LPS
includes the effect of the assumed conversion of potentially dilutive instruments.
The components of the numerator for the calculation of basic and diluted LPS are as follows:
(In $ millions)
Net loss attributable to the parent
Less: Allocation to participating securities
Net loss available to stockholders
Effect of dilution
Diluted net loss available to stockholders
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(1,219)
—
(1,219)
—
(1,219)
(602)
—
(602)
—
(602)
(3,881)
(2,973)
—
—
(3,881)
(2,973)
—
—
(3,881)
(2,973)
F-40
Table of Contents
The components of the denominator for the calculation of basic and diluted LPS are as follows:
(In $ millions)
Basic loss per share:
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
Weighted average number of common shares outstanding
Diluted loss per share:
Effect of dilution
Weighted average number of common shares outstanding adjusted for the
effects of dilution
100
—
100
100
—
100
504
—
504
505
—
505
The basic and diluted loss per share are as follows:
Successor
Predecessor
Year ended
December
31,
2019
(12.18)
(12.18)
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(6.02)
(6.02)
(7.71)
(7.71)
(5.89)
(5.89)
(In $)
Basic loss per share
Diluted loss per share
Note 14 – Restricted cash
Restricted cash consists of the following:
(In $ millions)
Accounts pledged as collateral for Senior Secured Notes (1)
Accounts pledged as collateral for performance bonds and similar guarantees
Demand deposit pledged as collateral for tax related guarantee (2)
Other
Total restricted cash
Successor
December
31, 2019
24
104
83
31
242
Successor
December
31, 2018
328
101
—
32
461
(1) The balance as at December 31, 2018 was used to repurchase Senior Secured Notes on April 10, 2019 (see Note 22 - Debt for further
details). In 2019, Seabras Sapura repaid $24 million of related party and shareholder loans, with the cash proceeds held in escrow against
a future redemption of Senior Secured Notes. This is held as non-current within the Consolidated Balance Sheet.
(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. This is held as non-current within the Consolidated Balance
Sheet.
Restricted cash is presented in our Consolidated Balance Sheets as follows:
(In $ millions)
Current restricted cash
Non-current restricted cash
Total restricted cash
Successor
Successor
December
31, 2019
December
31, 2018
135
107
242
461
—
461
F-41
Table of Contents
Note 15 – Marketable securities
Effective January 1, 2018, we adopted ASU 2016-01, which applies to equity investments that are neither (i) accounted for under the equity
method or (ii) result in consolidation. Under ASU 2016-01 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. We hold investments
in certain marketable securities which we account for at fair value through profit and loss per this guidance. We use quoted market prices to
determine the fair value of our marketable securities and categorize them as level 1 on the fair value hierarchy.
For fiscal periods beginning prior to January 1, 2018, marketable securities not accounted for under the equity method were classified as available-
for-sale. Unrealized gains and losses on equity securities classified as available-for-sale were recognized in other comprehensive income. When
we adopted ASU 2016-01 for the first time at January 1, 2018, we reclassified $31 million of previously recognized fair value gains from
accumulated other comprehensive income to retained earnings on January 1, 2018.
The below table shows the carrying value of our investments in marketable securities for periods presented in this report.
(In $ millions)
Seadrill Partners - Common units
Archer
Total marketable securities
Successor
December 31,
2019
2
Successor
December 31,
2018
45
9
11
12
57
The below table shows the gain and losses recognized through net income for the periods presented in this report since the adoption of ASU
2016-01.
(In $ millions)
Seadrill Partners - Common Units - unrealized loss on marketable securities
Archer - unrealized (loss)/gain on marketable securities
Total unrealized loss on marketable securities
Successor
Predecessor
Year ended
December 31,
2019
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
(43)
(3)
(46)
(45)
(19)
(64)
(5)
2
(3)
The below table shows the gain and losses recognized through other comprehensive income for the periods presented in this report before the
adoption of ASU 2016-01.
(In $ millions)
Seadrill Partners - Common Units - unrealized loss on marketable securities
Archer - unrealized gain on marketable securities
Total unrealized gain on marketable securities
Predecessor
Year ended
December 31,
2017
(14)
28
14
Until April 2017, we accounted for our investment in Archer under the equity method. However, as part of a financial restructuring, Archer
completed two share issuances in March and April 2017, which diluted our ownership interest to 15.7%. Also, as part of this restructuring, we
agreed with Archer to convert total outstanding subordinated loans, fees and interest provided to Archer, with a carrying value of $37 million,
into a $45 million loan. The fair value of the new loan receivable at the date of conversion was $56 million resulting in a gain of $19 million on
debt extinguishment, which is presented within “Gain on debt extinguishment” in our Predecessor Consolidated Statement of Operations.
As a result of these activities, we concluded that we no longer had significant influence over Archer's financial and operating decisions, primarily
as a result of the reduction in our shareholding and the significant reduction in our interests in related debt and guarantees. We reclassified our
equity method investment in Archer, which had a carrying value of nil, to an investment in marketable security, also with a carrying value of
nil. We then revalued the investment in marketable security to fair value based on Archer's share price. We recognized the gain through other
comprehensive income.
For periods before we adopted ASU 2016-01, we reviewed our marketable securities for other-than-temporary impairment at each reporting
date. However, there were no impairments recorded against our investments in marketable securities during any of the periods presented.
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Table of Contents
Note 16 – Accounts receivable
Accounts receivables are held at their nominal amount less an allowance for doubtful accounts. Doubtful accounts 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 December 31, 2019
(Successor) we had no allowances for doubtful accounts netted against our accounts receivable (December 31, 2018 (Successor): nil).
The below table sets out the bad debt expense incurred for the periods presented in this report.
(In $ millions)
Bad debt expense
Total bad debt expense
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
—
—
—
—
48
48
Year ended
December
31,
2017
—
—
In November 2018 and January 2019, we recovered a total of $47 million from a $48 million overdue receivable that was fully provided against
in the Predecessor company. This was recognized as other operating income in our 2018 and 2019 Successor periods.
Note 17 – Other assets
As at December 31, 2019 and 2018 (Successor), other assets included the following:
(In $ millions)
Favorable drilling and management services contracts
Taxes receivable
Prepaid expenses
Right of use asset
Reimbursable amounts due from customers (1)
Deferred contract costs
Derivative asset - interest rate cap (2)
Insurance receivable (3)
Other
Total other assets
Successor
Successor
As at December
31,
2019
As at December
31,
2018
33
38
33
35
21
12
3
14
28
217
186
50
32
—
10
15
39
1
25
358
(1) Includes related party balances of $5 million from Northern Drilling. For further information refer to Note 31 - Related party transactions.
(2) Refer to Note 32 - Financial instruments and risk management.
(3) In January 2019, there was a loss incident on the Sevan Louisiana related to a malfunction of its subsea equipment. As of December 31, 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.
Other assets are presented in our Consolidated Balance Sheets as follows:
(In $ millions)
Other current assets
Other non-current assets
Total other assets
F-43
Successor
Successor
As at December
31,
2019
As at December
31,
2018
158
59
217
322
36
358
Table of Contents
Favorable drilling contracts and management services contracts
On emergence from Chapter 11, we recognized favorable drilling and management service contracts at fair value, which will be amortized over
their remaining contract period. The amounts recognized represent the net present value of the existing contracts at the time of emergence
compared to the current market rates at that time, discounted at the weighted average cost of capital.
The gross carrying amounts and accumulated amortization included in 'Other current assets' and 'Other non-current assets' for favorable contracts
in the Consolidated Balance Sheet are as follows:
(In $ millions)
Favorable contracts
Balance at beginning of period
Amortization of favorable contracts
Balance at end of period
As at December 31, 2019
As at December 31, 2018
Gross
Carrying
Amount
Accumulated
amortization
Net carrying
amount
Gross
Carrying
Amount
Accumulated
amortization
Net carrying
amount
287
—
287
(101)
(153)
(254)
186
(153)
33
287
—
287
—
(101)
(101)
287
(101)
186
The amortization is recognized in the Consolidated Statements of Operations under "Amortization of intangibles". The weighted average remaining
amortization period for the favorable contracts is 20 years, 6 months.
The table below shows the amounts relating to favorable contracts that is expected to be amortized over the following periods:
(In $ millions)
Amortization of favorable contracts
2020
2
2021
2
2022
2
2023
2
2024 and
after
25
Total
33
Period ended December 31,
Note 18 – Investment in associated companies
We have the following investments in associated companies:
Ownership percentage
Seadrill Partners and Seadrill Partner subsidiaries ("SDLP investments") (a) (b)
Seabras Sapura (b)
SeaMex Ltd. ("SeaMex") (b)
Sonadrill (b)
Gulfdrill (b)
(a) Refer to the Seadrill Partners subsidiaries paragraph below for additional information.
(b) For transactions with related parties refer to Note 31 - Related party transactions.
Seadrill Partners
Seadrill Partners investments consist of the following:
Successor
December 31,
2019
Successor
December 31,
2018
(a)
50.0%
50.0%
50.0%
50.0%
(a)
50.0%
50.0%
—%
—%
(a) Subordinated units - Our holdings of subordinated units of Seadrill Partners are accounted for under the equity method on the basis that the
subordinated units are considered to be ‘in-substance common stock’. The subordination period will end on the satisfaction of various tests as
prescribed in the Operating Agreement of Seadrill Partners. Upon the expiration of the subordination period, the subordinated units will convert
into Common Units. Our holding in the subordinated units represents 18% of the limited partner interests in Seadrill Partners.
F-44
Table of Contents
(b) Direct ownership interests - All of our direct ownership interests in subsidiaries of Seadrill Partners are accounted for under the equity method.
We deem these investments to represent significant influence over the investees through their voting rights and by virtue of Seadrill’s representation
on the Board of Seadrill Partners. We hold ownership interests in the following entities controlled by Seadrill Partners as at December 31, 2019:
i.
42% in Seadrill Operating LP: Seadrill Operating LP is a limited partnership and is controlled by its General Partner, Seadrill Operating
GP LLC, which is wholly owned by Seadrill Partners.
ii. 49% Seadrill Capricorn Holdings LLC: Seadrill Capricorn Holdings LLC is a limited liability company. There is only one class of
member interest which is deemed to represent voting common stock.
iii. 39% in Seadrill Deepwater Drillship Ltd and 49% indirect interest in Seadrill Mobile Units (Nigeria) Ltd.: Both entities are limited
companies and only have one class of stock, which is deemed to represent voting common stock.
(c) Member interests and IDR's - Seadrill applies the cost method to account for its investment in Seadrill member interest and Incentive
Distribution Rights (“IDR’s”) on the basis that they do not represent common stock interests and their fair value is not readily determinable. The
investments are held at cost less impairment.
