What Will North Atlantic Drilling IPO Bring To SeaDrill?

Jan.29.14 | About: Seadrill Limited (SDRL)

North Atlantic Drilling (NYSE:NADL) is going to float its shares on the New York Stock Exchange - the company is a subsidiary of Seadrill (NYSE:SDRL), and most of its rigs operate in the North Sea. Seadrill owns 74% of the company. North Atlantic Drilling operates seven rigs - two of these rigs are ultra-deep water rigs. The company has two units under construction - one of these is ultra-deep water rig. The stock will trade under the symbol "NADL" in the New York Stock Exchange. Let's take a look at the IPO and what will this IPO bring to Seadrill.

A Look at the Proposed IPO and What it Brings to Seadrill

First of all, let's see what the company is planning to do. North Atlantic Drilling is going to offer around 13.5 million shares at the price of $9.25 per unit. Further, the company will give its underwriters an option to buy around 2 million shares. The total amount to be raised from 15.5 million shares will be close to $144 million. The company intends to use this cash to meet its working capital and general corporate purposes.

The size of the offering shows that the IPO is just a way to tap another financing source. In my previous article, I talked about the financing situation at Seadrill. The company has realized that the drilling companies are getting a lot of attention from the investors in the New York Stock Exchange and it can provide an outlet to raise capital in the future for both expansion and meeting working capital requirements. The debt situation at Seadrill has limited the options for the company, and expansion through subsidiaries and Seadrill Partners (NYSE:SDLP) is an excellent strategy. These subsidiaries and partnership are owned by the company and the cash flows come to the parent company. In case of North Atlantic Drilling, the cash flows come in the shape of dividends, and for Seadrill Partners, these cash flows reach Seadrill through cash distributions. Although Seadrill consolidates the debt of its subsidiaries, the overall debt position of the subsidiaries gives its management a better position to negotiate debt deals.

Growth prospects for North Atlantic Drilling

Growth prospects for the company are bright - the revenue mainly comes from its operations in the North Sea, and with increasing activity in the North Sea, we are likely to see continued growth in the company's revenues. First of all, let's look at the geographical distribution of the company's revenue. The table below shows the distribution of revenue.

Majority of the revenue for the company comes from Norway (83.5%) and United Kingdom is the second major contributor towards revenues with 15.65% revenues coming from this region. Ireland is the smallest contributor with less than 1% of the total revenues. The drilling activity is increasing in the North Sea as the British government is inviting the companies to apply for new licenses to drill in the North Sea. During the last year, North Sea saw capital expenditures of around $15 billion, and the companies paid around $10.75 billion in taxes on revenues. Naturally, the government is interested in increasing the activity in the region. At the moment, 50 companies are operating in the region, and 21 new entrants started operations in the region after the last round of applications for licenses. The U.K. government believes there are about 20 billion barrels of oil buried in the region, which should make this new license application process very attractive. If the process is successful again, the drilling companies will have more contracts to win as the exploration and extraction activities will increase. North Atlantic Drilling is well positioned in the region and it should be able to exploit further growth opportunities in the region.

Statoil (NYSE:STO) is the largest contributor towards the total revenues of the company with 59% share while Shell (NYSE:RDS.A), Exxon Mobil (NYSE:XOM) and Total (NYSE:TOT) account for 18%, 11% and 12%, respectively. The table below shows the breakdown of revenues by clients.

North Atlantic Drilling is providing services to some of the biggest players in the oil and gas sector. Furthermore, the growing capital expenditure will support the future growth in this sector. Lastly, the rigs are bringing in attractive day rates and the full list of the fleet and day rates is available here.

Conclusion

Seadrill is the biggest off-shore drilling company by market cap and these subsidiaries play a vital role in giving Seadrill that title. As I mentioned above, Seadrill consolidates the earnings of these subsidiaries and the cash flows to go to the company in shape of dividends. The IPO will allow the company to tap an extremely attractive market for future funding as the U.S. investors have been investing heavily in the off-shore drilling companies. It will certainly give the company an outlet to raise funds for future expansion projects.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.