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Seadrill Ltd. (NYSE:SDRL)

Q4 2013 Earnings Conference Call

February 25, 2014 12:00 PM ET

Executives

John Roche – Director-Investor Relations

Per Wullf – President and Chief Executive Officer

Rune Magnus Lundetrae – Senior Vice President and Chief Financial Officer

Analysts

Ian Macpherson – Simmons & Company International

Darren Gacicia – Guggenheim Securities LLC

Anders Bergland – RS Platou Markets AS

Lukas Daul – ABG Sundal Collier Norge ASA

Ryan W. Kauppila – Citigroup Global Markets Ltd.

Jason A. Gilbert – Goldman Sachs & Co.

Christyan F. Malek – Nomura International Plc

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2013 Seadrill Limited Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. John Roche. Please go ahead, sir.

John Roche

Thank you, good afternoon and welcome everyone to Seadrill’s fourth quarter earnings conference call. I would like to thank you all for joining us today. With me I have our Chief Executive Officer, Per Wullf, and our Chief Financial Officer, Rune Magnus Lundetrae.

Before we do get started I would like to remind everyone, as I’m sure you are all aware that much of the discussion today will not be based on historical fact, but rather consist of forward-looking statements and are subject to uncertainty.

We articulate some of the key items on page two of the presentation, if you all like to turn the page. 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 microphone over to Mr. Per Wullf. Per?

Per Wullf

Thank you John, and welcome everyone to Seadrill’s fourth quarter earnings call.

I’m pleased to report that Seadrill has had another quarter of safe and efficient operations and thank you very much to all employees, offshore as well as onshore, for making this accomplishment possible.

I’ll start today by walking through some of our operational highlights for the quarter, and then continue – we’ll spend some time on the current market and how Seadrill views the current market environment. I’ll then turn things over to Rune Magnus to take you through the financial performance highlights, and lastly we will open the phones up for Q&As. Once we’ve open up for Q&As our Board member Tor Olav Trøim will join us, for questions about dividend policies and all our relevant items.

Fourth quarter EBITDA of $768 million represents nearly 16% growth rate from third quarter and a 27% growth rate year-over-year. The increase in operating results in this quarter is a result of fleet additions including the West Tellus, West Auriga, West Vela, West Tucana and AOD III entering the fleet. During the year, we took delivery of 13 rigs, this is an impressive accomplishment and we are proud to maintain our industry leading uptime of 94% while taking rigs into service. Trust me this is not easy. We also were able to maintain our uptime throughout the year, while performing planned yard stays for many of our rigs at the same time. During the first quarter, we will take delivery of two jack-ups West Linus and Prospector 3, Prospector 3 is actually a new named to West Titania. In fact we’ve already taken delivery of West Linus and the rig will actually leave Singapore on a heavy lift towards the North Sea, and she will start commencing a five year contract when she arrives at North Sea working for ConocoPhillips up at the Ekofisk field.

Prospector 3, now West Titania, will be delivered at the end of March, we will load on to a heavy lifter and we’ll transport her to Mexico to start up a six year contract for Pemex, that’s part of the five week deal with Pemex. For the remainder of 2014, we will also take delivery of the ultra-deepwater Samsung drill ships West Jupiter, West Saturn, West Neptune plus the Semi Sevan developer. As I’ll discuss later in the presentation we are well positioned with regard to our rig deliverables, and Seadrill growth outlook is strong.

Finally, I’m pleased to announce that we have increased our dividend by $0.03 to $0.98 per share. The dividend increase reflects the improvement in operational results, solid order backlog and strong support received from the financing markets.

Seadrill have had another active quarter in terms of contract additions, financing, M&As and MLP drop downs.

Seadrill Partners added $337 million in backlog, the contract extension for the West Aquarius and although Total shortened the contract for the West Capella due to license shift to ExxonMobil we believe this rig has a high likelihood of renewal given the change in operatorship. Remember, it’s still well into 2017 before the contract ends.