We additionally hold an investment in the common units of Seadrill Partners, which are classified as marketable securities on our Consolidated
Balance Sheet. Refer to Note 15 - Marketable Securities for further information.
Seabras Sapura
Seabras Sapura is 50% owned by Sapura Energy, and 50% owned by Seadrill. We account for our 50% investment in Seabras Sapura under the
equity method.
SeaMex
We own a 50% equity interest in SeaMex. The remaining 50% is owned by Fintech. We account for our 50% investment in the joint venture
under the equity method.
Sonadrill
We own a 50% equity interest in Sonadrill. The remaining 50% is owned by Sonangol E.P. We account for our 50% investment in the joint
venture under the equity method.
Gulfdrill
We own 50% equity interest in Gulfdrill. The remaining 50% is owned by Gulf Drilling International. Gulfdrill is a joint venture that will manage
and operate five premium jack-ups in Qatar with Qatargas.
Fresh start accounting
On emergence from bankruptcy, our equity method investments were measured at fair value which resulted in a different basis from the underlying
carrying values of the investees' net assets at the date of emergence. The basis differences comprise of (i) drilling unit basis differences which
are depreciated over the remaining useful life of the associated asset and (ii) contract basis differences which are amortized over the remaining
term of the contract. The unwinding of the basis difference is recognized as a "Share in results from associated companies" in the Consolidated
Statement of Operations.
Share in results from associated companies
Our share in results of our associated companies (net of tax) were as follows:
(In $ millions)
Seadrill Partners - Direct ownership interests
Seadrill Partners - Subordinated units
Seabras Sapura
SeaMex
Sonadrill
Archer
Total share in results from associated companies (net of tax)
Successor
Predecessor
Year ended
December 31,
2019
(107)
(17)
29
(19)
(1)
—
(115)
Period from
July 2, 2018
through
December 31,
2018
(82)
(20)
24
(12)
—
—
(90)
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
77
22
46
4
—
—
149
82
22
80
—
—
(10)
174
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Table of Contents
Summary of Consolidated Statements of Operations for our equity method investees
The results of the Direct ownership interests in the SDLP companies and our share in those results (net of tax) were as follows:
SDLP
(in $ millions)
Operating revenues
Net operating income
Net income
Net (loss)/income allocated to SDLP direct ownership interests
Amortization of basis differences
Share in results of SDLP direct investments (net of tax)
Net (loss)/income allocated to SDLP subordinated units
Amortization of basis differences
Share in results of SDLP subordinated units (net of tax)
Successor
Predecessor
Year ended
December 31,
2019
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
750
51
(187)
(92)
(15)
(107)
(17)
—
(17)
426
100
(127)
(59)
(23)
(82)
(15)
(5)
(20)
612
257
201
77
—
77
22
—
22
1,128
464
235
93
(11)
82
24
(2)
22
The results of the Seabras Sapura companies and our share in those results (net of tax) were as follows:
Seabras Sapura
(in $ millions)
Operating revenues
Net operating income
Net income
Seadrill ownership percentage
Share of net income
Amortization of basis differences
Share in results from Seabras Sapura (net of tax)
Successor
Predecessor
Year ended
December 31,
2019
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
434
198
113
232
124
88
241
125
92
50%
50%
50%
50%
57
(28)
29
44
(20)
24
46
—
46
487
244
160
80
—
80
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The results of the SeaMex companies and our share in those results (net of tax) were as follows:
SeaMex
(in $ millions)
Operating revenues
Net operating income
Net income
Seadrill ownership percentage
Share of net income
Amortization of basis differences
Share in results from SeaMex (net of tax)
Successor
Predecessor
Year ended
December 31,
2019
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
232
70
18
118
40
4
121
40
7
50%
50%
50%
50%
9
(28)
(19)
2
(14)
(12)
4
—
4
239
80
—
—
—
—
The results of the Sonadrill companies and our share in those results (net of tax) were as follows:
Sonadrill
(in $ millions)
Operating revenues
Net operating income
Net income
Seadrill ownership percentage
Share of net income
Share in results from Sonadrill (net of tax)
Successor
Predecessor
Year ended
December 31,
2019
Period from
July 2, 2018
through
December 31,
2018
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
22
(1)
(2)
(1)
(1)
—%
—
—
—
—
—
—
—
—
—
—
—%
—
—
—
—
—
—%
50%
Book value of our investments in associated companies
At the year end, the book values of our investments in our associated companies were as follows:
(In $ millions)
Seadrill Partners - Direct ownership interest
Seadrill Partners - Subordinated units
Seadrill Partners - IDRs
Seabras Sapura
Seabras Sapura Holding GmbH - shareholder loans held as equity
SeaMex Ltd
Sonadrill
Total
Quoted market prices for all of our investments are not available.
F-47
Successor
Successor
December 31,
2019
December 31,
2018
122
—
—
98
123
22
24
389
479
17
54
77
132
41
—
800
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Summarized Consolidated Balance sheets for our equity method investees
The summarized balance sheets of the directly owned SDLP companies and our share of recorded equity in those companies was as follows:
SDLP
(in $ millions)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net Assets
Seadrill share of book equity
Basis difference allocated to rigs (2)
Basis difference allocated to contracts (2)
SDLP book equity allocated to direct investments
SDLP book equity allocated to subordinated units (1)
Successor
Successor
December 31,
2019
December 31,
2018
833
4,847
(533)
(2,623)
2,524
1,305
(1,220)
37
122
—
1,110
5,076
(433)
(3,039)
2,714
1,399
(1,019)
99
479
17
(1) Seadrill Partners subordinated units have a lock-up period during which they have subordinated liquidation and dividend rights. On application
of fresh start accounting the units were valued with reference to the market price of common units and adjusted for a discount for lack of
marketability (because of the subordination period). The value of the subordinated units on application of fresh start accounting was $37
million. Since application of fresh start accounting we allocated a share of the net loss incurred by Seadrill Partners to the subordinated units
using a Hypothetical Liquidation at Book Value methodology. We allocated a net loss of $20 million for the period from July 2, 2018 through
December 31, 2018. After allocating this loss the remaining balance of the investment in subordinated units at December 31, 2018 was $17
million. We allocated a further net loss of $17 million for the year ended December 31, 2019. After allocating this loss the remaining balance
of the investment in subordinated units was nil.
(2) 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 11 –
Impairment loss on investments in associated companies.
The summarized balance sheets of the Seabras Sapura companies and our share of recorded equity in those companies was as follows:
Seabras Sapura
(in $ millions)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net Assets
Seadrill ownership percentage
Seadrill share of book equity
Shareholder loans held as equity (1)
Basis difference allocated to rigs
Basis difference allocated to contracts
Total adjustments
Book value of Seadrill investment
Successor
Successor
December 31,
2019
December 31,
2018
195
1,495
(510)
(504)
676
50%
338
123
(369)
129
(117)
221
255
1,567
(599)
(637)
586
50%
293
132
(394)
178
(84)
209
(1) 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.
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Table of Contents
The summarized balance sheets of the SeaMex companies and our share of recorded equity in those companies was as follows:
SeaMex
(in $ millions)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net Assets
Seadrill ownership percentage
Seadrill share of book equity
Basis difference allocated to rigs
Basis difference allocated to contracts
Total adjustments
Book value of Seadrill investment
Successor
Successor
December 31,
2019
December 31,
2018
260
939
(141)
(586)
472
50%
236
(341)
127
(214)
22
253
977
(149)
(627)
454
50%
227
(357)
171
(186)
41
The summarized balance sheets of the Sonadrill companies and our share of recorded equity in those companies was as follows:
Sonadrill
(in $ millions)
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net Assets
Seadrill ownership percentage
Seadrill share of book equity
Book value of Seadrill investment
Note 19 – Newbuildings
Changes in drilling units for the periods presented in this report were as follows:
(In $ millions)
Opening balance as at January 1, 2018 (Predecessor)
Additions
Closing balance as at July 1, 2018 (Predecessor)
Fresh Start adjustments
Balance as at July 2, 2018, December 31, 2018 and December 31, 2019 (Successor)
Successor
Successor
December 31,
2019
December 31,
2018
57
—
(9)
—
48
50%
24
24
—
—
—
—
—
—%
—
—
248
1
249
(249)
—
On emergence from Chapter 11, the carrying values of our newbuilds were adjusted to fair value. The loss was recognized in the Consolidated
Statement of Operations under the heading "Reorganization items".
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Table of Contents
Note 20 – Drilling units
Changes in drilling units for the periods presented in this report were as follows:
(In $ millions)
Opening balance as at January 1, 2018 (Predecessor)
Additions
Depreciation
Impairment
Closing balance as at July 1, 2018 (Predecessor)
Fresh Start adjustments
Opening balance as at July 2, 2018 (Successor)
Additions
Depreciation
Closing balance as at December 31, 2018 (Successor)
Additions
Depreciation
Closing balance as at December 31, 2019 (Successor)
Cost
17,335
117
—
(414)
17,038
(10,241)
6,797
93
—
6,890
158
—
7,048
Accumulated
depreciation Net book value
(4,119)
13,216
—
(388)
—
(4,507)
4,507
—
—
(231)
(231)
—
(416)
(647)
117
(388)
(414)
12,531
(5,734)
6,797
93
(231)
6,659
158
(416)
6,401
We recognized an impairment expense of $414 million which was classified within "Loss on impairment of long-lived assets" on our Consolidated
Statement of Operations for the period from January 1, 2018 through July 1, 2018 (Predecessor). Please refer to Note 9- Other operating items
for further information.
On emergence from Chapter 11, the carrying values of our drilling units were adjusted to fair value and the accumulated depreciation of each
asset was reset to nil. The loss of $5,734 million was recognized in the Consolidated Statement of Operations under the heading "Reorganization
items".
As at December 31, 2019, as part of the joint venture with Gulfdrill, we have leased the West Castor to Gulfdrill. The net book value of the West
Castor was $53 million split between $72 million cost offset by $19 million accumulated depreciation. Refer to Note 24 - Leases for further
information.
Note 21 – Equipment
Equipment consists of office equipment, software, furniture and fittings. Changes in equipment balances for the periods presented in this
report were as follows:
(In $ millions)
Opening balance as at January 1, 2018 (Predecessor)
Additions
Depreciation
Closing balance as at July 1, 2018 (Predecessor)
Fresh Start adjustments
Opening balance as at July 2, 2018 (Successor)
Additions
Depreciation
Closing balance as at December 31, 2018 (Successor)
Additions
Depreciation
Closing balance as at December 31, 2019 (Successor)
Cost
Accumulated
depreciation Net book value
84
9
—
93
(64)
29
5
—
34
4
—
38
(55)
—
(3)
(58)
58
—
—
(5)
(5)
—
(10)
(15)
29
9
(3)
35
(6)
29
5
(5)
29
4
(10)
23
On emergence from Chapter 11, the carrying value of our equipment was adjusted to fair value and the accumulated depreciation of each asset
was reset to nil. The loss of $6 million was recognized in the Consolidated Statement of Operations under the heading "Reorganization items".
