Seadrill Partners LLC - Second Quarter 2013 Results
· Seadrill Partners reports net income attributable to Seadrill Partners Members for the second quarter 2013 of US$22.1 million and net operating income for the second quarter of US$71.6 million.
· Generated distributable cash flow of US$15.8 million for the second quarter 2013.
· Completed the acquisition of the companies that own and operate the tender rig T-15 from Seadrill Limited for $210 million on May 17, 2013
· Declared an increased distribution for the second quarter of US$0.4175 per unit.
Financial Results Overview
Seadrill Partners LLC reports:
Total contract revenues of US$158.6 million for the second quarter 2013 (the "second quarter") compared to US$161.5 million in the first quarter of 2013 (the "first quarter"). The decline is primarily driven by 23 days downtime for the West Capricorn as a result of required equipment repairs. This has partly been offset by improvements in the West Capella's uptime relative to the first quarter. The tender rig T-15 had little impact on operating income due to the fact that revenues and the majority of operating expenses prior to drilling operations commencement are capitalized and amortized over the contract period.
Net operating income for the quarter of US$71.6 million compared to US$74.7 million in the preceding quarter, the reduction as a result of the West Capricorn downtime.
Net Income for the quarter of US$77.2 million compared to US$61.3 million in the first quarter. This is after the recognition of non-cash gains on derivative instruments. Such items reflect a gain of US$27.0 million in the second quarter as compared to a gain of US$6.2 million for the first quarter as a result of an increase in long term interest rates.
Net income attributable to Seadrill Partners LLC Members was US$22.1 million for the second quarter compared to $19.8 million for the first quarter.
Distributable cash flow was US$15.8 million for Seadrill Partners' second quarter as compared to US$18.0 for the first quarter. The reduction is a result of the West Capricorn downtime.
Distribution for the period of US$0.4175 per unit, equivalent to an annual distribution of US$1.67, representing an approximate 8% increase from the Company's minimum quarterly distribution.
During the second quarter, Seadrill Partners had an interest in five rigs in operation. The fleet is comprised of two semi-submersible rigs, one drillship and two tender rigs operating in Canada, the US Gulf of Mexico, Nigeria, Angola and Thailand respectively. During the quarter the T-15, which was acquired on May 17, 2013, underwent acceptance testing, during which time it received a slightly reduced dayrate, mobilized and then commenced operations on full rate in July 2013.
Other than the West Capricorn, the Company's rigs performed well during the second quarter, achieving an overall economic utilization rate of 92% on average. The decline from the first quarter utilization of 96% is due to 23 days downtime for the West Capricorn as a result of required repairs and equipment change-outs.
Operating expenses for the second quarter were US$90.6 million, compared to US$96.1 million in the first quarter. The decrease in operating expenses is partly explained by lower operating costs for the West Aquarius rig after completing the start-up phase in Canada in the first quarter.
On May 17, 2013 Seadrill Partners completed the acquisition of the companies that own and operate the tender rig T-15 from Seadrill Limited ("Seadrill") for a total purchase price of $210 million. The T-15 is contracted with Chevron in Thailand at an initial contract dayrate of $115,500, which is subject to escalation to cover cost increases.
Financing and Liquidity
As of June 30, 2013, the Company had cash and cash equivalents, on a consolidated basis, of US$50.0 million and a revolving credit facility of US$300 million provided by Seadrill as the lender. As of June 30, 2013, US$69.6 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$1,262.2 million as of June 30, 2013; US$1,152.2 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 Limited are classified as related party transactions.
The Company has four secured credit facilities, one of which matures in June 2014. The Company expects to refinance this facility ahead of its expiration either in the secured rig finance market or in the debt capital markets in order to achieve the most effective capital structure. 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 Limited maturing in 2016 relating to the acquisition of the T-15. The Board is confident that the facilities can be refinanced at attractive terms with improved repayment profiles. The Company's goal is to achieve a capital structure independent of Seadrill Limited which will allow it to appropriately manage debt terms and debt amortization.
