Seadrill Partners LLC: SDLP - Seadrill Partners LLC - Fourth Quarter 2013 Results

  Seadrill Partners LLC: SDLP - Seadrill Partners LLC - Fourth Quarter 2013                                    Results  Highlights    oSeadrill Partners reports net income attributable to Seadrill Partners LLC     Members for the fourth quarter 2013 of US$62.6 million and net operating     income for the fourth quarter of US$134.4 million.         oGenerated distributable cash flow of $23.2 million for the fourth          quarter 2013.        oDeclared an increased distribution for the fourth quarter of          US$0.4450 per unit, an increase of 4.1% over the third quarter          distribution and an increase of 15% for 2013.        oCompleted the acquisition of the company that owns the tender rig          T-16 from Seadrill Limited for US$200 million.        oAnnounced settlement agreement and 18 month extension for the          semi-submersible West Aquarius with a total estimated revenue          potential of US$337 million.        oTotal S.A. exercised their option to convert the contract extension          for the West Capella from 5 years to 3 years due to transfer of          operatorship. 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        oFiled US$800 million mixed shelf registration statement to add          flexibility to financing future rig growth        oCompleted the acquisition of the companies that own and operate the          West Sirius and West Leo for US$2.3 billion on a 100% basis. The          acquisition was financed with debt and a US$465 million unit offering          for the Company's equity share. Management has recommended a          quarterly distribution increase as a result to between US$0.50 and          US$0.5125  Subsequent Events    oSeadrill Partners completes US$1.8 billion term loan B and US$100 million     revolving facility. Proceeds of the term loan are to be used to refinance     existing indebtedness and increase liquidity  Financial Results Overview  Seadrill Partners LLC^1 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.  ____________________  ^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 quarter^2 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  December31, 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 December31, 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 December31, 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 December31, 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 December31,  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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