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Note 22 – Debt
As at December 31, 2019 (Successor) and 2018 (Successor), we had the following liabilities for third party debt agreements:
(In $ millions)
Secured credit facilities
Senior Secured Notes
Credit facilities contained within variable interest entities
Total debt principal
Less: debt discount and fees
Carrying value
This was presented in our Consolidated Balance Sheet as follows.
(In $ millions)
Debt due within one year
Long-term debt
Total debt principal
Successor
December 31,
2019
5,662
476
621
6,759
(136)
6,623
Successor
December 31,
2018
5,662
769
655
7,086
(172)
6,914
Successor
December 31,
2019
343
6,280
6,623
Successor
December 31,
2018
33
6,881
6,914
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Table of Contents
In the next sections we cover key terms of our debt facilities at December 31, 2019:
Secured Credit Facilities
We have summarized the key terms of our secured credit facilities as at December 31, 2019 in the table below:
Facility name
$400 million
facility
$2,000 million
facility
$440 million
facility
$1,450 million
facility
$360 million
facility
$300 million
facility
$1,750 million
facility
$450 million
facility
$1,500 million
facility
$1,350 million
facility
$950 million
facility
$450 million
facility (2015)
Repayments
before
maturity ($m)
47
Maturity
4Q 2022
Final
Repayment (3)
($m) Total ($m)
135
88
Margin on
LIBOR
floating
interest (2)
3.50%
1Q 2023
248
660
908
3.00%
Collateral
vessels
West Cressida
West Callisto
West Leda
West Alpha
West Venture
West Phoenix
West Navigator
West Epsilon
West Elara
3Q 2023
4Q 2023
4Q 2023
1Q 2024
1Q 2024
2Q 2024
4Q 2024
4Q 2024
4Q 2024
4Q 2024
23
88
73
48
299
54
355
351
198
63
41
235
137
96
576
211
770
594
368
39
64
4.25%
West Telesto
323 3.35%-4.00% West Tellus
210
144
3.75%
4.00%
AOD I AOD II
AOD III
West Tucana
West Castor
875 3.50%-3.90% Sevan Driller
Sevan Brasil
Sevan
Louisiana
265
3.50%
West Eminence
1,125 2.70%-4.78% West Saturn
945
3.00%
West Neptune
West Jupiter
West Pegasus
West Gemini
West Orion
566 3.00%-4.42% West Eclipse
West Carina
102
3.85%
West Freedom
West Vigilant
West Prospero
West Ariel
Book value
of collateral
vessels ($m) Notes
150
732
58
332
191
107
865
275
(2)
(1)
(2)
1,020
(2)
895
648
(2)
176
Total secured credit facilities
5,662
(1) The facility is held by AOD, by which we hold a 67% ownership.
(2) Certain debt facilities are split into different tranches set at different margins. Under the ACE facility the margin is 5.5%.
(3) The final repayment shown in the above table includes balloon amount due on maturity and one quarters worth of amortization payments
deferred in the fourth quarter of 2019 under the ACE facility amounting to $63 million. We have the ability to defer a further $437 million
of amortization payments that would otherwise fall due between June 2020 and March 2021 through future use of the ACE facility.
Senior Secured Notes
On July 2, 2018, we raised $880 million of aggregate principle amount of 12.00% Senior Secured Notes due in 2025. The notes bear interest at
the annual rate of 4.00% payable in cash plus 8.00% payment-in-kind. The principal borrowed on the notes included the initial $880 million
principal value of the notes plus $10 million of payment-in-kind interest that was compounded into the principal on emergence from Chapter
11.
Per the terms of the Senior Secured Notes, we were required to redeem a proportion of the principal and interest outstanding on the notes using
our share of the West Rigel sale proceeds. We received $126 million proceeds from the sale of the West Rigel on May 9, 2018 and used this to
make a mandatory redemption of $121 million of principal and $5 million of accrued interest on November 1, 2018.
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Table of Contents
We were also required to make an offer to repurchase a proportion of the Senior Secured Notes using proceeds from a deferred consideration
arrangement relating to the sale of our tender rig business to Sapura Energy in 2013. We made an offer to purchase up to $56 million of the
Senior Secured Notes on October 10, 2018. On expiry of the offer, $0.1 million in aggregate principal amount of the notes were validly tendered.
We accepted and made payment for the tendered notes on November 14, 2018.
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 accrued payment-in-kind and cash interest.
After the two redemptions, there was a remaining $476 million principal outstanding on the notes.
The Senior Secured Notes are secured by, among other things, our investments in Seadrill Partners, SeaMex and Seabras Sapura. Refer to Note
18 - Investment in associated companies for further information.
Credit facilities contained within variable interest entities
We consolidate three legal subsidiaries of Ship Finance that own the West Taurus, West Hercules and West Linus. Please refer to Note 35 for
further details of this arrangement. These facilities were also amended during the period to conform with the charter payment schedules which
were amended as part of the RSA linked to our reorganization.
The terms of these facilities are set out in the below table:
Facility Name
$390 million facility
$375 million facility
$475 million facility
Repayments
before
maturity
($m)
43
Final
Repayment
($m)
144
53
52
149
180
Maturity
4Q 2022
2Q 2023
2Q 2023
Total credit facilities within VIEs
Margin on
LIBOR
floating
interest
Total ($m)
187 Margin not
disclosed
202 Margin not
disclosed
232 Margin not
disclosed
621
Collateral
vessels
West Taurus
West Hercules
West Linus
Book value
of collateral
vessels ($m)
271
322
191
Debt maturities
The outstanding debt as at December 31, 2019 is repayable as follows:
(In $ millions)
2020
2021
2022
2023
2024
2025 and thereafter
Total debt principal
December 31,
2019
343
569
984
1,774
2,613
476
6,759
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Table of Contents
Covenants and restrictions contained in our debt facilities
We have provided a summary of the main financial covenants contained within our debt facilities below:
The below financial covenants contained in our credit facilities post emergence are measured at the RigCo group level. Details of the levels
which are required to be maintained under the credit facilities are as follows:
• Aggregated minimum liquidity requirement for the Group: In summary, and as more particularly set out in the credit facilities, to
maintain cash and cash equivalents of at least $525 million within the Group at any time during the period from and including the
Effective Date to and including 31 December 2018; and $400 million at any time during the period from and including 1 January 2019
to the final maturity date of the credit facilities. Breach of this covenant leads to an event of default.
• Net leverage ratio: to maintain a ratio of net debt to EBITDA as set out below (which will be tested on each financial quarter commencing
with the financial quarter ending on March 31, 2022 until the final maturity date of the credit facilities):
Twelve months ended
March 31, 2022
June 30, 2022
September 30, 2022
December 31, 2022
March 31, 2023
June 30, 2023
September 30, 2023
December 31, 2023
March 31, 2024
June 30, 2024
September 30, 2024
December 31, 2024
Net leverage ratio
4.5x
4.2x
3.9x
3.7x
3.4x
3.3x
3.1x
3.0x
2.8x
2.7x
2.4x
2.2x
• Debt service coverage ratio: in summary to maintain a ratio of EBITDA to debt services (being all finance charges and principal, as
more particularly set out in the credit facilities) equal to or greater than 1:1 (which will be tested on each financial quarter commencing
with the financial quarter ending on March 31, 2022 until the final maturity date of the credit facilities).
For the periods ended March 31, 2021, June 30, 2021, September 30, 2021 and December 31, 2021 a margin increase of 0.25% per quarter,
which is capped at 1%, will be enacted if:
• Debt service coverage ratio is less than 0.8:1 in respect of the applicable period; and/or
• Net leverage ratio is greater than:
Twelve months ended
March 31, 2021
June 30, 2021
September 30, 2021
December 31, 2021
Net leverage ratio
7.3x
6.6x
6.2x
5.8x
In addition to the above there are various non-financial covenants.
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The covenants included in the Senior Secured Notes agreements limit our ability to:
•
•
•
Pay dividends or make certain other restricted payments or investments;
Incur additional indebtedness and issue disqualified shares;
Create liens on assets;
• Amalgamate, merge, consolidate or sell substantially all our, NSNCo's, IHCo's, RigCo's and their respective subsidiaries and the
guarantors' assets;
Enter into certain transactions with affiliates;
Create restrictions on dividends and other payments by our subsidiaries; and
•
•
• Guarantee indebtedness by our subsidiaries.
The above covenants are subject to important exceptions and qualifications.
Since the fourth quarter of 2019, we have been engaged in discussions with our secured lenders regarding potential amendments to our credit
facilities to provide operational flexibility and additional near-term liquidity by, among other things, converting certain interest payments under
our credit facilities to payment-in-kind (“PIK”) interest and deferring certain scheduled amortization payments (or increasing the aggregate
amount of such payments that may be converted to loans payable at the final scheduled maturity date of the relevant facility pursuant to the
amortization conversion election provisions contained in the facility agreements). Our debt service is anticipated to be primarily comprised of
interest through at least Q1 2021 because our facility agreements contain certain provisions that allow us to elect to defer and convert up to $500
million in the aggregate of scheduled amortization payments under certain of our credit facilities. We have already elected to use a portion of
this capacity with respect to the first scheduled amortization installments under our credit facilities occurring in Q1 2020. We intend to continue
exercising this option for each subsequent scheduled amortization payment date until such capacity is fully utilized; however, we cannot guarantee
that we will be able to satisfy the conditions set forth in the facility agreements in order to be able to do so. We have also requested that our
lenders consent to an extension of the periods before which we are required to comply with the net leverage and debt service coverage financial
covenants in our facility agreements because we currently anticipate that we will not be able to meet these requirements when such covenants
begin to be tested at the end of Q1 2021. If we are unable to comply with the net leverage and debt service coverage covenants in our debt
agreements between Q1 2021 and Q4 2021, this will lead to an interest margin increase of up to 100 bps in the form of PIK interest; however,
this does not constitute an event of default. Thereafter, if we are unable to comply with any of these restrictions and covenants, and we are unable
to obtain a waiver or amendment from our lenders for such non-compliance, a default could occur under the terms of those debt agreements. We
have also forecasted that we will not be able to meet the requirements under our ongoing liquidity financial covenant contained in the facility
agreements during certain periods occurring after the twelve-month period following the date of this report. If our amendment requests for certain
liquidity enhancing measures are not successful, including with respect to the conversion of certain interest payments to PIK and the deferral of
certain scheduled amortization payments then there is an increased risk that we will breach these liquidly requirements sooner than currently
anticipated after such twelve-month period following the date of this report. Failure to comply with such liquidity requirements could result in
a default under the terms of our facility agreements if we are unable to obtain a waiver or amendment from our lenders for such non-compliance.
