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Seadrill Ltd (NYSE:SDRL)

Q3 2012 Earnings Call

November 26, 2012 12:00 pm ET

Executives

Ragnvald Kavli – Investor Relations Manager

Fredrik HalvorsenChief Executive Officer and President

Rune Magnus Lundetrae – Chief Financial Officer and Senior Vice President

Robert Hingley-Wilson – Chief Accounting Officer and Senior Vice President

Analysts

Ian Macpherson – Simmons & Company

Gregory Lewis – Credit Suisse

Ryan Kauppila – Citigroup

Jeffrey Schwarz – Metropolitan Capital Group, Inc.,

Lukas Daul – SEB Enskilda

Richard Haydon – Yield Capital Partners

Peter Testa – One Investments

Andreas Stubsrud – Pareto Securities

Darren Gacicia – Guggenheim Securities LLC

Julien Laurent – Natixis

Ragnvald Kavli

Thank you and welcome to our Third Quarter 2012 Earnings Conference Call. Please note that this conference call also includes comments on the third quarter 2012 accounts for our majority owned OTC listed subsidiary North Atlantic Drilling Limited. The quarterly reports and other supporting materials are available on seadrill.com and nadlcorp.com.

Together with me on this call I have our new CEO and President, Mr. Fredrik Halvorsen, and our CFO and Senior Vice President, Mr. Rune Magnus Lundetrae; and Robert Hingley-Wilson, our Senior Vice President and Chief Accounting Officer.

But before I give the word to Fredrick to give us an update on the status of our business, I'd like to remind everyone that during the course of this call, we may make certain forward-looking statements regarding matters related to our business and Company that are not based on historical facts. Please note that such statements in addition to other information discussed are given within the Safe Harbor provisions provided by the Federal Securities Regulations. For further and more detailed description of other risks associated with our Company and industry, please see our most recent Annual Report on Form 20-F and other filings with the SEC.

That concludes the preliminary details. Now, I'll turn the call over to Fredrik, Please go ahead.

Fredrik Halvorsen

Thanks, Ragnvald. Next page please. So good morning and good afternoon to all of you and thanks for listening in. I'll start by going through the highlights for the third quarter followed by a market outlook and contract status for the fleet. I'll then hand the call over to Rune Magnus to take you through the financials for both Seadrill and North Atlantic in some more detail. We'll finish with a combined Q&A session for Seadrill and North Atlantic.

So, if we could have the next page please? For the third quarter, we came in at an EBITDA of $574 million and net income of $254 million. The corresponding earnings per share was $0.40. Our operational performance for the third quarter is impacted by several rig moves and planned downtime, our floater utilization was a bit low at 82% compared to 95% in the preceding quarter. The low utilization is related to the 90 days downtime on the three ultra-deepwater units as well as the mobilization of West Hercules and the West Aquarius.

We'll get back to some of the mobilization math later in the presentation. But excluding mobilization, economic utilization for 3Q would be at 88%. On the jack-up side, we experienced utilization of 83% in the third quarter and this compares to 79% in the second quarter.

Now, again, for the jack-ups, the utilization was influenced by several rig moves taking somewhat longer than anticipated. For the tender rig division, utilization came in at a strong 98% which is also marginally up from last quarter. For the third quarter, we have a result increase of our quarterly cash dividend to $0.85 per shares, and in addition, we've also chosen to distribute the fourth quarter dividend which we've also set at $0.85 per share before year-end, reason being that a significant part of our U.S. shareholder base could be subject to increased taxation in the New Year.

Our ambition remains to increase the dividend. This is made possible by growing our rig fleet and the improving day rates across our various drilling units. So, we like to believe that we are once again at the forefront of the industry and adding future capacities on our rig fleet through newbuild orders. During the third quarter, we've ordered one additional ultra-deepwater drillship with delivery in 2014.

In addition, through a Seadrill subsidiary we have a Letter of Agreement to potentially acquire the ultra-deepwater semi-sub Songa Eclipse for a consideration of $590 million.

So, let me also share some brief comments on the performance of North Atlantic Drilling. North Atlantic contributed an EBITDA of $148 million for the quarter which is a slight decrease compared to the second quarter EBITDA of US$156 million.

The resulting earnings per share are at $0.286. The North Atlantic Board resolved to maintain the quarterly cash dividend at $0.045 per share with after the share split is US$0.225 per share. In terms of the listing of North Atlantic in the U.S. we have filed the first registration statement with the SEC and we will follow up the statutory process from here on in.

If you could go to the next page please, given the magnitude of the mobilization on the quarter we wanted to give a bit more flavor. On the floaters side the third quarter was impacted by the West Aquarius and the West Hercules mobilizing from Southeast Asia to new locations in Canada and Norway respectively. Accumulated total time between drilling for the two rigs equates to 346 days and 164 of those days ended up in 3Q. This time of course includes transits, upgrade as well as drydocking and some of this will be compensated by the operators. Hercules is currently estimated to commence contract on the 2nd of January. On top of that we’ve had West Alpha, which has now completed a prolonged yard stay and have now commenced as of October 19, 13 days of zero rate was incurred in October.

