Seadrill - Q1 2023
May 23, 2023
Transcript
Operator (participant)
Hello everyone, welcome to Seadrill's quarterly earnings call for the Q1 of 2023. We are currently live via webcast and the conference call line. The format of today's call will start with a short presentation by Seadrill's President and CEO, Simon Johnson, and its EVP and CFO, Grant Creed. For those tuned via conference call line, you can obtain a PDF copy of the presentation from the investor section of Seadrill's website under Reports and Presentation. The former presentation will be followed by a Q&A session where industry analysts and market commentators will be invited to participate. To join the Q&A, you must be tuned in via conference call using the details provided on the Notice of Earnings release published on Thursday, 11 May 2023. To register to ask a question, please press star followed by one on your telephone keypad.
Please note that the recording of today's call will be available on the company's website within the next few days. I will now pass the line over to Simon Johnson. Simon, the line is now open to you.
Simon Johnson (President and CEO)
Thank you very much. Welcome all to our second quarterly earnings call this calendar year and the first call of the 2023 financial period. On the line today, Grant and I are joined by Leif Nelson, our Chief Operating Technology Officer, and Samir Ali, our Chief Commercial Officer. Grant and I will shortly take you through our prepared remarks before we open up for a Q&A session. For further information regarding today's presentation on the Q1 earnings, I invite you to read the full earnings release published to the market earlier today, which is accessible on the Seadrill website. On slide twp, you'll find a disclaimer relating to today's presentation. This outlines important points around forward-looking statements made in the earnings report and to be discussed on this call, which are based on current expectations and are subject to certain risks and uncertainties.
There are many factors that could cause actual performance and results to differ materially. For further information, please take the time after the call to read this disclaimer and refer to the full quarter earnings report, as well as our other SEC filings. In addition, please note that we'll be referencing non-GAAP measures on our call, and a reconciliation of operating income to adjusted EBITDA can be found in today's full earnings release. We've started this year strongly with an adjusted EBITDA more than doubling on a quarter-on-quarter basis to $85 million. This represents a 32% EBITDA margin. The significant improvement in financial performance was mainly due to a full quarter of operations for our drillships operating in Brazil. As of today, Seadrill's backlog stands at approximately $2.6 billion, which is especially strong in the context of our fleet size.
This backlog total includes the three-month extension secured for the West Neptune, which added $39 million, reflecting our long-standing relationship with Llog. We ended the quarter with an adjusted net cash position of $133 million. Going forward, free cash flow generated by the enterprise will be a key metric. Across our own fleet, we had good operational performance with technical utilization coming in at 96%, while our economic utilization was 95%. As Seadrill stands today, we have a fleet of 22 units, including 13 ultra-deepwater floaters. We are delighted that most floaters are contracted, including all of our 10 high-specification drillships, primarily deployed across the Golden Triangle. Also in our fleet, our two harsh environment units continue operations on the NCS. We have three benign jackups operating through our Qatari joint venture, and lastly, one tender assist unit is operating in Thailand.
Finally, we're proud to announce that we've received a B rating under the Carbon Disclosure Project framework, the equal highest rating amongst all offshore drillers, which reflects our commitments to minimizing our impact on the environment. I'll be covering ESG in a little more detail later in the presentation. Moving to slide four, I will touch on the market backdrop. Despite some volatility recently, the price of Brent has generally remained above the $70 mark, and oil and gas market fundamentals continue to be supportive for offshore drilling. Many analysts expect oil demand year on year to increase by around 1.5-2 million barrels per day in 2023. While on the supply side, OPEC announced further production cuts earlier this year. Coupled with the healthy economics of offshore projects, this demand supply balance is a positive read across for our activity in the sector.