Although lender discussions are well advanced and significant progress has been made, until such time as an agreement is reached, uncertainty
remains and therefore we are also preparing certain contingency plans. The Company's business operations remain unaffected by these amendment
negotiations and related contingency planning efforts, and the Company expects to meet its ongoing customer and business counterparty
obligations as they become due.
F-55
Table of Contents
Note 23 – Other liabilities
As at December 31, 2019 and 2018 (Successor), other liabilities included the following:
(In $ millions)
Taxes payable
Contract liabilities
Unfavorable drilling contracts
Employee withheld taxes, social security and vacation payments
Accrued interest expense
Accrued expenses
Lease liabilities
Uncertain tax provisions
Other liabilities
Total Other Liabilities
Other liabilities are presented in our Consolidated Balance Sheet as follows:
(In $ millions)
Other current liabilities
Other non-current liabilities
Total Other Liabilities
Unfavorable contracts
Successor
Successor
As at December
31,
2019
As at December
31,
2018
33
29
8
51
40
137
36
83
33
450
42
21
27
40
61
107
—
100
33
431
Successor
Successor
As at December
31,
2019
As at December
31,
2018
322
128
450
310
121
431
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. The amounts recognized represent the net present value of the existing contracts at the time of
emergence compared to the current market rates at the time of acquisition, discounted at the weighted average cost of capital. We amortize these
assets and liabilities over the remaining contract period and classify the amortization under operating expenses. For periods before emergence
from Chapter 11 and application of fresh start accounting 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 was to classify amortization expense for such contracts within
other revenues.
The gross carrying amounts and accumulated amortization included in 'Other current liabilities' and 'Other non-current liabilities' for unfavorable
contracts in the Consolidated Balance Sheets as follows:
(In $ millions)
Unfavorable contracts
Balance at beginning of period
Amortization of unfavorable
contracts
Balance at end of period
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
amortization
Net carrying
amount
Gross
Carrying
Amount
Accumulated
amortization
Net carrying
amount
(66)
—
(66)
39
19
58
(27)
19
(8)
(66)
—
(66)
—
39
39
(66)
39
(27)
The amortization is recognized in the Consolidated Statement of Operations under "Amortization of intangibles". For periods before emergence
from Chapter 11 and application of fresh start accounting we recognized intangible liabilities only where we acquired a drilling contract in a
business combination. We classified amortization expense for such contracts within other revenues in the Predecessor. The weighted average
remaining amortization period for the unfavorable contracts is 7 years, 9 months.
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Table of Contents
The table below shows the amounts relating to unfavorable contracts that is expected to be amortized over the following periods:
(In $ millions)
2020
2021
2022
2023
2024 and
after
Period ended December 31,
Amortization of unfavorable contracts
(1)
(1)
(1)
(1)
(4)
Total
(8)
Note 24 - 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.
On August 15, 2019 and September 3, 2019, in connection with the Gulfdrill joint venture, Seadrill entered charter agreements to lease three
jack-up rigs from a third-party shipyard. These arrangements are to be novated to Gulfdrill prior to the commencement of its operations. On
November 27, 2019, we received delivery of the jack-up rig Lovanda (formerly Zhenhai 5) under a charter agreement and a lease liability and
offsetting right of use asset were recognized accordingly.
Below are the significant assumptions and judgments we applied to account for our leases in accordance with Topic 842.
1.
2.
3.
4.
We apply judgment in determination whether a contract contains a lease or a lease component as defined by Topic 842.
We have elected to combine leases and non-lease components. As a result, we do not allocate our consideration between leases
and non-lease components.
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.
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 the right-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 are as follows:
(In $ millions)
2020
2021
2022
2023
2024 and thereafter
Total
Successor
Year ended
December 31, 2019
17
16
9
2
1
45
The following table gives a reconciliation between the undiscounted cash flows and the related operating lease liability recognized in our
Consolidated Balance Sheet as at December 31, 2019:
(In $ millions)
Total undiscounted cash flows
Less short term leases
Less discount
Operating lease liability
Of which:
Current
Non-current
F-57
Successor
Year ended
December 31, 2019
45
(1)
(8)
36
12
24
Table of Contents
Prior to the adoption of the New Lease Accounting Standard, rental commitments on an undiscounted basis were approximately $38 million at
December 31, 2018 under long-term non-cancelable operating leases and were payable as follows: $11 million in 2019, $9 million in 2020, $9
million in 2021, $5 million in 2022, $3 million in 2023 and $1 million thereafter.
The following table gives supplementary information regarding our lease accounting at December 31, 2019:
(In $ million)
Operating Lease Cost:
Operating lease cost
Total Lease cost
Other information:
Cash paid for amounts included in the measurement of lease liabilities- Operating Cash flows
Right-of-use assets obtained in exchange for operating lease liabilities during the period
Weighted-average remaining lease term in months
Weighted-average discount rate
Successor
Year ended
December 31,
2019
13
13
13
19
18
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 our right-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 and non-lease components because we have elected not to separate lease and non-lease
components for our operating leases where Seadrill is the lessor.
For our operating subleases, the future undiscounted cash flows are as follows:
(In $ millions)
2020
2021
2022
2023
2024 and thereafter
Total
Rental expense was as follows:
(In $ millions)
Rent expense
Total rent expense
Successor
Year ended
December 31,
2019
1
1
1
—
—
3
Successor
Predecessor
Year ended
December 31,
2019
13
13
Period from
July 2, 2018
through
December 31,
2018
7
7
Period from
January 1,
2018 through
July 1, 2018
Year ended
December 31,
2017
9
9
19
19
F-58
Table of Contents
On November 25, 2019 we leased the West Castor to Gulfdrill.
For operating leases where we are the lessor, our future undiscounted cash flows are as follows:
(In $ millions)
2020
2021
2022
2023
2024 and thereafter
Total
(In $ million)
Operating Lease Income:
Operating lease income
Total Lease income
Note 25 – Common shares
Successor
Year ended
December 31,
2019
10
10
10
9
—
39
Successor
Year ended
December 31,
2019
1
1
Changes in common shares for the periods presented in this report were 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, 2017, December
31, 2017 and July 1, 2018
(Predecessor)
Cancellation of Predecessor
Company common stock
Successor Company share
issuance
—
—
100,000,000
At July 2, 2018 (Successor)
100,000,000
At December 31, 2018
(Successor)
RSU share issuance
At December 31, 2019
(Successor)
100,000,000
234,973
100,234,973
Common share transactions for periods presented
—
508,763,020
1,017
(4,244,080)
(9)
— (508,763,020)
(1,017)
4,244,080
10
10
10
—
10
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9
—
—
—
—
—
On the Effective Date, the common stock of the Predecessor Company was cancelled and the Successor Company allocated 100,000,000 shares
of $0.10 par value in accordance with the Plan. The Successor Company's authorized share capital on the Effective Date was 111,111,111 common
shares each with a par value of $0.10. The unissued 11,111,111 common shares were reserved for issuance under our employee incentive plan
(see note 29).
On June 5, 2019 an additional 27,768,889 authorized share capital was approved at a par value of $0.10. This increased authorized share capital
to 138,880,000.
On September 4, 2019, 234,973 shares were issued to employees following a vesting of restricted stock units awarded under our employee
incentive plan.
F-59
Table of Contents
Key terms of shares outstanding
All our issued and outstanding common shares are and will be fully paid. Subject to the Bye-Laws, the Board of Directors is authorized to issue
any of the authorized but unissued common shares. There are no limitations on the right of non-Bermudians or non-residents of Bermuda to
hold or vote in the Company's shares.
Holders of common shares have no pre-emptive, redemption, conversion or sinking fund rights. Holders of common shares are entitled to one
vote per common share on all matters submitted to a vote of holders of common shares. Unless a different majority is required by law or the
Bye-Laws, resolutions to be approved by holders of common shares require the approval by an ordinary resolution (being a resolution approved
by a simple majority of votes cast at a general meeting at which a quorum is present). Under the Bye-Laws, each common share is entitled to
dividends if, as and when dividends are declared by the Board of Directors, subject to any preferred dividend right of the holders of any preference
shares.
In the event of liquidation, dissolution or winding up of the Company, the holders of common shares are entitled to share equally and ratably in
the Company's assets, if any, remaining after the payment of all its debts and liabilities, subject to any liquidation preference on any issued and
outstanding preference shares.
Note 26 – Non-controlling interest
Changes in non-controlling interests for the periods presented in this report were as follows:
(In $ millions)
January 1, 2017 (Predecessor)
Changes in 2017
Net (loss)/income attributable to
non-controlling interest in 2017
December 31, 2017 (Predecessor)
Adoption of new accounting
standard ASU 2016-16 - Income
Taxes
Net (loss)/income attributable to
non-controlling interest in period
from January 1, 2018 to July 1, 2018
Redeemable non-controlling interest
Elimination of NCI of North
Atlantic Drilling Ltd and Sevan
Drilling Limited
Fair value adjustment of the non-
controlling interest in the Ship
Finance VIEs and Seadrill Nigeria
Operations Limited
July 1, 2018 (Predecessor)
July 2, 2018 (Successor)
Net (loss)/income attributable to
non-controlling interest in period
from July 2, 2018 to December 31,
2018
December 31, 2018 (Successor)
Net (loss)/income attributable to
non-controlling interest in 2019
December 31, 2019 (Successor)
North
Atlantic
Drilling Ltd
Sevan
Drilling
Limited
Asia
Offshore
Drilling Ltd
Ship Finance
VIEs
Seadrill
Nigeria
Operations
Limited
165
—
(89)
76
(25)
(160)
—
291
—
(65)
226
—
(10)
—
109
(216)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
149
—
—
149
—
1
(150)
—
—
—
—
—
—
—
—
(69)
(14)
24
(59)
—
7
—
—
199
147
147
(2)
145
(5)
140
6
—
1
7
—
2
—
—
(2)
7
7
—
7
4
11
Total
542
(14)
(129)
399
(25)
(160)
(150)
(107)
197
154
154
(2)
152
(1)
151
On emergence from Chapter 11 the non-controlling interest was adjusted to fair value. Refer to Note 5 - Fresh Start Accounting for further
information.
North Atlantic Drilling Ltd and Sevan Drilling Limited
In the predecessor, we held a 70.36% interest in NADL and 50.11% interest in Sevan. The amount of shareholders' equity not attributable to us
was included in non-controlling interests. As determined in the plan of reorganization, both companies became wholly owned subsidiaries of
Seadrill and the non-controlling interests were eliminated prior to emergence on July 2, 2018.
