Seadrill Partners' CEO Discusses Q1 2013 Results - Earnings Call Transcript

May.28.13 | About: Seadrill Partners, (SDLP)

Seadrill Partners LLC (NYSE:SDLP)

Q1 2013 Earnings Conference Call

May 28, 2013 12:15 pm EST

Executives

John Roach – Head of Investor Relations

Graham Robjohns – Chief Executive Officer

Rune Magnus Lundetrae – Chief Financial Officer

Analysts

Michael Webber – Wells Fargo Securities LLC

Robin E. Shoemaker – Citigroup Global Markets Inc.

James M. Jampel – HITE Hedge Asset Management LLC

Operator

Good day and welcome to the Q1 2013 Seadrill Partners LLC Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Head of Investor Relations, John Roach. Please go ahead.

John Roach

Thanks, Sabrina. Thanks everyone for joining our call this afternoon, this morning for some of you. We apologize for the delay, ran into some technical difficulties. With me today is our CEO, Graham Robjohns; and our CFO, Rune Magnus Lundetrae. I do remind everyone that we will be making forward-looking statements today, and for everybody to reference our disclaimer and the forward-looking statements in our presentation. For more information, please log on to seadrillpartners.com, and you can refer to all the filings and press release that we have posted there.

With that, I’d like to turn the call over to Graham Robjohns for our presentation.

Graham Robjohns

Thank you, John, and thank you for your patience everybody. We start on slide three, the agenda. So the format of the presentation is we’ll run through the highlights for the quarter, business review, financial overview, and then we’ll open up for questions-and-answers at the end.

So, turning over to slide four, Seadrill Partners highlights; we reported net income attributable to Seadrill Partners Members, which is after non-controlling interest for the quarter of $20.6 million and net operating income was $75.5 million. Average economic utilization was good at 96% for the quarter and we generated distributable cash flow of $18 million, which was for the first full quarter since our IPO.

Again, with the coverage ratio of 1.3 times and our long-term target coverage ratio is 1.1. We of course declared a distribution for the first quarter of $0.3875 per unit, which is our minimum quarterly distribution.

Looking forward, we see significant potential future growth for Seadrill Partners through numerous dropdown opportunities from Seadrill, which should put us in an extremely good position to be a fast growing MLP, which is of course our target.

Turning over to slide five and highlight for the subsequent to the quarter end, we completed of course the acquisition of the T-15 tender rig for a purchase price of $210 million. It’s contracted for a five-year period with Chevron at an initial contract rate of $115,000 a day. That rate does escalate over time though. Currently the rig is undergoing its acceptance testing in Singapore prior and it will then be mobilizing to the drill site, which should be completed by mid-June.

As a result of the transaction, which management clearly view as accretive to the partnership, management put forward a recommendation to the Board to increase quarterly distributions by between $0.0275 and $0.0325 per quarter, which is an approximate 8% increase. We are of course extremely pleased to get this first transaction done. Starts itself on what we expect will be a rapid growth path.

Turning over to slide six and turning to review of business, and as we said in our results release and if you listen to the Seadrill presentation you’ll hear the same message that the market remains extremely positive with continued demand throughout the deepwater rigs both now and in the future. All of our rigs are of course on term contracts, but there is potential upside for re-contracting at the end of their existing terms. And if you look at this slide, this chart, the historical ultra-deepwater average dayrate over time and you can see that three ultra-deepwater rigs had paid somewhat lower than current rates.

Positive market also gives us confidence that Seadrill will be contracting additional rigs for terms of five years or more. Five years being the cut-off of which Seadrill will offer a contracted rig to the partnership to acquire, which of course adds to our growth story.

Turning now to slide seven, we have existing fleet to which we’ve added T-15 of course. This represents a total revenue backlog of approximately $2.5 billion and our average remaining contract term is 3.8 years, which has increased from, as at the end of March it was just short of 3.7 years. Obviously, two months further on at the end of the May having added T-15, we’re now 3.8 years.