All-in so far in the fourth quarter the operating part of the floater fleet have experienced 41 days of down time and it's trending positive amount at the moment. Now we also moved a number of jack-ups in the third quarter. The West Triton, the West Vigilant, the West Resolute, the West Callisto and the West Defender only operated for parts of the third quarter. This has been a conscious strategy of increasing the number of jack-ups in the Middle East which is our favorite market and should also over time lead to some overhead savings on shore.

Let's go to the next slide please. So we’ve had a couple of significant corporate transactions over the course of the quarter, this actually is in the fourth quarter. In October we listed Seadrill Partners on the New York Stock Exchange. Seadrill Partners is a first offshore drilling MLP and it's a landmark transaction for the offshore drilling industry.

Seadrill Partners raised $207 million in the offering, which in addition directly was used to acquire 30% in four Seadrill rigs. For further growing the MLP, Seadrill Partners had a right of first refusal to acquire any Seadrill rig with a contract length that is greater or equal to five years. In addition, of course, the MLP has an option to acquire the tender rig T15 and T16. Seadrill Partners has the potential to provide an additional source of funds and lower Seadrill's cost of capital as MLP investors place a premium on cash flow stability.

Now, the second transaction is that we entered into a non-binding agreement with SapuraKencana regarding our tender rig division. The potential transaction is for an enterprise value of $2.9 billion and will reduce our outstanding debt with approximately $800 million and about $363 million of future newbuilding commitment.

All funds received for the sale will be used to fund future growth in Seadrill in either the ultra-deepwater or the jack-up markets, this could again be organic or it could be through M&A. The transaction establishes the strong player in the Asian oil services markets and will increase the cooperation between Seadrill and SapuraKencana.

If you go to the next slide please, I would like to highlight a few of the market trends. The ultra-deepwater market continues to show a strength primarily from an increase in demand from Africa and the Gulf of Mexico and daily rates have now steadily increased to the range of $550,000 to $650,000 range somewhat depending on location and the contract duration.

Oil companies are exploring deep water depths and more technically demanding well construction techniques. Again this leads our customers to emphasize more on modern rigs with greater load capacities and we expect this trend to put further pressure on supply in the coming years.

The barriers to entry remains high as customers look for operational track record and it has become a lot tougher for new entrants to obtain financing.

On the harsh environment side, the harsh environment floater market is fine and with limited capacity available for 2014 and 2015. The age profile of the fleets operating in this segment could also lead to additional attrition of existing supply.

If you look at the jack-up demand, the jack-up demand has improved over the quarter and this is evident in both contract lead times, day rates and increased contract duration. Demand continues to be mostly from Asia and the Middle East, but we are also seeing demand coming from Australia and New Zealand. There is a clear preference from our customer for modern rigs with greater drilling efficiency and improved safety for operations and personnel.

We also continue to see strong interest in our tender rigs from our customers and we see the market is having further room for growth and developments. Tender rigs continued to provide advantages in fixed platforms, POP and spot development economics.

If you go through the next page please? If you look at the current backlog, since our last quarter reporting we have received contracts and commitments for about US$1.2 billion when it comes to the deepwater rig.

In November we received the commitment for Husky for the West Mira an ultra-deepwater harsh environment semi-sub for operations offshore Canada. As announced this is a five-year contract with a 2015 starts which also bodes quite well for our second harsh environment unit currently under construction which is the Rigel.

If you look at the new building program more broadly, we have already secured contracts for three of the nine rigs under construction and for 2013 we now have one ultra-deepwater drillship available, which is the West Tellus.

With the current strong markets we are confident in securing attractive employments for this newbuild program and we would add that as long as the fundamentals with both the low yard prices and attractive supply/demand remains in place, we will continue to seek and expand to grow our capacity in the deepwater space.

Can we move to the next page please? On the jack-up side, we continue to see strength in the jack-up markets and I think the recent contract announcement around the West Castor, the West Callisto and also the Asia Offshore Rig 1, it's a good testament to this. During the third quarter, the West Vigilant secured employment and will operate the Talisman Offshore Malaysia. The West Janus will complete its contract with VSP before the sale of the rig is finalized. This should take place either late fourth quarter or early fourth quarter 2013.

Without having said on the jack-up side, we have now sold out all our capacity for 2012, but we still have newbuilds available in 2013. The market for premium jack-ups is firming up and we are confident that attractive contracts will be fixed for remaining rigs. Average duration on the jack-up fleet currently stands at 22 months.

Move to the next slide please. On the tender rigs side, we have not had any new fixtures on the tender rigs side over the course of the quarter. As we said, we are having a non-binding agreement for a sale of the greater of our fleet and we look forward to working in cooperation with SapuraKencana in developing this segment going forward.

