SEADRILL Ltd

Note 1 –General information

Seadrill Limited (along with any one or more of its consolidated subsidiaries, or to all such entities, referred to as "Seadrill", "we", "us", "our", and "the Company") is incorporated in Bermuda. 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 and semi-submersible rigs for operations in shallow to ultra-deepwater areas in both benign and harsh environments. We contract our drilling units to drill wells for our customers on a dayrate basis. 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.

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Seadrill Limited have been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, they do not include all disclosures required by U.S. GAAP for annual financial statements. In the opinion of management, the unaudited Condensed Consolidated Financial Statements includes all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of financial position, results of operations and cash flows for the interim periods.

Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years, or any future period. The accompanying unaudited Condensed Consolidated Financial Statements and related notes should be read in conjunction with our 2024 10-K.

Reclassifications

Effective the second quarter of 2024, we have classified revenues from our bareboat charter agreements in "Leasing revenues" in order to enhance the presentation of the arrangements. To conform to current period presentation, $11 million of "Other revenues" for the three months ended March 31, 2024 have been reclassified to "Leasing revenues".

Significant accounting policies

Refer to Note 2 - "Accounting Policies" of our Consolidated Financial Statements from our 2024 10-K for additional information related to our significant accounting policies.

Note 2 -Revenue from contracts with customers

The following table provides information about receivables and contract liabilities from our contracts with customers, as of the dates presented:

Significant changes in the contract liabilities balances during the three months ended March 31, 2025 are as follows:

Revenues are attributed to geographical locations based on the country of operations for drilling activities, i.e., the country where the revenues are generated. The following table presents our revenues by geographic area:

(1) "Other" represents countries in which we operate that individually had revenues representing less than 10% of total operating revenues earned for any of the periods presented.

We had the following customers with revenues greater than 10% of total operating revenues in any of the periods presented:

Note 3 –Taxation

For the three months ended March 31, 2025, income tax expense was $15 million, compared to income tax expense of $10 million for the three months ended March 31, 2024.

The increase in tax expense relative to the comparative period primarily reflects the recognition, during the quarter ended March 31, 2024, of a deferred tax benefit of $8 million attributable to changes in valuation allowances established for Switzerland and Brazil, net of a $3 million charge recognized in the same quarter related to the tax effect of import duty credits in Brazil. The increase in tax expense also reflects changes in the Company's mix of pre-tax income among tax jurisdictions.

Note 4 –Loss/earnings per share

The computation of basic loss/earnings per share ("LPS/EPS") is based on the weighted average number of common shares of the Company, par value $0.01 per share (the "Shares"), outstanding during the period. Diluted LPS/EPS includes the effect of the assumed conversion of potentially dilutive instruments related to the effect of the unsecured senior convertible bond and share based compensation. Refer to Note 9 – "Debt" for further details on the unsecured senior convertible bond.

The components of the numerator for the calculation of basic and diluted LPS/EPS were as follows:

The components of the denominator for the calculation of basic and diluted LPS/EPS were as follows:

(1) Weighted average number of Shares outstanding in the three months ended March 31, 2024 excludes Shares repurchased during the period.

The basic and diluted LPS/EPS were as follows:

(1)For the three months ended March 31, 2025, the effect of including all potentially dilutive instruments in the calculation resulted in decreased loss per share, which is anti-dilutive. The instruments were not included in the calculation due to their anti-dilutive effect, and, as a result, the basic and diluted loss per share are equal.

Note 5 –Restricted cash

Restricted cash as of March 31, 2025 and December 31, 2024 was as follows:

Note 6 -Other current assets

As of March 31, 2025 and December 31, 2024, other current assets included the following:

Note 7 –Equity method investments

As of March 31, 2025 and December 31, 2024, the carrying values of our equity method investments were as follows:

Note 8 -Other current and non-current liabilities

Other current liabilities

As of March 31, 2025 and December 31, 2024, other current liabilities included the following:

Other non-current liabilities

As of March 31, 2025 and December 31, 2024, other non-current liabilities included the following:

Unfavorable drilling contracts

The following table summarizes the movement in unfavorable drilling contracts for the three months ended March 31, 2025:

Upon emergence from Chapter 11 proceedings and the application of fresh start accounting in 2022, and in connection with the acquisition of Aquadrill in 2023, unfavorable drilling contract and management service contract intangible liabilities were recognized. The amortization is recognized in the unaudited Condensed Consolidated Statement of Operations as "Depreciation and amortization". The weighted average remaining amortization for unfavorable contracts is 10 months.

