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Seadrill Partners (NYSE:SDRL)

Q2 2013 Earnings Call

August 28, 2013 11:00 a.m. ET

Executives

John Roach – Head of Investor Relations

Per Wullf – Chief Executive Officer

Rune Magnus Lundetrae – Chief Financial Officer

Robert Hingley-Wilson - Chief Accounting Officer

Alf Ragnar Lovdal - CEO, North Atlantic Drilling

Analysts

Mike Urban - Deutsche Bank

Ole Slorer - Morgan Stanley

Andreas Stubsrud - Pareto

Ryan Kauppila - Citi

Lucas [Dal] - SEB

Amy Wong - UBS

David Phillips - HSBC

Darren Garcia - Guggenheim Securities

Operator

Good day, and welcome to the Q2 2013 Seadrill Limited earnings conference call. Today’s conference is being recorded. For your information, there will be a question and answer session following the presentation today. At this time, I would like to turn the conference over to Mr. John Roach. Please go ahead, sir.

John Roach

Thanks, operator. Good afternoon, and welcome to Seadrill and North Atlantic Drilling’s second quarter earnings conference call. Thank you all for joining us today. With me today we have our chief executive officer, Per Wullf; our chief financial officer, Rune Magnus Lundetrae; and our chief accounting officer, Robert Hingley-Wilson. Representing North Atlantic Drilling is chief executive officer Alf Ragnar Lovdal.

Before we get started, I’d like to remind everyone, as I’m sure you’re all aware that much of the discussion today will not be based on historical facts, but rather consist of forward looking statements and are subject to uncertainty. We articulate some of the key items on page 2 of the presentation. For additional information, and to view our SEC filings, please visit our website at www.seadrill.com.

With that, I’d like to turn the call over to our CEO, Per Wullf, to take you through the second quarter earnings highlights and market outlook. Per?

Per Wullf

Thanks, John, and good afternoon to everyone on the call today. I’ll start today by calling out some of our second quarter highlights and a review of our competitive positioning and detail of our order backlog. We’ll then discuss our outlook for the ultradeepwater and high-specification jack-up markets. Rune Magnus will walk everyone through the financials for the second quarter.

Seadrill again recorded an operational record quarter with $665 million in EBITDA and earnings per share of $3.68. We are very pleased with these results, especially with our ratio of uptime of 94%.

As always, we focus our efforts on operational excellence and are continually improving our processes in order to meet and exceed the Seadrill standard for safe and efficient operations. As far as safety is concerned, improvements can always be made.

We are also pleased to announce a $0.03 increase to our quarterly dividend payment to $0.91 per share. As always, we believe in a long term sustainability quarterly dividend payment. We strive to grow our payout and to continue to grow our company.

Since our last quarterly report in May, Seadrill has made progress on many fronts. We have been active growing Seadrill partners, contracting available rigs, divesting noncore assets, and as I’m sure all of you are aware, ordering and acquiring a few new rigs.

On the new contract side, we have secured over $1 billion in new contracts since May. We are quite pleased with the current contracting activity and following the contract for West Tellus, our floater fleet is fully contracted for 2013.

So far this year, we have deployed approximately $5 billion into our fleet through strategic acquisitions and newbuilding orders. Most recently, we ordered four drill ships and four jack-ups. We continue to have a positive disposition towards [unintelligible] prices and expected day rates.

Additionally, after the close of the second quarter, we acquired a controlling position in Sevan Drilling and subsequently launched a mandatory tender offer. The tender offer expired on August 22, and we now control 50.11% of Sevan. We intend to incorporate the Sevan rigs into our fleet, and institute Seadrill operating standards and we’ll consolidate Sevan into our financials as of the beginning of the third quarter.

Seadrill has a global operational footprint that brings with it many efficiencies and economies of scale. We have focused our fleet in the high end of both the floater and jack-up markets and are proud to say that we are the only global driller that is solely exposed to these segments.

We have also worked to create a standardized fleet that is both in line with our customer specifications and has the ability to work in all-important offshore regions. Additionally, we have a high quality customer base and strong track record of winning repeat business from them.

As I look across the regions, tendering activity is robust worldwide. We expect the U.S. Gulf of Mexico, Brazil, and West Africa to continue to dominate ultradeepwater activity, especially as the Gulf returns to normal operating conditions and development activity increases. We also expect an increase in deepwater activity in East Africa as exploration programs are under consideration.

The Middle East and Asia continue to be

competitive advantage and our shareholder returns will continue to outpace any other company in the business.