During the fourth quarter we also advanced discussion with Pemex in Mexico for five jack-up rigs. I will go into additional detail in a moment on this point.

On the M&A side, Seadrill contributed three rigs into Seadrill Partners T-16, a tender rig we have, West Sirius and West Leo. The West Sirius and West Leo transaction was the first public equity offering for Seadrill Partners since IPO and Seadrill received net proceeds of $365 million.

Talking about first quarter 2014 subsequent events, since the end of 2013, we have been incredibly active on the financing front. North Atlantic completed its U.S. listing and U.S. bond offering. This represents the completion of establishing NADL as independently financed entity positioned for growth in the Arctic regions.

Seadrill Partners executed a $1.8 billion Term Loan B, but more effectively capitalizes the company and separate its capital structure from Seadrill. Additionally we are pleased to have secured contracts of five jack-up units equivalent to $1.8 billion of backlog with Pemex in Mexico.

In order to pursue further growth opportunities in the region, we have established SeaMex a 50/50 Joint Venture with Fintech. [Inaudible] rigs will be sold for $220 million apiece and the Friede & Goldman units for $215 million apiece. We expect proceeds amount to roughly $500 million once the joint venture is fully capitalized.

Lastly as of today, our order backlog stands at $20.2 billion; we expect this number to be maintained at this level going forward.

Furthermore January and part of February, we have faced operational challenges with the West Alpha and West Phoenix caused by extreme weather in the North Sea during the winter period here.

Furthermore, we have had subsea equipment challenges on the West Pegasus and West Capricorn. And finally, West Aquarius working in Canada incurred extensive damage to the mooring system. All units will be back in operations by the end of this week and counting the days out of operation, we expect first quarter 2014 result to be in line with our fourth quarter.

Seadrill remain committed to growing its dividend going forward. Broadly speaking future dividends depend on backlog additions, operational performance and market outlook. This is important to keep in mind as we progress through the current market environment. Based on today’s backlog, we will maintain our current dividend for the next couple of years. Should the rate of backlog addition slow, then the rate of dividend increases will likely slow. Dividend cuts are not on the radar screen where we sit today.

Seadrill is currently trading at a yield of roughly 10.5%, and consequently, the Board sees limited value increase in the current quarterly distribution beyond the $0.98 per share. However the Board for the time being would reserve these funds for later distribution, buyback of shares or acquisitions. We will however be rewarding shareholders by creating an additional dividend capacity fund by preserving approximately 20% of any net proceeds from the MLP drop downs.

The remaining 80% will be used for reduction of existing debt and future growth. The target will be to return these funds to shareholders over the 12 months following release of such funds. Seadrill’s ability to grow its dividend is proof that the strategic focus on high specification new assets, industry leading uptime, full utilization and lean costs structure is working.

In addition to our focus on dividends and operational excellence, we have succeeded in offering investors exposure to key themes within the Seadrill portfolio. Each vehicle has specific characteristics that will [diluted] [ph] within Seadrill’s [large] [ph] portfolio. Whether it be a regional focus or different risk profile Seadrill has offered investors the opportunity to target numerous segments of the business. However irrespective of the individual business vehicle, we will overwrite all units in the same manner under the Seadrill umbrella, meaning that the same safety and operational standards giving full value to our customers at all times.

This is only possible by operating rigs within the same management system, executed in a decentralized environment close to our customers, overseen by Seadrill cohort.

I will spend some time on the near-term outlook. The short-term outlook for floaters is influenced by the low activity level caused by reduced growth and cut back in CapEx from the major oil companies. In this regard, 2014 and 2015 show slower growth in activity levels than earlier anticipated. As oil companies’ budgets are re-allocated, the entire spending complex tends to slow down. In turn, demand for offshore drilling assets is being pushed into 2015 and 2016, but importantly this downturn is not driven by a declining oil price, the prior cycles for long downturn have been caused by deteriorating [hydrocarbon] [ph] supply and demand fundamentals.