The table below shows the amounts relating to unfavorable contracts that is expected to be amortized over the following periods:

Note 9 –Debt

The table below sets out our debt agreements as of March 31, 2025 and December 31, 2024:

$575 million secured bond

In July 2023, Seadrill issued $500 million in aggregate principal amount of 8.375% Senior Secured Second Lien Notes due 2030 in an offering conducted pursuant to Rule 144A and Regulation S under the Securities Act. Subsequently, in August 2023, Seadrill issued an additional $75 million in aggregate principal amount of 8.375% Senior Secured Second Lien Notes due 2030 (the "Incremental Notes"), maturing on August 1, 2030 (together the "Notes"). The Incremental Notes were issued at 100.75% of par.

Revolving credit facility

On July 27, 2023, Seadrill Limited, along with its subsidiary, Seadrill Finance Limited ("Seadrill Finance"), established a Senior Secured Revolving Credit Facility (the "Revolving Credit Facility"). The commitments under the Revolving Credit Facility, which carries afive-year term, became available for drawdown on July 27, 2023. The Revolving Credit Facility permits borrowings of up to $225 million in revolving credit for working capital and other corporate purposes and includes an "accordion feature" allowing Seadrill to increase this limit by up to an additional $100 million, subject to agreement from the lenders. It also includes a provision for issuing letters of credit up to $50 million. The Revolving Credit Facility incurs interest at a rate equal to a specified margin plus the Secured Overnight Financing Rate ("SOFR"). This facility has not been drawn to date. Seadrill is required to pay a quarterly commitment fee on any unused portion of the revolving credit.

Unsecured senior convertible bond

The $50 million unsecured senior convertible bond (the "unsecured senior convertible bond"), issued on emergence from Chapter 11, has a maturity of August 2028 and bears interest, payable quarterly in cash, at the Term SOFR (as defined in the Note Purchase Agreement dated as of February 22, 2022, as amended (the "Note Purchase Agreement"), plus 6% on the aggregate principal amount of $50 million. The bond is convertible(in full and not in part) into Shares at a conversion rate of 52.6316 Shares per $1,000 principal amount of the bond, subject to certain adjustments set forth in the Note Purchase Agreement relating to the unsecured senior convertible bond. If not converted, a bullet repayment will become due on the maturity date.

Note 10 –Related party transactions

As of March 31, 2025, our major related party is the Sonadrill joint venture, over which we hold significant influence.

Related party revenue

Our related party revenues include the following:

(a) Seadrill provides management and administrative services and operational and technical support services to Sonadrill. These services were charged on a dayrate basis.

(b) Reimbursable revenues relate to Sonadrill project work on the Libongos, Quenguelaand West Gemini rigs.

(c) During the first quarter of 2025, we earned leasing revenues on the charter of the West Geminito Sonadrill. During the first quarter of 2024, we also earned leasing revenues from the West Castor, West Telesto, and West Tucana, which were leased to Gulfdrill, up to their disposal in June 2024.

Related party balances

As of March 31, 2025, Sonadrill prepaid management fees of $1 million to Seadrill (December 31, 2024:$7 million). These balances are recorded in "Other current liabilities" within our unaudited Condensed Consolidated Balance Sheets.

Note 11 –Fair value 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 as of the dates specified are as follows:

Fair value is a market-based measurement, not an entity-specific measurement, and is determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within level 3 of the hierarchy).

Financial instruments categorized as level 1

The fair value of the $575 million secured bond is based on market traded value. We have categorized this at level 1 on the fair value measurement hierarchy.