Moving on to contracted backlog, we had $19 billion in total backlog at the end of August, of which $15.4 billion is from our floater fleet. As you’ll see, we have significant visibility into our earnings and dividend capabilities.

The backlog you see on the page gives us full confidence that we will be able to not only sustain but also grow our dividend going forward. If you look toward the bottom of the page, you’ll see that our floater fleet is 100% sold out for 2013, and nearly sold out for 2014. We expect all the newbuilds represented by the light blue shading to be contracted prior to delivery from the shipyard. Our jack-up fleet represents $3.1 billion of the $19 billion backlog.

In the shorter term, [unintelligible] of the jack-up market you’ll see that we have more availability in 2014 than with our floaters. There are some deals that we expect near term that will change our availability. However, we all have to wait a bit more for some news on that front.

On slide 10, you’ll see our backlog broken down by year. As discussed on the earlier slides, we expect to increase the amount for 2015 and 2016 as we sign additional contracts, an important point when you think about backlog as rates [unintelligible].

As I mentioned in my opening remarks, we have a high-quality customer base and a track record of winning repeat business from them. As indicated by the chart on the right side of the page, 66% of our backlog is coming from some of the leading [IOC] and NOC customers in the world.

This is an important point, as this type of customer tends to have longer term views in their budgeting, which leads to an element of stability in their spending patterns. There are also more developments pending from IOC and NOC customers, whereas independents tend to have a higher degree of exploration work and [unintelligible].

Moving on to our market outlook, on slide 12 we have a high level overview of the [offstream] spending trends that are a driving force in the offshore drilling business. There is a developing deepwater [unintelligible] for offstream production. Analysts estimate that in order to to achieve 1% growth in global production, ultradeepwater production will need to rise by an additional 19%.

This is largely driven by production declines seen onshore. This is represented by production [unintelligible], shown on the top chart, to meet forecasted demand. Again, it is estimated that a large portion, approximately 30% of this required production growth, would come from the deepwater. If you look at the number of deepwater discoveries in recent years, this trend is also highlighted. We could say today’s discoveries are tomorrow’s developments.

I know this chart may lead some to believe that this should benefit deepwater rigs in addition to ultradeep. However, as we turn the page, you’ll see that this is not the case. There is a clear bifurcation seen among deepwater and ultradeepwater rigs, as highlighted by the number of ultradeepwater rigs working below their slated water depth. Roughly half the fleet is working on deepwater projects and forcing deepwater rigs out of the market and onto less technical projects, at reduced day rates.

As indicated by the high percentage of newbuilds, there are higher specification, and we believe this trend will continue. I stress that Seadrill is ideally positioned here, and is the only offshore driller that is solely focused on the high end of asset classes.

Another factor driving the fleet bifurcation is age of assets. As you look at the chart on page 14, one can clearly recognize the benefits of Seadrill having the youngest and most capable fleet in the business. Not only does Seadrill have the youngest fleet, but we also have managed to operate at higher economic utilization rates than most of our peers. This is the [unintelligible] behind our ability to command higher day rates than the industry averages on the high end of each asset class. This dynamic is highlighted on the next page.

For my entire career in the drilling business, I’ve operated assets with a laser like focus on safe operations and strong operational uptime. This is at the core of Seadrill’s culture. Following disappointing results for the past few quarters, we have refocused our efforts to again be an industry leader in this regard.

As always, there’s room for improvement, and we place enormous value on each and every one of our employees on our rigs and onshore supporting them. It is these individuals who make the statistics highlighted here possible, and we remain committed to continuing this operational excellence.

Additionally, we have strategically organized the company with a strong customer focus. We have regional operations centers that are designed to be close to our customers in all regions. This decentralized structure affords us a fast response time to customer inquiries and improves our ability to have our finger on the pulse of the market from a bottom up perspective.

I would like to spend a bit of time discussing our dividend policy now. We have increased our quarterly dividend by $0.03 to $0.91 per share, or $3.64 annually. We continuously evaluate our contract [unintelligible] rates, expected capex, delivery capacity, and future earnings in order to determine what we think is a sustainable dividend level going forward.

In light of current market conditions and these metrics, we have decided to again raise our dividend. To give a sense for what we think our earnings power and ability to pay dividends going forward is, we need to look at some of the fleet additions we have in the near term.

Seadrill is entering a period of growth during the second half of 2013, and through 2015, driven by continued strong demand and newbuilds going into operations as indicated by the chart we see here. In 2013, we have the West Tellus, West Auriga, and West Vela beginning operations and as you can see, a robust delivery schedule.

