Edited Transcript of Seadrill Limited (SDRL) Q3 2014 Earnings Conference Call…
Seadrill Limited (NYSE:SDRL)hosted a conference call with investors and analysts to discuss Q3 2014 earnings results on November 26, 2014 at 12:00 p.m. ET. The following are the webcast audio and the associated transcript of the event…
Seadrill (SDRL) Q3 2014 Results Earnings Call – Webcast Audio
Operator: Good day, ladies and gentlemen. Welcome to the Seadrill Limited Q3 2014 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Roche, Director of Investor Relations. Please go ahead, sir.
John Roche – Director, IR
Thank you, Ann. And good afternoon to everyone on the call today. Welcome to Seadrill Limited’s third quarter earnings conference call.
With me today I have Per Wullf, our Chief Executive Officer; and Rune Magnus Lundetrae, our CFO.
Before we do get started, I’d like to remind everyone that much of the discussion today will not be based on historical fact, but rather consist of forward-looking statements and are subject to uncertainty. We articulate some of the new items on Page 2 of the presentation. For additional information, please visit our website at www.seadrill.com.
To begin the discussion today, Per is going to take us through some of the third quarter highlights and some of the more recent developments in the offshore drilling market. Per is also going to discuss a number of Seadrill’s recent contract wins and the overall market outlook. Rune will then address our financial highlights and take us through the rationale behind our dividend suspension and also Seadrill’s funding requirements going forward.
With that, I’d like to turn the call over to our CEO, Mr. Per Wullf.
Per Wullf – CEO
Thank you, John, and good afternoon, everybody.
The Seadrill group has had another strong quarter and has grown EBITDA by 27% year-over-year. I’m pleased with this impressive growth rate and the amount of value we have generated for shareholders by operating a best-in-class fleet with a best-in-class organization. We continue to focus our effort on running a safe and efficient operation by always keeping customer satisfaction on the top of our mind.
Seadrill’s value generation can be attributed to our industry-leading newbuild program and an innovative financing strategy, which has been in place since our inception and remain in place today.
Of course, in a cyclical business, there will be many smaller cycles within a long-term uptrend and that is what we are facing today. Since our last call we reported in August, the oil price has dropped by 23%, $24 per barrel. It remains to be seen how long the current market condition will persist and during this period, short to medium-term visibility will be reduced.
We have also seen day rates falling materially and contract cancellations in addition to further subletting activity. Most of all, however, has been the lack of visibility created by these events. At the management team, our focus has shifted to making responsible decisions in preparations for again making opportunistic ones.
However, the company believes the long-term fundamentals of our industry remain intact driven by the fact that the days of easy, low cost oil are over and reserves required to meet long-term demand growth are still to be found in the deep and ultra-deepwater regions.
As mentioned by a number of major oil companies, these reserves are well positioned on the cost of supply curves and can be expected to be produced even at today’s oil prices. It remains to be seen how long this current market will persist. However, Seadrill is prepared for whatever may transpire having locked up a large portion of its fleet and by making a preemptive dividend cut in order to pay down debt and focus on opportunities that may arise. A little later, Rune will provide more detail in the call on the philosophy behind our dividend and how we intend to utilize the available funds to generate further shareholder value.
Since our last earning report, we have announced a number of new contracts and we now have even fewer rigs exposed to this challenging market.
First off, we have signed a number of contracts and extensions with Petrobras in Brazil. We now have Petrobras Board and partner approval for two rigs, the West Tellus and West Carina to work on the Libra Field. The total revenue potential for these two contracts is approximately $1.1 billion including mobilization for these three-year contracts.
Additionally, we received Petrobras Board approval for three-year extensions for the West Tellus and West Eminence in direct continuation of their existing contracts. The total revenue potential for the extensions is $1.1 billion as well. We have also signed a 145-day extension of West Eclipse in Angola with Total, again in direct continuation of the existent contracts representing a revenue potential of $65 million.
And finally we have signed a number of jack-up contracts – contracts with West Vigilant, West Leda, West Telesto represent a collective $120 million of backlog additions. Overall, I’m very pleased with the contracting activity in the past three months. However, this does not change the challenges that this industry is facing in the near term.
We expect to see 2015 materialize into a more challenging market than 2014 and rig owners with aging fleet that have the available capacity will likely encounter significant difficulties. Following these new fixtures, Seadrill has 9% of its floater fleet and 26% of its jack-up fleet available in 2015 and 26% and 61% available for 2016, respectively.
