Seadrill Limited (SDRL) Q1 2010 Earnings Report, Transcript and Summary

Good day and welcome to the Seadrill quarter one 2010 results presentation conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Jim Daatland, Vice President of Investor Relations.

Thank you and welcome to Seadrill's first quarter 2010 earnings conference call. A copy of the first quarter report is posted on our website, seadrill.com, along with the reporting material for this conference call. Joining me today on the call is Mr. Alf Thorkildsen, Chief Executive Officer and Acting CFO; Mr. (Liva Rolle), Group Controller. As announced in April, we have hired Esa Ikaheimonen as new Financial Officer in Seadrill Management AS. Mr. Ikaheimonen is not present today, but will join us in August in time for our second quarter earnings release. Before I turn the call over to Alf, I would like to remind everyone that during the course of this conference call, we may make certain forward-looking statements regarding various matters related to our business, our company that are not based on historical facts. These can include future financial performance, operating results and the prospects for the contract drilling business in general. Any such statements in addition to other information discussed in this call are given within the Safe Harbor provisions provided by the federal securities regulation. For further and more detail description of all the risks associated with our company and industry, please see our most recent Form-20F and other filings with the U.S. Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results should differ materially. In order to give as many people as possible an opportunity to ask questions, please limit your questions to one initial question and one follow-up. Thank you. That concludes the preliminary details, and I'll hand the call over to Alf.

Thank you, Jim. Next page please. On the content today, I would start with some overall comments to the results and company developments through the quarter, walk you through the financial results in more detail, talk about our current operations and in particular the performance of our deepwater newbuilds. I will further discuss our contract backlog and market outlook, updated dividend policy, future opportunities and close with some summary remarks. Next page please. The highlights of first quarter 2010. First of all, it's an honor to host our first earnings conference call as a New York Stock Exchange listed company. The listing has been an ambition since the incorporation of our company, and we were thrilled to have the trading in our common share start on the New York Stock Exchange on April 13. It was a special day during the opening day on the stock exchange that day. In that respect, I would like to take the opportunity to thank all of our employees that are listening for a job well done in taking Seadrill to where we are today. I'm here today to share with you the quarter with an EBITDA of $434 million and the net income of $217 million. The corresponding earnings per share were $0.49 compared to $0.95 in previous quarter. We are somewhat disappointed that we missed the EBITDA consensus estimate. I will try to explain you the delta. First of all, the quarter was characterized by improved performance by our new deepwater units, which average utilization reaching our target of 97%. However, in spite of the strong utilization for our deepwater newbuilds, we had off-hire period related to submersible rigs as well as relatively high operating expenses compared to our target. We also made some adjustments related to sales tax in Brazil that…

(Operator instructions) We'll take our first question from Fiona Maclean of Merrill Lynch.

I've got two questions. Firstly, can I ask about your West Sirius rig in the Gulf of Mexico? Could you explain to us what happened with your sublet contract with Exxon and then your full-on contract with Devon (inaudible)? Can you just walk us through the technicals of that? So what is the risk to the day rates? How low can it go and what is the potential for a complete cancellation of that unit? And if it does get cancelled, what you do with the rig? And then secondly, I want to talk about a comment that you had at the back of your release today where you're saying that you are looking at possibly different options for the listing of your European shares. Could you just expand on that as to why you'd possibly be looking to move your listing away from Norway?

Let me try to start with the Sirius. West Sirius has a six-year contract with Devon. And we have so far been close to two years of it now with Devon. And we are currently on a sublet to Exxon. And on April 27, there was a moratorium on drilling, and that also affected the Sirius. We had a discussion with Exxon regarding force majeure, and we are in discussion with them in this respect. We don't know exactly what their plans are, and I guess it depends on when they lift the moratorium. And I can't speculate on that much more than that. What I can say that is that there is a force majeure close which lasts for 120 days. And in that period of time, we're getting somewhat reduced rate. Thereafter, each party can terminate the contract; however, Exxon has no right to terminate their contract in the sublet. On accounts to listing, we're just looking at opportunities to create both variation and liquidity in the shares. And one option could be London Stock Exchange?