Based on this delivery schedule, we believe that the company will be able to earn $4.5 billion in annualized EBITDA in 2016. This is truly an exciting time for the company, as we enter another high-growth phase, and we remain committed to operational excellence and high shareholder returns.

With that, I would like to turn things over to Rune Magnus to take you all through some of our financial highlights. Thank you.

Rune Magnus Lundetrae

Thank you very much, Per. This is Rune Magnus Lundetrae. I’m the CFO of Seadrill. I will start off by taking us through the financial highlights of Seadrill, then turn it to our Alf Ragnar Lovdal, the CEO of North Atlantic Drilling, who will take us through the highlights of NADL for the second quarter. I will then finish off with some financial highlights before we open it up for Q&A on the call.

Starting off by the financial performance highlights, we recorded another record quarter with $665 million of EBITDA in the second quarter. And earnings per share is affected by the $1.3 billion gain on the sale of our tendering fleet that we concluded at the end of April to SapuraKencana.

Strong cash flow generation and operational performance, market outlook, and the strong backlog have led us to increase the dividend per share by $0.03 to $0.91 per share as also highlighted by Per.

Looking at the EBITDA contribution in the quarter, we show the EBITDA bridge here to get us from first quarter to the second quarter as well as highlights in non-operating items. We are pleased with the contribution from each of our segments, and you will note the negative contribution from the tendering, as we only recognize 30 days of operations following the sale to SapuraKencana, effective from April 30.

For the floaters, we saw an improvement to our top line results, primarily driven by improvements in our overall utilization rates for floaters. We recorded 94% operational uptime. We are pleased by the stability in operating margins and we are not experiencing any meaningful cost inflation.

For the jack-ups, we continued to see a high utilization rate and we obtained 98% uptime in the second quarter. The primary variance with the first quarter is the absence of the gain on sale for the West Janus that we recognized in the first quarter of this year.

For the tendering, we divested the majority of our tendering fleet during this quarter, and the results you see here are for 30 days only. Thus, it is not comparable to prior periods. We currently own three tender rigs, the Vencedor, the T15, and T16, all of which were within expectations for this period.

The total picture then, and combined and consolidated results, shows consolidated revenues for the second quarter of 2013 were $1.268 billion. This compared to $1.265 billion in the first quarter of 2013. The increase includes the sale of [audio dropped out] million approximate decline in revenue from the previous period. Overall improvement in the fleet performance more than offset this revenue decline.

Operating profit for the quarter was $507 million compared to $552 million in the preceding quarter. The decrease is driven by the exclusion of the gain on sale of the West Janus, offset by lower operating and SG&A expenses during the second quarter.

Net income, then. Net financial items for the quarter showed a gain of $1.292 billion compared to a loss of $68 million in the previous quarter. The gain is primarily related to the sale of the tendering business and positive impacts from our interest rate swaps.

Income taxes for the quarter was $49 million, an increase of $5 million from the previous period, but the same effective tax rate of approximately 9%.

Net income for the quarter was $1.750 billion, representing basic and diluted earnings per share of $3.68 and $3.53, respectively.

Moving over to the balance sheet, and I will start with the asset side, as of June 30, 2013, total assets were $21.801 billion, an increase of $595 million compared to March 31, 2013. Total current assets increased to $2.978 billion from $2.350 billion over the course of the quarter. And this was primarily driven by an increase in the marketable securities and other current assets, offset by a decrease in amounts due from related parties and the sale of the tendering business.

Total noncurrent assets increased to $18.823 billion from $18.856 billion, primarily due to yard payments on the West Auriga, West Vela, T16, and West Mira. And this was offset by the sale of the tendering business.

On the liabilities and equities side, total current liabilities decreased to $4.397 billion, from $4.782 billion, largely due to increases in short term debt through related [parties] and liabilities associated with the sale of the tendering business. This was offset by an increase in the current portion of our long term debt.

Long term interest bearing debt increased to $8.521 billion, up from $7.883 billion over the course of the quarter and total net interest bearing debt decreased to $11.186 billion from $11.6 billion. The decrease is primarily due to repayments of related party debt.

Total equity, then, increased to $7.8 billion from $6.5 billion as of June 30, 2013. The increase is primarily driven by net income for the quarter offset by dividends paid.

Now I will give the word to Alf Ragnar on highlights for North Atlantic Drilling.

Alf Ragnar Lovdal

Thank you, Rune Magnus. For the nonfinancial highlights for the second quarter, we were pleased to announce in July a $600 million sale and [we expect construction with ship finance] for the harsh environment jack-up rig West Linus well above the remaining newbuild expenses and commitments related to this rig.

