SDRL Seadrill Limited

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the interim Financial Statements presented in this report, as well as the historical Consolidated Financial Statements and related notes of Seadrill Limited included in our annual report on Form 20-F filed with the SEC on April 13, 2018 (SEC File No. 001-34667) (the “20-F”). Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The unaudited Consolidated Financial Statements of Seadrill Limited included in this report have been prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”) and are presented in US Dollars.

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”, 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” or “Company” in context of events after July 1, 2018.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management. Our MD&A is presented in the following sections:

Overview

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-, mid-, deep- and ultra-deepwater areas, and in benign and harsh environments. We contract our drilling units primarily on a dayrate basis for periods between one and ten years to drill wells for our customers, typically oil super-majors and major integrated oil and gas companies, state-owned national oil companies and independent oil and gas companies.

Significant Developments

Events related to our refinancing

Emergence from Chapter 11

On February 26, 2018, the Predecessor and certain of its direct and indirect consolidated subsidiaries (the “Debtors”) filed a proposed Second Amended Joint Chapter 11 Plan of Reorganization (the “Plan”) 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. The Plan became effective and the Debtors emerged from bankruptcy on July 2, 2018.

Upon emergence, the Plan equitized approximately $2.4 billion in unsecured bond obligations, more than $1.0 billion in contingent newbuild obligations, substantial unliquidated guaranty obligations, and approximately $250 million in unsecured interest rate and currency swap claims. The Plan also deferred amortization payments on our debt until 2020 and extended maturities on our senior credit facilities to fall due between June 2022 and December 2024. As part of the Plan, an investment agreement (the “Investment Agreement”) was effectuated under which Hemen Investments Limited, an affiliate of the Predecessor’s largest shareholder Hemen Holding Ltd. and a consortium of additional investors, including the bondholder parties to the Restructuring Support and Lock-Up Agreement (the “RSA”) (collectively, the “Commitment Parties”), provided $1.08 billion in new capital. In return the Commitment Parties were issued common stock of Seadrill Limited and new secured notes (“New Secured Notes”). Refer to Note 3—“Chapter 11 Proceedings” of our Consolidated Financial Statements included herein for further information.

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The Plan provided for Seadrill Limited to serve as the parent holding company for the Predecessor’s subsidiaries after the Predecessor and the other Debtors’ emergence from bankruptcy. Seadrill Limited was initially formed as a wholly-owned subsidiary of the Predecessor and did not conduct any material operations prior to the effective date of the Plan. As part of the Debtors’ emergence from bankruptcy on July 2, 2018, the economic interests in the existing shares of the Predecessor were extinguished, the Predecessor is in the process of being dissolved under Bermuda law, and common shares of Seadrill Limited were issued to the parties entitled thereto under the Plan and under the Investment Agreement.

Fresh Start Accounting

Upon our 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 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 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 September 30, 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.

Accordingly, our Consolidated Financial Statements for periods after July 1, 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 1, 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.

Other significant developments

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 , which was held as an asset held for sale as at December 31, 2017. The agreed share of proceeds from the sale of the West Rigel by Jurong was $126 million. The sale completed and the proceeds were received on May 9, 2018.

Per the terms of the New 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.

Interest Rate Cap

On May 11, 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 September 30, 2018 is $4.5 billion. As at September 30, 2018 the fair value of the interest rate cap was $61 million.

West Leo early termination litigation

On July 18, 2018 we announced that Seadrill Partners LLC, a company in which Seadrill Limited holds a 46.6% investment interest, in a combination of common and subordinated units, received approximately $248 million relating to the West Leo early termination litigation award, of which $204 million was recognized as revenue in Seadrill Partners LLC’s Statement of Operations for the second quarter ended June 30, 2018.

Extinguishment of sponsor guarantees

On October 31, 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 also 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 have received, amongst other things, cross-collateralisation of the debt facilities, a prepayment from the joint venture, an increase in margin and a consent fee.

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Operations

At September 30, 2018, Seadrill Limited owned 19 floaters and 16 jack-up rigs. The status of our fleet as at September 30, 2018 was as follows:

Backlog

Our contract backlog, as of November 27, 2018, totaled approximately $2.1 billion. Of the total contract backlog, $0.6 billion is attributable to our semi-submersible rigs and drillships and $1.5 billion attributable to our jack-up units. In the quarter we added $0.2 billion in backlog, taking total 2018 backlog additions to $0.4 billion.