And just going back to the ban on the drilling, there seems to be indications in the market that the U.S. government is going to come out later today and say they're going to extend that ban by six months. Can you just give your reaction to that? And also, a follow-on to that, in terms of your dividend, can you just state that if there is some change in your contract on the West Sirius, your dividend policy is still going to be very firm and you're not planning to cut the dividend?

What I can confirm that our policy will be the same. We will not change the policy. But of course, if there are dramatic changes to our future earnings, we need to always everyday realize and review that story. But our policy remains the same. We have an ambition to pay out a substantial part of all the earnings in Seadrill. So that's the kind of the dividend policy. What was the other question?

The other question is just a reaction to a possible six-month extension to this drilling ban.

Depending on the already defined deepwater, there are between 25 and 35 rigs which should be impacted by this in the Gulf of Mexico. That of course is a serious event. We are however reasonably confident that even though Exxon may even put the rig back to Devon, there is a need for this rig in the licenses which have been bought by BP. I don't want to speculate much more than that on this issue. When it comes to termination and so on, that's uncharted territory. And now I don't want to speculate on it as we speak.

We move on to our next question which comes from Ole Slorer from Morgan Stanley.

Alf, could you give us a little bit of color on operating costs for the second quarter? You said a little higher than expected in the first quarter. Is that the new level or was there something that will be reduced?

There are costs there which we expect to be non-recurring. I would say that we have had start-up which had lasted longer and had costs incurred which are more significant. In particular, when we had started up things, in the last quarter we had 97% utilization. At the same time, we have had air freights into countries like Brazil to U.S. Gulf to make sure that we have utilization high. But that of course has cost us more than we had expected. When we have more stable operations, and we are getting there, we will see reductions in those new areas.

You're starting a number of rigs in this quarter as well. So is this sort of a fourth quarter event when you expect costs to normalize, or will they come down somewhat in the near term?

I think we would see it near term. When we look at our own forecast for second quarter, we see significant reductions already. When it comes to startup, we are starting up West Orion in third quarter, most likely end of July in Brazil, and we are taking the learnings from the two previous rigs of the same caliber, West Sirius and West Taurus, going into West Orion. I expect to see significantly less trouble starting up West Orion compared to those two previous rigs.

And I am sorry to get back to the West Sirius again, but you highlighted that there are potential use for this rig under the BP leases. So do you think that this rig could get extended therefore to some of Devon's old acreage in Brazil?

That could also be the case, but it's too early to speculate. What happens under a force majeure is that the oil company had to mitigate the force majeure issues, and that of course has a global reach. So it's too early to speculate on this issue.

Okay. I'm not going to push anymore on that, but you highlighted that jack-up market was a little uncertain because of near-term oil price weakness Sounds like this comment was drafted a couple of days ago. I mean oil prices are back up in the 70s again. So does it mean that you are now more confident in the near-term development of the jack-up market or do you see risks that Gulf of Mexico rigs might spill into international markets?

I don't think that there are many jack-ups left in the Gulf of Mexico, and I think that has a limited effect. What is affecting it is of course the uncertainty. It's not the level itself. It's the uncertainty with oil prices which impacts the activity; also the financial issues. But when we are seeing more solid oil prices going forward, we see that the companies, particularly the smaller independent, are more confident to start new activities. The jack-up is the first one to see it and also the first one to see the reduction. The uncertainty to some extent could impact it. But from Christmas and through now, we have seen significant increases in activity in this market.

We move on to our next question which comes from Lukas Daul of SEB Enskilda.

First question is regarding your comment on the consolidation. You are saying that you have an ambition to consolidate the ultra-deepwater segment. I believe a quarter and two ago, you were also talking about an ambition to create a significant jack-up player with a modern fleet. Has any thing changed there?

I guess everybody is aware that we have in fact had a mandatory offer on Scorpion. So that's the first one which is there. And then also Ensco has provided a competitive bid. When it comes to consolidation of the ultra-deepwater business, there will be consolidation. We see the market changing. There are more players in the market. Some of them have more financial difficulties. There are also difficulties in getting their rigs on job and get a contract with an oil company. And that is the thing which we believe will create opportunities for further consolidation.

And then more on the operational side. When you're talking about West Polaris having a downtime in the second quarter, I think this is the third time you are guiding that there will be a downtime on Polaris. Is there something specific with that rig or with the area where it is operating? Could you elaborate on that?