For [us] it was important to put in place a long term financing solution, independently from Seadrill, that also gave us flexibility short term to take advantage of any opportunities that may arise.

On the marketing side, we are pleased to announce that we have managed to put in place a combination of an extension of the current contract for West Navigator [unintelligible], and also a new contract for at least 70 days with [unintelligible] Norway. The total revenue potential is $98 million and the terms are the same as for the current contract with Shell.

More importantly, this expansion and new contract puts Navigator in pole position to secure a new longer term employment from the end of 2015. We are also actively marketing the newbuild [West Riga]. However, we do expect that the current available rig capacity in 2014, although very limited, will have to be absorbed before clients will be willing to commit for a long term contract at acceptable terms for [West Riga].

But, we are still very comfortable that we will be able to secure an attractive contract for [West Riga] well before its delivery in early 2015. Currently, we’re also evaluating to further [utilization] of those rigs for operations in the the [unintelligible] Sea.

Our operational results were [unintelligible] for the second quarter, factoring in the West Phoenix, was effectively [unintelligible] for 21 days in connection with the [unintelligible]. And for the next quarters, we expect to see improvement in the economic [uptime] and financial results as all scheduled [unintelligible] sales for this year have been completed.

About two weeks ago, we announced that Seadrill and North Atlantic had reached a preliminary agreement for a partnership with a strong industrial player in order to increase North Atlantic’s growth potential, particularly in Russia. We expect the deal to be finalized in the third quarter.

Please note that right now we are not in a position to disclose more detail than what we have done in the news release published on August 15. But we will follow up with missing pieces, including the identity of the potential partner, following the conclusion and closing of the deal.

The listing process is being resumed in the third quarter, and both the board of the majority owner Seadrill and the new potential partner wish to reiterate that they are truly committed to list North Atlantic Drilling on the New York Stock Exchange.

The next filing of the registration documents will most likely happen in the fourth quarter of this year, assuming that we are able to finalize the partnership deal in the third quarter.

Now I will hand it back to you, Rune Magnus.

Rune Magnus Lundetrae

Thank you, Alf Ragnar for these financial highlights for North Atlantic Drilling . The company generated an EBITDA of $132 million in the second quarter, and this represented a decrease of $3 million compared to the last period.

During the quarter, the [unintelligible] we achieved an average economic utilization for the fleet of 92%, compared to 94% in the last quarter. The utilization includes 21 days of effective off hire due to the West Phoenix yard stay that was related to the five-year [unintelligible].

Net income and corresponding earnings per share increased quarter on quarter, mainly due to improved financial items related to gain on derivative financial instruments in the second quarter versus a loss in the first quarter. The board has declared to maintain the regular cash dividend at the same level as in previous quarters.

Operating income. Total operating revenue for the quarter amounted to $375 million, an increase of $57 million compared to the previous period, while net operating income decreased by $5 million quarter on quarter due to the same effects discussed impacting the EBITDA. The reason for the increase in reimbursable income and expenses is largely related to the winterization of the West Hercules.

Net income. Net loss from financial items amounts to $15 million compared to $30 million in the previous period. The reduction is mainly due to the mentioned gain on financial derivatives of $9 million in Q2 compared to a loss of $6 million in the first quarter.

For the balance sheet, I will start with the assets. The main items affecting the balance sheet for the quarter was that North Atlantic entered into a sale and lease back transaction with [ship] finance for the new build jack-up rig West Linus in June. The ship finance entity that purchased the West Linus will be consolidated into our balance sheet.

The total consideration for the sale is $600 million, where $195 million has been paid to North Atlantic upon posting of the agreement. The remaining balance of the purchase price shall be paid at delivery of the rig, which is expected in December of this year.

On the liabilities and equities side, the ship finance subsidiary that purchased the West Linus has been granted a loan of $195 million from Ship Finance Limited. This loan is presented as long term debt to related parties in our balance sheet [unintelligible]. In addition, North Atlantic sold two of its subsidiaries, Seadrill [unintelligible] and Seadrill [unintelligible] to Seadrill Limited in June 2013 and has been reflected in our balance sheet as of June 30, reducing the uncertain tax position.

With that, I hand back to John Roach and we will open up for Q&A.

John Roach

Thanks, Rune Magnus. Can we open up the queue to the question and answer session, please?

Question-and-Answer Session

Operator

[Operator instructions.] Our first question today comes from Mike Urban of Deutsche Bank. Please go ahead. Your line is open.