On the contrary, the industry is experiencing challenging with cost inflation and aging reservoirs while commodity prices are strong and stable. As a result of the pause in offshore spending, we have observed a decline in the overall number of fixtures, lead times and contract durations. We see an increase in inquiries for 2015 and 2016 availability. Seadrill have managed to limit exposure to 2014 contracting environment to one rig that’s West Tellus and is well positioned to take advantage of the expected increase in activity in 2015 and 2016. We look towards projects such as Block 32 in Angola, Mad Dog 2, Stampede in U.S. Gulf of Mexico, Chevron in Indonesia, Bonga in Nigeria, as potential opportunities to contract our next available assets when our clients return to a more normalized spending activity.

In terms of how the industry is reacting to this pause is activity – inactivity we have seen a 2016 new build order book develop into one of the lightest delivery years in recent memory. This is potentially creating an undersupplied market in years to come. And I want to give you a few bullets there. The current production in ultra-deep water regions is roughly 1 million barrels a day as we speak. It is expected by 2020 production in these regions will approach 5 million barrels, and this is approximately 30% [inaudible] annual growth ratio represent one of the strongest production growth profiles globally. Although the current environment for ultra-deepwater floaters is challenging we are confident in the long-term fundamentals in the ultra-deepwater.

Looking at the market as a whole acute challenges lie with fourth and fifth generation assets. Our expectation for additional older assets should be stacked remain. As in prior cycles these will lead to more retirements and stacked units. The market for high specification ultra-deepwater units continue to be relatively bright spot in a challenging environment.

As mentioned previously, we have roughly $20 billion in total backlog of which $15.4 billion is from our floater fleet. Importantly if you look towards the bottom of the page we are nearly fully covered in for 2014 and we have 66% coverage for 2015. If you were to include the expected contract announcement for West Saturn and West Jupiter, the contract coverage go to 98% for 2014 and 72% for 2015. Seadrill is well positioned to avoid the weak contracting environment in 2014 and actually for Saturn and Jupiter, we are as we speak discussing detail with the two customers in question on how to start up the units this year. Taking into consideration the limited deliverables in 2016, we will potentially be contracting our available rigs into a tightening market.

We move to the jack-ups. Our jack-up fleet represent $4.1 billion of the $20 billion we have in contract backlog. The market for high specification jack-up units is distinct bright spot in the market today. Operators have come to appreciate the increased recovery factors that new assets can provide.

We have seen this trend for some time for our IOCs; a more recent shift towards newer units can be seen with our NOC customers. And we believe Seadrill has demonstrated this with the recent five rig deal of 30 rig years in Mexico. Seadrill’s execution of a landmark contract with Pemex in Mexico is prime example of the type of activity we are currently seeing. And the rigs coming in to the global Jack-up fleet have robust projects as we expect this market to remain busy, 100% utilization now and in the foreseeable future.

And let me to try to conclude this a little bit with the next slide. Seadrill is well positioned to weather the challenging market environment. We are confident that when a more aggressive growth in spending does return, it will first be focused on areas that are well positioned on cost curve and contain targets large enough to meaningfully add to oil companies’ reserve bases. The ultra-deep, also the deep for that fact, and Arctic regions all have these characteristics. The key question in the market today is what the duration of the spending slowdown may be.

Based on the fact that this pause in spending has not been caused by oil price declines, give us confidence that this is a momentary pause, rather than a cyclical downturn. Based on the number of inquiries for 2015 availability, we have some degree of visibility that the projects not funded in 2014 have been pushed to 2015 and 2016.

The medium and long-term supply demand fundamentals are intact, and new build activity has slowed down considerably, thus creating a potential on the supply situation in 2016 and onwards. As far as Seadrill is concerned, we have a little exposure to the current weakness due to limited rig availability in 2014; we actually only have five months available and I’m sure we will get them closed as well, and the contract coverage of 65% in 2015 and if you include Saturn and Jupiter, our contract coverage in 2015 of 72%. Lastly, due to our lean cost structure and financial flexibility, we firmly believe in our ability to sustain our dividend policy and grow distributions going forward.