Taking a close look at offshore drilling, in the benign ultra-deepwater floater segment, marketed utilization for drillships has remained around the 95% mark, while leading-edge day rates continue to increase with a recent fixture close to $500,000 per day. In our view, we expect to see a five-handle fixture at the leading edge in the second half of the year as the market tightens further. Brazil continues to be the main driver of floater demand, with Petrobras in particular moving to secure more capacity. In the near term, we anticipate additional requirements from Brazil and results from ongoing Petrobras tenders, leading to more rigs mobilizing to the region from different geographies. We also forecast incremental floater demand offshore Africa with active requirements for Angola, Nigeria, Namibia, and Mozambique.
To round off the Golden Triangle outlook, Gulf of Mexico demand visibility is typically limited with a lot of contracting activity undertaken via direct negotiations. However, this region is effectively sold out, and we remain positive about its utilization outlook. With that all said, although demand is very important, we continue to believe that supply-side discipline amongst drillers is the most salient factor as to how this upcycle progresses. Turning to the harsh environment segment, we have one CJ70 jackup on long-term contract with ConocoPhillips. One floater, the West Phoenix, operating with Vår Energi on the NCS that is currently estimated to roll off in the second half of 2024. On the supply front, we've seen a string of announcements about floaters exiting the North Sea for contracts outside the region, including notably Namibia and Australia, with more announcements to follow soon.
On the demand side, anticipated requirements in 2024 and 2025 are beginning to materialize. We are seeing interest in the West Phoenix for harsh environment operations outside the North Sea. We view these dynamics as supportive for our recontracting prospects next year. We are very optimistic about market developments in offshore drilling and continue to believe that we're in the constructive early stages of a multi-year upcycle. I'll now hand over to Grant, who will outline our 1st quarter financials, then cover a few points on a capital structure and set out our guidance for the full year of 2023. Over to you, Grant.
Grant Creed (EVP and CFO)
Thank you, Simon, and welcome again to everybody joining us today. Before I jump into the figures, please note that our Q1 results do not include the effects of our Aquadrill acquisition that closed on April 3rd. The operating results and the assets and liabilities of Aquadrill will be consolidated from April 3rd and presented as part of our next quarterly earnings. Our full year 2023 guidance, which I'll outline later in this presentation, includes the consolidation of Aquadrill for a period of nine months from the closing date to year-end. Now to the key quarterly figures. Q1 revenue was $266 million, an increase quarter-on-quarter, primarily due to a full period of operations in respect of our four drillships offshore Brazil.
We also benefited from a higher day rate on the West Neptune and from the Sevan Louisiana, achieving higher economic utilization. That was slightly offset by no further revenue from West Hercules, which demobilized and was returned to the rig owner in Q4. Moving to OpEx. Q1 OpEx was $219 million, a reduction quarter-on-quarter, mainly driven by the demobilization and redelivery of the West Hercules to the rig owner, partly offset by a full period of operations for our drillships in Brazil. As a result of these movements, we recorded adjusted EBITDA of $85 million, which marks a substantial increase compared to Q4. This translated to an adjusted EBITDA margin of approximately 32%, which screens well compared to our peer group.
On the balance sheet, unrestricted cash decreased to $376 million at the end of the period. This was largely driven by the settlement of liabilities for accrued expenditures in relation to our recent rig startups in Brazil and voluntary prepayments made under our second lien debt facility of $150 million. This was partly offset by the receipt of $43 million in net proceeds in respect of our sale of Paratus Energy Services, which closed in February. Elsewhere on the balance sheet, the settlements of accrued expenditures and voluntary prepayments that I just outlined were the main drivers of the reduction in our current and non-current liabilities, respectively. I'll now take a moment to focus a bit more on our leverage and capital structure more broadly.
Over the last year, we've been proactive in respect of our debt profile by making several mandatory and voluntary prepayments under our second lien debt facility, including those in Q1 that I highlighted on the previous slide. This put us in an adjusted net cash position of $133 million at the end of March, as mentioned by Simon earlier. We are delighted that we have delevered our balance sheet and in turn reduced our interest expense in light of the prevailing economic climate. Nevertheless, as stated in our prior earnings call, we are now focused on further optimizing and simplifying our capital structure, and we believe that we are well positioned following closing of the Aquadrill acquisition. We are in active discussions with our board and capital market advisors as to the form this may take.
