Operations
Seadrill Partners currently has an
interest in ten rigs in operation. The fleet is comprised of
four semi-submersible rigs, three drillships and three tender rigs
operating in Canada, the US Gulf of Mexico, Ghana, Nigeria, Angola
and Thailand.
Overall economic
utilization[1] for the
fleet was 90% for the fourth quarter. With the exception of
downtime on the West Aquarius, as guided in last quarter's report,
the fleet performed well during the fourth quarter, achieving an
economic utilization rate of 97% excluding the West Aquarius.
Total operating expenses for the
fourth quarter were $211.7 million, compared to $186.8
million in the previous quarter. The increase in operating expenses
in primarily driven by the inclusion of the West Vela in the fourth
quarter results.
Acquisitions
On November 4, 2014, Seadrill
Partners completed the acquisition of the entities that own and
operate the ultra-deepwater drillship, the West Vela for $900
million on a 100% basis. The West Vela was acquired by
Seadrill Capricorn Holdings LLC (51% owned by the Company).
Debt funding for the acquisition was $433 million comprised of a
secured debt facility originally entered into by Seadrill Limited
("Seadrill"). The Company's equity portion for its share of
the rig acquisition was therefore $238 million funded by the
proceeds of the 8 million units September equity offering.
The West Vela is a 6th
generation, dynamically positioned drillship delivered from the
Samsung shipyard to its current customer, BP, in November
2013. The West Vela is expected to carry out operations
in the U.S. Gulf of Mexico until the end of its contract in
November 2020.
Under the terms of the West
Vela contract BP is paying a daily rate of $565,000 plus
approximately $44,000 per day as a mobilization fee paid over the
term of the contract. Under the terms of the acquisition
agreement Capricorn Holdings will pay Seadrill $40,000 per day of
dayrate revenue actually received as well as the $44,000 per day
mobilization fee. These payments to Seadrill will cease at
the end of the current contract. By effectively lowering the
dayrate it receives to $525,000 per day the Company has reduced its
risk of having to re-contract at a lower dayrate when the contract
expires in 6 years time.
Financing and
Liquidity
As of December 31, 2014, the
Company had cash and cash equivalents, on a consolidated basis, of
$242.7 million and two undrawn revolving credit facilities totaling
$200 million. One $100 million facility is provided by Seadrill as
the lender and the second $100 million facility is provided by a
syndicate of banks and secured in connection with the $2.9 billion
term loan B facility. Total debt was $3,650.4 million as of
December 31, 2014; $581.5 million of this debt was originally
incurred by Seadrill, as borrower, in connection with its
acquisition of the drilling rigs.
Net debt as at December 31, 2014
was therefore $3,407.7 million giving a ratio of net debt to
annualized adjusted EBITDA[1] of
3.5:1
As of December 31, 2014 the
Company had two secured credit facilities, in addition to the term
loan B. These facilities expire in 2017 and 2025.
Additionally the Company has a $109.5 million vendor loan from
Seadrill maturing in 2016 relating to the acquisition of the T-15
and a $78.2 million intercompany loan from Seadrill relating to the
West Vencedor maturing in June 2015.
Seadrill has agreed to extended
the maturity for the West Vencedor loan by three years. The
new intercompany loan will be secured by the unit, matures in 2018,
has a 10 year amortization profile and will be priced at libor plus
2.5%.
Seadrill Partners will continue to
explore refinancing alternatives for the remaining related party
debt on the West Vencedor, T-15, T-16, and West Vela.
As of December 31, 2014,
Seadrill Partners had interest rate swaps outstanding on principal
debt of $3,571 million. All of the interest rate swap agreements
were entered into subsequent to the IPO Closing Date and represent
approximately 98% of debt obligations as of December 31, 2014.
The average swapped rate, excluding bank margins, is approximately
2.25%. 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
Since the Company's last quarterly
report in November, Brent spot price has dropped by 23%, or US$17.6
per barrel. The market, which was initially challenged by the
pace of supply additions and reduced capital expenditure by oil
companies, is now also dealing with a more significant reduction in
demand. To compound these issues, during the fourth quarter
OPEC made clear its intention to focus on market share rather than
price. A desire by oil companies to reduce capital
expenditures amidst the significant price decline has severely
curtailed drilling budgets for at least 2015. Consequently
significant additional spare capacity for offshore drilling units
is likely to materialize as 2015 progresses.
The offshore drilling market is
entering its second year of a downturn, which is shaping up to be
more challenging than the first and worse than had previously been
expected by the industry. Approximately a quarter of
ultra-deepwater floaters will become available in 2015, a third of
which are newbuilds that are yet to be delivered. Based on
this available capacity, significant delays or cancellation of
newbuild projects can be expected. New tendering activity
remains subdued as oil companies set their budgets at materially
lower levels than seen in recent years. Rig owners are bidding for
available work extremely competitively with a focus on utilization
over returns, which will likely drive rates down to or below cash
breakeven levels.
Seadrill Partners believes it is
well positioned with long term contracts, a modern fleet, strong
operations and high quality customers. The Company has no
ultra-deepwater rigs up for re-contracting before 2017 and only one
semi-tender rig, the West Vencedor up for re-contracting in
2015.