By this slide, I’ll hand it all over to you, Rune.

Rune Magnus Lundetrae

Thank you very much, Per and good morning and good afternoon everyone. Thanks for joining the call. I think it’s fair to say that on the operational front, it has been a very successful 2013, and that also extends to the financial side of the business and this is highlighted with our activity level since the last quarter reported end of November, where we have raised approximately $3.7 billion in the last three months.

As I said, I think we’ve had a very successful 2013 from a financing perspective and we have made significant progress in diversifying our sources of funding during 2013 and we’re not as reliant on the secured bank market as we were just a couple of years ago. We continue to access the unsecured bond market, we have secured attractive ECA funding, and we have completed MLP dropdowns, utilizing Seadrill Partners in Seadrill. Going forward, we expect to be opportunistic in all these markets we are active in and continually look for innovative funding sources in order to improve the cost and availability of capital to Seadrill.

As can be seen here on slide 15, we have continued to access the capital markets also in 2014.

In December, last year, we did raise $465 million in an equity offering when we dropped down the West Sirius and West Leo from Seadrill to Seadrill Partners. This generated cash proceeds of approximately $356 million to Seadrill Limited. Following this in January, we did the IPO of NADL raising approximately $125 million and also issued the $600 million unsecured bond. In February, we did launch and complete a $1.8 billion Term Loan B in Seadrill Partners and creating a cleaner capital structure with lower amortization that we think fit Seadrill Partners well.

Moving over to the financial performance highlights in the last quarter of 2013, we saw an EBITDA increase driven by the West Tellus, the West Auriga, the West Vela, and the West Tucana, and the AOD III, all entering services and an increase in dayrate on the West Gemini.

Net financial and other items for the quarter showed a loss of $286 million, compared to a loss of $96 million in the previous quarter. The loss is primarily related to our equity pickup share of $185 million of the losses in our investment in Archer, which is mainly due to Archer’s own non-cash impairment of goodwill and other long-lived assets of $430 million as communicated to the market at the end of last week. As Per discussed, our dividend was raised by $0.03 to $0.98 per share in the fourth quarter of 2013.

Moving over to the balance sheet: As of December 2013, total assets were $26.3 billion, and this is an increase of approximately $1.3 billion compared to the third quarter. Total current assets increased to $2.8 billion from $2.6 billion over the course of the quarter, primarily driven by the increase in cash and marketable securities, offset by decrease in restricted cash.

Total non-current assets increased to $23.5 billion from $22.4 billion, primarily due to the inclusion of the final yard installments for the West Tellus, the West Castor, and the West Oberon, and also the acquisition of the West Titania, formerly Prospector 3.

Total current liabilities decreased to $3.8 billion from $5.6 billion, largely due to a decrease in short-term debt and other current liabilities. Long-term, interest-bearing debt increased to $11.9 billion from $10 billion over the course of the quarter, and total net interest-bearing debt increased to $13.9 billion from $12.6 billion. The increase is primarily due to the new $1.7 billion Sevan credit facility, and the refinancing of the West Eminence and the subsequent use of the freed-up cash to pay yard installments. The West Eminence facility was completed in December last year.

Total equity increased to $8.2 billion from $7.8 billion as of December 31, 2013, primarily driven by net income for the quarter, proceeds from the Seadrill Partners’ equity offering, and a gain on our SapuraKencana investment. This was all offset by the dividends paid after our third quarter.

Looking at the EBITDA contribution. Here, we show the bridge and what represents the 16% increase from the third quarter, where we reported $663 million. On the floating side, we saw a net increase or a contribution of $81 million represented by the Tellus, the Auriga, and the West Vela all commencing operations.

On the jack-up side, we saw Tucana and AOD II, both entering services and that added a net effect of approximately $15 million to our EBITDA in the quarter compared to last one.

