Sevan Drillings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: Sevan Drillings (SDRNF)

Sevan Drillings AS (OTCPK:SDRNF) Q4 2013 Earnings Conference Call February 25, 2014 5:00 AM ET

Executives

Scott McReaken – CEO

Analysts

Andreas Stubsrud – Pareto Securities

Johan Strõm – Carnegie

Lukas Daul – ABG Sundal Collier

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Sevan Drilling ASA Earnings Conference. Today’s conference is being recorded. And at this time, I’d like to turn the conference over to Mr. Scott McReaken. Please go ahead sir.

Scott McReaken

Thank you, and good morning everybody, and thanks for joining us on this new format today. Welcome to the Sevan Drilling fourth quarter earnings call. My name is Scott McReaken. I’m the CEO for Sevan Drilling.

And before we get started today, as I’m sure everybody is aware, most of the discussion will consist of some forward-looking statements that are subject to risk and uncertainty. We articulate some of these key items on Page 2 of our presentations, as you can all see in the webcast. For additional information, please view our other board filings and visit our website at sevandrilling.com.

And with that out of the way, I can again take you through our fourth quarter and preliminary 2013 highlights of financials. And then we’ll open it up for some questions.

Both rigs came in with technical uptime at 92% for the quarter, bringing the uptimes for the year at 85% for the Sevan Driller and 93% for the Sevan Brasil. On the Driller, we were able to stabilize the performance above 90% in the second half of the year, bringing up the lower performance in the first half of the year, which was about 78%.

On October 23, we took delivery of the Sevan Louisiana. Since then, she has made three stops along the way; Singapore, Mauritius and Namibia. And she is now sailing between five to seven knots in her final stop to Curaçao. We expect the rig arriving the Gulf early April with commencement shortly thereafter.

On October 8, we drew on the $1.75 billion bank facility for $1.4 billion, which allowed us to pay down the remaining balances on the two term loans, paid the final of $426 million installment for the Sevan Louisiana, and paid the deferred payment for the Sevan Brasil at Cosco.

That left us with $131 million for mobilization and general corporate purposes. In connection with the new facility, we also entered into a $100 million revolving credit facility with Seadrill which is still currently undrawn. Additionally as disclosed in the last quarter, Seadrill also provides commitment to the banks for additional $120 million on top of this facility.

Through ongoing discussions with Cosco, the yard has indicated that the Sevan Developer is likely to be completed in Q3, 2014. Delays result from delayed subsea equipment deliveries for the yard, and we continue to work closely with Cosco to finalize the delivery schedule. Actually this provides us some relief in securing its schedule contract which I’ll expand on later.

Lastly, I’ll touch on integrating the company into Seadrill through the management agreements and we’ll talk about that.

Turning to the financials. Revenues for the quarter are $67.7 million and $257.7 million for the year, compared to $57.9 million and $173.4 million for 2012 respective periods. This main increase comes from the full year of operations on Sevan Brasil on contract versus start up in Q3, 2012 and improved operating performance on the Sevan Driller.

Operating costs for the quarter at $62.2 million and $200.2 million for the year, compared to $34.6 million and $119 million for the same periods in 2012. The Sevan Driller had operating costs per day for the quarter and year at $182,000 and $184,000 per day compared with the same periods in 2012, the cost increases are approximately 10% for each of the periods, and result mainly of annual labor increases in Brazil and repair and maintenance increases.

The R&M for the year increased in Q1 from hole inspections and BOP repairs, and in Q2 we had increased costs for the main shaft bearing replacement, but then in Q4 we repaired the CMC Q6 [ph] on the rig.

Look at the Sevan Brasil. Operating cost for the quarter and the year were $207,000 a day and $231,000 a day. Compared to 2012 the cost increased approximately $62,000 and $35,000 per day for the same periods.

With the first full year now under our belt, we estimate costs that we look to minimize into this year in 2014. Cost drivers resulted from the standard Brazil labor increases and then cost increases majority were from the higher R&M costs on the rig, which included rental and import for equipment that was required by the contract and the well programs where work is deferred and completed at the end of the clients well were operations are reduced, and Sevan relies heavily on the assistance of third-party providers for this type of work.

In both instances, we’re going to look to minimize these types of costs through the Seadrill management of the rigs now.

In Q4, we had CMC repairs on this rig as well and we had some first year inspection costs kind of throughout the year as well. Additionally, outside of operations, we had some 2013 specific one-time charges for restructuring. For the year, we charged $6.9 million of severance costs for termination and executives and workforce reductions. We had $2.3 million write-off of intangible assets and $900,000 of costs for general integrations.

