Highlights
Subsequent
Events
Financial
Results Overview
Seadrill Partners LLC1
reports:
Total contract revenues of
US$282.1 million for the fourth quarter 2013 (the "fourth quarter")
compared to US$262.4 million in the third quarter of 2013 (the
"third quarter"). The increase is primarily driven by the $22
million West Aquarius write off in the third quarter and the
contribution from the T-16 for the full quarter after commencement
of operations. This was partly offset by planned downtime on the
West Capella for 5 year classing, and in particular by 34 days
downtime during the quarter for the West Aquarius related to five
year classing and anchor chain repairs.
Net operating income for the
quarter of US$134.4 million compared to US$118.1 million in the
preceding quarter. The improvement is largely as a result of the
improvements in revenues noted above.
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1) All
references to "Seadrill Partners" and "the Company" refer to
Seadrill Partners LLC and its subsidiaries, including the operating
companies that indirectly own interests in the drilling rigs,
Seadrill Partners LLC owns: (i) a 30% limited partner interest in
Seadrill Operating LP, as well as the non-economic general partner
interest in Seadrill Operating LP through its 100% ownership of its
general partner, Seadrill Operating GP LLC, (ii) a 51% limited
liability company interest in Seadrill Capricorn Holdings LLC and
(iii) a 100% limited liability company interest in Seadrill
Partners Operating LLC. Seadrill Operating LP owns: (i) a 100%
interest in the entities that own the West
Aquarius, West Leo and the West Vencedor and (ii) an approximate 56% interest in
the entity that owns and operates the West
Capella. Seadrill Capricorn Holdings LLC owns 100% of the
entities that own and operate the West Capricorn
and West Sirius. Seadrill Partners Operating LLC owns 100% of
the entities that own and operate the T-15 and
T-16 tender barges.
Net Income for the quarter of
US$113.6 million compared to US$78.4 million in the previous
quarter. This is after the recognition of the gain/loss on
derivative instruments, which reflected a gain of US$16.1 million
in the fourth quarter as compared to a loss of US$11.8 million for
the third quarter as a result of an increase in long term
interest rates in the fourth quarter. The unrealized non-cash
element of these amounts are US$19.1 million gain and US$9.2
million loss respectively.
Net income attributable to
Seadrill Partners LLC Members was US$62.6 million for the fourth
quarter compared to US$14.2 million for the previous quarter.
Distributable cash flow was US$23.2 million for
Seadrill Partners' fourth quarter as compared to US$15.9 million
for the previous quarter2 giving a
coverage ratio of 0.86x for the fourth quarter. The increase
is mainly as a result of the contribution from the T-16 for the
full quarter and from the West Leo and West Sirius for part of
December in addition to the West Aquarius improvement noted
above.
The coverage ratio has been negatively impacted by
the increase in units outstanding following the December equity
issuance as the fourth quarter distribution is payable on all
outstanding units at the record date. Were the distribution
to be paid pro-rata on the new units for the 19 days of the
December that the Company benefited from the West Leo and West
Sirius cash flow, coverage would have been 1.08x.
Distribution for the period of US$0.4450 per unit,
equivalent to an annual distribution of US$1.78, represents an
approximate 15% increase from the Company's minimum quarterly
distribution set at its IPO. Subsequent to the acquisition of
the semi-submersible rigs the West Sirius and West Leo in December,
Management have recommended to the Board an annualized distribution
increase to between $2.00 and $2.05 per unit which would become
effective for the distribution with respect to the quarter ending
March 31, 2014 and would represent an approximate 30% increase
since IPO. Any such increase would be conditional upon, among other
things, the approval of such increase by the Board and the absence
of any material adverse developments that would make such an
increase inadvisable.
____________________
2) Please
see Appendix A for a reconciliation of DCF to net income, the most
directly comparable GAAP financial measure.
Operations
Seadrill Partners has an interest
in eight rigs in operation. The fleet is comprised of four
semi-submersible rigs, one drillship and three tender rigs
operating in Canada, the US Gulf of Mexico, Ghana, Nigeria, Angola
and Thailand respectively.
During the quarter, Hibernia
Management and Development Company Ltd, (HMDC) agreed to an 18
month contract extension for the ultra-deepwater harsh environment
semi-submersible West Aquarius thereby extending the operations for
the rig off the east coast of Canada until April 2017.
