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This is a hard one. It is fast growing in a capex intense sector--ultra-deep water drilling. The debt is big and free cash flow non-existent and it defies my ability to put a value on itGut feeling tells me that it is doing everything right and will be a major player right along side Transocean, Noble, Diamond and Ensco. It has a good chance of eclipsing everyone except RIGI hate to work off gut feelings however.If anyone has any way to get some value on Seadrill, please help me outIn light of my difficulties knowing what to do with this, the following is even more obnoxiously long than usual. It is necessary to try to explain the deepwater potential as far as E&P activity, day rates for SDRLs rigs in light of industry averages, the size of the fleet and what is in it, dissection of the debt and cash flow and assorted other bit of information. It is more a series of notes than any short efficient write up of a companyOne point that may help value SDRl is the outrageous price paid for Pride by Ensco. They paid 21X EBITDA for a fleet that is inferior to SDRL's. Using that multiple. Seadrill would be worth $96. War and Peace [or your own candidate for long-winded literature]Seadrill is an unusual deep sea drilling company formed denovo in 2005 from the vision of Norwegian billionaire John Fredriksen. It took only one year for it to become the 4th largest deep sea drilling service in the world. It was put together through a series of aggressive acquisitions and new build orders. It was capitalized with a combination of debt and equity and is currently slightly overleveraged with debt to capital at 65%. SDRL has done term loans, bank loans, convertibles, sale lease backs and most recently sold into private placement 25% of 6 ultra-deepwater drill ships for $450 million al in an effort to raise capital. Long-term debt has ballooned from $2.6 billion in 2006 to $7.8 billion in 2011.Shares have increased from 191 million to 464 million currently. All of this might be reason to avoid Seadrill, but there is something intriguing about the company. Fredriksen had the absolutely right instinct to go for it in deep water drilling. It is the last place on earth we are going to find large reservoirs of oil. The capacity in the sector could not keep up with demand. He saw a need and went after it. These ships and rigs are not cheap and the costs have come at the expense of high leverage and some dilution. The expense is enormous but the rewards and the revenues equally so when the price of oil supports E&P. As demand for oil increases and supplies shrink, the new “normal” for a barrel of oil is likely to support constant employment of these specialized vessels. At least that’s what Fredriksen is banking on. The more units he can bring on line and keep working, the better his returns on invested capital will become. It is early days for this company and it is still in its high growth stage. It will burn invested capital.Revenue has gone from $42.5 million in 2005 to $4.04 billion for annual 2010. Net income is now at $1.2 billion. In 2005, SDRL was operating at a loss. It has made great strides in just 5 years.SDRL currently lists 42 rigs in operation and 10 under construction at the end of 2010. Since then, they have contracts for 2 semisubs and two tenders bringing the rig count including new builds to 56. The 14 new builds increase the fleet by 33%-- continued fast growth. The expense is daunting and the debt high, but the gamble on deepwater growth is logical. Seadrill will have a highly advanced ultra-deepwater capable fleet with an average age well below its competitors. Fredriksen is definitely committed to making the company competitive.Ensco with Pride now has 77; Noble has 75 with good deepwater capabilities; and the big dog is Transocean with 143 and excellent deepwater service.That makes SDRL still in 4th place -- not terrible for an upstart. SDRL does have one enormous advantage over its competitors and that is the age of its fleet. The units are young, high tech and focused on deepwater. Average for SDRL rigs is around 8 years; Pride is 17 years; Transocean is 20 years; Noble is 20 years; and Diamond is 32 years. Ensco is not separately listed, as they were almost 100% shallow water jackups before Pride. The SDRL fleet is almost 100% deepwater capable. Jackups that can go greater than 300+ feet, while still shallow water compared to ultra-deepwater are “deeper” than the older fleet that had capabilities at 250 feet or less. This does have an impact as the day rate average for shallow jackups is around $70-$95K and the 350+ are getting $136K. Most of the SDRL jackups are 350+ and I am including a table of their contract rates to show the value even in these lower-priced rigs. The entire SDRL fleet ahs been designed to take on deepwater, which is where the oil and the money is. Building UDW [ultra-deepwater rigs and ships is an expensive undertaking. The company recently contracted new builds for two new drillships for $1.2 billion and two new build semisubs for $1.2 billion--average cost $600 million per unit. A 375-foot jackup just acquired was $180 million and a package of 4 new jackups will cost $790 million--average $197.5 million. Nothing in deepwater is cheap and it is clear why SDRL has been accumulating debt and using other creative financing for its new units. There will be a lag between comfortable debt levels and enough free cash to begin to pay down debt.The following table is included to illustrate the day rates now in place. Most of SDRL’s rates are above the fleet averages quoted at Rigzonehttp://www.rigzone.com/data/dayrates/Status of current fleet as of Feb 24 2010 Unit client location start end day rateSemi-submersible rigs ----------------------------------------------------------------West Alpha Consortium Norway May 2009 Jun 2012 $494,000West Aquarius Exxon China Feb 2009 Feb 2013 $525,000West Eminence Petrobras Brazil Jul 2009 Jul 2015 $618,500West Hercules Husky China Nov 2008 May 2012 $515,000 China Nov 2011 May 2012 $495,000 West Orion Petrobras Brazil Jul 2010 Jul 2016 $618,000West Phoenix Total Norway Jan 2009 Jan 2012 $536,000 UK Jan 2012 Jan 2015 $445,000West Sirius BP US GoM Jul 2008 Jul 2014 $474,000West Taurus Petrobras Brazil Feb 2009 Feb 2015 $650,000West Venture Statoil Norway Aug 2010 Jul 2015 $429,000 Options Aug 2015 Jul 2017 $429,000West Pegasus (NB)West Capricorn (NB) Singapore Jurong Shipyard West Leo (NB) NB is newbuildDrillships --------------------------------------------------------------West Capella Total Nigeria Apr 2009 Apr 2014 $542,000West Gemini Total Angola Sep 2010 Sep 2012 $445,000 Option Sep 2012 Sep 2013 $445,000West Navigator Shell Norway Jan 2009 Dec 2012 $599,000West Polaris Exxon Brazil Oct 2008 Oct 2011 $560,000 WW Oct 2011 Oct 2012 $618,000 West Vela (NB) South Korea Samsung Shipyard West Auriga (NB) South Korea Samsung Shipyard HE jack-ups--------------------------------------------------------------- West Epsilon Statoil Norway Dec 2010 Dec 2016 $276,000West Elara(NB)Statoil Singapore Jurong Shipyard Oct 2011 Oct 2020 $350,000 HE is harsh environment BE Jack-up rigs Unit Client location start end day rate--------------------------------------------------------------------Offshore Courageous Shell Malaysia Jan 2009 Jan 2012 $159,500Offshore Defender Petrobras Brazil Mar 2010 Feb 2012 $131,000Offshore Freedom Odfjell Saudi Arabia / Kuwait Jun 2009 May 2013 $185,000Offshore Intrepid Odfjell Saudi Arabia / Kuwait May 2009 Nov 2012 $180,000Offshore Mischief Anadarko Brazil Jun 2010 Jan 2011 $119,000Offshore Resolute PV Drill Vietnam warm stackedOffshore Vigilant Cardon IV Venezuela Aug 2010 Jun 2011 $155,000West Ariel VSP Vietnam Nov 2009 Dec 2011 $122,000West Callisto Premier Indonesia Aug 2010 Apr 2011 $119,500West Janus PCPPOC Malaysia Aug 2008 Aug 2011 $149,500West Leda PT Pan Indonesia Nov 2010 Feb 2011 $138,000West Prospero VSP Vietnam Nov 2010 Dec 2011 $108,000West Triton CPOC Malaysia Dec 2010 Aug 2011 $119,500West Juno PTTEP Andaman sea Jan 2011 Apr 2011 $129,500West Cressida PTTEP Thailand Nov 2010 May 2014 $129,500 West Castor (NB) Singapore Jurong Shipyard West Tucana (NB) Singapore Jurong Shipyard West Telesto (NB) China Dalian Shipyard West Oberon (NB) China Dalian Shipyard BE is benign environment Tender rigs Unit Client location start end day rate ---------------------------------------------------------- T11 Chevron Thailand May 2008 May 2013 $132,500T12 PTTEP Thailand Apr 2010 Apr 2016 $120,000T4 Chevron Thailand Jul 2008 Jul 2013 $102,000T7 Chevron Thailand Nov 2006 Oct 2011 $64,000T3 PTT Thailand Jul 2008-Jun 2012 $84,500T6 Various Malaysia Nov 2010 Mar 2013 $99,000 Mar 2013 Se2013 $99,000T8 warm stackedT9 Exxon Malaysia Jan 2009 Jan 2012 $139,500T10 Chevron Malaysia Jan 2011 Jan 2013 $120,000 West Alliance Shell Malaysia Jan 2010 Jan 2015 $169,000West Berani Conoco Indonesia Jan 2009 Dec 2011 $164,000West Pelaut Shell Brunei Apr 2009 Mar 2015 $138,500West Setia Chevron Angola Aug 2009 Aug 2012 $165,000West Vencedor Chevron Angola Apr 2010 Jul 2015 $207,500Teknik Berkat Petronas Malaysia Apr 2008 Apr 2012 $130,500West Jaya BP Jul 2011 Jul 2013 $169,000 Jul 2013 Jul 2014 $178,000West Menang in transitNotice the jackups are well over $100K in day rates per unit due to the 300+ water depth they can manage. Also of interest is the high day rates semisubs and drillships command and the almost complete utilization of the SDRL fleet. Idle rigs don’t pay down their debt. A little historySDRL was incorporated in Bermuda in 2005 and at the time had 7 jackups, 2 drillships and 2 semisubs. By the fall of 2005 and in early 2006 it was making acquisitions. January 2006 Seadrill began buying Smedvig and owned most of the company by March. Smedvig had 30 years of drilling experience globally before the merger. Price tag was $2.3 billion and SDRL got $2 billion worth of drilling units. Seadrill acquired one jack-up, two semi-submersible rigs, a drillship and 7 tender rigsMosvold was also a target in January 2006. The price was $353.5 million and brought two drillship-newbuilds for delivery in July 2008 and December 2008 worth $228 million.Eastern Drilling was also acquired in 2006 and the price tag was 312.6 million for two semi-submersibles-newbuilds for delivery in December 2007 and September 2008.By the end of 2006,SDRL and its partners had 37 offshore drilling rigs and ships