So, in summary, if we move to the next slide please, in summary, since our second quarter report we have entered into new contracts with a total revenue potential of some $2 billion. Our order backlog now stands at a high of US$21.3 billion as of November 23, 2012. The majority of this backlog is with large independent oil and gas companies with excellent credit quality and this of course provides greater visibility of future earnings with significant EBITDA margin. This makes us comfortable that this will enhance our dividend capacity in the years to come.

So if you move on and in summary, I think our financial and operational performance for the fleet as a whole was below par in the third quarter and this is largely related to the failure of subsea equipment and rig moves for a number of jack-ups. We expect and are confident in improving our operational and financial performance in the fourth quarter.

We continue to develop our corporate structure with existing MLP and sale of our four tender rigs and the sale of our tender rig business. The MLP had so far been successful and can be grown further through dropdowns. Having a list of MLP provides a week of growth that we see at Seadrill further at an accelerated pace compared to our competition and lowers our overall cost of capital. It is the intention of the Board that it should be one of the fastest growing MLPs out there for the next three to five years.

The sale of our tender rig fleet and starting of our relationship to SapuraKencana enabled us to focus on the ultra-deepwater and jack-up segment where we see significant growth potential going forward. Our evaluation of $2.9 billion this makes an attractive deal for both Seadrill and SapuraKencana. We look forward to working to SapuraKencana in an even tighter relationship for the years to come.

Now on the other side of the balance sheet to fit our growth ambitions we've issued a US$1 billion bond this year. This opens up a previously untouched and attractive source of financing for Seadrill. In addition, we have received commitments from banks and financing institutions for our newbuild program that is delivered in 2013 and made substantial progress on the 2014 vintage.

Now, I will leave it to Rune Magnus to take you through this and financial in some more detail. So, Rune?

Rune Magnus Lundetrae

Thank you, Fredrik if we can move on to Slide 13 please, and good morning and good afternoon to everybody and thanks for joining this call. The financial highlights for the third quarter gave us EBITDA of $574 million, earnings per share of $0.40, operating profit of $413 million from $483 million in the last quarter and then we declared a dividend of $0.85 up from $0.84 in the last quarter. In addition, we also accelerated the dividend for the fourth quarter due to possible change in the U.S. tax codes.'

Next slide please? The EBITDA decreased by $60 million from the previous quarter. For the floaters, the decreases were $59 million and the main drivers were as follows; the Hercules was in the yard and transit during the quarter; the Aquarius was in transit from Asia to Canada at a lower day rate. In addition we experienced operational challenges related to some units namely the West Polaris, the West Pegasus and the West Sirius of approximately $50 million. The decrease was partly offset by increased EBITDA contribution from the West Leo and the West Capricorn which have been operating through the whole quarter. This increase amounts to approximately $40 million.

For the jack-up units, the decrease, there was a decrease of $7 million compared to last quarter which was relates to units on the transit in the third quarter as well as some operational challenges for some of the units.

For the tender rigs, we experienced an increase of $6 million during the quarter. The main reason for the increase is higher utilization as several units are operating during the entire quarter versus partly under construction or under classification during the second quarter.

Next slide please. As mentioned in the EBITDA overview, there was a significant reduction of operating profit in the third quarter and this was also communicated in the second quarter report. The reduction was mainly related to lower utilization. The increase in depreciation was mainly due to the newbuilds delivered in the second quarter. G&A expenses also increased by some $9 million and is on the same level as in the fourth quarter of '11 and the first quarter of 2012. The decrease in second quarter was related to non-recurring items.

Next slide please. For the jack-ups the increase in revenue is mainly related to the West Janus that was operating for the whole quarter versus no operation in the second quarter. However there was no margin related to the contract and we have also experienced high repair costs for another unit. Also the G&A has increased some during the quarter.

Next slide please. For the tender rigs, we saw an increased operating profit mainly due to higher day rate for the West Setia and higher utilization for the West Jaya.

To sum it up on the next slide please. The operating revenues in the quarter, was $1.056 billion. Total operating revenue was $1.092 billion. That gets us to total operating and total operating expenses of $679 million. That gives us net operating income of $413 million.

Next slide please. Net operating income was $413 million and after the net financial items, there was a net income of $216 million. The difference was mainly due to interest rate swaps, foreign exchange forwards and the share results in associated company mainly Archer.

Next slide please. For the balance sheet, on the asset side, cash and cash equivalent, they increased by $276 million to $518 million. Other current assets increased by $84 million mainly due to unrealized gains on derivative. Newbuildings increased by $225 million mainly due to milestone payment for the West Saturn and the West Carina. Other non-current assets increased by $73 million, mainly due to an amortized loan fees, note receivables and increased mobilization costs.

Next slide please. The other side of the balance, long-term interest-bearing debt increased by $920 million, mainly due to a new $1 billion bond and a new tender rig facility of $750 million. The total facility is $900 million, but it was only drawn by $750 million by the third quarter. During the quarter, the Company paid approximately $300 million related to the old tender rig facility.