The severity of this downturn is
forcing the contract drilling industry to make prudent decisions
regarding cold stacking and scrapping of older units. This activity
is expected to accelerate, likely to levels which have not been
seen in two decades. Owners of older, inefficient units face
difficult decisions as these units approach periodic classing
activities and most seem to be opting not to invest the significant
expenditures required, instead choosing to stack or scrap the
unit. From a long term perspective, these decisions should
ultimately create a more healthy industry as weaker players leave
the business and old rigs are retired, leaving Seadrill Partners'
available capacity in 2017 positioned to take advantage of a
possible firming of the rig market.
Outlook
2014 was a busy year for Seadrill Partners having
completed three acquisitions, three equity offerings, a $2.9
billion term loan financing, and grown distributions by
27.5%. The fleet has now reached ten units with a more
staggered contract maturity and stable cash flow profile. The
Board is pleased with the progress in 2014 and since IPO, having
grown from a four rig company and increased distributions by 46%
since 2012.
On November 4, 2014, the Company completed the
acquisition of a 51% interest in the drillship West Vela, which has
a long-term contract with BP expiring in the fourth quarter of
2020. The Vela acquisition contributed positively to the Company's
operating income and also to a solid distributable cash flow
coverage ratio of 1.45x for the fourth quarter. The unit was
acquired based on a dayrate of $525,000 although the contracted
dayrate is $565,000 in order to reduce the risk of re-pricing the
unit at a lower rate in 2020 when the current contract ends.
Seadrill Partners will likely explore similar structures when
considering further acquisitions from Seadrill Limited.
Average economic utilization for the fourth
quarter was 90%. The largest negative impact on this being downtime
on the West Aquarius. Taking into account the number of days of
down time across the fleet of 10 rigs thus far in the first quarter
of 2015 and anticipated downtime for the remainder of the quarter,
utilization for the first quarter is currently expected to be
similar to average utilization for the fourth quarter.
The Semi-tender rig West Vencedor is now expected
to complete its current contract early in the second quarter of
2015. It will then go through the process of demobilisation for
which it will receive a fee of approximately $8.5 million. Seadrill
Partners is exploring all alternative employment opportunities for
the West Vencedor but the loss of the rig's revenue of $212,000 per
day will negatively impact earnings until alternative employment
can be found. In the event the rig is cold stacked however,
operating costs would be significantly reduced. Seadrill Partners
owns a 58% interest in the West Vencedor. In light of the
current environment, Seadrill Partners is encountering and may in
the future encounter situations where counterparties request relief
to contracted dayrates or seek early contract termination. In the
event of early termination for the customer's convenience, an early
termination amount is typically payable to Seadrill Partners, in
accordance with the terms of the drilling agreement. While
the Company is confident that its contract terms are enforceable,
it may be willing to engage in discussions to modify such contracts
if there is a commercial agreement that is beneficial to both
parties.
Whilst the offshore drilling industry is clearly
facing some challenging times, Seadrill Partners, apart from the
West Vencedor, has no contract maturities until the second quarter
of 2017. It has a contract backlog of $5.6 billion and an average
remaining contract term of 3.3 years. Following the agreement to
extend the West Vencedor credit facility with Seadrill Limited, the
Company has no debt maturities until 2016 and has a net debt to
EBITDA ratio, as at December 31, 2014, of 3.5:1. The Company also
has a good liquidity position with $243 million in cash as at
December 31, 2014 together with $200 million in undrawn
revolvers.
Seadrill Partners will continue to evaluate
acquisitions, distributions and distribution coverage to manage
through the near term challenges in the offshore drilling industry.
While Seadrill Partners' strategy is to grow distributions
via accretive acquisitions, given the current near term market
outlook acquisitions will also be evaluated with the goals of
building distribution coverage and mitigating contract rollover
risk.
February 26, 2015
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
FORWARD LOOKING
STATEMENTS
This news release includes forward
looking statements. Such statements are generally not historical in
nature, and specifically include statements about the Company's
plans, strategies, business prospects, changes and trends in its
business and the markets in which it operates. In particular,
statements regarding the Company's ability to make cash
distributions, the expected performance of the drilling units in
the Company's fleet, estimated duration of customer contracts,
contract dayrate amounts and the Company's ability to purchase
drilling rigs from Seadrill Limited in the future are considered
forward-looking statements. These statements are made based upon
management's current plans, expectations, assumptions and beliefs
concerning future events impacting the Company and therefore
involve a number of risks, uncertainties and assumptions that could
cause actual results to differ materially from those expressed or
implied in the forward-looking statements, which speak only as of
the date of this news release. Important factors that could cause
actual results to differ materially from those in the
forward-looking statements include, but are not limited to offshore
drilling market conditions including supply and demand, dayrates,
customer dilling programs and effects new rigs on the market,
contract awards and rig mobilizations, contract backlog, the
performance of the drilling units in the Company's fleet, delay in
payment or disputes with customers, our ability to successfully
employ our drilling units, procure or have access to financing,
ability to comply with loan covenants, liquidity and adequacy of
cash flow from operations, fluctuations in the international price
of oil, changes in governmental regulations that affect the Company
or the operations of the Company's fleet, increased competition in
the offshore drilling industry, and general economic, political and
business conditions globally. Consequently, no
forward-looking statement can be guaranteed. When considering
these forward-looking statements, you should keep in mind the risks
described from time to time in the Company's filings with the
SEC. The Company undertakes no obligation to update any
forward looking statements to reflect events or circumstances after
the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict all of these
factors. Further, the Company cannot assess the impact of each such
factor on its business or the extent to which any factor, or
combination of factors, may cause actual results to be materially
different from those contained in any forward looking
statement.