The following backlog was added in the quarter:

During the fourth quarter, we have had the following additions to backlog:

Contract backlog for our drilling fleet is calculated as the contract dayrate multiplied by the number of days remaining on the contract, assuming full utilization. Contract backlog excludes amounts for mobilization and demobilization, contract preparation, and customer reimbursables. The amount of actual revenues earned and the actual periods during which revenues are earned will be different from the backlog projections due to various factors. Downtime, caused by unscheduled repairs, maintenance, weather and other operating factors, may result in lower applicable dayrates than the full contractual operating dayrate.

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Market Overview and Trends

We provide operations in oil and gas exploration and development in regions throughout the world and our customers include integrated oil and gas companies, state-owned national oil companies and independent oil and gas companies. Over the course of the last several years, oil and gas companies have focused on preserving cash and reducing their spend, in some cases consciously allowing the production decline rate on producing fields to accelerate.

The worldwide fleet of semi-submersible rigs and drillships totaled 248 units as at October 31, 2018. Of the total delivered fleet, 160 units are capable of ultra-deepwater operations above 7,500 feet, 31 are classed for deepwater operations up to 7,500 feet and 57 are classed for mid-water operations up to 4,500 feet. Overall, the average global fleet is 15 years old. The average age of ultra-deepwater units is eight years, 26 years for units classed for deepwater operations and 29 years for units classed for mid-water operations. Included in the global floater fleet are units classed for operations in harsh environments. The global harsh environment floater fleet is comprised of 70 units and is 18 years old on average.

During 2017 and 2018, we have seen an increase in the activity level in the floater market, albeit at low dayrates. This improvement was from a low base and we expect activity levels to continue to improve. There has been a significant improvement in the harsh environment floater market where recent contracts have been entered into at rates closer to USD 300k/day for high spec rigs.

Based on the level of current activity and the aging floater fleet, we expect stacking and scrapping activity to continue. A total of 114 floaters have been scrapped or retired since the beginning of 2014, equivalent to 36% of the total fleet, and currently there are 23 cold or warm stacked units with no follow-on work identified that are 30 years old or older. In the next 18 months, a further 26 units that are 30 years old or older will be coming off contract with no follow-on work identified which represent additional scrapping candidates. A key rational for scrapping is the 35-year classing expenditures that can cost upwards of USD 100 million. Many rig owners are expected to choose to retire the unit rather than incur this cost without a visible recovery in demand on the horizon. Cold stacked units will generally require an improvement in dayrates sufficient to overcome reactivation costs before they are reintroduced into marketed supply. Continued cold stacking of units would represent a positive development in the market, effectively reducing marketed supply and helping to stabilize utilization and pricing until a more fundamental recovery is in place. Older units that roll off contract may require significant capital expenditure to remain in the working fleet and are therefore more likely to be cold stacked and ultimately scrapped. We expect the combination of improving activity levels, cold stacking and scrapping activity to lead to a balanced market at some point. Based on the expected level of scrapping activity and the number of units that are anticipated to be cold stacked, a relatively small increase in spending could meaningfully tighten the floater markets.

The global floater order book stands at approximately 42 units, comprised of 28 drillships and 14 semi-submersible rigs. 3 are scheduled for delivery in 2018, 20 in 2019 and 19 in 2020 and beyond. Due to the subdued level of contracting activity, we expect that it is likely that a significant number of newbuild orders will be delayed or cancelled until an improved market justifies taking delivery.

The worldwide fleet of jack-up rigs totaled 520 units at October 31, 2018. Of the total delivered fleet, 245 units were high specification and capable of operations in water depths of 350 feet and above and 275 units were standard jack-ups and capable of operations in water depths up to 350 feet. Overall, the global jack-up fleet is 21 years old on average. The average age of high specification units is 10 years and 30 years for standard units. Included in the global jackup fleet are units classed for operations in harsh environments. As at October 31, 2018, the global harsh environment jack-up fleet is comprised of 71 units and is 12 years old on average.

Tendering activity in the jack-up market continued during 2017 and 2018, albeit at low dayrates. The shorter-term contract profile in this market lends itself to more turnover and the market has likely reached the base level of units required to maintain existing decline curves.