Total S.A. have exercised their
option to convert the contract extension for the West Capella from
5 years to 3 years. As a result of this change in contract
terms the dayrate has increased from US$580,000 per day to
US$627,500 per day. The use of the option to convert to a shorter
contract with a higher dayrate reflects a transfer of operatorship
for the license and the wish for the new operator to retain
flexibility. The Company is confident however that there will be
additional requirements for the rig in Nigeria post 2017.
With the exception of 20 days
downtime linked to the West Aquarius anchor chain event, the
Company's fleet performed well during the fourth quarter achieving
an overall economic utilization rate of 91%. Average
utilization has been particularly impacted by the 34 days downtime
on the West Aquarius, 14 of which were related to 5 year classing
and the balance due to faulty anchor chains.
Total operating expenses for the
fourth quarter were US$148.0 million, compared to US$147.9 million
in the third quarter. The Company has good cost controls in
place and sees little risk of changes to the operating cost
structure.
Acquisitions
On October 18, 2013 Seadrill
Partners completed the acquisition of the company that owns the
tender rig T-16 from Seadrill Limited ("Seadrill") for a total
purchase price of US$200 million. The T-16 is contracted with
Chevron in Thailand at an initial contract dayrate of US$115,500,
which is subject to escalation to cover cost increases and is
currently US$121,268.
On December 13, 2013 Seadrill
Partners completed the acquisition of the companies that own and
operate the West Sirius and West Leo for a total consideration of
US$2.3 billion on a 100% basis. The West Sirius was acquired
by Seadrill Capricorn Holdings LLC (51% owned by SDLP) and the West
Leo acquired by Seadrill Operating LP (30% owned by SDLP).
Debt funding for the acquisition was US$936 million comprised of
back-to-back bank loans with Seadrill and a related party loan from
Seadrill. The Company's equity portion, for its share of the
rig acquisitions, of US$528 million was funded with Seadrill
Partner's first public equity offering and a $70 million sellers
loan. All the related party debt with Seadrill in connection with
the transaction will be refinanced by funds from the term
loan B financing.
The West Sirius is contracted with
BP in the US Gulf of Mexico at a dayrate of US$490,173 until the
third quarter of 2014, at which time the rate increases to
US$535,000 per day through the third quarter of 2019. The
West Leo is contracted with Tullow Oil in Ghana at a dayrate of
US$605,000 through the second quarter of 2018. The long term
contracted cash flows of these acquisitions further enhance
Seadrill Partners' cash flow profile and visibility in
distributable cash flows, as well as further diversifing Seadrill
Partners fleet and reduces the risk operating result
volatility.
Financing
and Liquidity
As of December 31, 2013, the
Company had cash and cash equivalents, on a consolidated basis, of
US$89.7 million and a revolving credit facility of US$300 million
provided by Seadrill as the lender, which has subsequently been
reduced to US$100 million as part of the term loan B refinancing
described below. As of December 31, 2013, US$125.9
million was drawn on this facility to finance short-term working
capital needs and to help manage the Company's debt amortization
requirements. Total debt excluding the drawn revolver balance
was US$2,234.6 million as of December 31, 2013; US$1,825.2
million of this debt was originally incurred by Seadrill, as
borrower, in connection with its acquisition of the drilling
rigs. Subsidiaries within the Seadrill Partners group that
now own the drilling rigs entered into agreements with Seadrill,
pursuant to which each rig owning subsidiary will make payments of
principal and interest directly to Seadrill. These loan
agreements with Seadrill are classified as related party
transactions.
As of December 31, 2013 the
Company had five secured credit facilities. The two
facilities maturing in June 2014 and Dec 2017 have since been
refinanced with the term loan B described below and as a result has
been reclassified as long term as at December 31, 2013. The
remaining three facilities expire in 2015, 2016, and 2017
respectively and a similar refinancing strategy should be expected
at maturity debt levels or higher. Additionally the Company
has a US$110 million vendor loan from Seadrill maturing in 2016
relating to the acquisition of the T-15 and two zero coupon
discount notes from Seadrill (US$70 million and US$230 million)
that mature in June 2015 relating to the West Sirius and West Leo
acquisition. Both these zero coupon discount notes will be
refinanced as part of the term loan B refinancing.