All this brings us to an EBITDA of $5.5 million for the quarter and $57.5 million for the year. Depreciation is $15.2 million for the quarter and $64.1 million for the year. Within depreciation, we have a $3.7 million impairment related to the IT infrastructure project that was terminated in Q3.

Financing expenses are $16.6 million for the quarter and $89.1 million for the year. In Q2, the company recognized $36.7 million for writing off non-cash deferred financing costs. And for the year, we had a gain $10 million on income related to swaps and expense of $4.6 million for the commitment fees related to the new debt.

Tax expenses came in at $2 million for the quarter and $60.9 million for the year. As you know, in Q3 we had the one-time non-cash charge for $52.9 million deferred tax assets related to carry-forward losses, tax losses. Net loss for the quarter is $28.3 million and for 2013 $156.6 million.

Looking at balance sheet, we have $1.976 million as non-current assets which includes the addition of the Sevan Louisiana, $3.5 million for IT integration costs in Q4, $25 million increase for mobilization costs and other assets, and then $52.9 million – the change in the tax liabilities of $52.9 million of the deferred tax impairment. We had a $128 million cash left on the balance sheet.

Moving to liability section, we have $1,369 million of debt on the new facility after refinancing the two term loans and netting off $30.8 million of deferred financing costs. Other movements in the non-current liabilities include; $27.4 million, a settlement for the old swaps, $26.5 million in deferred milestone payment for the Sevan Brasil in Q4 and $16 million paid in Q1 for deferred riser payments on the Sevan Brasil as well. That brings our equity ratio now to 32%.

Moving to operating performance. The Sevan Driller came in at a technical uptime of 91.9% for the quarter and averaged 86.2% for the year. And economic uptimes were 89.9% and 84.6% for the same periods. For the quarter, we had 7.5 days downtime resulting from two main events. The first, three days in October for slipjoint failure and the second was four days in December for events resulting in drill-stringing section [ph].

For the year, uptimes were brought down by the first quarter of the year – first half of the year, were we experienced downtime in Q4 for BOP maintenance and hole inspection, and Q2 mechanical failures on the main shaft bearings. The Petrobras’ Bad Sonda rating is 8.5 for the quarter and 8.8 for the year.

The Sevan Brasil has a technical uptime of 92.4% for the quarter and averaged 92.8% for the year. The economic uptimes are 92.3% and 95% for the same periods. For the quarter, we experienced three days downtime for [indiscernible] issues out in November and four days down for drill pipe racking system issue.

For the year, we had a couple of days downtime in each quarter for maintenance on draw works and some minor mechanical failures. The Petrobras’ Bad Sonda rating was 8.2 for the quarter and 9.1 for the year.

This next slide looks forward through our existing contracts and I’ll touch on the Developer marketing status at this time. As of December 31, we had approximately $1.6 billion in contract backlog through the three executed contracts on the fleet. The Sevan Driller initial term expires in Q3, 2016, and has an option period extended on mutually agreed terms.

Looking at the Developer, it’s likely to be available in Q3. And she is still currently on contracted. Seadrill is currently actively marketing the rig under the MSAs for us and we’re beginning to see a short-term market weakening in early 2014, resulting from less demand and increasing supply of the new and available units. This creates some challenges in securing acceptable contract for the Developer, but we don’t expect this downturn to be long-term, as the needs for new exploration and developing existing discoveries still continues. As noted previously, potential delays in the Developer actually provide us some relief now with our CTR [ph] marketing efforts.

October 23, we took the delivery of the Sevan Louisiana from Cosco Quidong yard in China. She made a stop at Singapore on November 17, arrived at Mauritius January 7, and to Namibia February 6. Working stops included bunkering, load out of equipment, acceptance testing with the client, including completing some of the punch items remaining from the yard.

Currently the crew is sailing the rig, five to seven knots to Curaçao, will also take on some fuel and finish commissioning of the BOP. We expect arrival in Curaçao in mid-March and the U.S. Gulf in April. The crew has done a great job to the challenges that present themselves on rig transit and we are looking forward to continue performance on the vessel.

The Sevan Developer was 89% complete at the end of December and currently 92% complete to-date. Major outstanding items related to final commissioning, sea trials and lead times for equipment and initial inventory. The BOP is on board, the accommodation units are complete and she is running on her own power. Cosco has notified us of some delays for one of the equipment providers and they now foresee that delivery will likely be some time in Q3 2014.

We continue to work closely with Cosco to firm up the delivery timeline as Q3 approaches, and I’d like to mention that we are very pleased with the construction progress to-date and as evolve and support through the support of the crew and Seadrill through the transition as Seadrill take the management on the project.

