Executive Summary / Key Takeaways

• Seadrill has strategically transformed into a pure-play floater company focused on high-specification assets in the resilient Golden Triangle deepwater basins, exiting non-core segments and integrating acquisitions to enhance efficiency.
• Despite near-term market volatility and operational headwinds impacting Q1 2025 results (Net Loss of $14M vs $60M Net Income in Q1 2024, EBITDA of $73M vs $80M in Q1 2024), the company maintains its full-year 2025 guidance ($1.3B-$1.36B Revenue, $320M-$380M EBITDA), underpinned by significant backlog coverage.
• Seadrill possesses key technological differentiators, particularly in Managed Pressure Drilling (MPD) and dual-activity rig capabilities, which contribute to superior operational performance and are increasingly valued by customers seeking efficiency.
• The company maintains a robust balance sheet ($404M unrestricted cash, $629M total liquidity as of Q1 2025) and is committed to returning capital to shareholders through a substantial share repurchase program ($208M remaining authorization as of Q1 2025), reflecting management's belief the stock is undervalued.
• While facing competitive pressures from peers and specific legal/regulatory risks, Seadrill's focus on operational excellence, disciplined capital allocation, and strong customer relationships positions it to capitalize on the anticipated medium to long-term recovery in deepwater demand.

Setting the Scene: A Transformed Deepwater Player

Seadrill Limited operates as a global offshore drilling contractor, specializing in providing high-specification drilling services to the oil and gas industry. The company's core business revolves around the ownership and operation of drillships and semi-submersible rigs, collectively known as floaters, designed for complex operations in shallow to ultra-deepwater environments, spanning both benign and harsh conditions. Its customer base is diverse, including oil super-majors, state-owned national oil companies, and independent oil and gas companies, with services typically contracted on a dayrate basis.

The company has undergone a significant transformation in recent years, emerging from Chapter 11 proceedings in 2022 and strategically refining its fleet and operational footprint. A pivotal move was the acquisition and subsequent integration of the Aquadrill fleet in 2023. This integration has been successful, eliminating costly third-party management fees and exceeding synergy targets, bringing valuable high-specification assets like the West Vela, West Capella, West Auriga, and West Polaris fully under Seadrill's operational control. Concurrently, Seadrill completed its exit from the benign jackup market with the sale of the West Prospero, solidifying its strategic pivot to a pure-play floater company.

This strategic focus centers on concentrating a highly standardized fleet in what the company terms the "Golden Triangle" – encompassing the U.S. Gulf of Mexico, South America (particularly Brazil), and West Africa. These regions represent key hubs of deepwater activity, offering resilience and long-term demand potential. By clustering assets, Seadrill aims to achieve basin scale, harvesting economies of scale in operations and support.

In the competitive offshore drilling landscape, Seadrill operates alongside major players such as Transocean (RIG), Valaris (VAL), and Noble Corporation (NE). While Seadrill is smaller in fleet size compared to industry giants like Transocean, it strategically positions itself through operational excellence, fleet quality, and geographic focus. The market is characterized by volatility, influenced by global macro conditions, oil price fluctuations, and customer capital allocation decisions. Recent periods have seen increased rig availability due to demand deferral, leading to intensified competition and downward pressure on dayrates for certain segments, particularly in the near term. However, Seadrill believes its disciplined approach to fleet management, including decisive stacking decisions when opportunities do not meet economic thresholds, differentiates it from rivals who may have brought back supply prematurely without sustainable demand.

Technological Edge and Operational Excellence

A critical component of Seadrill's strategy and competitive positioning is its focus on operating high-specification rigs equipped with advanced technology. The company emphasizes dual-activity drillships with 15,000 BOPs and Managed Pressure Drilling (MPD) capabilities. MPD is a key technological differentiator, enabling more precise control over downhole pressure, which can significantly enhance drilling efficiency and safety, particularly in complex reservoirs. Seadrill expects approximately 80% of its owned drillships to be MPD-equipped in 2025, highlighting its commitment to leading in this operational area.

The tangible benefits of this technological focus are reflected in operational performance. For instance, the West Vela, equipped with MPD, recently demonstrated exceptional performance by drilling a high-impact well 35% below budget and one month ahead of schedule for a customer. This level of efficiency is highly valued by operators and contributes to Seadrill's reputation for reliable execution. While direct, quantifiable comparisons of MPD's impact on dayrates or overall project costs versus non-MPD operations across the entire fleet are not detailed, the company's emphasis on this technology underscores its belief in its competitive advantage.