In February 2014, Seadrill
Partners executed a US$1.8 billion term loan B and US$100 million
revolving credit facility. The term loan was upsized from
US$1.7 billion and priced at Libor plus 3%, the low end of the
price range, and subsequently swapped to a fixed rate of
5.5%. In conjunction with the formation of Seadrill Partners
in 2012 and subsequent dropdown of the West Sirius and West Leo,
back-to-back and related party loans were used to finance the debt
portion of the transactions. As well as being overly reliant
on Seadrill Limited, this structure had an steep amortization
profile that was not optimal for Seadrill Partners. The 1%
amortization profile of the new facility will enable the Company to
more efficiently manage its replacement capital expenditure
reserves by investing in new assets. In conjunction with the
term loan B and revolver Seadrill Partners obtained a credit rating
of BB- / Ba3. As a rated entity Seadrill Partners' access to
and cost of funding should be improved, thus increasing financial
flexibility.
The Board is confident that a
similar refinancing can be executed on the remaining back to back
loans and related party debt in order to achieve a capital
structure that is independent from Seadrill Limited and further
facilitate Seadrill Partners growth.
As of December 31, 2013,
Seadrill Partners had interest rate swaps outstanding on principal
debt of US$2,068.0 million. All of the interest rate swap
agreements were entered into subsequent to the IPO Closing Date and
represent approximately 93% of debt obligations as of
December 31, 2013. The average swapped rate, excluding bank
margins, is approximately 1.64%. The Company has a policy of
hedging the significant majority of its long-term interest rate
exposure in order to reduce the risk of a rising interest rate
environment.
Market
The short term outlook for
floaters is influenced by the low activity level caused by reduced
growth in the capex from the major oil companies. In this
regard, 2014 and 2015 may show slower activity levels than earlier
anticipated. The oil price has remained firm and in recent
weeks has shown a stronger trend. The primary challenge for
oil companies is the negative real cash flow situation they are
currently encountering. Due to increasing depletion rates,
more capex needs to be spent in order to maintain production
levels. Combined with a relatively high dividend payout and
increasing development cost to bring new production on stream, oil
companies have limited opportunities to fund exploration
activities. We have encountered numerous instances of oil
majors reducing spending, especially in exploration and in certain
high cost areas of production such as onshore North America.
As budgets are re-allocated, the entire spending complex tends to
slow down. In turn, demand for offshore drilling assets is
being pushed into 2015-2016.
The Board is of the opinion that
this trend will lower oil production in the years to come.
Together with the generally tight supply demand balance and
political uncertainties in several oil producing countries, another
upward movement in oil price may occur. The funding of the
approximately 10 million barrels per day growth in global
production level from 2003 to 2013 was to a large extent financed
by an oil price that moved from US$30 to US$110 per barrel.
This created additional cash flow to reach current production
levels. It is likely that the next production increase will
be dependent on another upward movement in oil price.
Alternatively, oil companies will have to accelerate the time
between discovery and production, thereby materially increasing the
net present value of development projects and improving their cash
flow situation.
As a result of the pause in
upstream spending we have observed a decline in the overall number
of fixtures, lead times and contract duration. We also expect
to see a number of sublets adding to near term available
supply. Importantly, Seadrill Partners has no exposure to
re-contracting during 2014 and only the West Vencedor available
through 2015.
We are presently seeing a slight
increase in inquiries for 2015 availability. Given the amount
of work required to retain licenses that expire in 2015, this has
been expected. A total of 17 uncontracted ultra-deepwater
floater units will be delivered from the yards in 2015 and
2016. This is significantly lower than 2012 for instance when
all together 17 units were delivered. Based on the current
low contracting activity level it should be expected that this
capacity can be absorbed in the market without leading to
significant downtime for any ultra-deepwater capacity. An
increase in oil companies' activity level in 2015 is likely to push
rates higher.
Looking at the market as a whole,
the acute challenges lie with fourth and fifth generation
assets. The oil companies' new requirements after Macando and
the focus on increased water depth areas has significantly limited
the use of older equipment. The owners will face the choice
of investing several hundred million dollars into twenty or thirty
year old assets in order to try to meet the new demands or simply
just lay up the unit. It has been shown from the prior cycles
that such upgrades carried out by several of our competitors has
had a materially lower return than Seadrill's focus on building a
modern high specification fleet. Therefore, expectations for
additional older assets to be stacked remain. Pricing may
slip as utilization declines and operators of these asset classes
will face a difficult environment for the foreseeable future.