Turn next slide please, I would like to add some comments to the third quarter report for the North Atlantic drilling. The key highlight in the quarter was that the West Hercules was transferred from Seadrill to North Atlantic and that is the management of the West Hercules. They also saw a strong operational performance in the quarter and they submitted the first draft registration statement to the U.S. Securities and Exchange Commission. In addition, Mr. Alf Ragnar Lovdal was appointed CEO with effect from 1st of January 2013.

Some brief comments to the financials, so next slide please. The EBITDA has decreased by $8 million from the previous quarter. I will come back to some more details in the following slides and please also note that the earnings per share and the dividend per share is adjusted for the reverse stock split that was announced earlier.

Nest slide please, operating profit decreased from $114 million in the previous quarter to $106 million in the third quarter. The decrease is mainly related to the West Alpha which was at yard stay at a lower day rate. The economic utilization across this fleet averaged 96%, down from 99% in the preceding quarter.

Next slide please. Net financial items in the quarter amounted to an expense of $32 million of which $19 million was related to interest expense, $4 million was related to losses on derivative instruments primarily loss on interest rate swap agreement and foreign exchange losses of $9 million. Net income amounted to $65 million, equivalent to $28.06 per share. Net income amounted to $65 million.

On the balance sheet, there was no significant changes during the quarter, so no comments to the North Atlantic balance sheet.

Back to Ragnvald.

Ragnvald Kavli

Next slide please. Operator, we're ready for the question-and-answer session.

Question-and-Answer Session

Operator

We will now take the first question, it comes from Ian Macpherson of Simmons. Please go ahead.

Ian Macpherson – Simmons & Company

Hi, thank you, I had a couple of questions regarding the Songa Eclipse if you could please clarify the contract status there and whether that's under subject to negotiation with Total or if you're keeping the contract that came with it which I believe was 435 or so is day rate and also comment on what the options entail and then if you could also comment on whether that rig becomes a candidate for drop down into the MLP? Thank you.

Fredrik Halvorsen

All right, thank you. I think, so the transaction has not been completed yet and rig’s been a Seadrill subsidiary and as such, we are working through the various contract issues and we'll announce when and if closed. You're right with regards to the day rate, it is 434 that's agreed and the subsidiary would step into that arrangement for this deal. In terms of that this could be a candidate for the MLP. It's not the most obvious candidates. Let me just put it like that. We have several orders. I'm sure we'll get back to that later on in the call.

Ian Macpherson – Simmons & Company

Okay, well, maybe my follow-up question would be, just to ask you how you're thinking about the pace of drop-downs as we go forward next year. There is obviously a lot left to do and I'm curious what you think a good sustainable run rate is for growth in terms of the pace of drop-downs and how much of the growth of asset by Seadrill might be in Seadrill Partners a year from now?

Rune Magnus Lundetrae

Hi, yeah, this is Rune here. I think what we like about this story is that we can pretty much control that goals our self, because have so many drop-down candidates, but at the same time we don't want to move too fast. So what we have said is that we would aim for close to 15% growth per today. And then you have several good candidates for drop-down. The T15 and the C16 have been announced as options already in the perspective. I could also add the Mira that we signed up few weeks ago, the Husky rig. You also have the two drillships that was contracted with BP this summer that we take delivery on next year and also the West Sirius, which also extended its contract with BP. So there's so many dropdown candidates that we see and that can surely give us that growth target.

Ian Macpherson – Simmons & Company

Okay, just one last one. You had a kind a significant increase in your G&A expense, this quarter, you've also mentioned in a release that the relocation to London will bring a temporary increase to the G&A as well going forward, can you provide any quantification on that?

Fredrik Halvorsen

Yeah, absolutely, I think, so you are right. In the short term you will see a bit of a jump because of the move in having to, move some people go redundant and some double pay for offices and the like. Now I think more importantly underlying the move is an intention by the Board to make sure that every time a Company becomes big and it grows very successfully you got to shake the tree a bit, so to reduce the corporate overhead staff by moving it to London and by having more of the operational functions put out in the regions. So, we are quite confident that while you have couple of quarters with some extra G&A, the long-term benefit of such a move will far outweigh it, both from a cost perspective and also from an access to talent type perspective.

Ian Macpherson – Simmons & Company

Okay, thank you very much.

Operator

We will now take the next question from Gregory Lewis of Credit Suisse. Please go ahead.

Gregory Lewis – Credit Suisse

Yes, thank you for taking my call. When we look at the support transaction or the potential closing of that and netting the Company $1.2 billion, clearly you are thinking about going after additional growth opportunities in M&A. At what point could, is there a point in time where if you are unable to do any M&A transactions and the newbuild growth opportunities are too far out in the future, is there any point where you would consider paying out a special dividend?

Fredrik Halvorsen

So, I think we have a track record of being quite successful of finding growth opportunities, so I didn't hold my breath on that one. We wanted to go out because we do see good opportunities now when we do foresee this, the proceeds from that deal being something we want to invest back into our both our harsh environment, our ultra-deepwater as well as the premium jack-up segment. Now, similarly I think we also have a good track record, should none of those materialize, of course we will pay out a dividend.