Turning over to slide eight, this is growth story, dropdown candidates. The three rigs, the top Seadrill Partners under its omnibus agreement has the right to acquire T-16, which was included in the auction asset in the time of the IPO. That’s an exact copy of T-15. The tender barge also contracted to Chevron for a five-year period and then since IPO, the West Leo and then West Mira have been contracted for terms of greater than five years.

Seadrill of course have three other rigs all and contracted to BP in the Gulf of Mexico or will be operating in the Gulf of Mexico once the (inaudible) and commence operations and the partnership doesn’t have a right to acquire those, but of course they are potential dropdown candidates.

Turning over to slide nine, then to take a quick look at the acquisition that we’ve recently made, the T-15 tender barge, as I said, purchase price of $210 million. That was entirely debt financed. $100 million was bank debt, which is indirectly, if you like, from third-party banks, but that original loan agreement was taken out by Seadrill. So we’ve entered into a back-to-back loan agreement with Seadrill. And the balance being financed with a vendor loan from Seadrill, which we will expect to refinance before the end of its term, which is for a three-year period.

Initial contract term, five years, and as I said, the management have put out a recommendation to the Board to increase distributions on annualized basis of between $0.11 and $0.13, which is approximately 8%.

So, we come on to financial performance highlights; starting with the income statement on slide 11. Revenues were up slightly in the quarter. That’s in large part related to the West Aquarius, which was transiting to Canada during the fourth quarter and during large part of the first quarter, is on full operating dayrate. The other point to note, the reimbursable revenues, there are two lines; the reimbursable revenues and other revenues, which already sort of contracted by other vessel operating expenses and reimbursable expenses and below the operating level line. So that gets us down to net operating income of an improved $75.5 million for the first quarter of 2013 as opposed to $72.2 million for the fourth quarter of 2012.

Carrying on with the income statement on the next slide, the large variance here within total financial items is the movement on the gain, loss on derivative financial instruments, the vast majority of Seadrill Partners debt is swapped and obviously interest rates move the market valuations of those swaps move and interest rates increased slightly in the quarter, which gave us a gain as opposed to a loss that we incurred in the fourth quarter.

Then just quickly on net income attributable to non-controlling interests, the 41.5 Q1 2013 versus 29.9 in the fourth quarter of 2012, just to point out that fourth quarter number is from October 24, which is why it’s lower than the first quarter.

That leads us down to net income attributable to Seadrill Partners Members of $20.6 million in Q1 against $20.9 million in Q4 2012.

Turning to the balance sheet on slide 13, one number really to point out here, which is the accounts receivable, which has increased significantly in the quarter, I’m pleased to say that has been addressed both quarter-end and we’ve collected in excess of $100 million to-date of that balance.

On the liability side of the balance sheet on slide 14, as you’ll see on the second line down the revolving credit facility, we’ve drawn down, which is the total facility, enter into the IPO with Seadrill of $300 million in total. We’ve drawn down $90 million that was partly to help from working capital in relation to the accounts receivable that I just mentioned, but it also with the main reason for being helps us to manage our debt amortization over the longer-term.

As of March 31, net debt, net of the $20 million cash that we had on the balance sheet is $1.172 billion, approximately 92% of that is swapped to a fixed rate. Fixed rate of interest excluding bank margin of 1.16%, we’ve also entered into an additional $100 million of interest rates swaps in connection to the acquisition of T-15 just immediately after the acquisition after an interest rate quite similar to that 1.16%.

We do have a debt facility that reaches maturity in June, 2014, related to the West Aquarius and the West Capella, we’ve had a number of discussions with respect to the refinancing of that facility, very positive responses in that respect and we believe from indications that we’ll get some good terms and I think we’ll also be able to stretch our repayment profiles.