Mike Urban - Deutsche Bank

With regard to Sevan, as you integrate those rigs into your fleet, what do you see as the opportunity there? Is it improving utilization? Is it bringing down cost? Is it better access to customers? Is it all those things? And could you maybe put some numbers around that for us?

Per Wullf

Yeah, I can. You’re right on all questions, actually. First of all, we will get the utilization out of these units. I’ve been sitting on the board myself the past couple of years, and monitor up closely how they are doing, and we took the decision to come in control of the Sevan units.

We believe we can get that utilization up several percentage points. We’ve been running them since mid-July, and right now we are running at 94% uptime. And we’re already up quite a bit, because we have exactly the same equipment on the Sevan units, the two of them operating in Brazil, as we have on our other units in Brazil. And we can help these units to become more effective than we have seen in the past. So that’s one side of it.

On the operations side, of course running 45 units as we are running right now, we have a buying power and we also have a good portion of capex equipment that can help the day you’re in a bind. And there we will also help Sevan to make sure that we come down on the cost like we have on our other units in Brazil, and also that we have readily available equipment the day you are in a bind.

Rune Magnus Lundetrae

I can also add a little bit of color on the expected savings. On the financing side, as we also communicated in the report, we expect to see annual savings of some $30 million. We also see savings on the insurance side, of millions. Of course not in the same amount as the financing, but several million. And then it’s a little bit too early to put a number on the onshore savings, but clearly we see Sevan being integrated with our operational centers in Brazil, in Rio that is, and also in Houston.

Alf Ragnar Lovdal

On the customer side, just to finalize your last question, [unintelligible] have welcomed us. We’ve spoken with them about it, and they look forward to us having these couple of units in Brazil joining our fleet down there. And also in the U.S. Gulf, we have the first Sevan unit, [Luciana], arriving later this year, early next year. That is going to [unintelligible], but we also have a drillship going in. So again, there, synergies in place, because we’re going to have two units working for the same customer.

Mike Urban - Deutsche Bank

And then moving over to Mexico, you highlighted the potential opportunity there. And Pemex has always expressed an interest and desire to have newer, higher-spec units, but hasn’t really been willing to pay for that. Are you sensing a change in tone or policy there?

Per Wullf

Yes. We said on one of the slides that we see opportunities in Mexico. We have a number of units we can make available for Mexico, and we also have more units coming out. And we’ve already put a rig into Venezuela, on good terms. But we look positively on Mexico. And we are putting a number of units in there in order to get economy of scale. Again, when you operate a number of units in the same spot - we see it in the Middle East, we see it in the Far East - how we can drive cost down if you have a number of units working for the same customer over a term period. So yes, we hope we can announce that in the foreseeable future that we’re doing something in Mexico.

Operator

Our next question comes from Ole Slorer of Morgan Stanley. Please go ahead. Your line is open.

Ole Slorer - Morgan Stanley

Per, given your operational background, perhaps you could help us better understand what’s been driving this continuous improvement in execution. And on that same note, could you elaborate on what’s driving your conviction that the standard can be maintained going forward?

Per Wullf

Well, I think it’s a matter of focus on operation. This is operation, operation, operation. If you keep focus on this, together with our people actually trying to conduct a safe and efficient operation, then you will actually have it happen. If you lose focus… We saw it last year. It was going the wrong way for us, and it was partly because we were losing focus, and then we regained that.

So it is a matter of having a dedicated eye on operation and support. The people out there offshore are actually our bread and butter. And you also see that, since I’m now sitting in as the CEO, there’s another CEO coming into place, because we need the command line from myself to the actual rig manager running a rig to be as sure as possible, so we can react quickly and we can act when we are in a bind.

And in Seadrill, we’re actually good at helping [unintelligible]. We spend a lot of time on that, and we have adjusted our fleet over the years, and fine-tuned it so we have a lot of [life] of units, so we can share capital equipment. And we will also have it going forward. If you want to bind all those up. If you have a [train wreck], we can quickly react, because we have shared capital equipment placed strategic places in the world, and that is actually what made me unique for Seadrill with regard to uptime. Having the equipment available, having the people trained to be able to execute what they’re supposed to execute out offshore, that makes the difference.

Ole Slorer - Morgan Stanley

And shifting to Brazil if I may, with that news suggesting that Petrobras called off negotiations for ultradeepwater extensions, but only to resume discussions recently, could you shed more color on what’s actually happening on the ground? And while we’re on the topic of Brazil, could you describe the operating landscape as it relates to cost inflation and logistical downtime?