Gregory Lewis – Credit Suisse

Okay, great. And then so when we think about newbuilding opportunities that are out there and clearly, you can go down the jack, the high spec jack-up road or the ultra-deepwater floater market. When we think about those, can you sort of have any sort of sense for what that's going to look like, is it going to be a little, is it going to be a blend of the two or at this point I mean it sounds like there is probably deliveries in early '15 for the ultra-deepwater, is that how we should be thinking about that? Then just in thinking about this delivering and there is potential of the opportunity to be good dropped in candidates, is that how we should be thinking about that?

Fredrik Halvorsen

Yeah, I mean, it is a tricky one. We will continue to act quite opportunistically and I think so far as you have seen with the nine newbuilds across all strategic footprints and harsh environment we have now contracted out three of them. The investment economics in that space has been strongest to-date and we’ve also seen the jack-up segment improve significantly with utilization of premium segments since June being in the high-90s. So depending on what comes up, also inorganic, there might be some interesting opportunities to take out some smaller opportunistic, some one and two off type rigs or it could be just that we go in and we continue to contract. We think that the harsh environment segments to some extent, is very promising. We have as you saw now already contracted out one of our newbuilds the Mira, with a 2015 start that brings it all to 2020 and we only have the Rigel West for contracting and that is seeing a lot of attention these days. So I would like to keep that one open, but trust that we will do the ROI analysis very carefully when making the trade-offs.

Gregory Lewis – Credit Suisse

Okay, perfect, thank you.

Operator

Thank you. We will take the next question from Ryan Kauppila of Citigroup. Please go ahead.

Ryan Kauppila – Citigroup

Yeah, good afternoon. Just curious, I mean you highlighted in the presentation, we can all see it every day just how robust the newbuild environment is. What do you think is the constraint right now from aggressive players as you call it from sanctioning more newbuilds?

Fredrik Halvorsen

Yeah. I'll let Rune Magnus view this. Well, I think on the ultra-deepwater side, I think operational track record is becoming and also safety record is becoming actually key barrier to new entrants. As we pointed out the bank financing space, those are probably a little less open for speculative builds now in the deepwater space. So, those are I think the two major.

Ryan Kauppila – Citigroup

And just on the financing, would you say it's improved, stayed the same or worsened over the last six to nine months?

Fredrik Halvorsen

It depends on who you are. I would say for us it has definitely improved, but for new entrants, it must be extremely hard to secure that financing. I mean the numbers we're talking about is just so large. So, it's not for everybody just to go out there and get that commitment from whatever money it is, whether it's a bond market or the [TE] market or equity. So, the barrier to entry when it comes to the funding side has definitely gone up, if you're not the right payer.

Ryan Kauppila – Citigroup

Okay, thanks.

Fredrik Halvorsen

I don't think we are ruling it out. We are seeing some aggressive yards out there that are willing now to try and finance the rig almost themselves by very aggressive payment terms and so forth so. By no means are we ruling it out, but I think that's where we would stop ordering if you see people starting down that route.

Ryan Kauppila – Citigroup

Right, understood.

Operator

Thank you. We will take the next question from Jeffrey Schwarz of Metropolitan Capital. Please go ahead.

Jeffrey Schwarz – Metropolitan Capital Group, Inc.,

Good afternoon gentlemen. We are North Atlantic shareholders and we're quite disappointed to see the lapse of our option on the West Mira especially since Seadrill must have been very deep into negotiations with Husky at the time that the option laps and instead it appears now was that unit will likely be dropped into Seadrill Partners. Could you give us some comfort that North Atlantic is not going to be a stepchild where Seadrill views the Seadrill Partners as the better vehicle for growth and especially given the fact that you do talk about opportunities in the harsh environment and we had imagined that North Atlantic was going to be the vehicle for growth in harsh environment. This doesn't make any sense to us that that rig is now going to wind up with Seadrill Partners?

Fredrik Halvorsen

So, let me answer, number one, I think we are economically aligned in trying to do the best for all companies. I hope you trust that and we have to delineate somehow and North Atlantic now when their new CEO to come as well, let the option basically laps because there was not a contract at the time when they would have to declare the option. Now it brings a very good prospect I think for North Atlantic when it comes to the ownership of Rigel. We should say similar rig and it sets a very good term and a very high day rate to it as well. So that would be some upside to the pure North Atlantic shareholders on the call.

Jeffrey Schwarz – Metropolitan Capital Group, Inc.,

I have a follow-up then to switch gears over to the ultra-deepwater market, one of our brokers made a very bold call in the marketplace that they see a plateauing in of and maybe even a softening in the ultra-deepwater marketplace with sublets around. I'm wondering if you would offer your perspective. I'm sure you folks heard the same call?

Fredrik Halvorsen

Right. So, I think number one, I think you are probably seeing the market taking a little bit of breather now in terms of budget season. But to say that things are plateauing, I'm not sure we fully agree. We've seen 53 separate fixtures and 175 rig years already year-to-date, which is the highest activity level since 2008. So, even if you are seeing a few sublets now, I think it's way too early to try and read anything into that. At least looking at our open positions and the interest we're seeing in our rigs, we are very confident that we can find good opportunities to deploy our current fleet and our current newbuild program.