On slide seven, you'll find our financial guidance for the full year of 2023, which includes the consolidation of Aquadrill into Seadrill from April 3rd. We anticipate total operating revenues to be between $1.435 billion and $1.485 billion. Our adjusted EBITDA range stands at $435-485 million. Lastly, we expect CapEx and long-term maintenance to be between $210 million and $250 million. I'd like to draw your attention to a footnote in the earnings release, which essentially says our 2023 EBITDA guidance includes net $12 million in non-cash costs related to the amortized mobilization revenues received and costs incurred prior to 1 January 2023. I'll now hand the line back to Simon.
Simon Johnson (President and CEO)
Thanks, Grant. On screen, you'll see Seadrill's ultra-deepwater floater fleet. During the last year, we pivoted strategically to this segment through two transformative M&A transactions in the belief that this part of the rig market will produce outsized growth and value for our shareholders. Taking a closer look at the fleet, all 13 floaters on screen are at least 10,000 foot capable in terms of water depth. We have 10 drillships that are all dual activity and seven that are of seventh-generation design, which typically have better specification, require less maintenance spend, and deliver superior contract economics as a result. On managed pressure drilling, Seadrill was a trailblazer in this adaptive drilling technology, and we continue to be amongst the market leaders on this equipment with six units currently outfilled across our fleet.
We have contributed strongly to industry knowledge and technology in this important drilling approach, which will be increasingly vital for penetrating the deeper geological horizons in our targeted ultra-deepwater markets. Moving to the next slide, I wanna focus on our ESG strategy, which has delivered our leading position as part of the Carbon Disclosure Project. As a major offshore driller, we have a critical role to play in the global energy transition. Our aim at Seadrill is to deliver oil and gas wells to our customers responsibly and with the best carbon footprint possible. In our latest sustainability report, we published Seadrill's ESG framework with its contributions towards the United Nations Sustainable Development Goals. I won't outline all the elements here, but there are two of particular focus for us, which I'll explain in a little bit more detail.
First, on the environmental front, we are committed to adopting greenhouse gas reducing technologies. In offshore drilling, Seadrill has developed the first methanol injection system for an offshore drilling rig. We pioneered the introduction of MODU hybrid power technology. More recently, we installed a closed bus-tie system on the West Saturn, working for Equinor in Brazil, enabling the rig to position itself dynamically with fewer engines running, which is a substantially more efficient operating mode, reducing fuel burn and emissions. We've also deployed the first version of NOV's DORS technology, which enables remote operation of the mud system. We continue to advance automation of the drilling process. Second, I wanna highlight our commitment to the development of our employees with the Seadrill Development Academy, which we rolled out earlier this year.
The program uses an enhanced facility that is owned and managed by Seadrill, complete with a state-of-the-art drilling simulator. Seadrill has a best-in-class workforce that is integral to the development of safe and efficient operations for our customers. An investment such as this one illustrate our commitment to operational excellence and also our employees' development and growth. Furthermore, in the expanding business environment, our ability to train our own people will be critical to service delivery quality and cost control. To wrap up, we're very pleased with our start to the year with a nearly fully utilized fleet and the closing of our Aquadrill acquisition in April on an accelerated timeline. The offshore outlook is promising.
Looking ahead into future quarters, we're focusing on further refining our fleet and enhancing our exposure to our core segments, including through organic transactions, if accretive, while optimizing our capital structure to enable the implementation of a sustainable shareholder returns policy. We have demonstrated during the past 12 months that our management team has a bias for action, put simply, we fully intend to continue to deliver on what we promise. That brings an end to today's presentation. I'll now hand the line back to the operator, who will handle the Q&A session to answer any questions that you may have for the management team.
Operator (participant)
Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. To withdraw your question, press star followed by two, and please do also remember to unmute your microphone when it's your turn to speak. Our first question comes from Gregory Lewis from BTIG. Gregory, your line is now open. Please go ahead.