F-60
Table of Contents
Asia Offshore Drilling Ltd
We hold a 66.24% interest in Asia Offshore Drilling Ltd. In the predecessor, the amount of shareholders' equity not attributable to us was included
in non-controlling interests. Subsequent to filing bankruptcy petitions, the predecessor executed a Transaction Support Agreement on April 4,
2018, which included a put option to the holders of the non-controlling interest shares. This redemption feature caused the fair value of the non-
controlling interest held in AOD to be reclassified from equity to 'Redeemable non-controlling interest' within the Consolidated Balance Sheets.
Refer to Note 27 - Redeemable non-controlling interest for further information.
Ship Finance VIEs
In 2007, 2008 and 2014, we entered into sale and leaseback arrangements for drilling units with SFL Corporation Ltd, who incorporated subsidiary
companies for the sole purpose of owning and leasing the drilling units. We concluded that we are the primary beneficiary of these companies
and therefore consolidate them under the variable interest model. Accordingly, these subsidiary companies are included in our Consolidated
Financial Statements, with the SFL Corporation Ltd equity in these companies included in non-controlling interest. Refer to Note 35 – Variable
Interest Entities for more information.
On emergence from Chapter 11 the non-controlling interest was adjusted to fair value. Refer to Note 5 – Fresh Start Accounting for further
information.
Seadrill Nigeria Operations Limited
HH Global Alliance Investments Limited ("Heirs Holdings"), an unrelated party registered in Nigeria, owns a non-controlling interest in one of
our subsidiaries, Seadrill Nigeria Operations Limited, which holds a 10% interest in our drillship West Jupiter and previously supported the West
Jupiter's operations whilst it was under contract with Total in Nigeria. The equity attributable to Heirs Holdings is classified as a non-controlling
interest in our consolidated balance sheet. In February 2020, we paid $11 million to Heirs Holdings for an option to buy the non-controlling
interest at any point in the future for a $1 purchase price.
Note 27 - Redeemable non-controlling interest
Changes in redeemable non-controlling interests for the periods presented in this report were as follows:
(In $ millions)
As at January 1, 2018 (Predecessor)
Reclassification from non-controlling interest
Fair value adjustment on initial recognition
Net income attributable to redeemable non-controlling interest
Fresh start fair value adjustment
As at July 1, 2018 (Predecessor)
As at July 2, 2018 (Successor)
Net loss attributable to redeemable non-controlling interest
Fair value adjustment
As at December 31, 2018 (Successor)
Net loss attributable to redeemable non-controlling interest
Fair value adjustment
As at December 31, 2019 (Successor)
Asia Offshore
Drilling Ltd
—
150
(127)
2
5
30
30
(1)
9
38
(2)
21
57
We hold a 66.24% interest in Asia Offshore Drilling Limited (“AOD”), which owns the benign environment jack-up rigs AOD 1, AOD 2 and
AOD 3. The remaining 33.76% interest is owned by Mermaid Maritime Public Company Limited ("Mermaid").
On April 4, 2018, subsequent to filing bankruptcy petitions, the Predecessor executed a Transaction Support Agreement (“TSA”) with Mermaid
in order to (i) provide a framework for a monetization event for Mermaid and (ii) obtain unanimous approval for AOD to become a party to the
RSA and participate in Seadrill’s broader debt restructuring under its Chapter 11 reorganization.
The TSA provided Mermaid with put option that gave them the right (with no obligation) to sell their non-controlling interest shares to Seadrill.
The repurchase price is based on the fair value of the shares, determined by a valuation expert, subject to a price ceiling of $125 million. The
exercise window for the put option started on October 1, 2019 and ends on September 30, 2020.
If Mermaid do not exercise their option, Seadrill will have a call option that gives them the right (with no obligation) to buy Mermaid's non-
controlling interest shares for fair value, subject to a price floor of $75 million. The exercise window for the call option starts on October 1, 2020
and ends on March 31, 2021.
F-61
Table of Contents
If the purchase price is less than $50 million then it will be settled in cash. If the purchase price is greater than $50 million, then Seadrill is
required to settle the first $50 million in cash and any excess fair value in a variable number of Seadrill common shares (based on the 60 day
volume-weighted average price).
The put option generated a redemption feature for Mermaid that is outside the control of Seadrill. This caused the fair value of Mermaid's non-
controlling interest shares to be reclassified from equity to "Redeemable non-controlling interest" within the consolidated balance sheet of the
Predecessor. Each reporting period, we are required to (i) attribute Mermaid's share of AOD's profit to the redeemable non-controlling interest
and (ii) make an adjustment to record the redeemable non-controlling interest shares at fair value, with the offsetting entry going to equity. These
entries are set out in the table above.
Note 28 – Accumulated other comprehensive income/(loss)
Changes in accumulated other comprehensive income/(loss) for the periods presented in this report were as follows:
Unrealized
gain on
marketable
securities
Unrealized
gain on
foreign
exchange
Actuarial
gain/(loss)
relating to
pension
Share in
unrealized
gains from
associated
companies
Change in
unrealized
gain on
interest
rate swaps
in VIEs
Change in
debt
component
on Archer
facility
31
(31)
—
—
—
—
—
—
—
36
—
36
(36)
—
—
—
—
—
(26)
—
(26)
26
—
1
1
(1)
—
15
—
15
(15)
—
(5)
(5)
(8)
(13)
2
—
2
(2)
—
—
—
—
—
—
—
—
—
—
(3)
(3)
3
—
Total
58
(31)
27
(27)
—
(7)
(7)
(6)
(13)
(In $ millions)
Balance as at December 31,
2017 (Predecessor)
Adoption of accounting
standard update
Balance as at January 1, 2018
(Predecessor)
Reset accumulated other
comprehensive (loss)/income
Balance as at July 1, 2018
(Predecessor)
Other comprehensive income/
(loss) before reclassifications
Balance as at December 31,
2018 (Successor)
Other comprehensive (loss)/
income
Balance as at December 31,
2019 (Successor)
In January 2016, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" to enhance the
reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 became
effective for fiscal years and interim periods beginning after December 15, 2017. We adopted ASU 2016-01 starting from January 1, 2018 on a
modified retrospective basis, with no changes recognized in the prior year comparatives and a cumulative catch up adjustment recognized in the
Predecessor opening retained earnings. Upon adoption of ASU 2016-01, we reclassified $31 million of unrealized gains related to our marketable
securities from accumulated other comprehensive income to retained earnings in the Predecessor. As a result of the adoption of this guidance
we are required to recognize the movement in the fair value of our marketable securities in the Consolidated Statement of Operations. Refer to
Note 15 "Marketable securities" for further information.
On emergence from Chapter 11, the accumulated other comprehensive income of the Predecessor was reset to nil. For further information refer
to Note 5 - Fresh start accounting.
The applicable amount of income taxes associated with each component of other comprehensive income in the Successor is nil, other than on
the actuarial loss on pension, due to the fact that the items relate to companies domiciled in non-taxable jurisdictions. For actuarial loss related
to pension the accumulated applicable amount of income taxes is nil for the year ended December 31, 2019 (Successor) (nil for the period July
2, 2018 to December 31, 2018 (Successor) and $1 million for the period from January 1, 2018 to July 1, 2018 (Predecessor) as this item is related
to companies domiciled in Norway where the tax rate is 22% (December 31, 2018 (Successor): 23%).
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Table of Contents
Note 29 – Share based compensation
The share-based compensation expense for our share options and Restricted Stock Unit ("RSU") plans in the Consolidated Statements of
Operations are as follows:
(In $ millions)
Share-based compensation expense (1)
Total share-based compensation expense
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
5
5
—
—
9
9
7
7
(1) The $9 million expense for the period from January 1, 2018 through July 1, 2018 included a charge of $6 million for schemes cancelled on
emergence from Chapter 11. This was classified within reorganization items.
On August 16, 2018, we established an employee incentive plan with a limit of 11.1 million shares in Seadrill Limited.
On September 4, 2018 we made a grant of 0.5 million RSUs to certain employees and directors under the employee incentive plan. The awards
were subject to a service condition and vest 33% per year over the three-year period to September 4, 2021. On September 4, 2019, the first
tranche of RSUs vested and 0.2 million Seadrill shares were issued to employees and directors.
On April 26, 2019, we made a grant of 1.7 million performance shares to certain employees under our employee incentive plan. The awards are
subject to service and performance conditions and the vesting period ends on March 31, 2022.
On August 23, 2019, we made a grant of 0.3 million restricted stock units to directors. The awards were subject to a service condition and vest
33% per year over the three-year period to August 23, 2022.
The compensation cost for non-vested awards not yet recognized as at December 31, 2019 is $9 million (December 31, 2018: $9 million), with
a weighted average vesting period of 2 years.
Note 30 - Pension benefits
Defined benefit plans
We have several defined benefit pension plans covering a number of our Norwegian employees. All the plans are administered by a life insurance
company. Our net obligation is calculated separately for each plan by estimating the amount of the future benefit that employees have earned in
return for their cumulative service. The aggregated projected future benefit obligation is discounted to present value, from which the aggregated
fair value of plan assets is deducted. The discount rate is the market yield at the balance sheet date on government bonds in the relevant currency
and based on terms consistent with the post-employment benefit obligations.
Actuarial gains and losses are recognized in the Consolidated Statement of Operations when the net cumulative unrecognized actuarial gains or
losses for each individual plan at the end of the previous reporting year exceed 10 percent of the higher of the present value of the defined benefit
obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected remaining working lives of the
employees participating in the plans. Otherwise, recognition of actuarial gains and losses is included in other comprehensive income. Those
amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated
other comprehensive income.
On retirement, or when an employee leaves the company, the member’s pension liability is transferred to the life insurance company administering
the plan, and the pension plan no longer retains an obligation relating to the leaving member. This action is deemed to represent a settlement
under U.S. GAAP, as it represents the elimination of significant risks relating to the pension obligation and related assets. Under settlement
accounting, the portion of the net unrealized actuarial gains/losses corresponding to the relative value of the obligation reduction is recognized
through the Consolidated Statement of Operations. However, settlement accounting is not required if the cost of all settlements in a year is not
deemed to be significant in the context of the plan. We deem the settlement not to be significant when the cost of settlements in the year is less
than the sum of service cost and interest cost in the year. In this case, the difference between the reduction in benefit obligation and the plan
assets transferred to the life insurance company is recognized within “other comprehensive income,” rather than being recognized in the
Consolidated Statement of Operations.
For onshore employees in Norway, who are participants in the defined benefit plans, the primary benefits are a retirement pension of approximately
66 percent of salary at retirement age of 67 years, together with a long-term disability pension. The retirement pension per employee is capped
at an annual payment of 66 percent of the total of 12 times the Norwegian Social Security Base. Most employees in this group may choose to
start a pre-retirement pension at 62 years of age.