One the tendering side, most of the increase there is represented by the T-16 that commenced operation. That is our rig that is 100% owned by Seadrill Partners. We are pleased with the contribution from each of our segments, and we are also pleased with EBITDA growth shown over the course of the year. As we also say, we expect this increase to also continue in the current financial period.

We are quite pleased that we have continued our path towards diversifying our funding sources over the last 12 to 18 months. As discussed earlier, we’ve continue to access the secured bank, unsecured bond, and MLP markets.

For the last couple of quarters, we have been discussing with you all the prospect of Seadrill obtaining a credit rating. In the light of the structural opportunity, a rating that Seadrill Partners has given us and the time it has taken to complete other major activities, the Board has decided not to prioritize completing the rating process with Seadrill prior to March 14.

As you may know this will result in a 50-basis-point step-up to the coupon on the two existing U.S. bonds. We do, however, see the rating of Seadrill as an important evolution in the company’s development, but expect that the rating will improve significantly in the coming period as Seadrill’s balance sheet will be strengthened through further dropdowns, increased order backlog, and a reduction in future CapEx as we take delivery of the current newbuild program.

I would now just hand the word over to Mr. Tor Olav Trøim for a final message and then we will continue with Q&A where both myself, Per, and Tor Olav will be available to take questions. Thank you very much.

Tor Olav Trøim

Thank you. First of all, I want to thank all the employees of the company. I think we had a quarter where we have increased EBITDA around $100 million. So, I think we have reason to be happy with the performance both financially and also operationally. Secondly, I think we have had some kind of people in the market who have a very strong opinion about where we are going, and in that respect, I think it’s useful to bring some comments from the Board to that.

There are totally six points I want to point out. First of all, the first point is that we are, as a Board, not convinced that what we currently see really is cyclical downturn. I think we see a very strong oil price, we see full utilization of the fleet. We see that Transocean offer rigs in Brazil $100,000 cheaper than anybody else, and that that seems to be a combination of an offer which also includes other assets, which is diffusing the market a little bit.

You see a strong trend in Russia that they need additional rig capacity, and to add to the flavor, yesterday I just came off the phone with one of the rig charting managers in one of the companies who had significantly cut back in CapEx, and his comment was that he is already starting to look into the shortage of rigs he has for 2016. So, I think for us the jury is still out if it really is a cyclical downturn, but that is – we’ll leave that to the market and we’ll act thereafter.

The second point I want to point out is Seadrill’s order backlog had never been bigger than it is today. Seadrill’s capital has never been stronger than it is today, and Seadrill’s financial flexibility has never been larger than it is today, that’s point two. Point three, which we want to communicate, is that a dividend of $0.98 is a very responsible dividend, and it’s rock solid for the coming years. I think we have stated that specifically in the message several times, and it’s communicated clearly from the board that this is a floor to the dividend. I think some people have seen this as there is to be a cap to dividend going forward, I’ll come back to that in my last point. What we are saying is this is a floor for the next years.

The fourth thing we’re saying is that we have created a special fund, which was created with 20% of the capital we have net coming out of the drop down to the MLP. Totally, corresponds to around $0.16 over the next year. We have, for the time being, decided not to distribute the first $0.04 of those partly because nobody expects it, partly because we haven’t found the best way to give it back to shareholders. It can be done $0.04 a quarter for four quarters, it can be done $0.16 over one quarter, it can be given also as dividend in kind in some of the assets we have, which we cannot (inaudible) enough to shareholders, and it can also be given in a buyback.

I think we specifically -- and that’s point number five, when we talk about buyback and distribution in kind, you will know that for us, we are looking at relative valuation and of course, we can probably order rigs cheaper than we can buy our own stock. So I don’t think you will see us buying back large amounts of our own stock.