Gregory Lewis (Managing Director and Infrastructure Analyst)
Yeah. Hi, thank you, and good afternoon, everybody. you know, Simon, I realize the ink is barely dry on the Aquadrill acquisition. But, all that being said, you know, a lot of, you know, common questions thematic we continue to get from investors is around, you know, you know, continued consolidation across the offshore drilling sector. you know, just kinda curious, maybe, you know, how active, you know, the company is at this point, you know, realizing we're still integrating Aquadrill and really as you think about a bigger picture. Do we think that there's still opportunities, whether it's Seadrill or others, to help or to continue to consolidate the market?
Realizing at this point, as I look at most publicly listed drillers, you know, whether it was this year or last year or even, you know, over the last couple of years, you know, each one of you has kind of put a stake in the ground and done some M&A. Just kinda curious on your thoughts around that?
Simon Johnson (President and CEO)
Yeah. Thanks, Greg. Look, I don't think the window is closed for consolidation, but obviously as the community shrinks, it gets harder and harder to do interesting deals. You know, we believe there's still considerable market upside, and that's really the most important factor. You know, and we're still, you know, there's a lot of work, a lot of room for improvement with leading-edge day rates. We're early in the business cycle, we believe. We think that as people progress their refinancing efforts, and the restrictive covenants that act as somewhat of a barrier to further consolidation, some of those will fall away. That could be a catalyst for further combinations across the space. I think that most deals will continue to, you know, likely be stock transactions.
Few of us have enough cash consideration at this point to do outright cash deals today. You know, we've been active in concentrating our asset base. There's an opportunity for some of our peers to do, you know, similar things. I think it may not be sort of, you know, large scale M&A necessarily, although there's probably room for some terminal transactions for certainly our larger peers. I think there's the possibility of people, you know, specializing and concentrating their asset base. Yeah. No, I don't think it's behind us. I think there's still a lot of opportunities for people to choose the part of the market they wanna play in and focus their asset acquisition and divestment activities around that.
Gregory Lewis (Managing Director and Infrastructure Analyst)
Okay, great. Thank you. Thank you for those thoughts. And then I did wanna touch on a couple other rigs. You know, the West Polaris, which is, you know, it's being managed. I, you know, it's still being managed by, you know, a third party manager. You know, I mean, it's, you know, I guess September's here, gonna be here before we know it, unfortunately. Summer's gonna fly by. You know, could you maybe talk a little bit about the outlook for that rig, and, you know, and how we should be thinking about the, you know, the continuation or termination of that management contract.
Simon Johnson (President and CEO)
Yeah, you bet, Greg. Well, let me start, and then I'll throw to Samir, and he can give you the market color. I mean, when we announced the Aquadrill transaction, you'll recall that we anticipated realizing all of the synergies within the first two years. As a practical matter, transition of management is still some time off, and we've only really started the conversations with the existing rig managers and the customers who would be affected. There's not much to report at this time other than to let you know that we have started those conversations. Samir can probably put a little bit more granularity around that.
Samir Ali (Chief Commercial Officer)
Hey, Greg. I'd say, you know, we are in active dialogue with the current client. They have an open tender in the same region. You know, we think we're well positioned. You know, in this business, it's not done till it's signed. You know, we're optimistic that we'll be able to keep her working where she is today. You know, we are also looking at other opportunities for the rig, and we are bidding her around the world. Our working assumption right now is that she will stay in India and continue on with ONGC.
Gregory Lewis (Managing Director and Infrastructure Analyst)
Okay. Yeah, that's kind of what I was curious about. Then, you know, Samir, while I have you know, realizing that, you know, the bulk of the fleet is contracted out, but there are, you know, as we look out over the next 12 months, there are rigs that start to, you know, at least roll off their contracts. Any kind of sense, realizing that there's always a spot market in the US Gulf of Mexico for short-term work, but as we look, you know, maybe in West Africa, Brazil, Asia, how far ahead are customers at this point looking to fix out, i.e. we're in May of 2023, you know, are...