It's the first rig from Samsung of this class and another rig, similar one, for an (overall) competitive, but with a different upside. So this is one of the first ones. I would say that these are some initial startup issues which have lasted for somewhat longer. When we compared to the next rig, which was the Capella, we have seen significant improvements in that. So to some extent, we see that the first of any class of rigs are having more startup issues, and the learnings both from an operational point of view, but also from the supplier and vendor point of view, this is a learning and the improvements in the second and third rigs. So yes, I think you are right. It was one of the first one. We see that we are taking some learnings both from vendors and from own operations on this rig.

We move on to our next question now which comes from David Phillips of HSBC.

Just one question. Could you talk a little bit about what in your experience has been happening in recent months with market values of rigs, second-hand values, and also to quoted yard prices? Especially, what's happening with some of the Asian yards, given some of the pressures they have in backlog there?

I haven't seen so many data points when it comes to second-hand rig market. We see that Sembcorp bought into a rig in Jurong. I think that was around $600 million. We have seen some PetroMENA rigs being sold. We are competing for one at $530 million. When it comes to the yard prices in the Far East, we all see that there are no order backlog after 2012, and I think we see that our attractive prices to be (inaudible). I cannot speculate exactly on it, but around $550 million to $600 million yard price depending on what kind of equipment and what depth level you want it to reach is an estimate we see these days.

Okay. And just out of interest, when you look at the balance of opportunities out there right now, let's say in the next six to 12 months, do the economics look better to you to investigate rigs that are already under construction or even that already exists or actually are the other yards looking a bit more interesting?

That is a question I could not answer. But to be fair, of course, we are screening both opportunities.

We move on to our next question which comes from Phil Lindsay of RBS.

In light of the Macondo oil spill, do you envisage insurance premiums increasing significantly? And if so, will that be absorbed by yourself or tossed on to the operator?

I think it's fair to say that we will see increases and to some extent significant increases in insurance. There is no doubt about that. In most of our contracts, we have a mechanism where we get compensated for increases in insurance cost, not on all, but on some of them. I guess approximately half of our contracts have such a close where we have a direct kind of increase in our day rate if the insurance increases. On other contracts, we have it under the general clause and general provisions that as an operating cost goes up there is escalation according to some indices, normally American indices, for labor and other aspects of that. But for at least half of our rigs, we have specifically for insurance.

We take the next question from Andreas Stubsrud of Pareto.

Could you just give us some more details please on the $1.2 billion loan facility? It looks like you have secured for West Orion, West Gemini and West Vencedor?

You are correct. We have secured it. It's a committed loan secured through a number of banks and through Eksportfinans and guaranteed by GIEK. That is the $1.2 billion. And as a collateral, we have West Orion, West Gemini and West Vencedor. It's a five-year loan with (the wallet).

Could you please give us some details on the cost of this loan?

It’s a bit more than 200 basis points.

Our next question comes from Kenan Najafov of Citi.

Just one of the questions about the jack-up rigs. Could you elaborate on the status of West Leda please? I've seen some changes today in the fleet report suggesting that it's been contracted from August this year.

As we've said, we are in a process of finalizing contracts of both West Callisto and West Leda. I don't think there is much more to say. I think it is a 120 to 140 days job in Indonesia.

We take the next question from Karen Finerman of Metropolitan.

On April 12, when you bid for SCORE, which actually didn't have any Kroner exposure, but trades that way, the bid was equivalent to 611. But now, with the move, it's 39.5, that bid would be 604. So if it made sense for you then, would it not make sense for you now to compete with the Ensco bid?

I think you're right on the math. We are evaluating all our options.

So you're not in the market right now buying SCORE?

I didn't say that. I just say that we are evaluating all our options.

(Operator Instructions) Move on to our next question which comes from Kjetil Garstad of Artic Securities.

Hi, it's Kjetil from Artic. You were saying that you were in specific discussion of further extension for some of your deepwater rigs. And I'm guessing you're talking about Hercules, Alpha and potentially also Navigator. Am I right? And could you elaborate a little bit on potential timing of contract announcements, please?

Yes, I think you are approximately right. And I did not elaborate on the timing as such. But I would be disappointed if we couldn't announce another contract within the next quarter presentation.