A total of 83 jack-ups have been scrapped since the beginning of 2014, equivalent to 16% of the total fleet, and at October 31, 2018 there were 89 cold or warm stacked units that were 30 years old or older, which were prime scrapping candidates. In the next 18 months, 79 units that are 30 years old or older will be coming off contract with no follow on work identified which represent additional scrapping candidates, however scrapping activity in the jack-up segment may remain subdued relative to the floater segment due to the lower cost of stacking and classing these units.

The global jack-up order book stood at approximately 81 units at October 31, 2018. However, a significant portion of these orders were placed by investors with little or no operating track record. While a number of these speculators may exit projects, these units may eventually reach the market, possibly in the hands of more established companies. The deployment of this incremental supply may be somewhat

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rationalized in the longer term as the more established players will likely only take delivery when economically viable. In 2018, 5 units are scheduled for delivery, with an additional 51 scheduled for 2019 and 25 in 2020 and beyond. Due to the subdued level of contracting activity we believe that it is likely that a significant number of jack-up orders may be delayed until an improved market justifies taking delivery or be cancelled.

The above overview of the offshore drilling market is based on historical facts and current market conditions. Future market conditions and developments cannot be predicted and may materially differ from what we have set out above.

Results of Operations

The tables included below set out financial information for the periods presented. The period from July 2, 2018 through September 30, 2018 (Successor) and the period of January 1, 2018 through July 1, 2018 (Predecessor) 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.

Total operating revenues

Total operating revenues consist of contract, reimbursable and other revenues. For each reported period, these are split out in the table below:

Contract revenues - Contract revenues represent the revenues that we earn from contracting our drilling units to customers, primarily on a dayrate basis. Contract revenues are primarily driven by the average number of rigs under contract during a period, the average dayrates earned and the economic utilization achieved by those rigs. The number of rigs on contract, average dayrates and economic utilization for each period presented are set out in the table below:

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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.

Other revenues - Other revenues comprise the following:

Related party revenues - Related party revenues represents income from management and technical support services provided to Seadrill Partners, Seamex and Northern Drilling.

Amortization of unfavorable contracts - For periods before emergence from Chapter 11 and application of fresh start accounting we recognized an intangible asset or liability if we acquired 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. We classified the amortization of these intangible assets or liabilities within other revenues. For periods after emergence from Chapter 11 and 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.

Early termination fees - Other revenues for the period from January 1, 2018 through July 1, 2018 (Predecessor) and for the Nine months ended September 30, 2017 (Predecessor) included early termination fee revenue for the West Pegasus and West Hercules, respectively.

Loss on disposals

For the periods from July 2, 2018 through September 30, 2018 (Successor) and January 1, 2018 through July 1, 2018 (Predecessor) there were no gains or losses on disposals recognized. The share of proceeds from the sale of the West Rigel in the predecessor period was equal to its book value, and therefore did not generate a gain or loss.

The loss made in the nine months ended September 30, 2017 (Predecessor) 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.

Contingent consideration recognized

For the period from July 2, 2018 through September 30, 2018 (Successor), no contingent consideration was recognized, as when applying fresh start accounting we recognized future contingent consideration associated to the sale of the West Vela and West Polaris to Seadrill Partners as an asset at fair value.

Contingent consideration recognized in the period from January 1, 2018 through July 1, 2018 (Predecessor) was $7 million compared to $18 million for the nine months ended September 30, 2017 (Predecessor). The West Polaris contract concluded in December 2017 and no further contingent consideration has been recognized after this date.

Impairment of long-lived assets

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.

Total operating expenses (excluding impairment of long-lived assets)

Operating expenses comprise of vessel and rig operating expenses, amortization of favorable and unfavorable contracts, reimbursable expenses, depreciation of drilling units and equipment, and general and administrative expenses. For each reported period, these are split out in the table below:

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Vessel and rig operating expenses - 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. On average, we incur higher vessel and rig operating expenses when a rig is operating compared to when it is stacked. As set out in the revenue section above, we had an average of 16 rigs in operation during the period from July 2, 2018 through September 30, 2018 (Successor), 18 rigs in operation during the period of January 1, 2018 through July 1, 2018 (Predecessor) and 22 rigs in operation during the nine months ended September 30, 2017 (Predecessor).

Amortization of favorable and unfavorable contracts - 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. 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.