Is any way to characterize, you know, maybe on a quarterly forward basis as you're looking at looking at the market, you know, are we seeing tenders pop up for work next summer, next fall, next spring? How far out is it going? Just to kinda get a feel for, you know, how anxious maybe some customers are starting to get.
Samir Ali (Chief Commercial Officer)
Sure. You know, I'd say as a sign of the market continuing to tighten, clients are looking for rigs further and further out. Now, there's one data point where there's a client looking for a rig in 2026, that's, you know, probably the outermost part of where clients are right now. I'd say you are seeing it elongate out, right? Clients are starting to come to us earlier and saying, "Hey, can we talk about, you know, options that aren't due for a while," or, "Can we talk about, you know, rigs in 2024, 2025?" You are seeing it as a reaction just to a tightening market.
They're looking to secure supply and as they build out their, you know, drilling plans, we are seeing an elongation of the kind of time before award and when customers are looking to secure rigs.
Gregory Lewis (Managing Director and Infrastructure Analyst)
Okay. Super helpful. Thank you all for the time.
Simon Johnson (President and CEO)
Thanks, Greg.
Operator (participant)
Our next question comes from Fredrik Stene from Clarksons Securities. Fredrik, your line's now open. Please go ahead.
Fredrik Stene (Senior Analyst and Equity Research)
Hey, Simon and team. Hope you are well, and congratulations on the nice performance this quarter. I wanted to touch a bit more on the fleet here. You're mostly locked up for 2023 and a large part of 2024 is also locked up. Of course, as we touched upon, I think, last quarter as well, you have your stacked assets. First, since we spoke last time, have anything kind of changed in your approach to those assets? Simon, you talked about supply discipline.
I guess my question is either have you changed anything in your requirements to take those rigs back, or have you since then noticed a difference from your clients in terms of more opportunities or more active discussions for those rigs?
Simon Johnson (President and CEO)
Yeah. Hi, Fredrik, good to hear your voice. Look, firstly, I'd say that, you know, we consider those assets to be fungible. Whereas, you know, it is possible that we may even divest them. Insofar as reactivating is concerned, I think we've been pretty forceful in our views that, you know, we require a full recovery of the capital up front from any, you know, potential customer. I'll pass to Samir to talk about the individual market opportunities, nothing's changed in our position or approach in terms of what we require. I think as we go further into this cycle, we're just gonna be, you know, increasingly resolute in that stance. Samir, perhaps you'd care to add something to that.
Samir Ali (Chief Commercial Officer)
You know, we're definitely looking at opportunities for our stacked fleet, but, you know, we're gonna remain disciplined, right? I mean, there is significant cost to reactivate these rigs, and given supply chain constraints, those costs aren't going down. They're actually going up. For us, it's making sure that we can find the right job, the right opportunity to, you know, invest in the rig and bring her back out. We're absolutely chasing opportunities for our stacked fleet, but we are gonna be judicious about it, and we're gonna make sure that, you know, we're getting a return on our capital, and we're not gonna take it on our balance sheet just because.
Fredrik Stene (Senior Analyst and Equity Research)
Thanks. A follow-up to the comment about potential divestment there. If you were to divest some of those stacked assets to other players, would you know, be willing to divest it to competitors? Or would you try to channel them into local or non-internationally competitive markets or owners if you were to do that?
Simon Johnson (President and CEO)
I think we look at every opportunity on its merit. I don't think, you know, necessarily we would be averse to selling to a competitor, you know, whatever shape and form that may take. Yeah, no, I think it's whatever would generate the best return for us, Fredrik. We, we have an open mind.
Fredrik Stene (Senior Analyst and Equity Research)
Okay, thanks. Specifically on the West Phoenix, just turning away from the stacked fleet. You've got an extension now until August, if I remember correctly. You said that rig was also being bid outside Norway or outside the NTS. Do you have any thoughts or comments around your preference in terms of keeping that rig in Norway? I guess kind of in a way you're right now a bit subscale in that region. Would it be, you know, better if it actually worked elsewhere?