Per Wullf

First of all, [unintelligible] quite attractive, [unintelligible], which we didn’t like, actually. So that’s one of the reasons why we came in control of Sevan. And the market, or Petrobras, stopped the negotiation at the time. We were negotiating an extension of two units that were coming available in 1.5 years’ time. We have reestablished that negotiation. We have started the negotiation with them. We’ve already went a quite good way in the first round. We have the second round now. And obviously we look at how can we do that both on our units coming out, but also what can we do going forward with the Sevan units. That’s one thing.

We saw a couple of years that it was hard to control cost in Brazil, because a number of units entered that market, and we just saw crew costs just being almost out of control. It was hard for us to maintain cost there. It’s not a problem on the equipment side. That’s completely under control. But the crew cost, that was out of control. The past year and a half, we have just seen that level out in a good, controllable manner, and this is under control now, and it’s partly [colored] by our escalations in the contracts. So this is under control today. So that is okay, actually.

Operator

Our next question comes from Andreas Stubsrud of Pareto. Please go ahead. Your line is open.

Andreas Stubsrud - Pareto

On slide nine, I was just curious, you were talking about some jack-up contracts, but that we had to wait a little bit longer. Are you talking about several jack-up rigs at the same time?

Per Wullf

Yes, maybe it can be a little bit confusing, so let me elaborate a little on this. We have four jack-up 2000s coming out over the next couple of months. Two of them have contracts already. The other two we could actually lock tomorrow if we wanted to, out in the Far East. But we have maybe a potential to close a number of contracts, to work with the same customer in one particular area. You’ve heard Mexico before.

So we’re actually holding a little bit back on purpose on securing contracts on the [unintelligible] rigs coming out. So a combination of these two [unintelligible] rigs coming out together with some of the rigs being available within the next year or so could actually be that you’ll see a shift in our location of a number of our jack-ups. So we are in a quite attractive position. We could lock them in tomorrow if we wanted to, but we’re actually holding back on purpose for strategic reasons.

Andreas Stubsrud - Pareto

And you were talking about the more long term contracts, correct?

Per Wullf

That’s correct. Because we are exploring where we could get a term contract for a number of units, because, I’ll just repeat what I said before, if we can get term, we can get the same place, you will also see us driving EBITDA.

Andreas Stubsrud - Pareto

And to Rune Magnus, or North Atlantic Drilling, in terms of West Phoenix, I think you said 21 days at the shipyard. Can you guide us on the cost of that shipyard stay?

Alf Ragnar Lovdal

The cost is actually $30 million.

Operator

Our next question today comes from Ryan Kauppila of Citigroup. Please go ahead. Your line is open.

Ryan Kauppila - Citi

Over the last few months, it seems like we’ve seen a few operators citing drilling cost inflation as a reason for delays, and delaying developments. I was just wondering, do you think we’re at an upper limit in day rates before we start to see some significant demand destruction? And given the returns that are on offer right now in drilling, what do you think is stopping some of the operators from taking equity stakes and reverse vertically integrating into drilling?

Per Wullf

We’re actually not too worried. We have a very stable situation as we see it, also during 2014, and then we actually see it being [unintelligible] going again. So we have a stable 2014 where we believe, depending on where you are in the world, rate continuing in 2014 between 550 and 650 and we are quite pleased with that, actually.

So that’s on the ultradeepwater side. And that looks fine for us. We don’t see a struggle on the jack-up side. We still see increasing rates for our new jack-ups coming out and that hasn’t leveled out yet like you see on the ultradeepwater where we are stable. But we are also enjoying good term on our new jack-ups.

So all in all, we don’t see that we will be in trouble with our units and we don’t see that we have trouble with our new units coming. We have three units coming next year, and like we said in the presentation, these [light blue things] that we don’t have contracts prior to leaving the shipyards.

Ryan Kauppila - Citi

And I know nothing on the North Atlantic view, but besides that, have you seen an increase in interest from operators who want to take equity stakes in rigs? Or is that something you really haven’t seen any acceleration in?

Per Wullf

No, we haven’t seen any.

Operator

Our next question comes from Lucas [Dal] of SEB. Please go ahead. Your line is open.

Lucas [Dal] - SEB

Can you remind us what was the capitalized interest in the quarter?

Rune Magnus Lundetrae

The average interest is approximately 4.43.

Lucas [Dal] - SEB

And then do you have a number on facilities at the end of Q2?