But that’s an opportunistic thing to cover, for instance things like outstanding share options to employees. We have always had dynamic market approach. We think that the stock at 210 currently is significantly cheaper than 285 and the likelihood for using that market to buy back stock if higher, but don’t expect us to spend the money, big time money on that, but it’s an opportunistic thing, and when you are talking about $70 million, $80 million, you might be able to see that, that goes to cover for instance the program we have to the employees, because they find the share price attractive. That’s point five. Point six and the final point in the message is, if you read this quarterly report from Seadrill, you will see that we’ve stated we will for the rest of the year and next quarter have minimum 20% growth in EBITDA.

Here we come back to what I said about the dividend. We said it’s minimum and assurance from the Board that we can sustain this $0.98 for the coming years. I would say that we’ve, as a Board, and as a company have significantly phased, if we can in a situation where we will grow the EBITDA with more than 20% a year cannot be able to grow that dividend further as well.

But there is no promises here, but I think there is a clear preference from the board and everybody to continue the growth story both when it comes to assets and when it comes to dividend. And when it comes to our ability to grow the dividend going forward, I think the order backlog, the cash, the current cash flow, the financial flexibility everything points in the direction that this should be easier to raise the dividend in the years to come than (inaudible) we have behind us.

So let me -- that would be the final comment from me. I think there has been confusion, there has been uncertainty. I hope some of what we’ve stated today takes away that uncertainty. There is a floor under our share price today of 10% to 11% based on the $0.92 dividend.

So I’m happy to give it back to the people in London, and effectively open up for questions from everybody.

John Roche

Thanks to our Operator, if we could open up the line and assemble the queue for questions please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

John Roche

Operator, we are ready for Q&A.

Operator

Thank you. We will take the first question from Ian Macpherson of Simmons. Please go ahead.

John Roach

Hi, Ian. Can you hear us?

Ian Macpherson – Simmons & Company International

Hi, can you hear me now, John.

John Roach

Yes, we can.

Ian Macpherson – Simmons & Company International

Sorry about that. I think there has been an understanding that Seadrill would continue to build newbuilds at current construction prices down to the dayrate floor closer to 450. Is the pause -- the temporary pause at least in your construction agenda, does it imply a leading edge dayrate level that’s approaching that level now or is that incorrect?

Per Wullf

No, that’s incorrect.

Ian Macpherson – Simmons & Company International

Do you see, do you have a pause in your construction that is disconnected from the newbuild returns, but that is more a reflection of your financial flexibility at this point, or how do you see the medium-term outlook for new construction within your strategy?

Rune Magnus Lundetrae

There will, of course, be a pause, but I just see Tor Olav raising the hand. Tor Olav, do you want to comment?

Per Wullf

I think when it comes to our newbuilding commitment, it’s important to just look six months back. In one day, we effectively executed – taken four new contract for newbuildings in one day. I think that took care of the 2015, 2016 situation, and I think for the time being we are happy just sitting and waiting and see where this market is going.

And I think it’s also kind of -- as we’ve written in the report, it’s also responsibility as the market leading not to give too much encouragement to other in-current situations to add supply. So, I think you should note we read the signal at all. We are more bullish on this kind of, not more bullish, but we are still very, very bullish. We think the rig market is materially undersupplied to meet the demand coming from the large companies, and to turn back to the conversation I had with one of the guys who cut CapEx materially, his comments about lack of rig capacity for 2016 again.

So I think that you have to be dynamic. You can’t just have a long-term strategy. You have to look at the market everyday when you wake up and say what do we do today. And for the time being, we will refrain from ordering and we hope that also the other people will do that which will create a much better situation again when the oil companies come back to the table.

Ian Macpherson – Simmons & Company International

Yes. no question you guys have done an exemplary job of always timing the market in that regard. Just one follow-up question for me, something that was not addressed in your prepared remarks, it seems like there is more uncertainty with regard to the status of the Sevan developer. Can you comment on that? Is that a rig that might not get finished or how are you dealing that situation?