F-63
Table of Contents
Consolidated Balance Sheet position
(In $ millions)
Accrued pension liabilities - Non-current liabilities
Less: Deferred tax (Asset)
Shareholders' equity
Annual pension cost
We record pension costs in the period during which the services are rendered by the employees.
Successor
Successor
December 31,
2019
2
(1)
1
December 31,
2018
4
(1)
3
(In $ millions)
Service cost
Interest cost on prior years’ benefit obligation
Gross pension cost for the year
Expected return on plan assets
Net pension cost for the year
Impact of settlement/curtailment funded status
Total net pension cost
The funded status of the defined benefit plan
(In $ millions)
Projected benefit obligations at end of period
Plan assets at market value
Accrued pension liabilities
Change in projected benefit obligations
(In $ millions)
Projected benefit obligations at beginning of period
Interest cost
Service cost
Benefits paid
Change in unrecognized actuarial gain
Foreign currency translations
Projected benefit obligations at end of period
Successor
Predecessor
Year ended
December
31,
2019
3
1
4
(1)
3
—
3
Period from
July 2, 2018
through
December
31, 2018
2
1
3
(1)
2
—
2
Period from
January 1,
2018
through
July 1, 2018
1
—
1
—
1
—
1
Year ended
December
31,
2017
2
2
4
(1)
3
(1)
2
Successor
December 31,
2019
40
(39)
1
Successor
December 31,
2018
37
(33)
4
Successor
December
31, 2019
December
31, 2018
Predecessor
June 30,
2018
37
1
3
(2)
—
1
40
36
1
1
(1)
2
(2)
37
38
—
1
(1)
(2)
—
36
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Table of Contents
Change in pension plan assets
(In $ millions)
Fair value of plan assets at beginning of year
Estimated return
Contribution by employer
Administration charges
Benefits paid
Actuarial gain
Foreign currency translations
Fair value of plan assets at end of year
Successor
December
31, 2019
33
1
6
—
(2)
—
1
39
December
31, 2018
33
1
—
—
(1)
2
(2)
33
Predecessor
June 30,
2018
33
—
2
—
(1)
(1)
—
33
The accumulated benefit obligation for all defined benefit pension plans was $37 million and $33 million at December 31, 2019 (Successor)
and 2018 (Successor), respectively.
Pension obligations are actuarially determined and are critically affected by the assumptions used, including the expected return on plan assets,
discount rates, compensation increases and employee turnover rates. We periodically review the assumptions used and adjust them and the
recorded liabilities as necessary.
During the year ended December 31, 2017, a number of employees left and as a result, the defined benefit scheme transferred the pension liability
for these employees to the life insurance company administering the scheme. The difference between the reduction in benefit obligation and
the plan assets transferred to the life insurance company has been recognized within “Other comprehensive income.” The settlement is not
deemed to be significant in the context of the overall scheme and as such net unrecognized actuarial losses have not been recycled as a result of
the settlement.
The expected rate of return on plan assets and the discount rate applied to projected benefits are particularly important factors in calculating our
pension expense and liabilities. We evaluate assumptions regarding the estimated rate of return on plan assets based on historical experience and
future expectations on investment returns, utilizing the asset allocation classes held by the plan’s portfolios. The discount rate is based on the
covered bond rate in Norway. Changes in these and other assumptions used in the actuarial computations could impact the projected benefit
obligations, pension liabilities, pension expense and other comprehensive income.
Assumptions used in calculation of pension obligations
Rate of compensation increase at the end of year
Discount rate at the end of year
Prescribed pension index factor
Expected return on plan assets for the year
Employee turnover
Expected increases in Social Security Base
Successor
Predecessor
Year ended
December
31,
2019
2.25%
2.30%
Period from
July 2, 2018
through
December
31, 2018
2.75%
2.60%
Period from
January 1,
2018
through
July 1, 2018
2.50%
2.40%
Year ended
December
31,
2017
2.50%
2.40%
2.00%
2.60%
4.00%
2.50%
2.00%
2.60%
4.00%
2.50%
2.00%
2.40%
4.00%
2.25%
1.50%
2.40%
4.00%
2.25%
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Table of Contents
The weighted-average asset allocation of funds related to our defined benefit plan at December 31, was as follows:
Pension benefit plan assets
Equity securities
Debt securities
Real estate
Money market
Other
Total
Successor
Successor
December
31, 2019
13.6 %
58.4 %
11.0 %
16.5 %
0.5 %
100.0%
December
31, 2018
12.7 %
70.0 %
9.9 %
6.9 %
0.5 %
100.0%
The investment policies and strategies for the pension benefit plan funds do not use target allocations for the individual asset categories. The
investment objectives are to maximize returns subject to specific risk management policies. We diversify our allocation of plan assets by investing
in both domestic and international fixed income securities and domestic and international equity securities. These investments are readily
marketable and can be sold to fund benefit payment obligations as they become payable.
Cash flows - Contributions expected to be paid
The table below shows our expected annual pension plans contributions under defined benefit plans for the years ending December 31, 2020-2029.
The expected payments are based on the assumptions used to measure our obligations at December 31, 2019 and include estimated future
employee services.
(In $ millions)
2020
2021
2022
2023
2024
2025-2029
Total payments expected during the next 10 years
Defined contribution and other plans
December 31,
2019
4
2
2
3
2
13
26
We made contributions to personal defined contribution pension and other plans totaling $16 million for the year ended December 31, 2019 and
$9 million for the period from July 2, 2018 through December 31, 2018 (Successor) and $10 million for the period from January 1, 2018 through
July 1, 2018 (Predecessor). For the year to December 31, 2017 (Predecessor) the charge was $17 million. These were charged as operational
expenses as they became payable.
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Note 31 – 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 major shareholder, Hemen.
Companies in which we hold significant influence include (i) Seadrill Partners, (ii) SeaMex and (iii) Seabras Sapura (iv) Sonadrill and (v)
Gulfdrill. 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.
(In $ millions)
Management fee revenues (a)
In country support services revenues (b)
Related party inventory sales
Other
Total related party operating revenues
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
109
—
1
—
110
41
—
1
4
46
41
1
1
—
43
84
23
—
3
110
(a) We provide management and administrative services to Seadrill Partners and SeaMex and operation and technical support services to Seadrill
Partners, SeaMex, Sonadrill and Northern Drilling. We charge our affiliates for support services provided either on a cost-plus mark up or dayrate
basis.
(b) We previously provided in country support services to the Seadrill Partners rig West Polaris when it operated in Angola. The West Polaris's
contract ended in December 31, 2017, so we no longer earn revenues under this arrangement.
In addition to the amounts shown above, we recognized reimbursable revenues and expenses from Northern Drilling of $167 million for the
year ended December 31, 2019 for work to perform the first mobilization of the Northern Drilling rigs, West Mira and West Bollsta. As at
December 31, 2019 our Consolidated Balance Sheet included a $55 million receivable from Northern Drilling included in related parties and
$5 million unbilled reimbursables amounts within Other Assets 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.
(In $ millions)
In country support services expenses (c)
Related party inventory purchases
Other related party operating expenses (d)
Net bareboat charter arrangements (e)
Total related party operating expenses
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
1
2
—
3
—
—
1
—
1
1
—
3
—
4
8
3
3
(1)
13
(c) Seadrill Partners previously provided us with in country support services for the West Jupiter in Nigeria. This arrangement ended in early
2018. In addition, SeaMex previously provided us with in country support services for the West Pegasus and West Freedom when those rigs
operated in Mexico and Venezuela.
(d) We received services from certain other related parties. These included management and administrative services from Frontline, warehouse
rental from Seabras Sapura and other services from Archer and Seatankers.
(e) We previously acted as an intermediate charterer for the Seadrill Partners rig West Aquarius, during its contract with Hibernia in Canada,
which ended in April 2017.
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Table of Contents
Related party financial items
The below table provides an analysis of related party financial income for periods presented in this report.
(In $ millions)
Interest income (f)
Gains on related party derivatives
Interest income recognized on deferred contingent consideration (g)
Total related party financial items
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
26
—
4
30
15
—
1
16
12
—
2
14
34
1
3
38
(f) We earn interest income on our related party loans to SeaMex and Seabras Sapura (see below). We also previously earned interest income
on our related party loans to Seadrill Partners in 2017.
(g) We record interest income on deferred consideration receivables from Seadrill Partners (see item (i) below).
Related party receivable balances
The below table provides an analysis of related party receivable balances for periods presented in this report.
(In $ millions)
Related party loans and interest (h)
Deferred consideration arrangements (i)
Convertible bond (j)
Trading balances (k)
Total related party receivables
Of which:
Amounts due from related parties - current
Amounts due from related parties - non-current
Successor
Successor
December 31,
2019
December 31,
2018
488
31
35
150
704
181
523
476
59
43
138
716
177
539
(h) We have loan receivables outstanding from SeaMex and Seabras Sapura. We previously had loan receivables from Seadrill Partners, which
have been repaid. We have summarized the amounts outstanding in the table below:
(In $ millions)
SeaMex seller's credit and loans receivable
Seabras loans receivable
Total related party loans and interest
Successor
Successor
December 31,
2019
December 31,
2018
422
66
488
398
78
476
SeaMex loans include (i) $250 million "sellers credit" provided to SeaMex in March 2015 which matured in December 2019 but is subordinated
to SeaMex's external debt facility, which matures in March 2022, and therefore cannot be repaid. As such, we have classified this balance as
non-current on our Consolidated Balance Sheets. (ii) $45 million working capital loan advanced in November 2016 and (iii) $127 million accrued
interest on above loans and other funding. The sellers credit and working capital loan both earn interest at 6.5% and are subordinated to SeaMex's
external debt facility.
Seabras loans include a series of loan facilities that we extended to Seabras Sapura between May 2014 and December 2016. The $66 million
balance shown in the table above includes (i) $54 million of loan principal and (ii) $12 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. We received repayments against these related party loans of $15 million during 2019.
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 18 - "Investments in Associated Companies" for further details. We received repayments
against these shareholder loans of $9 million during 2019.
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Table of Contents
(i) Deferred consideration arrangements include receivables due to us from Seadrill Partners from the sale of the West Vela and the West Polaris
to Seadrill Partners in November 2014 and June 2015 respectively. We have summarized amounts due for each period in the table below:
(In $ millions)
West Vela - Mobilization receivable
West Vela - Share of dayrate
West Polaris
Total deferred consideration receivable
Successor
Successor
December 31,
2019
December 31,
2018
17
14
—
31
31
27
1
59
On adoption of fresh start accounting, we recorded receivables for West Vela share of dayrate and West Polaris earnout. These amounts were
previously accounted for as gain contingencies so were only recognized when realized. 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 in other operating income for these arrangements.