Jeffrey Schwarz – Metropolitan Capital Group, Inc.,

Thank you.

Operator

Thank you. We will take the next question, it comes from Lukas Daul of SEB Enskilda. Please go ahead.

Lukas Daul – SEB Enskilda

Yeah, thank you, good evening everyone. I was wondering when North Atlantic Drilling assumes the management of West Hercules what impact is it going to have on your P&L? Is it going to be increased cost in terms of the management fee?

Rune Magnus Lundetrae

For Seadrill or for North Atlantic or…

Lukas Daul – SEB Enskilda

No, for Seadrill. Are you going to pay North Atlantic $10 million a year?

Rune Magnus Lundetrae

There will be a management fee, yes, to North Atlantic, exactly.

Lukas Daul – SEB Enskilda

Okay, so…

Rune Magnus Lundetrae

But it's consolidated on Seadrill books.

Lukas Daul – SEB Enskilda

Yeah., Then looking at the cash flow statement, I show that your maintenance CapEx was in excess of $100 million for the second quarter in a row. I was wondering where was that CapEx allocated and if you could maybe give us some sort of a range for what we should expect going forward?

Fredrik Halvorsen

Okay, I think on the maintenance CapEx side right, it is a bit lumpy because you go through classings at various times and so forth. So, as you saw, in the quarter, we had Aquarius, we also had Hercules and on the Hercules, we chose to do the five-year classing actually a little bit ahead of time than we did it in an accelerated fashion to take advantage of it being in transition. So, I think you should expect to see that number oscillate somewhat, I don't know if Rob, you want to add anything to that.

Robert Hingley-Wilson

No, I think that's a very fair comment, we'll continue to do those classings when the opportunity arises and we cannot impact our customers too much, but also the age of our fleet will continue to age in the future despite the newbuilds and that long-term cost will creep up over several periods. I mean, that's just there's no getting on that one.

Lukas Daul – SEB Enskilda

But can you say how much for instance the SPS for Hercules end up at given that it's five-year old rig or not even five-year old rig?

Fredrik Halvorsen

Right, I think we want to be specific around the numbers, because it also depends on the status of the rig and what areas it has been operating in, but a few or just five year classing should range in the $18 million to $25 million if there is no other work undertaken on the rig.

Lukas Daul – SEB Enskilda

Okay. And just finally a quick one, how much in undrawn facilities have you had in the third quarter?

Rune Magnus Lundetrae

I'll have to get back to you exactly what that amount is Lucas.

Lukas Daul – SEB Enskilda

Yeah, sure, No problem.

Rune Magnus Lundetrae

Yeah, but we’ll return to you after the call.

Lukas Daul – SEB Enskilda

Thank you. Ill turnover.

Operator

Thank you. We will now take the next question from Richard Haydon of Yield Capital. Please go ahead.

Richard Haydon – Yield Capital Partners

Hi, there. Can you be more specific on the timing of the listing for North Atlantic and New York Stock Exchange and additionally, does Seadrill intend to sell any of the its current holdings in North Atlantic?

Fredrik Halvorsen

I think there was two questions in it, but yeah in term of the timing we have now filed with the SEC and I think it's sort of on auto pilot from here where we will just follow the statutory process to get there. When it comes to additional rates and so forth, that would be completely dependent on the growth opportunities you'll see in the market going forward.

Richard Haydon – Yield Capital Partners

Okay, thank you.

Operator

We will now take the next question from Peter Testa of One Investments. Please go ahead.

Peter Testa – One Investments

Yeah, I was just hoping to help wrap up together a few of the things on the financing side. You've got the SDLP now quoted, you have the proceeds presumably that will come from SapuraCrest which is the equity of roughly $1.2 billion. On the other side, you've got $2.4 billion of financing maturing next year and $2.5 billion of newbuild payments due. Can you just help us understand how we can, these things will sequence, i.e. the extent to which the equity that will come with SapuraCrest is necessary to arrive before you start really moving on newbuilds or the extent to which you will face other of your maturity and other faith payments in front of that just to kind of how the various different levers will come into play in this sequence of what you could do on the new asset line?

Rune Magnus Lundetrae

Yeah, I mean, first of all, we don’t take, there is a proverbial into account when we do our financial planning, because that deal has yet to be concluded. There is some work ahead but we are working extremely hard to make that happen. But the way our funding strategy works right now is that we have specific facilities or deals out in the market for all the newbuilds to be delivered in '12 and '13, sort of end of this year and through '13 and also what you referred to that the refinancings that are due next year.