To note here, we still maintain the option not to take delivery and we’ll experience a loss of what we’ve invested if we walked away. While this isn’t the preferred option for the company, it’s still something that we have to consider on planning. For the last several months, we’ve been working on alternatives for the Developer and we’re still not finalized. We now estimate in Q3, we’ll need to take $100million to $150 million additional capital should we take delivery. As we progress to find the right solution, will be notified to market.

Next I’ll comment on the impact of the Seadrill ownership and how we’re changing benefit to making risk. Initial benefits are shown in the financing and parent guarantee of our debt. In the quarter we closed on financing with no covenants for Sevan which allowed us more flexibility on our capital structure and remove that restricted cash requirement on our previous loans. Initially Seadrill has shown support and willingness to find efficient capital solutions as we look to alternatives for taking delivery of the Developer.

Currently, we’re in transition period in adopting a new culture, which always takes sometime. The offshore rig crews have been very open to this transition and looked to see how they can leverage the resources that Seadrill offers. The management systems are now adopted offshore and we’re utilizing the Seadrill procurement function and improving maintenance planning and stock levels.

Additionally delivery and mobilization philosophy is changing, where project management now hands over control to operations at delivery and the regional rig management mobilizes the rig, trains the crew and works with the client for integrated acceptance testing, which we did to improve times to commencement on this result.

While we took to a substantial charge this quarter for severance and restructuring, we expect to have less cost through the beginning of Q2. The return is that we’re able to reduce our ongoing corporate fixed costs and push the transaction level back office to Seadrill, while still maintaining our requirements as a listed company.

Lastly, Seadrill has shown a lot of support in continuing design work for the Mk II yard vessels which we look at as the next growth area for Sevan.

Moving to the mitigated risk. The main risk we run with this MSA structure is that we rely on one service provider for the support. However Seadrill is very transparent with operations and KPIs, and through the MSA we’ve maintained control of the capital expenditures and budget approvals. And worth mentioning is that no matter how well we plan and integrate, we’re still subject to unavoidable mechanical downtime here in our business.

In conclusion, I would just like to say we’ve had a very active past six months. We’re able to increase efficiencies, improve operational safety and establish the plan to reduce our fixed overheads. We’re very pleased with mobilization and the transit time on Sevan Louisiana and the construction team’s progress on the Sevan Developer.

We’re working closely with Cosco and Seadrill in regards to likely delays on the Sevan Developer, and would like to take advantage of that time now available to market the rigs. We have financing in place that supports our existing operations and we’re looking at various alternatives where decision on the delivery of the Sevan Developer is required.

Thank you all for joining us today. And I’d like to open it up now for some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Andreas Stubsrud of Pareto. Please go ahead. Your line is now open.

Andreas Stubsrud – Pareto Securities

Hello, and thank you for taking my questions. On Page 6 of your report, you were saying that so far you have spent $75.8 million on the Developer and that the total will be $110 million to $120 million if you don’t take delivery. So an additional $40 million if you don’t take delivery. Is that correct?

Scott McReaken

That’s the current cost that we’re expecting for completing the rig. And of course not all of that is for payment to the yard, some of that is just some of the backlog and lead times of equipment and then the cost of the crew from now up until Q3 that we’re going to have to spend in that period. So the $75.8 million is currently what we put into it and what was on the books from December. And then from that period, there is some interest charges back from a deferred payment for the second milestone. Then the rest is really just pre-ops and operations prep cost.

Andreas Stubsrud – Pareto Securities

Okay. So I am reading this correctly when you’re saying that your estimate is $110 million to $120 million if you don’t take delivery of the rig, which kind of is the decision you’re going to make in the next six months, right?

Scott McReaken

Yes.

Andreas Stubsrud – Pareto Securities

Okay. And the second question is related to the same topic. You specifically say that in terms of additional funding, and you also said that in the presentation there. And on Page 5, you are saying by way of an increase in the revolving credit facility and/or an underwriting of an equity issue. In terms of the underwriting of an equity issue, it seems you are – that specific – I have a specific question. Is that related to 100% on potential equity issue or Seadrill 50%?

Scott McReaken

Well, first I had to say we haven’t finalized how we’re going to go to market and raise additional funding, should we take delivery. And secondly, in that it wouldn’t be – if we were to do an equity issue, it would be opened up with participation.

Andreas Stubsrud – Pareto Securities

But the underwriting, how would you say that will probably be?

Scott McReaken

We’ll just have to wait and see actually. I don’t want to comment on that yet. We haven’t made that decision.

Andreas Stubsrud – Pareto Securities

Okay. And in terms of the decision of canceling or not in terms of the Developer, like what are you looking for here obviously if the long-term contracts to get financing etcetera, or you have [indiscernible] anyway, but like what’s – do you have any like contract length or day rates, or what’s the main decision here in terms of taking delivery of the rig or not?