Do you think based on your market view that the intent is actually going to tighten quite significantly 2024 and 2025, that you would like to keep it there still, even though you're exploring other opportunities?
Samir Ali (Chief Commercial Officer)
Hey, Fredrik, it's Samir. I'd say, you know, our preference is gonna be to keep her in Norway, but that is from a cash flow perspective, right? Setting up another shore base in another location, unless it's a region that we operate in, that's our preference is to maximize cash flow wherever that is. The math would tell you that that's most likely Norway, but by no means are we married to keeping the rig in Norway. That is, again, it is a maximizing our return profile and our cash flow. If we can co-locate the rigs, that does help us in the long term. You know, if we find the right opportunity outside of Norway, and I would say there are a number of opportunities outside of Norway for that rig now.
The harsh environment market, you know, you've seen some of our peers pull out rigs from that market. You know, you're going to continue to probably see rigs leave that market and, you know, the market's starting to tighten in Norway. You're, you're finding that perfect storm in 2024 and 2025 in the Norwegian market. For, for us, you know, we will maximize cash flow ideally in Norway, but we have no problems taking the rig outside.
Fredrik Stene (Senior Analyst and Equity Research)
Perfect. Thank you much. Thank you so much, all, for the answers. I'll leave it at that. Have a good day.
Operator (participant)
Our next question comes from Hamed Khorsand from BWS. Hamed, your line is now open. Please go ahead.
Hamed Khorsand (Principal and Equity Research Analyst)
Hi. The first question I had was about Aquadrill, just given that you've only provided Q4 2022 numbers? Is there any operational enhancements or improvements since then? Is that because they're all fully operational rigs now, that's going to be the operating kind of rate per quarter for them?
Grant Creed (EVP and CFO)
Let me try to take it, Hamed. I'm not sure I fully understand the question, but, so Q1 doesn't include any results from Aquadrill, right? From a financial perspective-
Hamed Khorsand (Principal and Equity Research Analyst)
Correct.
Grant Creed (EVP and CFO)
You don't see anything in there from Aquadrill. You'll start seeing that come through Q2. From a financial perspective, Q2 will, of course, include Auriga, Vela, and Polaris and some of Capella. You know, Capella is just starting up now, or has just recently started up, but you won't get a full quote from Capella. From Q3 onwards, you'll get, you know, full run rate performance on the four Aquadrill drillships. I hope that answered your question from a financial perspective, but if you're looking for more of an operational, sort of technical asset, type answer, I can hand over to Lee for that.
Hamed Khorsand (Principal and Equity Research Analyst)
No, that was exactly what I was looking for. Thank you.
Grant Creed (EVP and CFO)
Right.
Hamed Khorsand (Principal and Equity Research Analyst)
As far as your fleet is concerned, just given the lockup, trends right now with your fleet, is there much to do as far as contracting goes? I mean, you're talking about customers looking out for 2024 and 2025, but you're pretty much locked in. Is there any advantage to getting in those conversations now, just given the trajectory of day rates?
Simon Johnson (President and CEO)
Yeah. No, Hamed, I think one of the, you know, part of the rationale for the Aquadrill transaction was to get a, you know, more exposure to the spot market. You know, we had some opportunities there with, you know, the Polaris. There's one that's, you know, crystallized for the Capella here in the near term.
I think, you know, relative to, you know, the comments that Samir made about, you know, opportunities in the marketplace and how that's stretching out, we think that, you know, what you've mentioned may have been a weakness in our story, maybe three, six months ago, but is increasingly irrelevant in terms of how we see the market developing going forward and, you know, the spread of availability of the units that are either rolling off contracts over the next couple of years or, you know, will be available. Samir, anything to add?
Samir Ali (Chief Commercial Officer)
No, I think that's right. You know, I think as, you know, clients are starting to look further out, you know, that's where we're spending our time, is starting to layer in contracts and, you know, build a layered approach to our contracts with some short-term duration and some long-term duration. I think that's what we're focused on kind of going forward in 2024 and 2025.