including 15 undelivered newbuilds. They are now at 56 including 14 new builds in just 4 years. The 40% increase in rig numbers translated into an increase in revenue from $1054 million to $4041 million. The company will be increasing the count by 33% over the next 4 years. Of course it is impossible to predict the impact on revenue but if we can let history be a guide I expect at least 50%-75% based on their EBITDA projections by 2014.Q4 2010 and 2010Debt and new build obligationsDebt is significant and Seadrill just completed 100% debt financing of a $1.2 billion build for 2 UDW semisubs in Q4 2010, adding to 2009 levels.They also issued $650 in 2017 convertibles and a fixed rate bond of $350 million. At present, debt is as follows:Total bank loans are $5216.5 million up around $2 billion over 2009Total ship finance in consolidated VIEs is $1746.6 million down $200 millionTotal bonds are $1838.7 including the $1286.7 million in convertiblesTotal interest bearing debt is $9156.4 million with $980.6 million current.Long term debt works out to $8175.8 million and the debt/capital is 65%Schedule of repayment2011 980.6 2012 1,923.1 2013 2,303.0 2014 1,701.92015 and thereafter 2,367.6=================================Total debt 9,156.4With CFFO approaching $2 billion per year, the company could pay down at least part of the debt. This seems unlikely as they pursue growth. I would expect them to refinance. I am also expecting higher debt levels or some dilution. At number 4 in offshore, they may take a breather and consolidate. Seadrill does have covenants to maintain and they are close to the limit on at least one by my calculations. Any new fleet additions will have to find alternate sources of financing until some of the debt is paid or covenants renegotiated. In addition to the debt on the balance sheet the company has obligations to shipyards that will have to paid.The maturity schedule for the remaining yard installments is as follows:Maturity schedule for yard installments as of December 31, 2010(In millions of US dollar) 2011 336 2012 324 2013 1,413 ===============Total 2,073 This in effect makes total obligations $11 billion. There will be little room to incur further debt. The debt can be refinanced if necessary—SDRL has unencumbered rigs to use as collateral. Covenants will need to be watched. The yards will most likely have to be paid from cash flow. I fully expect there will be some tug of war between debt repayment and dividends starting in 2012. I would not suggest that Seadrill is a good investment for dividend income. I do think they will manage to bring the 14 new builds on line and see revenue increases commensurate with the increased rig count—as much as 30%? It is difficult to predict revenue growth as contracts and the company has to find new contracts. Jackups are the nearest term problem with most of the contracts running out in 2011. Cash flows and capex 2010 2009 2008 2007 2006 ========================================================CFFO 1,300.4 1,452.0 401.0 486.0 174.2Capex 2,367.4 1,369.4 2,767.5 1,737.6 1,195.8 Again, trying to predict CFFO is difficult, but we might reasonably expect $2 billion by 2013. That can be used to pay the yard obligations with cash to spare. I would guess some would be needed to pay debt. However, the closest covenant ratio, Debt/EBITDA will be eased considerably by the 48% increase predicted by the company for EBITDA over the next two years making it less critical to strap cash flow to pay down principal. Watching how Fredriksen handles the debt over the next few years should be interesting The company has this to say about the next quarterWe expect our first quarter 2011 earnings to be favorably impacted by full quarter earnings from the new jack-up rigs West Juno and West Leda as well as the newly acquired jack-up rig West Cressida. Furthermore, we expect improved utilization for the floaters that delivered lower than expected utilization rates in the fourth quarter. However, we estimate that West Phoenix due to manufacturing problems with the BOP system will have some 25 days of downtime. In addition, the idle tender rigs T8 and West Menang and the idle jack-up rig Offshore Resolute are all expected to remain unemployed throughout the quarter. For the jack-up rigs West Leda and West Juno that are expected to complete existing contracts, late March/early April we are close to securing new contracts and continued employment.With the market expecting to tighten, it appears the 2011 contract expirations will not see idled rigs for any extended period. The jackups as always are at higher risk than semi-subs or drillships. In spite of the debt levels, the company has been determined to pay a dividend--possibly because Fredriksen owns more than 30% of the shares? They announced dividends of $0.675 per share this Q to be paid quarterly. In 2010, SDRL paid $989.8 in dividends. It decreased in 2009 and they will cut if macro-events dictate. At present, they are forecasting rising dayrates and utilization over the next couple of years and debt will not come due in any large amount until 2012. The dividend looks payable at least through 2011. Seadrill has a very high leverage, especially when compared