Scott McReaken

The Tranche B [ph] actually has requirements for 460 a day on an 18-month tender. So for us to access the current facility, we have to have that as minimum. Yes.

Andreas Stubsrud – Pareto Securities

Okay. Fantastic. Thank you.

Operator

Our next question comes from Johan Strõm of Carnegie. Please go ahead. Your line is now open.

Johan Strõm – Carnegie

Thank you. Just a follow-up on the last question there. Do you have a specific date where you would decide to walk away from rig number four?

Scott McReaken

We have one internally that was based on the previous delivery scheduled. As we’re working with Cosco, it’s definitely pushed out. We still don’t have a firm schedule on when the delivery is. And I think back in couple of months from there depending on what type of commitments we’re in with vendors in the crews and where we’re at with that work.

I don’t have anything that I can disclose at the moment on that. I still think there is a little bit uncertainty on that timeline from the yard, so when we can get to a firm date then we can start to back into when we make that decision. But like we said, that’s not the preferred option for us, and we’re going to look towards alternatives to take that rig and to purchase it.

Johan Strõm – Carnegie

Thank you. And secondly you mentioned some special items that affected the Q4 costs. So what should be sort of normalized G&A level going forward?

Scott McReaken

We typically don’t make guidance to that. We’re bringing it down. We’re still going to have some higher costs to what our normal run rate would be after – towards the end of Q2, we should be at a normal level where we can talk about that.

Johan Strõm – Carnegie

Okay. And finally, I was also wondering if you could give some kind of guidance on the expectations of OpEx levels for Driller and Brasil in 2014?

Scott McReaken

We’re looking to bring them back down to definitely below the 200 per day, forecasting about 185 and around that range.

Johan Strõm – Carnegie

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Lukas Daul of ABG. Please go ahead. Your line is open.

Lukas Daul – ABG Sundal Collier

Thank you. Hi good morning, Scott. Just a quick question on Developer. You are bidding it in Brazil. Can you also say whether you are actively bidding in other tenders as well?

Scott McReaken

We are. We’ve qualified on some technical specs for some other tenders. I don’t want to say which ones but it’s not the only one we’re hanging our head on.

Lukas Daul – ABG Sundal Collier

Okay. And could you say something about maybe about the competition in those? Is it limited to a few rigs, or are we talking double-digit number of rigs bidding for the same job?

Scott McReaken

It’s not quite double-digit for most of that. I think what we’re bidding into is for us. We’re at a slight lower spec, so without the dual BOPs and dual activity. And so I think you’ll see some of the lower generation rigs and some of the new builds, the other bigger competitors trying to just be competitive with us in getting there as well. As we talked about, it is beginning to be a challenging market and we keep pushing to get a contract on this rig, but we just have to see how it goes.

Lukas Daul – ABG Sundal Collier

Sure. And then on the construction process, given that it’s being delayed to the third quarter. What do you now see as sort of a total cost for the break given that it is delivered in Q3?

Scott McReaken

Well we still have – we’re estimating $100 million and $120 million for additional investment in there on top of the $430 million we have due to the yard.

Lukas Daul – ABG Sundal Collier

Okay.

Scott McReaken

And it does not include any mob estimates in there.

Lukas Daul – ABG Sundal Collier

Sure. And are there any – if we think about the payments that you need to make over the next 12 months, previously you said or the company said that you would need to acquire some additional equipment for Louisiana, extra riser, etcetera. Could you just roughly walk us through the uses that you will have over the next 12 months?

Scott McReaken

Well, currently with our capital structure in place, excluding the Developer, we feel we’re fully financed. And so additional equipment and some of the client contracts we’ve actually gone through and worked closely with the client has actually what’s best required in the Gulf and so we’re able to minimize some of that, and as well as leverage off of Seadrill resources, instead of going out and procure some of their critical spares and equipment we have available through Seadrill and kind of purchase that way.

So the additional funding and the sources used on that really relates to the Developer, and that’s what we’ve been trying to communicate is that going to the market again is really contingent on having a contract and taking – or taking delivery [indiscernible].

Lukas Daul – ABG Sundal Collier

And given that we are half way through first quarter, can you say something about the performance of Driller and Brasil so far?

Scott McReaken

We still got good continued performance on there. We’ll have to wait to see how we come into the quarter, but we’re expecting that we’re in line with where we’re at in Q4.

Lukas Daul – ABG Sundal Collier

Okay. Thank you.

Operator

(Operator Instructions) As we have no further questions, that will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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