Hamed Khorsand (Principal and Equity Research Analyst)
Got it. My last question was, are you seeing any customer conversations talking about, you know, bringing those cold stacked or warm stacked fleets online?
Samir Ali (Chief Commercial Officer)
There's some conversation around that, right? You've seen a few of the new or, you know, stranded assets get brought back into the market. You know, the cost of bringing these things back is increasing. You know, we are having conversations with clients about our stacked fleet. I'd say, you know, we haven't reached a point, obviously, of where we can announce a contract or we feel comfortable bringing a rig back. I'd say we are progressing those conversations, the market's not there yet in our view, given we just can't get that return profile where we need it to be. You know, I'd say if the market continues the way it is, we should be seeing some of those conversations materialize or kind of crystallize, you know, later this year or next year.
Hamed Khorsand (Principal and Equity Research Analyst)
Okay, great. Thank you.
Operator (participant)
As a reminder, to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Our next question comes from Konstantin Chinarov from Aptior Capital. Konstantin, your line is now open. Please go ahead.
Konstantin Chinarov (LLP Member)
Hi, guys. Thanks so much for taking my questions. When I think about adjusted EBITDA guidance, so that range of $435-485 million, could you please talk a bit more about what's behind that guidance? Is it basically just saying that you're gonna execute the backlog that you've locked in for this year or there are some other assumptions behind that? Also curious if that guidance includes any synergies from Aquadrill acquisition. That's my first question.
Grant Creed (EVP and CFO)
Hey, Konstantin. Thanks. I would break it down by looking at the old Seadrill legacy fleet, first of all, and I'd say that that is. That's pretty clear. You saw Q1 was that fleet, and that kind of gives you a good idea what to expect from Seadrill for the rest of this year in that sort of. I think it was a relatively good quarter, so the 80-85 region for the rest of the quarter on the Seadrill legacy fleet. On the Aquadrill fleet, Auriga, Vela, they come into the 2023 results. All the Aquadrill fleet, I should say, comes in from April 3rd. Auriga, Vela, of course, on contract for the full year, so you get the benefit of all of those.
Like I said earlier to Hamed, Capella just started up recently. Then Polaris. Polaris is the only other variable then because she has a firm term ending end of August. Q4, you do need to take a view on what the recontracting assumption is. There's a range of possibilities and a range of outcomes, and that's what we've sort of taken into account when setting the guided range. Final part of your question, I think, was whether there are any synergies coming in.
Konstantin Chinarov (LLP Member)
Yep.
Grant Creed (EVP and CFO)
The answer to that is no for now. We said to you that. We said when announcing the transaction that that will take some time. It'll take a period of, you know, well, at least up to the first two years to realize those synergies. We just gotta wait for those Aquadrill rigs to roll off their existing contracts.
Konstantin Chinarov (LLP Member)
Sure.
Grant Creed (EVP and CFO)
That answer, Konstantin, I should just add, that's in relation to the key synergy area of the MSAs. There are a smaller amount of synergies to be realized in respect to their overheads. We said that that was $10 million per annum. We will start realizing those synergies sort of more late Q3, Q4. There's a small element of that. It does take some time to start realizing those, but there will be an element, albeit small, for that piece.
Konstantin Chinarov (LLP Member)
Got it. And you're still looking to get $70 million of run rate synergies out of Aquadrill transaction?
Grant Creed (EVP and CFO)
That's right. On a recurring basis, yes, once the rigs roll off their.
Konstantin Chinarov (LLP Member)
Is that from 2024 or from 2025?
Grant Creed (EVP and CFO)
We said two years. Yeah. I think, 2025. We said two years from when the deal closed and allow the contracts to roll off.
Konstantin Chinarov (LLP Member)
Got it. I see. Do you have a sense of adjusted EBITDA number if you were to effectively deploy the whole fleet, including Aquadrill, at the moment at the current spot market? Just to get a sense of the earnings power of the.
Grant Creed (EVP and CFO)
Yeah
Konstantin Chinarov (LLP Member)
of the combined business.