On slide 15, we’ve distributable cash flow, where we take EBITDA number for the quarter at bank amortization of revenue expenses, adjust for cashing interest, income expense tax paid that brings us down to cash flow available for distribution after, I should say also of course deducting for estimated maintenance and replacement CapEx for our rigs. Then we deduct of course the non-controlling interest share in that cash flow again for the fourth quarter that is from a period from October 24 to the end of the quarter, which gives us a distributable cash flow in the first quarter of 2013 of $18 million as opposed to a declared distribution of $16 million and therefore a coverage ratio of 1.13 times. As I mentioned, our long-term target is 1.1 times.

So, in summary, we have strong market fundamentals. We’ve increased our average contract term with the addition of the T-15. T-15 of course is our first accretive acquisition. Management has been recommended an 8% increase in distributions. We believe this is the first step in our growth path. There are, as I’ve said, again significant growth opportunities from Seadrill’s newbuild fleets and existing long-term contracted rigs.

All in all, we have made a good start since our IPO and we see an extremely bright future for Seadrill Partners.

Thank you, operator and I’ll now turn the call over to Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Michael Webber from Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo Securities LLC

Hey, good morning, guys. How are you?

Graham Robjohns

Yeah, hi, Michael.

Michael Webber – Wells Fargo Securities LLC

Just a couple of questions around the dropdowns, first around T-16, along the lines of the T-16, T-15, is that something you specifically doing with all debt and how should we think about the capital structure associated with that drill down.

Graham Robjohns

I wouldn’t say so in the long-term, I think that SDLP with the relatively low net debt to EBITDA ratio, I think if we finance both rigs, all debt will be getting to relatively high.

Michael Webber – Wells Fargo Securities LLC

Right.

Graham Robjohns

That’s high levels, but against that, not obviously to that going through the ins and outs of discussions in our plans and exactly how we’re going to do that against that, we do not have seasoned issue or status until well, we’ll be relatively till November of this year, and therefore doing any sort of public equity offering is, not out of question but it’s a challenge.

Michael Webber – Wells Fargo Securities LLC

Right, I guess it’s a more of a question of timing, I mean in terms of whether would you need to be doing another drillship kind of beyond the tender rig before you think about trying to do an equity raise before you get to the annual window or and I guess maybe what dropdown or acquisition would make you guys kind of rethink the idea of kind of waiting until the October and November timeframe.

Graham Robjohns

Well, I think, I mean as I said, I think we made a good start with T-15. I think it’s not unreasonable to expect T-16 to be looked at prior to that October, November timeframe, and then as it’s pretty clear, we have quite a few options.

Michael Webber – Wells Fargo Securities LLC

Right no, no, it’s a good problem to have just curious around timing and it seems like it’s still tough to tell. Just a couple of, one more from me, I’ll turn it over and really just kind of more maintenance. Can you explain our facets within the model, what’s actually going into the other revenue category, the line item?

Graham Robjohns

Yeah, it’s basically all to do with reimbursable costs. So if you look at the income statement that I had in the presentation the costs there are, you got reimbursable revenues $4.5 million in the quarter, both expense $4.4 million. Then other revenues of $4.8 million that’s effectively re-invoicing out operating expenses of $4.8 million that you can see, identified in the expense line.

Michael Webber – Wells Fargo Securities LLC

Got you.

Graham Robjohns

Related to expenses related to other parts of the Seadrill group.

Michael Webber – Wells Fargo Securities LLC

Got you. Okay. That’s helpful.

Graham Robjohns

That will disappear.

Michael Webber – Wells Fargo Securities LLC

That will disappear going forward.

Graham Robjohns

Yeah, yeah.

Michael Webber – Wells Fargo Securities LLC

Okay.

Graham Robjohns

But it’s in net zero in the end.

Michael Webber – Wells Fargo Securities LLC

But again this doesn’t change the modeling. Okay, and then finally, in terms of your maintenance reserves with the T-15 dropdown and kind of 17% to 20% of EBITDA we’re looking another $4.5 million to $5 million of kind of cumulative reserves. Is that kind of the right way to think about that run rate going forward kind of your $19 million level now plus another $4.5 million to $5 million?