Current production in
ultra-deepwater regions is a mere 1 million barrels per day.
There are approximately 130 rigs which can serve this market
today. It is expected that by 2020 production in these
regions will approach 5 million barrels. The approximate 20%
CAGR represents one of the strongest production growth profiles
globally. Although the current market for ultra-deepwater
floaters is at lower activity levels than 2012, we are confident
that significant new rig capacity will need to be added to explore
and develop these reserves.
Mexico presents a particularly
interesting opportunity for future work in ultra-deepwater.
Legislation is moving forward at an impressive pace and we expect
the opening up of projects to potentially impact 2015 demand.
Seadrill has operated the West Pegasus in Mexico for the last 2.5
years and has developed a solid operational track record and good
working relationship with its customer, Pemex. As capital
from major oil companies enters the country, demand for rigs is
sure to follow.
Seadrill Partner's ultra-deepwater
rigs current dayrates range from US$490,173 per day to US$605,000
per day. As of December 31, 2013 Seadrill Partners' total
fleet's average remaining contract term was 3.7 years and current
backlog is US$4.5 billion. Given the Company's expectation of
continued strength in dayrates, it is possible that the Company's
below market contracts will be re-contracted at higher rates as
their contracts expire. This may create the potential for increased
distribution from existing assets.
Outlook
The year 2013 has been an active one for the
Company, doubling the size of the fleet with the acquisition of
four rigs and successfully completing its first public equity
offering post IPO. Distributions have grown 15% during 2013, and
taking into account the distribution increase recommended by
management in connection with the most recent acquisition,
distributions will have grown approximately 30% since IPO in
October 2012.
The Board believes this demonstrates the Company's
commitment to growth and is fully focused on continuing this
aggressive growth strategy. This growth will be driven primarily by
acquisitions from Seadrill's long term contracted premium
ultra-deepwater rig fleet as well as the acquisition of additional
units in Seadrill Partners operating companies.
The recently announced term loan B refinancing is
Seadrill Partners first step towards rationalizing its debt
structure, in particular to lower debt amortization so it can use
replacement capital expenditure cash reserves more efficiently and
to create a debt structure independent of Seadrill. As noted above
the transaction has been successful and the Company anticipates
using this market again in the future.
The term loan B facility, compared to traditional
rig financing, will result in higher interest cost of approximately
US$22 million per annum and at the same time reduce installments by
approximately US$162 million per annum. The net effect will
be an increase in free cash generation after finance of
approximately US$140 million annually for the four rigs supported
by this facility.
Economic utilization in 2013 was affected by 5
year classing on the West Aquarius and West Capella.
Seadrill's next 5 year survey will not be until 2015 when the West
Vencedor is due to be classed. The Company therefore does not
expect downtime to be as severe this year and looks forward to
returning to its long term target of 95% uptime.
Distributable cash flow for the first quarter of
2014 will be positively impacted by the cash contribution for the
full quarter from West Sirius and West Leo but negatively impacted
by approximately 60 days of collective downtime for the West
Aquarius, West Capricorn, and West Leo.
The increased rates for the Capella and the Sirius
of an additional $65,380 and $44,827 respectively per day will come
into effect in April and July 2014 respectively will strengthen
cash flow. Further improvement is expected due to the increased
rate of $75,000 in respect of the West Aquarius extension from
2015.
The Board is in discussions with
Seadrill with regards to acquiring more units in order to
strengthen the fleet composition, diversify the customer base, and
lengthen backlog. Such acquisitions should also provide further
distribution growth. The Company's best in class fleet, high
operational performance and long term contracts protects the
Company from any short-term negative market sentiment.
Seadrill Partners is ideally positioned to see through the current
market environment and potentially be re-contracting rigs into a
rising dayrate environment in the future.
February 25, 2014
The Board of Directors
Seadrill Partners LLC
London, UK.
Questions should be directed
to:
Graham Robjohns: Chief Executive Officer
Rune Magnus Lundetrae: Chief Financial Officer
Seadrill Partners Fourth Quarter
2013 Results
Seadrill Partners Fourth Quarter 2013 Fleet Status
This
announcement is distributed by NASDAQ OMX Corporate Solutions on
behalf of NASDAQ OMX Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the
information contained therein.
Source: Seadrill Partners LLC via Globenewswire
HUG#1764477
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