to international peers--not uncommon for a new company in a capex intense business. There is no indication that they intend to pay debt levels down any time soon. Instead Seadrill has made clear its intention to use free cash flow to continue the dividend payment. This is SOP for companies controlled by Fredriksen [FRO], and there is no reason to believe that Seadrill will be different from Frontline and Golden Ocean when it comes to dividend policy. The test will come in 2012 when $2 billion in debt is due. Until then I expect SDRL will continue to pay. This is not a company I would ever buy for the dividend. It is a good fast-growing UDW capable operator with a promising fleet that will benefit from large oil reserves at 7000 feet or deeper, There is no other company that has specifically targeted all its rigs at deepwater from jackups to drillships and that will give it a competitive edge. I was able to calculate most of their ratios that pertain to the covenants. They are not breached.CovenantsMinimum liquidity requirements: to maintain cash and cash equivalents of at least $100 million within the group. $1352 millionInterest coverage ratio: to maintain an EBITDA to interest expense ratio of 2.5:1. 5.96X Current ratio: to maintain a current assets to current liabilities ratio of at least 1:1. Current assets are defined as book value less minimum liquidity, but including up to 20% of shares in listed companies of which we own 20% or more. Current liabilities are defined as book value less the current portion of long term debt. 1.8X Equity ratio: to maintain a total equity to total assets ratio of at least 30%. Both equity and total assets are adjusted for the difference between book and market values of drilling units.There is no way to calculate the equity ratio. Market value of rigs unknown and will have to check the upcoming 20F. In the past they have not published the numbers, but just stated that they were in compliance Leverage ratio: to maintain a ratio of net debt to EBITDA no greater than 4.5:1. Net debt is calculated as all interest bearing debt less cash and cash equivalents excluding minimum liquidity requirements.This one is close and should be OK as long as EBITDA continues to increase. If it does they will not have to pay down the debt to keep the ratio in line. So far, every year, revenue and earnings are increasing. The closeness of the ratio to the upper limit will make it difficult to take on much higher debt. That is likely why they sold 25% interest in the Atlantic deepwater spin-off. 4.06X Comments from the companyMarket developmentI am leaving all these comments intact because they offer some insight into the current state of the deepwater activity for all companies. It’s long but worth reading if you have any interest in this sector. The favorable outlook may help explain why Ensco with almost zero deepwater capability just overpaid for Pride to jumpstart its deepwater fleet. It’s either that or go through costly, long organic fleet building. Ensco paid a rather staggering 21X EBITDA for Pride. The following is only for those obsessively interested in the company’s evaluation of deepwater drilling prospects. The outlook and fundamentals for the oil industry look increasingly attractive with the Brent oil price exceeding US$100/bbl. In addition, the world economy shows steady improvement providing support for increasing energy demand longer-term. In the oil industry, the focus continues on newer drilling units offering superior technical capabilities, operational flexibility and reliability. In response, the industry has ordered 29 new jack-ups rigs and 21 new ultra-deepwater units (including seven Petrobras orders) over the last months.Ultra-deepwater floaters (>7,500 ft water)The demand for ultra-deepwater units continues to be adversely impacted by the low activity in the US Gulf of Mexico as no new drilling permits for deepwater wells have been issued in spite of the moratorium being lifted last year. At the same time, new demand from other regions is absorbing the new units that are delivered from yards. There is also an increase in areas and countries for deepwater activities. This covers additional countries in West Africa, East Africa, and Southeast Asia. Also new frontier markets are emerging such as Greenland and Australia. Nevertheless, the strong growth in demand for development drilling in Brazil and West Africa is the main new driver in the market, which will further accelerate in the years to come.Oil companies continue their focus on new technically superior dynamically positioned deepwater units. The industry has shown a reduced interest in using moored and upgraded deepwater vessels with weight and capacity restrictions. Consequently, established players have taken advantage of the material reduction in newbuild prices and favorable payment terms. Since October last year, 21 new ultra deepwater units have been ordered, mainly on speculation. However, these units are not expected to adversely affect the market near term as the deliveries are scheduled in 2013 and 2014.Near term, more rigs are moving into Brazil and a return of deepwater drilling activities in the US Gulf could have a positive impact