Financial instruments categorized as level 3

The fair value attributed to the unsecured senior convertible bond is bifurcated into two elements: the straight debt component is derived through a discounted cash flow approach, and the conversion option is derived through an option pricing model, which forecasts equity volatility and compares the potential conversion redemption against historical and implied equity movements in comparable companies in our industry. The conversion option was recorded in equity at the point the bond was issued and, therefore, has not been included in the table above.

Our accounts receivable and accounts payable are by their nature short-term. As a result, the carrying values included in our unaudited Condensed Consolidated Balance Sheets approximate fair value.

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 as of the dates specified are as follows:

Level 1 fair value measurements

The carrying value of cash and cash equivalents and restricted cash, which are highly liquid, is a reasonable estimate of fair value and are categorized at level 1 of the fair value hierarchy.

Note 12 –Common shares

Share capital as of March 31, 2025 and December 31, 2024 was as follows:

Share transactions for period presented

During the three months ended March 31, 2025,8,606 Shares were issued relating to the vesting of restricted stock units under the Company's share based compensation plan.

Note 13 –Commitments and contingencies

We recognize loss contingencies in the unaudited Condensed Consolidated Financial Statements where it is probable that an outflow of economic benefits will be required to settle an obligation, and the amount is reasonably estimable. An adverse outcome in a matter described below could have an adverse effect on Seadrill's operating results, cash flows and financial position.

Legal Proceedings

SFL Hercules Ltd

On March 5, 2023, Seadrill was served with a claim from SFL Hercules Ltd., filed in the Oslo District Court in Norway, relating to our redelivery of the rig West Hercules to SFL Corporation Ltd. ("SFL") in December 2022. On February 6, 2025, the Oslo District Court delivered a judgment in favor of SFL Hercules Ltd. ordering Seadrill to pay SFL approximately $37 million plus interest and legal costs of approximately $11 million. Seadrill intends to vigorously contest the judgment and filed an appeal on March 5, 2025. The timing of resolution and ultimate amount due, if any, cannot be predicted at this time.

Sonadrill fees claim

In March 2023, Seadrill was served with a claim from an individual (the “Claimant”) filed in the High Court of Justice, Business and Property Courts of England and Wales, King's Bench Division, Commercial Court. The Claimant alleges breach of contract and unjust enrichment damages of approximately $72 million related to an alleged failure by the Company to pay the Claimant a fee for services in arranging the Sonadrill joint venture. The case concluded on March 18, 2025, and we are awaiting the High Court's judgment, which we expect to receive by end of the second quarter of 2025.

Nigerian Cabotage Act litigation

In November 2015, the Nigerian Maritime Administration and Safety Agency ("NMASA") issued a detention in respect of the rig West Capella for failure to comply with requirements of the Coastal and Inland Shipping (Cabotage) Act 2003 (the "Cabotage Act"), specifically, failure to pay a Cabotage fee of 2% on contract revenue. While the named party is Seadrill Mobile Units Nigeria Ltd (previously an Aquadrill entity, acquired by Seadrill upon the merger of Seadrill and Aquadrill) ("SMUNL"), the matter relates tothree rigs: the West Capella, West Saturn and West Jupiter. SMUNL commenced proceedings in May 2016 against the Honourable Minister for Transportation, the Attorney General of the Federation and NMASA with respect to interpretation of the Cabotage Act. On June 14, 2019, the Federal High Court of Nigeria delivered a judgment (1) finding that: (a) Drilling operations fall within the definition of "Coastal Trade" or "Cabotage" under the Cabotage Act and (b) Drilling Rigs fall within the definition of "Vessels" under the Cabotage Act, and (2) directing SMUNL to deduct 2%, or approximately $69 million, of their contract value and remit the same to NMASA. On June 24, 2019, the Court of Appeals sitting in Lagos ("COA") issued a conflicting judgment in Transocean Support Services Nigeria & Ors v NIMASA & Anor, finding drilling rigs cannot be deemed vessels under the Cabotage Act pending appeal. SMUNL filed an appeal to the COA on July 22, 2019, and applied to the Federal High Court for an injunction pending appeal to prevent enforcement. Due to the volume of cases currently being handled by the COA, the Registry of the COA is yet to schedule the hearing date for the appeal. Although we intend to strongly pursue this appeal, we cannot predict the outcome of this case.

