Seadrill Limited: Navigating Challenges and Charting a Path Forward

Seadrill Limited, a leading offshore drilling contractor, has recently released its unaudited condensed consolidated financial statements for the first quarter of 2025. The report sheds light on the company’s financial performance, operational challenges, and future outlook amidst a dynamic industry landscape.

Financial Performance

Seadrill’s total operating revenues for the first quarter of 2025 stood at $335 million, a decrease of 9% compared to the same period in 2024. This decline was primarily driven by a reduction in the average number of rigs under contract, from ten in Q1 2024 to nine in Q1 2025. However, the company’s average contractual dayrate increased from $300 thousand to $323 thousand, partially offsetting the impact of fewer rigs in operation.

The company’s operating expenses rose by 5% to $317 million, mainly due to higher depreciation and amortization costs, as well as increased management contract expenses. Seadrill’s operating profit for the quarter was $18 million, a significant decrease of 78% compared to the $80 million recorded in the first quarter of 2024.

Net loss for the period was $14 million, compared to a net income of $60 million in the same quarter of the previous year. This decline was largely attributable to a $69 million decrease in profit before income taxes, driven by lower operating revenues and the absence of a one-time $16 million other operating income item recorded in Q1 2024.

Contract Backlog and Business Environment

Seadrill’s contract backlog, which represents the total value of future contracted revenues, stood at $2.9 billion as of March 31, 2025, down from $3.2 billion at the end of 2024. The company expects to realize $922 million of this backlog in the remainder of 2025, with the remainder spread over the following years.

The global business environment for offshore drilling services has been mixed. While oil prices have remained relatively stable, averaging $75 per barrel in the first quarter of 2025, concerns over global economic conditions, government trade policies, and output increases by major producers have led to the continued deferral of offshore capital expenditures and contracting of offshore drilling services.

This uncertainty has had a direct impact on Seadrill’s operations. The company’s marketed utilization for benign-environment floaters decreased from 84% in Q4 2024 to 81% in Q1 2025, primarily due to rigs coming off contract and not being immediately recontracted. Similarly, the marketed utilization for harsh-environment floaters declined from 93% to 84% over the same period, reflecting the reduction in contracted units.

Operational Challenges and Legal Matters

Seadrill’s financial performance has been impacted by several operational challenges and legal matters:

1. Nigerian Cabotage Act Litigation: In 2019, the Federal High Court of Nigeria ruled that Seadrill’s Nigerian subsidiary, Seadrill Mobile Units Nigeria Ltd (SMUNL), must pay a 2% Cabotage fee, or approximately $69 million, on its contract revenue. SMUNL has appealed the decision, and the case is currently pending before the Court of Appeals. The ultimate outcome of this litigation remains uncertain.

2. Brazil Tax Audit: Seadrill’s Brazilian subsidiary, Seadrill Serviços de Petróleo Ltda, has been involved in a long-standing tax audit related to the years 2009 and 2010. In 2023, an appellate court ruled in favor of the tax authorities, assessing a tax and interest of approximately $70 million. Seadrill has appealed this decision and is awaiting a ruling from the higher courts. Additionally, there are open cases related to the years 2012, 2016, and 2017, with a total assessed amount, including tax and interest, of approximately $75 million.

3. Sete Brazil Claim: In January 2025, Seadrill Brazil received notices from Petrobras asserting delay penalties of approximately $213 million related to drillships that were to be operated in Brazil as part of the Sete Brazil Project. Seadrill and Petrobras have agreed to participate in voluntary mediation, and Petrobras has committed to not exercise any set-off rights pending the outcome of the mediation.

These legal and operational challenges have added uncertainty to Seadrill’s financial position and have the potential to impact the company’s future cash flows and profitability.

Capital Allocation and Shareholder Returns

In July 2023, Seadrill announced a new capital allocation framework designed to prioritize a conservative capital structure, liquidity position, and returns to shareholders. The company intends to maintain a net leverage target of less than 1.0x under current market conditions, with a maximum through-cycle net leverage target of less than 2.0x.

As part of this framework, Seadrill has established a target minimum cash-on-hand of $250 million to provide resilience even in a downturn scenario. The company also plans to evaluate potential accretive additions to its core asset categories, while returning at least 50% of its free cash flow to shareholders through share repurchases or dividends.

During the second quarter of 2024, Seadrill’s Board of Directors authorized a new $500 million share repurchase program, of which $208 million remained available as of March 31, 2025. The company has been actively repurchasing its shares, having canceled a total of 6,714,252 shares as of the end of 2024.

Outlook and Conclusion

Seadrill’s financial performance in the first quarter of 2025 was impacted by a combination of operational challenges, legal disputes, and industry-wide uncertainty. The company’s contract backlog remains substantial, but the deferral of offshore capital expenditures and the decline in marketed utilization for certain rig types pose risks to future revenue and profitability.

To navigate these challenges, Seadrill has implemented a disciplined capital allocation framework focused on maintaining a strong balance sheet and liquidity position. The company’s commitment to returning capital to shareholders through share repurchases is a positive signal, but the ultimate success of this strategy will depend on the company’s ability to manage its operational and legal issues effectively.

Looking ahead, Seadrill’s ability to secure new contracts, resolve its legal disputes favorably, and control costs will be crucial in determining its future performance. The company’s management team will need to demonstrate agility and resilience in the face of an uncertain industry landscape, while also delivering value to its shareholders. With a focus on operational excellence, financial discipline, and strategic decision-making, Seadrill can position itself for long-term success in the offshore drilling market.