on demand pushing daily rates higher. There is likely to be a catch up effect in the US Gulf of Mexico related to all the deep water drilling that has been “lost” during the last 10 months. This should support the daily rates for quality newbuilds in the next years. It should be observed, that no ultra-deepwater newbuilding so far has left a yard without employment in place, and that the utilization of the modern fleet is close to 100 percent. Furthermore, the number of market enquiries for ultra-deepwater rigs is currently significantly higher than it was six to twelve months ago.Premium jack-up rigs (>300 ft water) The market for premium jack-up rigs continues to show improvement. The large newbuild order book that existed two years ago has been significantly reduced with only 11 rigs remaining for deliveries in 2011. The utilization of premium jack-up rigs continues to hold above 90 percent and tendering activity has increased quarter over quarter since mid 2010. The risk to the supply/demand balance caused by the possible reactivation of stacked jack-up rigs appears to be decreasing over time as the significant investments that are needed to put many of these units back in operational mode cannot be justified by the returns. Oil companies remain attracted to the safety and efficiency gains offered by the newer and higher specification units. Consequently, the bifurcation in utilization and pricing between older jack-ups and newer premium jack-ups continues with daily rate spreads in the range from US$50,000 to US$60,000 being common. The trend of replacing older equipment with new equipment is continuing with 29 firm orders new jack- up rigs agreed since October last year. Despite this increase in supply, we remain optimistic on the long-term outlook for premium jack-up rigs. The number of jack-ups under construction still corresponds to less than 5 percent of the existing jack-up rig fleet, which already has an average age of more than 20 years. The high oil price has improved the availability of financing for smaller independent oil companies. This combined with the market for energy related public and private equity offerings reopening, is likely to lead to increased drilling activity particularly in the jack-up segment.Tender rigsSeadrill sees strong interest from oil companies for its tender rig concept. Recent long- term contracts entered into portray an improved market in terms of daily rate development and contract terms. As with the other rig classes, we are also seeing an increased customer focus on equipment quality, operational experience and track-record creating barriers to entry to the tender rig market. Commencement of operations for our West Jaya unit in Trinidad Tobago is opening up a new market in the Americas for this concept. Furthermore, we are seeing increased interest for assignments in the Gulf of Mexico and Australia. We together with our customers continue to benefit from the tender rig concept being a versatile and cost effective alternative to a fixed or floating platform solution. We are optimistic about the outlook for our existing fleet, and intend to add further capacity to our fleet in this attractive segment. It is likely that such additional capacity will be accompanied by long-term contracts.Seadrill’s strategy and outlookSeadrill since inception has been focused on building a competitive offshore drilling contractor capable of taking on the bigger players. They are 4th overall and second in ultra-deepwater. For 5 years in business, they have made rather remarkable progress. The strategy has been to develop a fleet of new premium offshore drilling units through newbuild orders and targeted acquisitions of modern assets. They are not interested in older equipment and this gives them an advantage when bidding for contracts.They invested and continue to invest in new rigs with higher technical capability while some of competitors are facing the challenges of an aging rig fleet.They recently increased the ultra-deepwater fleet by two semi-submersible drilling rigs at the start of the year acquiring two Seadragon units currently under construction in Singapore. SDRL feels that price at $600 million per unit was a reasonably good deal. The units have strong equipment specifications and are suitable for challenging drilling operations in all environments. They will be ready for operation later in 2011. The day rates are expected to be high and there is a 5-year contract being negotiated for one of the units underway.The increased production capacity for yards and vendors in this cycle compared to the 2005 – 2008 cycle raise some concerns. These concerns are further highlighted by the yards willingness to accept heavy back ended payment terms. Such payment schedules lower the entry ticket for more speculative non-industry players.SDRL expects the tightening of the drilling market to continue at least to 2013. The main driver in this trend will be a solid drilling demand spurred by high oil price further supported by a limited amount of new supply due to the lack of new orders placed between the mid 2008 and the autumn of 2010. The development of the market after 2013 will depend on the amount of capital made available