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 applied fresh start accounting on emergence from Chapter 11. The depreciation expense for the period from July 2, 2018 through September 30, 2018 (Successor) is therefore based on lower carrying values and is not comparable to the level of depreciation expense recorded in the Predecessor company.

General and administrative expenses - 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 restructuring are classified under reorganization items.

Interest expense

Cash and payment-in-kind interest - Represents cash and payment-in-kind interest incurred on our debt facilities. This is summarized in the table below.

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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).

Unwind of discount on debt - On emergence from Chapter 11, 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.

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. Loan fee amortization expense is therefore not comparable between these periods.

Capitalized interest - We capitalize the interest cost incurred to finance Newbuilds. We ceased capitalization of interest on Newbuilds when we filed for Chapter 11 on September 12, 2017.

Reorganization items

Reorganization items reported in the Consolidated Statement of Operations include the following items:

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, fresh start adjustments and any interest income generated from surplus cash invested. We have recognized professional and advisory fees that were incurred post-emergence, but relate to our Chapter 11 filing, within “Reorganization items”.

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Financial items and other income and expense

Financial items and other income and expense (excluding reorganization items) reported in the Consolidated Statement of Operations include the following:

Interest Income - 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 for the period from January 1, 2018 through July 1, 2018 (Predecessor) and $2 million for the nine months ended September 30, 2017.

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 period July 2, 2018 through September 30, 2018 (Successor) is not comparable to the share of results in associated companies recorded in the Predecessor company.

The share in after tax loss of associated companies for the period from July 2, 2018 through September 2018 (Successor) reflects a share in after tax profits of our investments in Seabras Sapura joint venture and a share of losses in our investments in Seadrill Partners and Seamex. This includes a net expense for the unwind of basis differences of $29.8 million. The share in after tax profit for the period from January 1, 2018 through July 1, 2018 (Predecessor) includes the benefit of a litigation ruling in the favor of Seadrill Partners. The share in profit for the nine months ended September 30, 2017 reflects our share of the profit generated by our equity method investments during that period.

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 longer revalued after we filed for Chapter 11 and were extinguished through the Chapter 11 restructuring.

Other financial items - Other financial items included $68 million of pre-petition professional and advisory fees related to our reorganization in the nine months ended September 30, 2017 period (Predecessor). This is offset by $10 million of income in April 2017 resulting from the derecognition of Archer as an investment in associate and recognition as an available-for-sale security.

Income taxes

Income tax expense was $2 million for the period from July 2, 2018 through September 2018 (Successor), $30 million for the period from January 1, 2018 through July 1, 2018 (Predecessor) and $9 million for the nine months ended September 30, 2017 (Predecessor).

Our funding and treasury activities are conducted within corporate policies to maximize returns while maintaining appropriate liquidity for our operating requirements. Cash and cash equivalents are held mainly in US dollars, with lesser amounts held in Norwegian Kroner, Malaysian Ringgit, British Pounds and Brazilian Reais.

Our liquidity requirements relate to servicing and repaying debt, funding investment in drilling units, 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 generally received between 30 and 60 days in arrears, and most of our operating costs are paid on a monthly basis. We have historically relied on our cash generated from operations to meet our short-term liquidity needs. However, as a result of the downturn in the offshore industry, we required additional liquidity to fully meet our short-term liquidity requirements. To obtain this additional liquidity and to implement the transactions contemplated as part of the RSA and Investment Agreement, we commenced Chapter 11 proceedings under the Bankruptcy Code on September 12, 2017. In our Form 20-F for the year ended December 31, 2017, we reported that these conditions gave rise to a substantial doubt over our ability to continue as a going concern for a period of at least twelve months after the date the financial statements were issued.

On July 2, 2018, we emerged from the Chapter 11 proceedings. The emergence from the Chapter 11 proceedings and consummation of the Plan addressed our liquidity concerns as it provided $1.08 billion in new capital, equitized approximately $2.4 billion in unsecured bond obligations and approximately $250 million in unsecured interest rate and currency swaps, eliminated near-term amortization obligations and extended maturities on debt. We emerged from Chapter 11 with $2.1 billion of post emergence cash and $7.6 billion of outstanding debt principal.

We believe that cash on hand, liquid investments, contract and other revenues will generate sufficient cash flow to fund our anticipated debt service and working capital requirements for the next twelve months. Therefore, there is no longer a substantial doubt over our ability to continue as a going concern for at least the next twelve months following the date of issue of the financial statements. The financial information included herein has been prepared on the basis that we will continue as a going concern, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business as they come due.