Rune Magnus Lundetrae

We’re fully drawn.

Lucas [Dal] - SEB

And then in the beginning of the year, you said that you expect a revenue loss of around $100 million in connection with the [classing surveys]. Could you ballpark how much of that has been incurred in the first half?

Per Wullf

We have classed a number of our units, and we only have, for the remainder of the year, West Polaris. That’s a drill ship we have working down in West Africa. We have had success with a number of units, and we’re getting better and better class in units. The last unit we had class this year is over in the U.S. Gulf. She went up for her five-year classing and we just completed that one. And all in all we were down for 16 days, and that was less than budgeted.

So we are under control, and our classing is in line with what we actually have budgeted. So there’s no surprises there, actually, neither on timing or cost.

Lucas [Dal] - SEB

And then your comments on the opex going forward, you seem to be comfortable with the cost inflation, which is a bit contrasting to what some of your peers have been saying recently. Is there any particular reason why you should differ from that view? Or do you think that it’s special for the view that you have?

Per Wullf

No. Just quickly on this, I spoke about Brazil before. When we look at West Africa, we look at Nigeria and we look at Angola, we have cost challenges. We all have them. All drillers working down there have challenges. We also have challenges. But what we did in order to come in control of the costs in Brazil, over a rather short period, through our education program, we have exceeded 80% lower content now on our Brazilian rigs.

And that is actually what drives, so we get cost under control. We’re not quite there yet in West Africa, but we’re working on it. But that is where we see cost increases coming. Also, next year that is actually Angola and Nigeria. Otherwise, worldwide it’s pretty much under control.

Rune Magnus Lundetrae

I think I actually answered another question from you. The [unintelligible] interest for the quarter was $28 million. I thought you asked about the [cost of the] debt. I apologize.

Operator

Our next question today comes from Amy Wong of UBS. Please go ahead. Your line is open.

Amy Wong - UBS

The first one is on the North Atlantic Drilling partnership agreement. Just what are you looking for in this industrial player? Could you give us the quality that you’re looking for, and how this industrial player will help you move that strategy forward? It just seems a fairly complicated transaction overall.

Alf Ragnar Lovdal

I will have to refer you to the announcement of August 15. I’m sorry, and I ask you to respect that.

Amy Wong - UBS

Okay. And just a bit of housekeeping here. On the tender rig division performance of $44 million of EBITDA, can you split that for us related to the three remaining rigs, and what related to the one month of operations?

John Roach

Let me follow up with you offline.

Operator

Our next question today comes from David Phillips from HSBC. Please go ahead. Your line is open.

David Phillips - HSBC

A couple of questions about the North Sea, particularly [designs in] Statoil, looking at certain rigs working in the North Sea. Everyone knows the first four [Cat Ds] were a rather low price, but I wonder if you ever see this opportunity being of interest to you, both in terms of the semis, where there may happen to be a [Cat D] category and also looking at the drillship designs, the [Cat DIs]. I guess this is overlapping with Amy’s question as well in terms of of an arctic reference, but is this area something that you think could work out in terms of a decent long term contract for you as a rig owner?

Per Wullf

No, not really. While I’m answering this one, I go back a couple of years, because I was sitting in [unintelligible] at the time, looking at the [Cat D] rigs, and the [unintelligible] there they were building, and we offered what we believe should be the rates for running that operation, and we didn’t win. We put the figures back into our model, the winner of this one here, and we just couldn’t get it to work out. So we don’t see that we’re going to have any interest in running these rigs for Statoil.

David Phillips - HSBC

Sure, that’s certainly my impression. And maybe it’s too early to get a feeling about this, but for the Cat DI [drawships], is the process near enough for you to have a feeling as to whether Statoil, or whatever client it would end up being, would give a more commercially interesting package to you guys?

Per Wullf

Well, we actually participate in the meetings around these [high-class] rigs, but both Seadrill and also North Atlantic Drilling, we’re really good at running rigs we own. We’re not really good at running rigs owned by someone else.

David Phillips - HSBC

I guess my quick follow up to that is when you look at the North Sea overall, you look at the drilling plans and the number of rigs and so on, clearly something has to give. And obviously you’ve had some nice opportunities up there in the last few years. What’s your thought as to how that market really pans out there now, given Statoil’s drilling plans, given the obvious lack of attraction of some of their rather home grown designs to the industry? How do you think that North Sea market works out?