to fund further speculative orders. However, such orders are not expected to significantly influence the market balance before 2013 for jack-up rigs and 2014 for ultra-deepwater units.SDRL has options to build 2 new drill ships and six jackups. They are not just jumping at the builds to expand the fleet but are looking at the possibility of over-capacity coming on line. This note of caution is reassuring in light of the debt levels. It appears unlikely they will overbuild just for the sake of having the biggest fleet. Seadrill feels selective newbuilds offer an attractive risk/reward combination superior to other corporate or asset acquisitions.Certainly it looks like they will avoid the Ensco mistake of overpaying for growth.It was widely accepted Seadrill would buy Pride, but they have opted to grow with new builds. Of the newly ordered 29 jack-up rigs, companies that independently own less than five existing rigs have ordered 12. These “project companies” have limited cash flow from operation to support payment of further installments. The combined building cost for these units is estimated to $2,465 million while only $592 million has been funded so far according to independent research analysts. Of the remaining $1,874 million, it is unlikely that the traditional bank market is willing to finance these companies without a long-term contract in place. Even with a long-term contract, the gearing capacity would be limited. This creates a funding gap that needs to be financed through the high yield bond and equity markets. The amount needed is significant compared to what these companies have raised and their shareholders have put in so far. Seadrill anticipates that several interesting opportunities for take-over and joint ventures will arise as this situation evolves. Such opportunities might be more attractive than adding more orders to the newbuilding book at this stage. Spin-off of drillshipsRecently, they announced that they would sell 25% share of their ultra-deepwater ships and HE jackups to a newly formed company. I read this with some skepticism. Why sell the highest demand, highest paid part of the fleet? The company does address this in the followingNew listed subsidiary establishedThe new company will be the North Atlantic Drilling Ltd (NADL), focusing on harsh-environment operations. The new entity was formed based on the Seadrill’s six existing harsh-environment units(currently under constructions). The shares will be listed on the Norwegian OTC list.The harsh environment market is a fragmented market place with no player controlling more than six units. Seadrill feels the new company can capitalize on its strong market position and seek growth and consolidation opportunities, that would have been limited by the previous ownership structure. In order to fund the acquisition of the six rigs, NADL successfully raised $425 million in new equity through a Private Placement that was 20 times oversubscribed, reducing Seadrill’s ownership interest to 75 percent.The spin-off will give SDRL much needed capital –around $700 million--without raising debt or issuing equity. They will still be a majority owner. The keep the revenue on the P&L, will report the 25% that does not belong to them as a minority holding. They will also be entitled to a 7% dividend payment annually from the new company.The combined bond and equity investment in NADL of $1,775 million is expected to generate free cash around $129 million per year.Q4 2010 and annual 2010Growth 2010 2009 2008 2007 2006===================================================revenue 26% 57% 39% 39% 2384%gross 35% 109% 51% 57% 7237%operating income 29% 150% 81% 120% -645%net income -7% 867% -133% 134% -1978%Convertible debt exit cost $145 million, decreasing 2010 net income. Growth has been high since 2006. Seadrill came through a difficult 2009 in reasonably good shape with accelerating growth and higher margins. They are aiming for an EBITDA at $3 billion in the next two years. With current EBITDA around $2.026 billion, that would imply 48% growth over two years and may be not entirely unrealistic. The company has seen significant margin improvement along with high growth over the past 5 years; reaching $3 billion in EBITDA in 2013 is probable Margins 2010 2009 2008 2007 2006 2005 =================================================== gross 60% 56% 42% 39% 34% 12%ebitda 50% 50% 33% 25% 17% -9%operating 40% 39% 25% 19% 12% -54%net 29% 39% -8% 34% 20% -27%Net was negatively impacted by the $145 million penalty on conversion of convertibles in 2010Bullet points Q4 • Q4 2010 EBITDA was $618 million for a 12% increase yoy. This is good since the debt/EBITDA needs to stay under 4.5% and quarterly increases will help maintain covenant compliance• 2010 net income was $268 million and earnings per share were $0.61 (after accounting impact of $145 million ($0.35 per share) linked to the successful incentive offer for early conversion of the company’s convertible loans) SDRL had EPS of 53¢ Q3 and 46¢ in Q4 2009. • increased quarterly regular cash dividend to $0.675 per share and announced an additional extraordinary dividend payment of $0.20 per share• finalized sale of 1984-built jack-up rig West Larissa for $55 million continuing the upgrade of the fleet to new units. It has the youngest fleet in the sector• acquired the 2008-build 375ft jack-up rig Petrojack IV (renamed West Cressida) for $180 million--another “deepwater” jackup. Note the difference in prices for the sale of a 26 year old jackup and the newer 2008 jackup.