Graham Robjohns

$19 million now ballpark, yeah, ballpark.

Michael Webber – Wells Fargo Securities LLC

Okay.

Graham Robjohns

Yeah.

Michael Webber – Wells Fargo Securities LLC

Great. All right. That’s all I’ve got. Thanks for the time guys.

Operator

Our next question comes from Robin Shoemaker from Citi. Please go ahead.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Yes. Hello, Graham.

Graham Robjohns

Hi, Robin.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Hi, so couple of just specific questions for me. On the West Capella, has Total indicated or, I’ve forgotten when exactly they have until to convert that five-year to either a three-year or four-year contract and have they indicated what they are going to do on that front?

Graham Robjohns

The decision hasn’t been made, at the moment, Robin, no.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Okay.

Graham Robjohns

There’s nothing more that I could say than that really. I mean, obviously I’ll show you note that if it were reduced to three-year periods, the rate does go up quite significantly.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Yes, right. I understand that. I thought there was a date here pretty soon when they have to…

Graham Robjohns

You are correct. It is coming up, and as of now I don’t have an answer.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Yeah, and it’s showing there is a five-year contract in your backlog calculation.

Graham Robjohns

Well, that’s right. It is a five-year contract. It just I have an option to reduce.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Right. Okay. And then, I had a question on the West Capricorn, the 20 days of downtime that you’re expecting in the second quarter. I’m assuming that’s a zero dayrate and can you describe what, is that just a routine maintenance or some kind of dry docking or…?

Graham Robjohns

Now that we’re, I think, three separate unconnected repair issues that we had on the rig, which is, obviously things happen. You need to do repairs and it’s just a bit of bad luck that three have happened in one quarter.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Okay. So your estimate is 20 days is the time required to complete all three.

Graham Robjohns

Correct. Yes, yes.

Robin E. Shoemaker – Citigroup Global Markets Inc.

Right. Okay. Yeah, so basically that’s what I want to know. Just clarify on the revolving credit facility of $300 million that you’ve drawn down on. Is that for working capital only or could that possibly be used in the near-term to partially finance the acquisition, say, the T-16?

Rune Magnus Lundetrae

Hi, Robin, it’s Rune. The main purpose of that facility is to be able to debt amortization profile. So it’s not a facility that it’s intention is not to use it for, to fund the dropdowns, but…

Robin E. Shoemaker – Citigroup Global Markets Inc.

Right. Okay. Good. Thanks for those answers.

Graham Robjohns

Okay. Thanks.

Operator

(Operator Instructions) We will take our next question from Lin Shen from HITE Hedge. Please go ahead.

James M. Jampel – HITE Hedge Asset Management LLC

Hi. It’s actually James Jampel from HITE. Thanks for taking the call. If I heard it right, did you say that you may consider the dropdown before you became seasoned equity issuer?

Graham Robjohns

We may. Yes.

James M. Jampel – HITE Hedge Asset Management LLC

Okay. And then, second, I guess it’s a question. It’s also sort of a comment. We met a lot of interesting MLPs at the recent NAPTP Conference including Teekay and their subsidiaries and we are wondering why you’ve chosen not to attend because we do think that it boosts the visibility of the Company and leads to heighten investor interest.

Graham Robjohns

Yeah, I entirely agree with you. Actually, unfortunately this year it clashed with internal Board meetings that we had here, but it will be on our agenda for next year.

James M. Jampel – HITE Hedge Asset Management LLC

Okay. Thank you.

Operator

(Operator Instructions)

John Roach

All right. Thanks everybody. I don’t see any more questions on the line here. Thank you once again for joining, Rune and Graham, thanks for taking us through the presentation. I wish everybody a good day and this concludes today’s conference call.

Graham Robjohns

Thank you.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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