Cash and cash equivalents and cash flows

The following tables summarize our cash and cash equivalents for the periods presented and our net cash flows from operating, investing and financing activities:

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Net cash used in / provided by operating activities

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.

Net cash provided by investing activities

Cash flows from investing activities include purchases and sales of newbuildings, drilling units and equipment, investments and sales of investments in unconsolidated entities, cash flows from purchases and sales of debt or marketable securities and certain cash flows from business combinations.

Net cash provided by investing activities for the period from July 2, 2018 through September 30, 2018 (Successor) was primarily generated from the proceeds from Sapura Kencana contingent consideration and proceeds from Seadrill Partners for contingent consideration with regard to the West Vela, offset by capital expenditure.

Net cash provided by investing activities for the period from January 1, 2018 through July 1, 2018 (Predecessor) was driven by our share of proceeds from the sale of the West Rigel and proceeds from Seadrill Partners for contingent consideration with regard to the West Vela and West Polaris and payments received from loans granted to Seadrill Partners, offset by capital expenditure.

Net cash provided by investing activities for the nine months ended September 30, 2017 (Predecessor) was driven by the settlement of the West Mira construction contract, sale of the West Resolute, West Mischief and West Triton , proceeds from Seadrill Partners for contingent consideration related to the West Vela and West Polaris and payments of interest and remaining principal on loans granted to Seadrill Partners and Sevan Developer yard installment refunds, offset by capital expenditures and a payment to remove guarantees on Archer debt.

Net cash used in / provided by financing activities

Cash flows from financing activities include proceeds from issue of new equity and payment of cash dividends, proceeds from issuing debt and repayments of debt, payment of debt issue costs, purchases of treasury shares, proceeds from exercise of stock options and cash flows from transactions with non-controlling interests.

Net cash used in financing activities for the period from July 2, 2018 through September 30, 2018 (Successor) was for repayments of debt.

Net cash provided by financing activities during the period from January 1, 2018 through July 1, 2018 (Predecessor) was driven by proceeds from issue of New Secured Notes and new equity on emergence from Chapter 11, offset by repayments of debt and debt fees paid.

Net cash used in financing activities during the nine months ended September 30, 2017 (Predecessor) was for repayments of debt and revolving lines of credit and debt fees paid.

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Fresh start accounting

On emergence from Chapter 11 and application of fresh start accounting, we recorded fair value adjustments against our debt, which reduced its carrying value by $283 million, and wrote-off any previously capitalized debt issue costs and discounts. In addition, during bankruptcy proceedings we recorded interest payments on secured debt facilities held within “Liabilities subject to compromise” as reductions on the principal amount of the debt outstanding. On emergence from Chapter 11 we expensed $186 million of these interest payments. We classified these expenses within reorganization items in the period January 1, 2018 to July 1, 2018 (Predecessor).

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Key terms of borrowing facilities

The below table summarizes the key terms of our borrowing facilities at September 30, 2018.

Key changes to borrowing facilities

Senior credit facilities - The terms our senior credit facilities were amended when we emerged from Chapter 11 as follows:

Unsecured bonds - The unsecured bonds were extinguished when we emerged from Chapter 11.

New Secured Notes - On July 2, 2018, we issued $880 million of 12.00% senior secured notes due in 2025. The notes bear interest at the annual rate of 4.00% payable in cash plus at the annual rate of 8.00% payable in kind. The principal amount shown in the above table includes 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.

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Per the terms of the New 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.

We were also required to make an offer to repurchase a proportion of the New 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 New 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.

Collateral

Our secured credit facilities are secured by, among other things, liens on our drilling units. All of our loan agreements contain cross-default provisions, meaning that if we defaulted and amounts became due and payable under one of our loan agreements, this would trigger a cross-default in our other facilities so that amounts outstanding under our other loan agreements become due and payable and capable of being accelerated. The New Secured Notes are secured by, among other things, our investments in Seadrill Partners, SeaMex and Seabras Sapura.

Covenants contained in our debt facilities

Following emergence from Chapter 11, except for 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.

Please refer to Note 19 “Debt” of the unaudited interim financial statements included herein for detailed information on our borrowings and credit facilities.

In addition to the above, we have recognized uncertain tax positions, inclusive of interest and penalties, of $71 million as at September 30, 2018 (Successor) (December 31, 2017 (Predecessor): $67 million).