Seadrill’s success for tenders and extensions in Brazil are of particular importance to the company. Not only do they fix a good portion of available capacity but also demonstrate that Seadrill’s strategy of creating strategic partnership with key customers is paying off. The lead for tenders are an example of Seadrill’s follow-up planning as we were one of the few competitors that were able to deliver high specification units and manage pressure drilling equipment within Petrobras’ desired start-up window.
Managed pressure drilling is particular important for the Libra Field and it will materially increase recovery rates. Seadrill have two spare kits in its cabinet of spare inventory. These are packages that have 12 months lead time and if you have not planned accordingly, the opportunity to bid on these tenders would be lost.
Accordingly, there were a limited number of companies able to compete for these opportunities resulting in improved pricing relative to all recently announced contracts. The success in Brazil is also an example of Seadrill’s strategy of aligning strategically with customers. Whether it be in U.S., Mexico, Saudi Arabia, Nigeria or Russia, Seadrill has evolved to a company that provides strategic solutions to clients rather than just a single asset. We look forward to continued success with our strategic partnerships and the stability that it brings to the employment of our fleet.
The near-term outlook for ultra-deepwater drilling units has become increasingly challenging in light of the market developments over the course of the last quarter. While there are not yet clear indications that the oil price declines will alter oil companies’ spending plans in 2015, some rig owners are already acting as it will. This is especially true of those rig contractors that are concerned about the viability of their older units and the cost associated with keeping those assets in service.
With approximately 25% of the ultra-deepwater fleet available in 2015, certain rig owners seem willing to work at or close to cash flow breakeven rates and we expect this type of activity to continue in the short term. Seadrill remain very well positioned in this environment with relatively few rigs exposed to falling day rates in the near term.
Following the announcement of four contracts in Brazil and an extension of the West Eclipse, Seadrill has only 7% of the floater fleet available in 2015. If oil companies adjust their budgets based on the current macro environment, tendering activity may remain at the current low levels or even decline further.
On the positive side, major oil companies are still proceeding with planned development projects and independent oil companies are coming to the market to take advantage of current day rate levels. It appears that short-term exploration plans are under the greatest pressure and may be pushed back if the lease expirations rights are not breached. Typically, at this point in the year, we would have expected to understand what near-term demand look like and the fact that we do not may be an indication that projects have encountered further budgeting delays.
The long-term outlook for the floater market is intact and we believe the current market is in the short-term dislocation driven by a pullback in spending at a time when a significant number of new rigs are entering service. Over the long run, these rigs would be absorbed as reserves discovered in the deep and ultra-deepwater are developing.
The premium jack-up market much be approached with an element of caution. Overall utilization continues to decline as the market digests newbuilds coming to the market. The dynamics in the jack-up market are quite different from the floater market as the work is primarily developed and is not affected by cuts in the exploration budgets. However, with 65 units coming into service during 2015 there is likely to be increased pressure on day rates in the short term.
Although this may paint a rather bleak picture, there is high likelihood that many rigs that are on order will not make it to market or end up in the hands of contractors without the operational and safety track record required to compete in the global market. Maybe oil companies do, however, continue to high grade their jack-up fleet, which will provide some attractive opportunities for established contractors in this segment.
Looking at the overall supply and demand balance in the long run, the fundamentals remain intact. With over 200 rigs older than 30 years and roughly 140 rigs expected to be delivered up to 2017, a replacement cycle will materialize. The key questions still to be answered are: how long it takes for attrition to take place and if the high specification units can retain pricing power during this replacement cycle?
A very competitive jack-up market puts further emphasis on the need for drilling contractors to have strong local relationships in markets where national oil companies dominate the tendering process. Seadrill’s global footprint is underpinned by our ability to develop and execute on building a local presence through joint venture models that comply with strict local content regulations. Example of which already exists, Mexico, West Africa and Asia.
We find it encouraging to see the industry rationalizing older fleet with increased stacking and scrapping activity. We expect this activity to accelerate as 2015 progresses. Roughly, 45% of the current floater fleet is 15 years old and 30% of the fleet is 30 years old. Although these older units are not directly competitive with Seadrill’s fleet, it will allow our competitors with less capable fleet to be less concerned about the cash flow drain older units create and they will be in a more stable condition overall, thus less willing to work for breakeven day rates.
In the meantime, however, challenges will continue for the industry. Seadrill’s high specification fleet gives the company the flexibility to choose the right contract at the right rate and remain idle if necessary. In order for this industry to return to a healthy state, scrapping activity is required. The often repeated mistake of spinning off older fleets is not a productive exercise for rig owners or shareholders. In most cases, a competitor is formed and rationalization is further postponed.