Operational excellence extends beyond technology to encompass safety and uptime. Seadrill places a strong emphasis on safety performance, achieving a Total Recordable Incident Frequency Rate (TRIR) nearly 20% below the IADC average in 2024 and receiving rig awards like the West Jupiter being named Rig of the Year within the fleet. Maximizing uptime and economic utilization are paramount, as these directly impact revenue and profitability. While Q1 2025 saw a dip in economic utilization (84% vs 97% in Q1 2024) due to unplanned downtime related to regulatory matters on the West Tellus and commencement issues on the West Auriga and West Polaris, management has prioritized returning utilization to historical standards and noted material improvement by April.

Compared to peers, Seadrill's focus on safety and operational reliability provides a competitive moat. While larger rivals like Transocean may offer greater scale, Seadrill's emphasis on execution and differentiated capabilities like MPD can lead to superior performance on a per-rig basis. The company's post-restructuring focus on cost optimization also aims to ensure that operational efficiencies translate into stronger margins, although current TTM Gross Profit Margins (21.30%) and EBITDA Margins (24.36%) trail those of Valaris (20% Gross, 26.16% EBITDA TTM) and Noble (24% Gross, 20% EBITDA TTM), while being competitive with or exceeding Transocean's (79% Gross - likely skewed by specific items, 24.36% EBITDA TTM). Seadrill's Debt/Equity ratio (0.21 TTM) is favorable compared to RIG (0.70 TTM), VAL (0.52 TTM), and NE (0.43 TTM), reflecting a healthier post-restructuring balance sheet.

Financial Performance and Health

Seadrill's financial performance in the first quarter of 2025 reflected the challenging market conditions and operational issues experienced early in the year. Total operating revenues decreased to $335 million for the three months ended March 31, 2025, down from $367 million in the same period of 2024. This decline was primarily driven by a $27 million decrease in contract revenues, resulting from a lower average number of rigs on contract (nine vs. ten) and reduced economic utilization (84% vs. 97%). These factors outweighed the positive impact of higher average contractual dayrates ($323 thousand vs. $300 thousand) and increased amortization of deferred mobilization fees from recently commenced contracts.

Operating expenses saw a modest increase to $317 million in Q1 2025 from $303 million in Q1 2024. This was mainly attributable to higher depreciation and amortization ($55 million vs $38 million), reflecting capital projects on the West Auriga and West Polaris, and increased management contract expenses ($45 million vs $38 million) for the Sonadrill rigs. Lower SG&A costs and the absence of merger-related expenses partially offset these increases.

The combination of lower revenues and higher operating expenses resulted in a significant decrease in operating profit, falling from $80 million in Q1 2024 to $18 million in Q1 2025. After accounting for financial and other non-operating items (which resulted in a net gain of $17 million in Q1 2025 vs $10 million in Q1 2024, primarily due to increased equity in earnings from Sonadrill and other financial items, partially offset by lower interest income) and income tax expense ($15 million vs $10 million), Seadrill reported a net loss of $14 million for Q1 2025, a sharp contrast to the net income of $60 million in Q1 2024.

Despite the Q1 loss, Seadrill maintains a strong balance sheet and robust liquidity position. As of March 31, 2025, the company held $404 million in unrestricted cash and had access to $225 million under its undrawn Revolving Credit Facility, totaling $629 million in available liquidity. Gross principal debt stood at $625 million, primarily comprising the $575 million secured bond maturing in 2030 and a $50 million unsecured convertible bond due in 2028. The company was in compliance with its financial covenants as of the reporting date. This financial strength provides resilience against market volatility and supports its capital allocation framework.

Seadrill's capital allocation strategy prioritizes maintaining a conservative capital structure, strong liquidity (targeting minimum cash of $250 million), focused investment in its fleet, and returning capital to shareholders. The company aims for net leverage below 1.0x currently and below 2.0x through the cycle. Subject to these targets and covenant compliance, Seadrill intends to return at least 50% of Free Cash Flow (operating cash flow minus CapEx) via share repurchases or dividends.

A $500 million share repurchase program was authorized in Q2 2024, with $208 million remaining as of March 31, 2025. While no shares were repurchased in Q1 2025, management views the stock as undervalued and has historically been active in buybacks, having returned $792 million to shareholders through the end of 2024, reducing the issued share count by 22% since September 2023.

Market Outlook and Guidance

The near-term outlook for the offshore drilling market, particularly for 2025, is characterized by management as "cloudy" due to ongoing global macro uncertainty, oil price volatility, and client caution leading to demand deferral. This has resulted in increased rig availability and intensified competition, putting downward pressure on rates in certain segments. Marketed utilization for drillships has softened and is expected to trend lower through the year.