(In $ millions)
West Polaris earn out realized
West Vela earn out realized
Total contingent consideration recognized
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
—
—
—
—
—
—
7
7
13
14
27
(j) 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. At inception, the fair value of the convertible bond was $56 million whereas the previous loan had a carrying value of
$37 million. We therefore recognized a gain on debt extinguishment of $19 million in 2017 because of this transaction.
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 December 31, 2019, Archer were in negotiations with their lenders to
refinance their debt obligations, which we expected to result in an extension to maturities for all lenders, including Seadrill. As a result, we
recorded an other than temporary impairment against our investment in the convertible bond issued to us by Archer. Following the other-than-
temporary impairment, the fair value of the convertible debt instrument was $35 million of which the split between debt and embedded derivative
option was $35 million and nil respectively. See Note 33 - Fair values of financial instruments for further details.
Subsequent to the year end, on March 13, 2020, Archer announced that it had successfully secured a consensual amendment and extension to
its debt facilities. This included a reduction to the principal and accrued interest on the convertible loan due to us from Archer, in exchange for
a reduced stock conversion price and removal of certain restrictions regarding the sale or conversion of the loan. Following the amendment, the
principal due on the loan would be $13 million and the stock conversion price would decrease from $2.083 per share to $0.40. The maturity date
of the loan would also extend to April 1, 2024. The transaction is subject to execution of final agreements and completion of closing conditions.
The fair value gain/(loss) on the convertible bond for periods presented is summarized below:
(In $ millions)
Other than temporary impairment
Fair value gain / (loss) of Archer debt component
Fair value (loss) / gain of Archer embedded conversion option
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(11)
3
—
—
(3)
(9)
—
2
2
—
1
(4)
(k) Trading balances primarily comprise receivables from Seadrill Partners, SeaMex, Northern Drilling and Sonadrill 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.
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Table of Contents
Related party payable balances
The below table provides an analysis of related party payable balances for periods presented in this report.
(In $ millions)
Related party loans payable (n)
Trading balances (o)
Total related party liabilities
Of which:
Amounts due to related parties - current
Long-term debt due to related parties
Successor
Successor
December 31,
2019
December 31,
2018
239
19
258
(19)
(239)
222
39
261
(39)
(222)
(n) Related party loans include related party loans from Ship Finance to the Ship Finance subsidiaries that we consolidated as variable interest
entities (see Note 35 – Variable Interest Entities (VIEs) for further details). The carrying amount of the loans was $239 million at December 31,
2019 (2018: $222 million). The principal outstanding on the loans was $314 million at December 31, 2019, (2018: $314 million).
There is a right of offset of trading balance assets against the loans, the net position is disclosed within “Long-term debt due to related parties”
on the Consolidated Balance Sheets. As at December 31, 2019 (Successor) the trading position was a net liability position of nil.
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 year
ended December 31, 2019 (Successor) was $14 million, the period from July 2, 2018 through December 31, 2018 (Successor) was $7 million,
the period from January 1, 2018 through July 1, 2018 (Predecessor) was $7 million (year ended December 31, 2017 (Predecessor): $15 million).
(o) 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 secured
credit 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 December 31, 2019 (Successor) was $146 million (December 31, 2018
(Successor): $165 million).
We have not recognized a liability for any of the above guarantees as we did not consider it to be probable that the guarantees would be called.
Other guarantees - In addition, we have made certain guarantees over the performance of Seadrill Partners and SeaMex on behalf of
customers. Please refer to Note 34 - "Commitments and contingencies" for details.
Omnibus agreement - In 2012 we entered into an Omnibus Agreement with Seadrill Partners. The agreement outlines the following provisions:
(i) a non-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. Refer to exhibit 4.4.
Note 32 – Financial instruments and risk management
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 from non-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 our non-performance credit risk assumption.
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Table of Contents
Concentration of risk
There is also 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 and ING Bank N.V. We consider these risks to be remote. We also have a
concentration of risk with respect to customers, including affiliated companies. For details on the customers with greater than 10% of contract
revenues, refer to Note 6 - Segment information. For details on amounts due from affiliated companies, refer to Note 31 - Related Party transactions.
Foreign exchange risk
As is customary in the oil and gas industry, a majority 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 exposures primarily relate to foreign denominated cash and working capital balances. We do not expect these remaining
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 therefore we do not apply hedge accounting. The capped rate against the 3-
month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023.
We have set out our exposure to interest rate risk on our net debt obligations at December 31, 2019 (Successor) in the table below:
(In $ millions)
Senior Credit Facilities
Ineffective portion of interest rate cap (1)
Debt contained within VIEs
Debt exposed to interest rate fluctuations
Less: Cash and Restricted Cash
Net debt exposed to interest rate fluctuations (2)
Principal
Hedging
instruments
5,662
—
621
6,283
(1,357)
4,926
(4,500)
4,320
—
(180)
—
(180)
Total
1,162
4,320
621
6,103
(1,357)
4,746
Impact of 1%
increase in rates
12
43
6
61
(14)
47
(1) The 3-month LIBOR rate as at December 31, 2019 was 1.91%. At this date, the interest cap would mitigate 4% of the impact of a theoretical
1% point increase in LIBOR.
(2) The $476 million of Senior Secured Notes are a fixed rate debt instrument and are therefore excluded from the above table.
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Table of Contents
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)
(Loss)/gain recognized in the Consolidated Statement of Operations
relating to derivative financial instruments
Interest rate cap agreement
Archer convertible debt instrument
Interest rate swaps not designated for hedge accounting
Cross currency swaps not designated for hedge accounting
Loss/(gain) on derivative financial instruments
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
(37)
—
—
—
(37)
(22)
(9)
—
—
(31)
(6)
2
—
—
(4)
—
(4)
(31)
46
11
a) Interest rate cap
This represents changes in fair value on our interest rate cap agreement referred above.
b) Archer convertible debt instrument
This represents gains and losses on the conversion option included within a $45 million convertible bond issued to us by Archer. Please see Note
31 - Related party transactions for further details.
c) Interest rate swaps and cross currency swaps
Prior to filing for Chapter 11 (Predecessor), we used interest rate swaps and cross currency swaps to mitigate the impact of currency and interest
rate fluctuations on our debt. When we filed for Chapter 11 we triggered a default under these agreements and our counterparties terminated the
contracts and received an allowed claim for damages suffered. We reversed the liabilities for these instruments and recorded liabilities equal to
the expected value of the allowed claims received by our counterparties. The allowed claim values were higher than the previous fair values,
which factored in a discount for our own credit risk, so this led to an expense of $89 million. We classified the expense within reorganization
items (see Note 4 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)
Interest rate cap
Maturity date
Applicable rate
June 2023
2.87% LIBOR
cap
Outstanding
principal -
December 31,
2019
4,500
As at
December 31,
2019
As at
December 31,
2018
3
3
39
39
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Table of Contents
Note 33 - 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 December 31, 2019 (Successor)
and December 31, 2018 (Successor) are as follows:
(In $ millions)
Assets
Related party loans receivable (1) (Level 2)
Liabilities
Secured credit facilities (Level 2)
Credit facilities contained within variable interest entities (Level 2)
Senior Secured Notes (Level 1)
Related party loans payable by the VIE (Level 2)
Successor
December 31, 2019
Successor
December 31, 2018
Fair
value
Carrying
value
Fair
value
Carrying
value
395
488
476
476
5,464
590
404
229
5,549
598
476
239
5,388
612
770
222
5,519
626
769
226
(1) Excludes Archer convertible debt receivable, which is measured at fair value on a recurring basis
Level 1
The fair value of the Senior Secured Notes are derived using market traded value. We have categorized this at level 1 on the fair value measurement
hierarchy. Refer to Note 22 – Debt for further information.
Level 2
Upon the adoption of fresh start accounting, the related party loans receivable from SeaMex and Seabras Sapura were recorded at fair value. We
estimate the fair value to be equal to the carrying value after adjusting for expected credit losses on the loans. 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. The loans 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 31 - Related party transactions. The fair value of other trading balances with related parties are also assumed to be equal
to their carrying value after adjusting for expected credit losses on the receivables.
The fair value of the secured credit facilities and Ship Finance loans are 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 are 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 31 - 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 December 31,
2019 (Successor) and December 31, 2018 (Successor) are as follows:
(In $ millions)
Assets
Cash and cash equivalents (Level 1)
Restricted cash (Level 1)
Marketable securities (Level 1)
Related party loans receivable - Archer convertible debt (Level 3)
Interest rate cap (Level 2)
Temporary equity
Redeemable non-controlling interest (Level 3)
F-73
Successor
December 31, 2019
Successor
December 31, 2018
Fair
value
1,115
242
11
35
3
57
Carrying
value
1,115
242
11
35
3
57
Fair
value
1,542
461
57
43
39
38
Carrying
value
1,542
461
57
43
39
38
Table of Contents
Level 1
The carrying value of cash and cash equivalents and restricted cash, which are highly liquid, is a reasonable estimate of fair value and categorized
at level 1 on the fair value measurement hierarchy. Quoted market prices are used to estimate the fair value of marketable securities, which are
valued at fair value on a recurring basis.
Level 2
The fair value of the interest rate cap as at December 31, 2019 is calculated using well-established independent valuation techniques and
counterparty non-performance credit risk assumptions. The calculation of the credit risk in the swap values is subject to a number of assumptions
including an assumed credit default swap rate based on our traded debt, and recovery rate, which assumes the proportion of value recovered,
given an event of default. 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 is 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 is derived using the discounted cash flow model including assumptions
relating to cost of debt and credit risk associated to the instrument.
The redeemable non-controlling interest in AOD is calculated by applying a fair value to the three AOD rigs and debt facility using a discounted
cash flow model. The rig values are 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 is derived using the discounted cash flow model, using a cost of debt of 6%.
Fair value considerations on one-time transactions
Archer convertible bond fair value
As at December 31, 2019 we reassessed the fair value of the Archer convertible bond held as a related party balance as a result of the current
negotiations to restructure Archer's debt with senior lenders and Seadrill. We have re-assessed the fair value of the bond using a discounted
cashflow model approach. For the purposes of the valuation, we have assumed that the maturity date of the bond will be pushed out to December
2024, which we expect to be required in order for Archer to refinance their bank borrowings to which the Seadrill bond is subordinate. We applied
a discount rate of 14%.
As a result, an impairment of $11 million was recognized in the Consolidated Statements of Operations within "Impairment of convertible bond
from related party" and $3 million recognized in the Consolidated Statements of Comprehensive loss within "Change in fair value of debt
component of Archer convertible bond" for the year ended December 31, 2019.