• delivery of the new 375ft jack-up newbuild rig West Juno• new convertible debt of $650 million and fixed rate bond of $350 million--counted in total debt when figuring the covenants• completes induced offer to accelerate conversion of $750 million to convertible bond debt into equity• agreement to purchase two ultra-deepwater semi-submersible units under construction in Singapore for $1.2 billion with 100% debt financing for the investment included in 2010 debt.• orders for two ultra-deepwater drillships for a total consideration of less than $1,200 million and four new jack-up rigs for a total consideration of $790 million.Next are the figures for utilization. They are excellent. Current utilization across the entire sector is 75%Diamond is 73%Ensco is 68%Noble is 59%Transocean is 60%Pride is 65%For our floaters (drillships and semis) the average economical utilization rate averaged 93 percent compared to 95 percent in the third quarter. The reduction was mainly related to operational challenges reported in the third quarter report for the deepwater units West Phoenix and West Eminence. For the jack-up rigs, the average economical utilization was 97 percent for the units for operation. This reduces to 92 percent if we include Offshore Resolute, which was unemployed for most of the quarter. The economical utilization rate for our tender rigs averaged 99 percent compared to 97 percent in the third quarter. This reduces to 90 percent if we include the tender barge T8 that has been idle since June 2009.Seawell is a majority owned at 52%. The recent merger with Allis-Chalmers will decrease SDRL to a minority owner. There will be some loss of revenue. Allis Chalmers becomes a subsidiary. Owner ship will be decreased by 17%. Seawell account for $716 million in revenue in 2010. this could cost them around $100 million or 2% in revenue.The Pride/Ensco dealPride has: 2 drillships under construction5 drillships6 semisubs6 semisubs midwater7 jackups2 managed rigs=================total 26The fleet is on average 17 years oldIf Ensco was building these new, the cost would be around $12.7 billionThe jackups are almost worthless right now and revenue was down 66% in 2010. It is a largely shallow water fleet. Ensco is paying $8.4 billion including debt and 21X EBITDA for the fleet that will include just 2 new drillships. If you apply this same multiple to SDRL, it is worth $96 per share for a much newer fleet with superior deepwater capabilities. Ensco banking on ever-increasing deepwater opportunities and is looking for exposure to Africa and Brazil where it has no units. Seadrill is already there.Relative ValueEnsco will pay 0.4778 of its own stock and $15.60 in cash for each Pride share, according to the terms of the agreement. That valued Pride at $41.60 a share, or about a 24 percent premium, data compiled by Bloomberg show.The total value of the acquisition, including the assumption of Pride’s net debt, is now about $8.4 billion, or 21 times the company’s previous 12 months of reported Ebitda. Based on analysts’ Ebitda estimates of $480.2 million for 2010, Pride is valued at 17.4 times.No oil drilling takeover of at least $500 million has been costlier in the past 10 years based on either measure, data compiled by Bloomberg show. The most expensive deal on record was Vernier, Switzerland-based Transocean Ltd.’s purchase of R&B Falcon Corp. for $6.8 billion including net debt.Transocean announced in August 2000 that it agreed to pay 36 times R&B Falcon’s reported Ebitda. After completing the transaction on Feb. 1, 2001, the combined company’s shares fell 31 percent in the next 12 months, almost double the 18 percent drop in the Standard & Poor’s 500 Index in the same period.The value of the transaction is 8.2 times next year’s earnings, or 14 percent higher than the 7.2 times average multiple for Pride’s competitors Seadrill, Noble Corp. and Diamond Offshore Drilling Inc. “It was a salty premium,” said Collin Gerry, an analyst for St. Petersburg, Florida-based Raymond James Financial Inc. “It was an expensive deal but they’ve got some high quality assets. The forward numbers for Pride are substantially higher than the trailing numbers because they are adding a lot of assets.”The assets so far are two new drillships under construction—not a lot compared to what SDRL is bringing on board in the next couple of yearsThis acquisition is outlined here to illustrate how valuable these deepwater companies are becoming. Frdriksen’s heavy leverage may be farsighted even if it causes some short-term pain.Discounted cash flowThe company is young and high growth. The discounted cash flow is difficult to predict, but I went ahead just to get some idea of what it might be worth with a rather high growth scenario over 10 yearsUsing a 16% CAGR over 10 years and a terminal growth of 3% gives a value of $13. This is largely due to the complete absence