And we said in the quarterly report that we have firm commitment of some 1.7 and we are very confident that we will have more announcements in the fourth quarter, so in the next quarter. So I'm very optimistic when it comes to all our funding needs for '12 and '13 and then we will start planning '14 early next year. What I'm pleased with of course that we personally have firmed up the story over the last couple of quarters. What we have said is pretty much what we are delivering now and also we have added some of the taxability we have pointed to in the past. Of course the U.S. bond is a big one for us opening up a new avenue of funding and also the MLP is a source of possible funding. So I think you have to definitely look at the Seadrill funding requirements as a separate issue to the Sapura deal and then like Fredrik said earlier, I think when that is concluded, let's see what makes sense for the Seadrill shareholders.

Peter Testa – One Investments

And then related to that if you could give us a sense excluding this report what do you think you have as an equity capacity to launch other new projects or the equity component of any more purchases, internal equity? I'm not talking about shares this year as I understood your point there, but I'm just talking the equity component of any finance structure to expand ex-Sapura?

Fredrik Halvorsen

Right. I think this Company is also blessed to having a shareholder structure and an owner that is willing to fund growth to some extent also on this own balance sheet speculatively, should the deals be good enough. Newbuilds out there can now be done all the way down to 10% or even lower in terms of upfront commitment for newbuild ultra-deepwater unit. So, it's not an equity constraint per se if we find the market is right for newbuilds. So, I'll just leave it at that.

Peter Testa – One Investments

Okay. And last question just on the utilization rate the underlying 88%, can you give us sense given that we've had these BOP issues that I think largely dealt with, what you think the constraints are towards that going back up into the low mid 90s in the coming quarters?

Fredrik Halvorsen

Can you repeat the question? I apologize.

Peter Testa – One Investments

Okay. If you look at the utilization rate which excluding mobilization is running at 88% in the quarter. I think we finished most of the BOP related issues that that were existing. So, I was wondering if you could give us sense as to what the obstacles are at this point to bring that up in the low mid 90s again on the ultra-deepwater units.

Fredrik Halvorsen

Right, right, right, I think it's a good question and if it also brings some comfort is the one thing that the Chairman wakes up and looks at every morning is what we call the (inaudible) report where you are reporting any downtime particularly the technical downtime or call date. So we do track that on a daily basis across the entire fleet and that's of 23rd of November. We therefore also know we've had 41 days of so called technical downtime today which is a variety of issues, everything from top class and BOPs and so forth. That was still a little bit I think influenced by some of the BOP issues we saw in Q3, if you look at the month of October. Month of November, it's a clear improvement over that again, so we fingers crossed, we'll will not see any major technical downtime incidents going forward which should allow us to move back up to our norm.

Peter Testa – One Investments

That’s very good, thanks for the help

Operator

Thank you. We will take now the next question from Andreas Stubsrud of Pareto. Please go ahead.

Andreas Stubsrud – Pareto Securities

Thank you and just two quick questions, number one on West Alpha, can you help us on estimating the cost of the yard stay in the fourth quarter?

Fredrik Halvorsen

What we, I think, have said is that the rig is now back and has commenced. It did so a little later than what it should have done, so it was back on contract on the 19 of October having incurred 13 days of zero rate. The biggest cost in all this math is actually the lost days, so if you take those 13 days I have answered your question sort of half way, I am not going to go into the OpEx incurred in relation to the yard stay.

Andreas Stubsrud – Pareto Securities

You're not going to get into details about the CapEx cost or the yard stay?

Fredrik Halvorsen

I prefer not to. I hope you are right about.

Andreas Stubsrud – Pareto Securities

Okay, okay, that’s right. And just if you have that in your notes, I just couldn't find it. What was the yard stay cost of West Alpha in 2009? Wasn't that around $100 million, but of course much larger than this one probably?

Fredrik Halvorsen

Yeah, that was a significant upgrade of that unit and it included classing and included some necessary upgrades, living quarters, new cranes and so on and also bear in mind that part of that was also reimbursed by the clients. But you're right there, that was not just a normal yard stay. It was a upgrade of the rig and that's why you see the rates for the West Alpha, the current contract and the next one at very solid day rates and yes very or kind of old rig.

Andreas Stubsrud – Pareto Securities

Okay, so and the last time it was a full SPF and this time it was intermediate, wasn't it? Is that correct?

Fredrik Halvorsen

Last time was a full one and like I said, including some significant CapEx program to make it operational.

Andreas Stubsrud – Pareto Securities

Okay. Very good. The second question is related to the U.S. bonds you were talking about and it's very impressive, but my question is, is the cost of that bond the same if it continues to be rated or not rated or is it higher cost if it continues to be not rated.

Rune Magnus Lundetrae

It's an uplift after 18 months of 50 basis points.

Andreas Stubsrud – Pareto Securities

Okay, a 50 basis points of what you have reported so far?

Rune Magnus Lundetrae

Yeah, after 18 months.

Andreas Stubsrud – Pareto Securities

After 18 months if you continue to be not rated?

Rune Magnus Lundetrae

Yeah.

Andreas Stubsrud – Pareto Securities

Okay, very good, thank you.

Rune Magnus Lundetrae

Okay.

Operator

Thank you. We will take the next question from Darren Gacicia of Guggenheim. Please go ahead.