However, Seadrill remains confident in the medium to long-term prospects for deepwater drilling. Management believes that investment is fundamentally required to offset depletion and that deepwater projects remain economically compelling, often more attractive than onshore alternatives like U.S. shale plays as Tier 1 acreage is depleted. Forecasts for offshore sanctioning activity in 2026 and 2027 are significantly higher than in 2025, with a large percentage of projects economic at Brent prices above $50-$60 per barrel.

Regionally, the outlook varies. The U.S. Gulf of Mexico is expected to see temporary dislocation in 2025 before returning to balance and potentially becoming undersupplied in 2026 and beyond. West Africa is anticipated to see demand rebound and incremental growth from 2027. Brazil remains the most important and resilient deepwater market, with stable demand and expectations for 30-plus floaters needed in the coming years. Petrobras (PBR) continues to issue tenders, including a multiyear tender for the Bougios field starting in late 2026, and demand is also seen from other operators and IOCs. In Asia, opportunities are emerging for the second half of 2025 and longer-term work in 2026. The harsh environment jackup market in Norway faces uncertainty regarding demand beyond 2026.

For the full year 2025, Seadrill maintains its guidance:

• Total Operating Revenues: $1.3 billion to $1.36 billion (excluding $35 million in reimbursable revenues).
• Adjusted EBITDA: $320 million to $380 million.
• Full Year Capital Expenditures: $250 million to $300 million.

This guidance incorporates the impact of operational issues experienced in Q1 2025. The revenue midpoint includes approximately 90% coverage from the existing contract backlog, which stood at a robust $2.8 billion as of March 31, 2025, extending meaningfully through 2028 and into 2029. Recent contract awards, such as the three-year contracts for the West Jupiter and West Telus with Petrobras commencing in 2026 (adding $1 billion in backlog), provide significant earnings visibility. Upside to the guidance midpoint exists depending on securing contracts for rigs with uncommitted capacity, such as the West Capella and Sevan Louisiana. The CapEx guidance includes rollover from 2024 and investments in long lead items for rigs commencing contracts in 2026.

Risks and Challenges

Despite its strategic positioning and financial strength, Seadrill faces several risks and challenges. The most prominent near-term risk is the continued market volatility and demand deferral, which could prolong the period of increased rig availability and competitive pricing pressure, potentially impacting utilization and dayrates for rigs rolling off contract. Inflationary pressures could also impact the company's cost base.

Operational risks include unplanned downtime, which directly affects revenue and utilization, as demonstrated by the West Tellus in Q1 2025. Regulatory environments, particularly in key operating regions like Brazil, can be dynamic, leading to unexpected delays or requirements. Shipyard and mobilization delays can also impact contract start dates and costs.

Several legal and contingent matters pose potential financial risks. The SFL Hercules litigation in Norway resulted in a judgment against Seadrill for approximately $37 million plus interest and legal costs, which the company is appealing. A claim related to Sonadrill fees for approximately $72 million is awaiting judgment. Long-standing tax audits in Brazil, with an aggregate assessed amount of around $145 million including tax and interest, are being litigated. Most significantly, Petrobras has asserted delay penalties of approximately $213 million (with potential for more) related to the uncompleted Sete Brazil project drillships and indicated potential set-off rights against amounts payable under existing contracts. While mediation is agreed and Petrobras has committed to not exercising set-off rights pending the outcome, this matter is in its early stages, and the timing and outcome are uncertain. Seadrill intends to vigorously defend its position in all these matters. Guarantees provided for Sonadrill's potential liabilities are capped at $1.1 billion.

Competitively, rivals bringing back stacked rigs prematurely could exacerbate the supply/demand imbalance. Seadrill's ability to secure profitable work for its uncommitted rigs in a competitive environment will be key. While its 6th generation rigs are considered competitive due to their capabilities, the market perception of 6th vs. 7th generation assets could influence contracting opportunities and rates.

Conclusion

Seadrill has successfully executed a strategic transformation, emerging as a focused deepwater floater company with a high-specification fleet concentrated in core, resilient basins. While the near-term market presents challenges characterized by volatility and demand deferral, impacting recent financial performance, the company's strong balance sheet, significant contract backlog, and disciplined capital allocation framework provide a solid foundation.

Seadrill's operational focus, underpinned by technological capabilities like MPD and a commitment to safety and efficiency, differentiates it in a competitive landscape where performance is increasingly valued by customers. The company's maintained full-year guidance reflects confidence in its ability to navigate the current environment and capitalize on the anticipated recovery in deepwater demand from late 2025 into 2026 and beyond. Despite facing specific legal and operational risks, Seadrill's management is actively addressing these challenges and remains focused on creating long-term shareholder value through operational optimization, disciplined growth, and continued capital returns. The investment thesis hinges on the successful execution of its strategy amidst market fluctuations and the realization of value embedded in its backlog and future deepwater opportunities.