And then, on to your Norwegian floaters including Epsilon. Can you remind me how much is outstanding on the $1.5 billion debt facility that you have against those rigs? And could you also talk a little bit about a potential refinancing or a increasing of that facility once you have added backlog to Alpha and the Navigator?

You're referring to the $1.5 billion credit facility?

Yes. Sorry, yes.

If I recall correctly, I think we have repaid of that. And I don't have it in front of me, but approximately $400 million is paid back of that amount.

So it's either the 1,178 or the 8,888. So I guess it's the 1,178 left, or that is outstanding on that?

Yes. Something like that. That's correct.

Could you then just talk a little bit about, if you add contracts to Alpha and Navigator, if this is a correct debt against those four rigs taking into consideration what you have announced today on the Gemini, Orion and the Vencedor, and potential timing of this?

What you have is, of course we have added five years for West Venture. We added another four years for West Epsilon. We are confident that we are getting attractive contracts going forward for our current rigs. Too early to say what the right level is, but of course this visibility and earnings visibility on these rates and the rates we are achieving of course creates opportunities. We have not explored that yet.

We take our next question from Geoff Kieburtz of Weeden.

Just a couple of follow-up questions. In regards to the Scorpion deal, now that you're in the mandatory offer phase, are there any limitations or complications in terms of your ability to raise your offer?

No. There are no complications as such. You would require it to extend the offer for some more period, I think for another 14 days. If you raised it, you would need to extend the offer period with approximately 14 days.

Okay. And your commentary in regards to the effect of the Gulf of Mexico incident, it seems that the current view is that it's likely to have a positive impact at this point. Could you elaborate a little bit on your thought process?

To be clearer, I think short term, particularly if the rumors that there will be a six months moratorium is correct, then of course there will be a significant impact in the short term in the Gulf of Mexico, and it’s negative. I think longer term, I think it is beneficial and advantageous to have modern equipment, then maintain modern equipment and deep competencies in the organization. I think those two things will be extremely important going forward based on what we see here.

Okay. So is really more of a segmentation of the market that you were referring to as opposed to an overall market positive impact.

Yes, I think that's correct to say.

And just lastly, could you give us any comments on the Seadrill sort of perspective on the Petrobras orders, and does that represent an interesting opportunity in your view?

If you look upon it, and these are our newbuilds from yards which have not been building any rigs before. I think what you see now in this stage is that these opportunities have a duration, and the rigs will be complete in a four-year timeframe; that is, the first rig will be available in 2014 and then going forward. It could be interesting, but of course there are significant risks of building very advanced units in greenfield areas. We have always said that Seadrill should do from very experienced job because we know how difficult it is to build advanced deepwater units. And we have also said that we don't want to do prototypes because they are inherent with uncertainties. So these are the things which were the guiding principle for Seadrill. If some of those risks can be mitigated, it could be interesting, but of course, there are risks attached here which are of course a concern to Seadrill.

We'll take the next question as a follow up question from Lukas Daul of SEB Enskilda.

Just a quick one on your comment that you expect a contract for one of the rigs that were mentioned by Kjetil. I'm a bit surprised because you have put yourself in a very good position in terms of the contracting risk diversification, and now you are talking about fixing a rig that becomes available in 2012. Does it mean that you don’t expect the market to tighten going forward, or there are of course some more aspects to that? Could you comment on that?

I think we fix contracts if we feel like the level is correct and the terms and conditions are attractive to Seadrill. I think we have so much exposure going forward and we have so many opportunities going forward that we have also attracted opportunities when the market improves, which I do believe in '13 or something around that. I think we have to see that there are some new rigs coming to the market and there is some uncertainty in the short term. Longer term, if the old price keeps up, I have a very, very strong belief that the market will strengthen further. And at the same time, if we can achieve attractive rates in the next three, four, five, six months, we are of course also interested in that.

Okay. And I guess asking what an attractive rate is would be premature?

I think that is correct.

(Operator Instructions) As there are no further questions at this time, I would like to turn the conference back over to Mr. Thorkildsen for any additional or closing remarks.

As there seems to be no further questions, I'll just like to take the opportunity to thank you everyone for participating today, and then will close the conference call for Seadrill. See you next quarter. Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.