The convertible bond outstanding as at December 31, 2019 was $35 million (December 31, 2018: $43 million). For further information and fair
value considerations, refer to Note 31 - Related Party Transactions.
Impairment of investments in associated companies
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. We determined that this was a trigger of other-than-temporary
impairment against our investments in Seadrill Partners. As a result, we recognized an impairment of $302 million against the Seadrill Partners
direct ownership interests, subordinated units and IDRs. This expense was classified under the line item "Loss on impairment of investments"
in the consolidated statement of operations, in the year ended December 31, 2019.
Fresh start valuations
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 which a reorganization value was derived based on the mid-point of this range of estimated distributable values.
The reorganization value represents the fair value of the Successor Company’s total assets and, under fresh start accounting, we are required to
allocate the reorganization value to individual assets based on their estimated fair values. For further information, refer to Note 5 - Fresh Start
Accounting.
Drilling unit impairment
In our reported Predecessor period ended July 1, 2018 (Predecessor), we recorded an impairment expense of $414 million against our drilling
units, derived from a fair value using an income approach based on updated projections of future dayrates, contract probabilities, economic
utilization, capital and operating expenditures, applicable tax rates and asset lives. For further information, refer to Note 9 - Other operating
items.
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Impairment of marketable securities and investments in associated companies and joint ventures
In the year ended December 31, 2017 we recognized impairments on our investments in marketable securities, associated companies and joint
ventures following deteriorating conditions in the oil and gas industry and supply and demand conditions in the offshore drilling sector.
For further information and fair value considerations, refer to Note 11 - Impairment loss on investments in associated companies.
Note 34 – 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 Consolidated Financial
Statements as at December 31, 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
As at December 31, 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.
In January 2019, Dalian appointed an administrator to restructure its liabilities. 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.
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. As at
31 March 2020, the date of the creditor’s meeting remains unconfirmed.
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 within 3-5 years.
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 as co-
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. On January 3, 2020, Oro Negro’s
foreign representative was changed to Jose Gerardo Badin Cherit. As a consequence there has been an extension to Seadrill responding to Gil
White’s response in further support of its motion to dismiss until further notice. . 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.
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Guarantees
We have issued guarantees in favor of third parties as follows, which is the maximum potential future payment for each type of guarantee:
(In $ millions)
Guarantees in favor of customers (1)(2)(3)
Guarantees in favor of banks (4)
Guarantees in favor of suppliers
Total
Successor
December 31,
2019
215
146
—
361
Successor
December 31,
2018
7
165
1
173
(1) Guarantees to Seadrill Partners - Guarantees in favor of customers are performance guarantees provided on behalf of Seadrill Partners of
$15 million (December 31, 2018 (Successor): $7 million). Guarantees in favor of suppliers includes guarantees on behalf of Seadrill Partners
of nil (December 31, 2018 (Successor): $1 million). Contractual maturity from 2020-2021.
(2) Guarantees to Northern Drilling - Guarantees in favor of customers are performance guarantees provided on behalf of Northern Drilling of
$150 million (December 31, 2018 (Successor): $nil). These guarantees are indemnified by Northern Drilling. Contractual maturity till 2022.
(3) Guarantees to Sonadrill - Guarantees in favor of customers are performance guarantees provided on behalf of Sonadrill of $50 million
(December 31, 2018 (Successor): $nil). Contractual maturity till 2021 and remains in full force and effect until all obligations under the contract
have been discharged and in any event shall terminate on the 90th day after completion of demobilization.
(4) Guarantees to Seabras Sapura - Guarantees in favor of banks are guarantees provided by a subsidiary of Seadrill Limited on behalf of Seabras
Sapura Participacoes and Seabras Sapura Holdco totaling $146 million (December 31, 2018 (Successor): $165 million). Contractual maturity
till 2021.
As of December 31, 2019 we have not recognized any liabilities for the above guarantees, as we do not consider it is probable for the guarantees
to be called.
On March 26, 2020 we signed a joint sponsor guarantee with Fintech Investments Ltd over the senior secured debt held by SeaMex. The total
amount guaranteed is up to $22 million of which we are joint and severally liable.
Other contingencies
Sevan Louisiana loss incident
In January 2019, there was a loss incident on the Sevan Louisiana related to a malfunction of its subsea equipment. As of December 31, 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.
The loss incident resulted in a period of downtime for the Sevan Louisiana. As a result, we have recovered $10 million insurance income from
loss of hire of the Sevan Louisiana, covering the period until May 2019. As any further loss of hire in bringing the rig back to work in August
2019 was not readily determined as at December 31, 2019 we have not recognized the gain contingency for further amounts recoverable under
the policy.
Note 35 – Variable Interest Entities
Between 2007 and 2013, we entered into sale and leaseback arrangements for drilling units with SFL Corporation Ltd, who incorporated subsidiary
companies for the sole purpose of owning and leasing the drilling units ("Ship Finance VIEs"). We concluded that we are the primary beneficiary
of these companies and therefore consolidate them under the variable interest model.
As at December 31, 2019 (Successor), the Ship Finance VIEs lease two semi-submersible rigs and a jack-up rig to certain fully owned Seadrill
entities under long-term charter agreements. These agreements include options for the Seadrill entities to purchase the rigs during the charter
periods and obligations to purchase the assets at the end of the lease.
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The following table gives a summary of the sale and leaseback arrangements and repurchase options, as at December 31, 2019:
Unit
West Taurus
West Hercules
West Linus
Effective
from
Nov 2008
Oct 2008
June 2013
Sale value
(In $
millions)
850
850
600
First
repurchase
option
(In $ millions)
418
580
370
Month of first
repurchase
option
Feb 2015
Aug 2011
Jun 2018
Last
repurchase
option (1)
(In $ millions)
154
138
170
Month of last
repurchase
Option (1)
Dec 2024
Dec 2024
May 2029
(i) Ship Finance has a right to require us to purchase the West Linus for $86 million if we don’t exercise the final repurchase option.
The bareboat charter rates are set on the basis of a Base LIBOR Interest Rate for each bareboat charter contract, and thereafter are adjusted for
differences between the LIBOR fixing each month and the Base LIBOR Interest Rate for each contract. A summary of the average bareboat
charter rates per day for each unit is given below for the respective years.
(In $ thousands)
West Taurus
West Hercules
West Linus
2020
101
100
99
2021
96
96
99
2022
96
96
92
2023
181
183
189
2024
177
176
153
The Ship Finance VIEs are fully consolidated in our Consolidated Financial Statements. The equity attributable to Ship Finance in the VIEs is
included in non-controlling interests. The rigs are reported within drilling units in our balance sheet. No gain from the sale of the units was
recorded at the time of each transaction. The investment in the capital leases recorded in the Ship Finance VIEs are eliminated on consolidation
against the corresponding capital lease liability held within Seadrill entities. The other assets and liabilities of the VIEs are fully reflected within
the Consolidated Financial Statements.
The balance sheets of the VIEs on a stand-alone basis at December 31, 2019 and December 31, 2018 (Successor) were as follows:
(In $ millions)
Cash and cash equivalents
Investment in finance lease
Total assets of the VIEs (1)
Short-term interest bearing debt (2)
Long-term interest bearing debt (2)
Other liabilities
Short-term amounts due to related parties
Long-term debt due to related parties (3)
Total liabilities of the VIEs
Equity of the VIEs
Successor
Successor
As at December
31, 2019
As at December
31, 2018
22
972
994
48
550
5
12
239
854
140
2
1,024
1,026
33
593
2
31
222
881
145
(1) Book value of units in the Company's consolidated financial statements as at December 31, 2019 was $784 million (December 31, 2018:
$823 million).
(2) Total interest bearing debt comprises principal outstanding of $621 million offset by $23 million debt discount (December 31, 2018:
$655 million principal outstanding offset by $29 million debt discount).
(3) 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:
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(In $ millions)
Debt principal outstanding
Debt discount
Trading liability positions held against long-term loan
Long-term loan due to related parties
Successor
As at December 31, 2019
Successor
As at December 31, 2018
314
(75)
—
239
314
(88)
(4)
222
Note 36 - Supplementary cash flow information
The table below summarizes the non-cash investing and financing activities relating to the periods presented:
(In $ millions)
Non-cash investing activities
Sale of rigs and equipment (1)
Proceeds from repayment of short-term loan from related parties due to
Seadrill Partners insulation from Seadrill Limited (2)
Derecognition of Sevan Developer newbuild asset (3)
Derecognition of Sevan Developer construction obligation (3)
Non-cash financing activities
Repayment of debt following sale of rigs and equipment (1)
Repayment of debt following insulation of Seadrill Partners from Seadrill
Limited (3)
Dividend to non-controlling interests in VIEs (4)
Successor
Predecessor
Year ended
December
31,
2019
Period from
July 2, 2018
through
December
31, 2018
Period from
January 1,
2018
through
July 1, 2018
Year ended
December
31,
2017
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
103
109
620
(526)
(103)
(109)
(14)
(1)
(2)
(3)
(4)
During the year ended December 31, 2017 (Predecessor), we completed the sale of the West Triton, West Resolute and West Mischief to
Shelf Drilling, receiving cash consideration of $122 million. This comprised sales value of $225 million offset by $103 million of debt
repayments. Refer to Note 9 - Other operating items for further information.
During the year ended December 31, 2017 (Predecessor), Seadrill Partners amended certain credit facilities to insulate itself from Seadrill
Limited. This resulted in a $109 million repayment in respect to the $440 million secured debt facility. Refer to Note 31 - Related party
transactions for further information on related party transactions.
During the year ended December 31, 2017 (Predecessor), Sevan and Cosco agreed to defer the Sevan Developer delivery period until June
30, 2020. The contract amendment included a contract termination clause for Cosco and therefore it was deemed that Sevan had lost
control of the asset and therefore derecognized the newbuild asset, which was held at $620 million, construction obligation held at $526
million, and accrued interest and other liabilities held at $19 million, resulting in a net loss on disposal of $75 million. Refer to Note 9 –
Other operating items for further information.
During the years ended December 31, 2017, the Ship Finance VIEs declared dividends payable to Ship Finance. Refer to Note 35 - Variable
interest entities for further information.
Note 37 – Subsequent Events
Archer convertible note
On March 13, 2020, Archer announced that it had successfully secured a consensual amendment and extension to its debt facilities. This included
a reduction to the principal and interest on the convertible loan due to us from Archer, in exchange for a reduced stock conversion price and
removal of certain restrictions regarding the sale or conversion of the loan (see Note 31 - "Related party transactions" for details of loan).
Following the amendment, the principal due on the loan would be $13 million and the stock conversion price would decrease from $2.083 per
share to $0.40. The maturity date of the loan would also extend to April 1, 2024. The transaction is subject to execution of final agreements and
completion of closing conditions.
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