Darren Gacicia – Guggenheim Securities LLC

Hey, thanks for taking my questions. It’s kind of one sort of starting from a housekeeping element. In the quarter, this just seems like with the [move] is with some of the BOP issues with the surveys coming a little bit early, can you kind of breakout in a little more detail, maybe how that affected the cost side of the equation, I think some questions you kind of handled it, but I haven't heard it kind of quantified?

Fredrik Halvorsen

I think you’ve seen there the total impact on the EBITDA for the quarter, right, so this is, it hits you on the cost side, it hits you on the lost days. We are not prepared to give you any more detail over and beyond the breakdown of the days between drilling as we have provided in the quarterly report I'm afraid.

Darren Gacicia – Guggenheim Securities LLC

Okay. Kind of on a higher level, one of the more interesting comments I heard kind of at the beginning of the call was that new entrants wouldn't be able to get funding and kind of the big two questions is, what seem to be the barriers there and are there a significant amount of new entrants that may actually like to participate from your view?

Rune Magnus Lundetrae

I mean, we don't say it's impossible, I think it's definitely a tougher environment to get speculative funding if you can call it that. That's also to do with the increased requirement to a driller you need operational track record in our view to attract the kind of contracts that you see Seadrill signed off for. And we have fortunately enough operational track record although we are quite a young company, we manage to get enough operational track record prior to the Macondo incident and we have seen increased scrutiny and sort of requirements from the clients, regulation or no regulation so there is several barriers to entry and that all sort of makes it harder to attract the type of funding. So, it's not a definite sort of, it's impossible, but in our view it seems to be harder and as I guess that's also what you see out there in the market. The economics are quite attractive yet, but you need to time it right, you need to get the funding, you need to get the contracts, so it's lot of work besides just ordering the rig.

Darren Gacicia – Guggenheim Securities LLC

So from an operating standpoint in terms of requirements from the operators in the offshore realm, are there specific things that being a small start-up Company that would automatically preclude given what you've kind of seen from requirements and tenders?

Fredrik Halvorsen

Again I think, number one, I'm sure there will be some speculative activity out there. We're not trying to deny that. You might have a couple of guys trying to enter this space given the overall economics. Now depending on where you end up in landing your initial contract, right, the chances could be very different. You end up in the Gulf of Mexico, that's definitely a push now from the various operators to have something with a safety track record and I think it's just highly risk to take someone without a track record if you want to go into the Gulf. Now if you want to step up on West Africa some of these places, the local content rules and the regulation of the way you write the contract, the way you work with the operators, I think again benefits the bigger players.

Little further down the road when it comes to the ability to take [hot] cruise and change between your rigs, the operational efficiency of having sister rigs with multiple BOPs if something goes down, so you can take one BOP that you have stashed for a number of ships and utilized across your fleet. They just seem to be an unfair advantage of having a new bigger fleet and also a quite homogenous fleet when competing in this market place. Now, you are seeing a lot of people try some with some success and some with less success. So, I don't think we want to rule out either or but at least our sense is that barriers to entry in this space is quite a bit higher both operationally and financially, than for instance in the jack-up space where you're seeing quite a bit more speculative ordering.

Darren Gacicia – Guggenheim Securities LLC

Okay, great, thanks for the color.

Fredrik Halvorsen

I think we want to try and wrap up the call. Should we allow time for two more questions please?

Operator

Thank you. We will take the second last question which is a follow-up question from Ian Macpherson of Simmons. Please go ahead.

Ian Macpherson – Simmons & Company

Hi, thanks for taking my follow-up. I just wanted to get an update on your CapEx. You have $5.9 billion in remaining CapEx and I just want to adjust that for disposals and acquisitions. So am I correct in estimating you have about $365 million in CapEx for the tender rigs that would move out to support in Ghana? Then the CapEx that you will be taking on for Asia Offshore would that be in the ballpark of $450 million?

Fredrik Halvorsen

Yes. Correct. Just shy of that.

Ian Macpherson – Simmons & Company

Perfect, thank you.

Fredrik Halvorsen

Thank you.

Operator

We will now take the last question from Julien Laurent of Natixis. Please go ahead..

Julien Laurent – Natixis

Yes, good evening. I was wondering talking about PLSV for Petrobras, local construction in Brazil I assume now are riskier than for deep offshore newbuilds on the drilling side. So what kind of freedom are you looking for this kind of venture investments?

Fredrik Halvorsen

Well, I think if you look at the payback on the ultra-deepwater fleet now, it's in that five year range, some of the contracts even below five years. We are definitely looking for very high returns and we put our capital to alternative use. I think we are on the long horizon big believers in Brazil and the need to take off several rigs I think that are close to the business of our business. We have chosen to engage in this project on both good economics and in utilizing a very strong local organization that we have in Brazil.

Julien Laurent – Natixis

Okay. Thank you.

Fredrik Halvorsen

Thank you.

Operator

There are no further questions.

Ragnvald Kavli

Okay, thank you all for participating on this call and see you again next quarter.

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