Grant Creed (EVP and CFO)
We have a... You'll see on our website an investor deck where we do an analysis like that where we assume the entire fleet is contracted at spot, and then you take a view on what spot is. Encourage you to go and look at that deck. It's more or less $1 billion EBITDA in that range when you start getting $450,000-500,000 a day. Yeah. It's yeah, $800 million-1 billion when operating between that $450,000-500,000 for a seventh-generation.
Konstantin Chinarov (LLP Member)
Got it. If, if I look at page six, at the capital structure, it looks somewhat deficient. I guess some of your peers went out and, you know, took advantage of the high yield market and raised debt. Are you looking to optimize the capital structure anytime soon, maybe return capital to shareholders? What's your latest thinking there?
Grant Creed (EVP and CFO)
We are. We see our existing debt facilities as in sub-optimal, both in terms of pricing as well as the covenants contained in them. We are looking into what a refinancing would look like. We did take the view that the best approach was to complete the Aquadrill transaction so that we could go to market on a refinancing with a stronger collateral package. We've now done that, of course, in April and been working since then on a refinancing. Like I said in the prepared remarks, we're in active discussions with our board to discuss the pros and cons of the options we see in front of us.
Konstantin Chinarov (LLP Member)
Is the idea to run an unlevered balance sheet, or you're happy? At the moment, net debt is effectively 0, which is arguably suboptimal.
Grant Creed (EVP and CFO)
Yeah.
Konstantin Chinarov (LLP Member)
how do you think about sort of optimal leverage for the business? Related to that, this year on unlevered basis, you know, the business is gonna be cash generative, so wondering what you're thinking to do with excess cash flow. Would you invest in the business or you might buy back shares or whatever? Like, what's your latest thinking there?
Grant Creed (EVP and CFO)
On the quantum of debt, like I said, we're in active discussions with the board. I don't wanna get too far out in front of that discussion. I can say at a high level, you know, we'd expect to have some debt on the balance sheet. We're certainly gonna maintain a prudent or conservative balance sheet. Talking about net leverage, you know, certainly not exceeding the 2 times net leverage on a through cycle basis. Like I said, those discussions are live with our board. Can't give too much for you at this stage.
On the, as it relates to what we do with the cash, let me hand over to Simon and he can give you some comments there.
Konstantin Chinarov (LLP Member)
Sure.
Simon Johnson (President and CEO)
Yeah. I think we mentioned earlier, Constantine, that our, you know, our loan docs currently prohibit the issuance of dividends. As Grant said, you know, we recognize that we have a need to refinance first, and that's an area of current focus. We've been explicit through time on the need or the potential to return capital to shareholders, be it via dividends or buybacks if we can't use those funds, you know, elsewhere within the enterprise. You're gonna be hearing something from us very soon on this. It's a topic of constant discussion and debate. We do believe that dividends should be supported by sound capital structure and strong cash flows, and we think we're well-placed in that regard.
When we look at our peer group, we see a lot of people who are either highly leveraged or have poor cash flows in the near term. We think that's an area where Seadrill represents extremely good value compared to our competitors.
Konstantin Chinarov (LLP Member)
Got it. Makes sense. Finally, on the asset base, are there any assets that you're planning to retire anytime soon? Or are there any sort of non-core assets that you might consider selling, let's say jackups or, you know, certain drillships, anything like that on the horizon?
Simon Johnson (President and CEO)
Yeah, sure. Yeah, I think we've been pretty open. We've, you know, there's some things that we've communicated in our 20-F. You know, we're actively considering options to dispose non-core assets. We can't provide any specific comments at this time. We'll come back to you if we have any news in that regard. I think generally speaking, we wanna be an important player in a smaller number of asset segments so that we can be more efficient and harness economies of scale across the cost base. We're, you know, we're focusing our asset base through time, so you should expect to see, you know, movement from us as we, you know, continually refocus and refine other parts of the market that we wanna play in.
Konstantin Chinarov (LLP Member)
Got it. Okay, thanks for your comments.
Grant Creed (EVP and CFO)
We currently have no further questions. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.