At December 31, 2017 we were in Chapter 11 and did not make interest payments on our Senior Credit Facilities. Our exposure to interest rate risk was therefore limited to loans contained within VIEs. The net exposure on those debt obligations was not materially different to the amount shown in the above table.

Senior credit facilities

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 capped rate against the 3-month US LIBOR is 2.87% and covers the period from June 15, 2018 to June 15, 2023. The LIBOR rate applied on our debt at September 30, 2018 was 2.33%. Therefore, the interest cap would only mitigate the impact of 46% of a theoretical 1% point increase in the LIBOR rate. This is set out in the below table.

Debt contained within VIEs

A Ship Finance subsidiary consolidated by Seadrill Limited as a VIEs (refer to Note 25 “Variable Interest Entities”) has entered into interest rate swaps to mitigate its exposure to variability in cash flows for future interest payments on the loans taken out to finance the acquisition of the West Linus . These interest rate swaps cover $135 million principal value of debt obligations as set out in the table above.

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 investee 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.

Before we entered Chapter 11, we had unsecured bonds denominated in Norwegian Krone and Swedish Krona. These bonds were equitized on emergence from Chapter 11. Our remaining 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.

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Credit risk

We have financial assets, including cash and cash equivalents, marketable securities, receivables and certain 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.

Critical Accounting Estimates

The preparation of the Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures about contingent assets and liabilities. We base these estimates and assumptions on historical experience and on various other information and assumptions that we believe to be reasonable. Critical accounting estimates are important to the portrayal of both our financial position and results of operations and require us to make subjective or complex assumptions or estimates about matters that are uncertain. The basis of preparation and significant accounting policies are disclosed in our annual report on Form 20-F.

Critical accounting estimates that have significantly impacted the nine months ended September 30, 2018 are as follows:

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, Reorganization. The following critical accounting estimates were used to derive the fresh start value, effective July 1, 2018.

Reorganization Value

Reorganization value represents the fair value of the Successor Company’s total assets and is intended to approximate 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. We derived reorganization value based on our estimated distributable value of approximately $11.0 billion.

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 back 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.

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, we then compare the carrying value of the asset with its fair value to determine an impairment loss to be recognized during the period. The determination of expected undiscounted cash flow amounts requires significant estimates, judgments and assumptions, including future dayrates, contract probabilities, economic utilization, capital and operating expenditure, applicable tax rates and asset lives. We operate in a highly cyclical industry which can’t always be predicted with a high level of accuracy. Therefore, differences between previous judgments and estimates and actual results will occur. We reassess judgments and estimates in the period in which significant differences are observed and may conclude that a triggering event has occurred and perform a recoverability test.

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The downturn in the offshore drilling market, which started in 2013, continued into the period from January 1, 2018 through July 1, 2018 (Predecessor). At this time, we observed contract dayrates were below the levels assumed in our previous forecasts. We considered this to be an indicator of potential impairment and reassessed recoverability of our drilling units by evaluating their estimated undiscounted future net cash flows based on updated projections of future dayrates, contract probabilities, economic utilization, capital and operating expenditures, applicable tax rates and asset lives. We calculated that the estimated undiscounted future net cash flows for three of our rigs were lower than their carrying values. This was primarily driven by lower assumptions on future dayrates and future contract probabilities. As a result, we recorded an impairment charge to reduce the value of these rigs to their fair value. The impairment expense totaled $414 million and was classified within “Loss on impairment of long-lived assets” on the Consolidated Statement of Operations. We derived the fair value of the rigs using an income approach. 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. These estimates represented Level 3 fair value measurements.

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 RSA 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.

The embedded redemption feature of the put option causes 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 Sheet. Any fair value adjustments to generate an expected redemption value have been taken through retained earnings. The impact of this adjustment reduced non-controlling interest in the Consolidated Balance Sheet as at July 1, 2018 (Predecessor) by $150 million, created redeemable non-controlling interest of $25 million, with a fair value adjustment through retained earnings of $127 million. On fresh start, the redeemable non-controlling interest was revalued to $30 million and as at September 30, 2018 (Successor) was $28 million.

To calculate the fair value of the non-controlling interest shares, we first 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 market approach.

Income taxes

Seadrill Limited 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 fluctuates.

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, 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

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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 in 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.

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