As of June 30, 2013, Seadrill Partners had interest rate swaps outstanding on principal debt of US$1,158.4 million. All of the interest rate swap agreements were entered into subsequent to the IPO Closing Date and represent approximately 87% of debt obligations as of June 30, 2013. The average swapped rate, excluding bank margins, is approximately 1.16%.
The fundamental outlook for the oil and gas industry remains positive. Although overall E&P spending trends appear to be slowing it is apparent that the slowdown is primarily driven by onshore spending, especially in North American shale activity. The activity offshore is expected to continue to grow at a healthy pace with an emerging trend for deepwater development projects.
The number of deep and ultra-deepwater discoveries has increased materially since 2010 and the Company expects this trend to continue. Importantly, as these trends migrate from discoveries to development projects average contract terms are expected to increase as development plans typically have longer duration than exploration activities. Seadrill Partners' tender rig fleet is also ideally positioned to take advantage of development spending trends as these assets are primarily used in development activities.
The market is also experiencing a distinct bifurcation trend. Sixth generation rigs are increasingly preferred by operators given their ability to perform dual activity drilling, greater BOP capability, higher variable deckloads, and higher hookload capacities. These technological developments make the rig better suited to drill a wide range of well designs and provide greater efficiency and safety than older generations. Seadrill Partners' current ultra-deepwater rigs and potential dropdowns from Seadrill Limited are well positioned as premium units.
There is very limited ultra-deepwater availability and the Company believes the current orderbook will to a large extent be absorbed by increasing deep water demand and by replacement of the older mid and deepwater fleet. Utilization of modern higher specification rigs is therefore expected to remain at current levels.
During the third quarter leading edge dayrates continue to be in-line with first half 2013 levels with the most recent contracted dayrates ranging from US$550,000-US$650,000. Seadrill Partner's ultra-deepwater rigs current dayrates range from US$487,000 per day to US$552,000 per day. As of June 30, 2013 Seadrill Partners' total fleet's average remaining contract term was 3.8 years. 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.
Having acquired the T-15 tender barge the Company is focused on completing its second acquisition, the tender barge T-16, soon. The T-16 is contracted for a five-year period with Chevron in Thailand at an initial contract dayrate of US$115,500, which is subject to escalation to cover cost increases. The rig underwent acceptance testing in Singapore prior to mobilizing to its drilling location and recently commenced its drilling contract.
The Company is also preparing for further acquisitions from Seadrill Limited. Pursuant to the omnibus agreement with Seadrill Limited, Seadrill Partners has the right to acquire from Seadrill Limited any drilling rig that enters into a contract with a firm term of five years or more. Seadrill Limited has an existing fleet of 11 ultra-deepwater rigs, as well as a newbuild program with 10 ultra-deepwater rigs on order. There is therefore a unique opportunity for high growth via further asset dropdowns. The company has also entered into discussions with customers to extend some of its existing operating agreements. The Board is hopeful that at least one of the units can be contracted for an extended period within the next quarter. The extended rate is likely to be higher than current rates. The Board is confident about Seadrill Partners ability to be able to grow its future earnings and distributions and be one of the fastest growing MLP's in the years to come.
Average economic utilization of the Company's rigs at 92% was adversely impacted by West Capricorn's downtime. The third quarter will be positively impacted by the cash contribution of the T-15 tender barge. The West Aquarius has incurred a total of 13 days downtime during the third quarter which will negatively impact consolidated operating results. The rig is now operating well and results for the third quarter are otherwise expected to confirm good operational performance.
The Board is confident about the Company's ability to grow its distributions in the future and is fully focused on the acquisition of new rigs in order to achieve this.
August 28, 2013
The Board of Directors
Seadrill Partners LLC
Questions should be directed to:
Graham Robjohns: Chief Executive Officer
Rune Magnus Lundetrae: Chief Financial Officer