Per Wullf

Well, I think [you’ve seen] the announcement that we have this industrial partner, and part of this is that once the oil companies in Norway decided to start to build rigs themselves, and all of a sudden this company controlling 80% of that market, it forced us to think out of the box a little bit and look outside maybe [unintelligible] North Sea, but you also have other interesting areas. And that’s why you see that announcement.

There’s still a lot going on in the North Sea, both the U.K. side and also the Norwegian side, but definitely also further up north. And when you take the best [unintelligible] and North Atlantic Drilling are building right now, can go up very far north as we speak. And we’re actually evaluating to go even further, this rig, because we’re building it now and maybe we could go even further up with maybe a completely ice class unit.

So there are possibilities up north, but also we see that other companies build rigs and they come out [unintelligible] competitors.

David Phillips - HSBC

And just one last quick question. Looking at the value chain right now, and the number of floaters coming out of the yards, I just wondered, given the additional works in the yards, and taking a look at the [unintelligible] and building offshore platforms and so on, do you have any sense that the yard’s ability to deliver on time over the next 12 to 24 months is [unintelligible]? Or do you think they still look pretty much on track to keep to their usual schedules?

Per Wullf

It’s not a secret that first of all we have a good record on delivering on time and on budget, and there’s a risk that we want to continue doing that. We see our subcontractors, they are busy delivering, and we also see challenges there, and we have a number of people on their factories 24/7 to be honest, in order to deliver on time.

We have delivered eight units so far this year on time on schedule, and we have seven. But West Tellus is the next drillship coming out. She will be delivered to us, and [unintelligible] for this morning, the end of October, 10 days behind schedule.

So it’s not all bad, actually. We are in control, but we just see that we have to dedicate more of our people out to our subcontractor off to the yard subcontractors in order to make sure that we actually get deliverables on time so we can actually fabricate these units. But so far so good, and we are confident, and you also see that we attempt to build - like you see the jack-ups we build at the same yard coming into a good routine there, and we’ve also done that to a large extent in Korea in the drillships.

Operator

Our final question today comes from Darren Garcia of Guggenheim Securities. Please go ahead. Your line is open.

Darren Garcia - Guggenheim Securities

One of the things I noticed when I looked through your release today is working towards getting a credit rating, and if I understand correctly, and I’ve looked at things correctly in the past, there’s a lot of bank-related debt tied directly to assets, and there seems to be maybe a slight migration away from this.

At the same time, given your leverage ratios and some of your peers’ view on their own, and their concerns about debt rating, there seems to be some things disconnected between A) your traditional strategy, B) what your peer drilling companies may think about their own debt ratings and how they work. And I was just trying to get a sense for where your heads are here and what the philosophy was behind going after a credit rating.

Rune Magnus Lundetrae

Just starting with your second comment, I think we’re not very comparable to most of our peers. As you know, they have mostly unsecured financing. We have so far used secured financing. So our strategy is definitely a little bit different. I think also, I’m not sure if I agree that there is a change in strategy. We’ve tried to be quite open and transparent when it comes to when people get to a certain size, we need to have another balance of our debt. So maybe the secured debt will stay at today’s levels, but as we grow, we have quite a significant capital commitment going forward. You can expect more of that debt to be placed in the unsecured market.

Then we have one bond out there, the $1 billion we did last fall, and we recognize that if we’re going to be a repeat issuer in the U.S. market, we need the rating, and then of course the question is what kind of rating would be good for Seadrill. And I think that’s what we have been evaluating and how can we be the company that gets that rating. So that’s the process we have been in, and are in, and then we want to guide a little bit more than we have in the past about when you can expect those two to actually go to the agencies and get a public rating.

Darren Garcia - Guggenheim Securities

Well, financial flexibility has really been one of your strengths, and it seems after you’ve levered a full year that you’ve become a seasoned offerer, as has been discussed in the past, for SDLP. Is there some tie in in the logic here about further drop downs, which is kind of basically equity financing, when you think about it, versus the ability to approach the credit market in a different way?

Rune Magnus Lundetrae

The way we see the MLP is definitely as an additional source of funding to us. Then it depends on how you structure each drop sum, but you can’t expect [unintelligible] to be communicated by Seadrill Partners. You can expect equity and debt as part of those drop downs. But yeah, definitely the MLP will be a source of funding for Seadrill going forward, and as we tried to communicate in the report, that’s an additional source for us, and we are getting close to November 1, and it will be more efficient for us to drop down assets.

Operator

That will conclude our question and answer session. I’d now like to turn the call back to Mr. John Roach for any closing or final remarks.

John Roach

Thanks, everyone for joining us today. Thanks, everyone in the room, and enjoy the rest of your day.

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