Brazil tax audit

Seadrill Serviços de Petróleo Ltda ("Seadrill Brazil") has a long-standing tax audit relating to years 2009 and 2010, which is being litigated through the Brazilian courts. The initial court ruled in favor of Seadrill Brazil, but the appellate court reversed the lower court decision in September 2023 and ruled in favor of the tax authorities, assessing a tax and interest thereon of approximately $70 million. We will vigorously defend our position and, in the first quarter of 2024, our appeal was admitted by the higher courts, but the ultimate timing and outcome of this litigation cannot be determined. There are additional open cases relating to years 2012, 2016, and 2017, where a similar principle is being contested but they are not as far advanced through the courts, for an aggregate assessed amount, including tax and interest, of approximately $75 million.

In order to litigate the tax audit relating to years 2009 and 2010, Seadrill Brazil has entered into an agreement for an insurance bond of BRL 405 million ($70 million as of March 31, 2025), which is supported by a parent company guarantee.

Sete Brazil claim

On January 6, 2025, Seadrill Brazil received notices from Petroleo Brasileiro S.A. ("Petrobras") asserting delay penalties against Seadrill Brazil relating to drillships to be operated in Brazil by Seadrill Brazil pursuant to the Sete Brazil Project, an initiative aimed at constructing a fleet of 28 offshore drilling rigs to support Petrobras. The alleged penalties arise from contracts awarded in relation to the Sete Brazil Project in 2012 forthree drillships that were to be constructed by Sete Brazil and operated by Seadrill, but were never completed. Sete Brazil was eventually declared bankrupt by the Brazilian courts in December 2024 although that bankruptcy is presently suspended. The aggregate amount claimed by Petrobras as of the date of receipt of the notices was approximately $213 million in delay penalties, with the potential for further delay penalties to be assessed ratably over the remaining term of the drilling contracts for thethree Sete drillships. The contracts limit aggregate delay penalties to 10% of the total "estimated contract value," as defined in the contract. Petrobras has indicated it may exercise set-off rights against certain amounts payable to Seadrill Brazil under its contracts with Petrobras for ourfive drillships currently operating in Brazil, revenues related to which are included in our backlog as of March 31, 2025. No set-off right has been exercised to date. Petrobras and Seadrill have agreed to participate in voluntary mediation, and Petrobras has committed to not exercise any set-off rights pending the outcome of the mediation. We cannot predict when the mediation will commence or be completed, or what the outcome may be. Dialogue between the parties is ongoing. We are evaluating our legal options, which may include, among other things, seeking injunctive relief and asserting counterclaims against Petrobras in Brazilian courts, and seeking remedies against Petrobras under Seadrill’s prior U.S. Chapter 11 bankruptcy proceedings. This matter is in its early stages, and we are not able to predict its timing or outcome. In addition, the nature, timing, calculation and ultimate amount of the purported penalties are subject to principles of contract interpretation before Brazilian courts. Seadrill intends to vigorously defend its position and pursue available remedies.

Other matters

In addition to the foregoing, from time to time we are a named defendant or party in certain other lawsuits, claims or proceedings arising in the ordinary course of business or in connection with our acquisition and disposal activities. Although the outcome of such lawsuits or other proceedings cannot be predicted with certainty, and the amount of any liability that could arise with respect to such lawsuits or other proceedings cannot be predicted accurately, we currently do not expect these other matters to have a material adverse effect on our financial position, operating results and cash flows.

Guarantees

We have issued performance guarantees for potential liabilities that may result from drilling activities under current or previously managed rig arrangements with Sonadrill. As of March 31, 2025, we have not recognized any liabilities for these guarantees as we do not consider it probable that the guarantees will be called. The guarantees provided on behalf of Sonadrill have been capped at $1.1 billion (December 31, 2024: $1.1 billion), in the aggregate, across thethree rigs operating in the joint venture onthree active, andone historic, contract.