of free cash flow in the 10 years of high growth which is what I would expect given the debt levels and capex spendingAll of the value is created after 10 years when capex winds downBy year 10 Seadrill would need to be pulling down $20 billion in revenue from the $4 billion today. That seems unlikely. RIG with a fleet of 143 units does around $10 billion. Cutting the CAGR by 25% to 12% gives a 10 year revenue of $13 billion that might be attainable in a decade. The value drops into negative numbersIt has nearly doubled operating rigs in 4 years to 42 today and it could easily turn the 42 working rigs into 120 by 2020. That is unlikely to support revenue of $20 billion; $13 billion is not unrealistic. Value will depend on debt. Wipe the debt out and it is worth $44 per share.I don’t find much help in a DCF at this point in the company’s life cycle
Unit client location start end day rateSemi-submersible rigs ----------------------------------------------------------------West Alpha Consortium Norway May 2009 Jun 2012 $494,000West Aquarius Exxon China Feb 2009 Feb 2013 $525,000West Eminence Petrobras Brazil Jul 2009 Jul 2015 $618,500West Hercules Husky China Nov 2008 May 2012 $515,000 China Nov 2011 May 2012 $495,000 West Orion Petrobras Brazil Jul 2010 Jul 2016 $618,000West Phoenix Total Norway Jan 2009 Jan 2012 $536,000 UK Jan 2012 Jan 2015 $445,000West Sirius BP US GoM Jul 2008 Jul 2014 $474,000West Taurus Petrobras Brazil Feb 2009 Feb 2015 $650,000West Venture Statoil Norway Aug 2010 Jul 2015 $429,000 Options Aug 2015 Jul 2017 $429,000West Pegasus (NB)West Capricorn (NB) Singapore Jurong Shipyard West Leo (NB) NB is newbuildDrillships --------------------------------------------------------------West Capella Total Nigeria Apr 2009 Apr 2014 $542,000West Gemini Total Angola Sep 2010 Sep 2012 $445,000 Option Sep 2012 Sep 2013 $445,000West Navigator Shell Norway Jan 2009 Dec 2012 $599,000West Polaris Exxon Brazil Oct 2008 Oct 2011 $560,000 WW Oct 2011 Oct 2012 $618,000 West Vela (NB) South Korea Samsung Shipyard West Auriga (NB) South Korea Samsung Shipyard HE jack-ups--------------------------------------------------------------- West Epsilon Statoil Norway Dec 2010 Dec 2016 $276,000West Elara(NB)Statoil Singapore Jurong Shipyard Oct 2011 Oct 2020 $350,000 HE is harsh environment BE Jack-up rigs Unit Client location start end day rate--------------------------------------------------------------------Offshore Courageous Shell Malaysia Jan 2009 Jan 2012 $159,500Offshore Defender Petrobras Brazil Mar 2010 Feb 2012 $131,000Offshore Freedom Odfjell Saudi Arabia / Kuwait Jun 2009 May 2013 $185,000Offshore Intrepid Odfjell Saudi Arabia / Kuwait May 2009 Nov 2012 $180,000Offshore Mischief Anadarko Brazil Jun 2010 Jan 2011 $119,000Offshore Resolute PV Drill Vietnam warm stackedOffshore Vigilant Cardon IV Venezuela Aug 2010 Jun 2011 $155,000West Ariel VSP Vietnam Nov 2009 Dec 2011 $122,000West Callisto Premier Indonesia Aug 2010 Apr 2011 $119,500West Janus PCPPOC Malaysia Aug 2008 Aug 2011 $149,500West Leda PT Pan Indonesia Nov 2010 Feb 2011 $138,000West Prospero VSP Vietnam Nov 2010 Dec 2011 $108,000West Triton CPOC Malaysia Dec 2010 Aug 2011 $119,500West Juno PTTEP Andaman sea Jan 2011 Apr 2011 $129,500West Cressida PTTEP Thailand Nov 2010 May 2014 $129,500 West Castor (NB) Singapore Jurong Shipyard West Tucana (NB) Singapore Jurong Shipyard West Telesto (NB) China Dalian Shipyard West Oberon (NB) China Dalian Shipyard BE is benign environment Tender rigs Unit Client location start end day rate ---------------------------------------------------------- T11 Chevron Thailand May 2008 May 2013 $132,500T12 PTTEP Thailand Apr 2010 Apr 2016 $120,000T4 Chevron Thailand Jul 2008 Jul 2013 $102,000T7 Chevron Thailand Nov 2006 Oct 2011 $64,000T3 PTT Thailand Jul 2008-Jun 2012 $84,500T6 Various Malaysia Nov 2010 Mar 2013 $99,000 Mar 2013 Se2013 $99,000T8 warm stackedT9 Exxon Malaysia Jan 2009 Jan 2012 $139,500T10 Chevron Malaysia Jan 2011 Jan 2013 $120,000 West Alliance Shell Malaysia Jan 2010 Jan 2015 $169,000West Berani Conoco Indonesia Jan 2009 Dec 2011 $164,000West Pelaut Shell Brunei Apr 2009 Mar 2015 $138,500West Setia Chevron Angola Aug 2009 Aug 2012 $165,000West Vencedor Chevron Angola Apr 2010 Jul 2015 $207,500Teknik Berkat Petronas Malaysia Apr 2008 Apr 2012 $130,500West Jaya BP Jul 2011 Jul 2013 $169,000 Jul 2013 Jul 2014 $178,000West Menang in transit
2011 980.6 2012 1,923.1 2013 2,303.0 2014 1,701.92015 and thereafter 2,367.6=================================Total debt 9,156.4
2011 336 2012 324 2013 1,413 ===============Total 2,073
2010 2009 2008 2007 2006 ========================================================CFFO 1,300.4 1,452.0 401.0 486.0 174.2Capex 2,367.4 1,369.4 2,767.5 1,737.6 1,195.8
2010 2009 2008 2007 2006===================================================revenue 26% 57% 39% 39% 2384%gross 35% 109% 51% 57% 7237%operating income 29% 150% 81% 120% -645%net income -7% 867% -133% 134% -1978%
2010 2009 2008 2007 2006 2005 =================================================== gross 60% 56% 42% 39% 34% 12%ebitda 50% 50% 33% 25% 17% -9%operating 40% 39% 25% 19% 12% -54%net 29% 39% -8% 34% 20% -27%
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