Per Wullf

Yes. It could be a rig, at least we follow building on the completion of this unit, and we have done that since summer last year. And this rig will not be completed as we see it until -- it could be September, it could be October before we see this unit being complete, and we’ve asked Sevan, but they can walk away from this one if they feel they want to walk away from it. But we see a delay in this unit because the yard has been let down by subcontractors and full commissioning of this unit will not be until end of September, beginning of October, and then we will have to see what we do at that time.

Ian Macpherson – Simmons & Company International

Well, the CapEx for that rig is included though in your $7.2 billion remaining CapEx balance though, correct? So that could be a downward revision.

Per Wullf

That’s correct.

Ian Macpherson – Simmons & Company International

Okay. Thank you.

Operator

Thank you. We’ll now move to Darren Gacicia of Guggenheim Securities. Please go ahead.

Darren Gacicia – Guggenheim Securities LLC

Hey, thanks for taking my question. I guess where I wanted to start is, there is some talk here about kind of deconsolidating and reconsolidating Seadrill Partners and just a little color on the moving parts of that. And also, maybe just a little color on kind of how you look at Seadrill SDRL versus the partnership and how the interchange really works there, kind of strategically going forward?

Rune Magnus Lundetrae

Yes, I mean – hi, Darren, this is Rune Lundetrae. First of all, I think we can all agree that this is a complicated and highly technical accounting issue and will have no operational or managerial implications on how the relationship between Seadrill and Seadrill Partners works. The background here is that from the first AGM, the majority of the Board members became electable by the common unitholders, and therefore Seadrill lost the ability to control the majority of the Board due to a cutback feature in our voting rights, meaning that you can only vote up to 5% regardless of your ownership percentage. So, this technicality resulted in requirement in the U.S. GAAP to deconsolidate Seadrill Partners.

As we also said in our report, we are evaluating options for how we can reconsolidate, because I think in our view, it does not make sense to deconsolidate a company we effectively control 62.4% of, but we will have to come back to the market with more upside, when it’s more clear. So, I think -- hope that helped a little bit.

Darren Gacicia – Guggenheim Securities LLC

There was some detail on the release on kind of the timing of kind of giving us some clarity on how that's going to look and the rest, which is appreciated. The second question, there is some talk about -- and maybe it’s my term not yours of kind of rig attrition with regard to say older rigs or lower spec rigs or kind of go by generation that may need a fair amount of investment to stay alive.

I wanted to kind of have you expand on maybe how many rigs do you think kind of are in the market that maybe need that – that maybe some level of investment that may preclude them from kind of going forward and how do you think that that plays out on a timing perspective to help market bounces a little bit.

Per Wullf

There is no doubt that, I’ll try to answer this one here. There is no doubt that the fourth and fifth generation rigs, they are facing a tough time, and they will try to hang in there all they can do despite the rate drops, and where we're going to see the big cuts, where we’ll actually stack them or retire them, that's when you come up to the five-year classing for the individual units because you take a little bit of strength there before you decide to put $100 million, $150 million, $200 million in to an old unit. And that’s why we are so perfectly positioned for the future.

We don’t have that challenge. That’s okay our competitors have that. We don’t have that challenge. How many will retire we will see. But of course with the dropping rate for fourth, fifth generation or in the whole market, then they will start to soften. You'll take a little bit of [gut] before you start to invest for further five-year operation into these units. So, you will come as they come close to the five year classings.

John Roach

To press you a little bit for an order of magnitude, say through the middle of next year, do you think that number is like 0 to 10, 10 to 20 do you have, just some rough parameter what you think the impact on the supply demand is?

Darren Gacicia – Guggenheim Securities LLC

You bet it on John, I’m not (inaudible).

Per Wullf

I think historically we look at 7 or 8 floaters retiring per year, given the age of the floater fleet, I think you can expect a number north of that. If you look at a floater fleet of roughly 255 units, 130 of which are ultra deep I think everything above that you need to keep your eye on over the next five years.

Darren Gacicia – Guggenheim Securities LLC

Great, that’s great color Per Wullf.

Operator

Thank you, we’ll now move to Anders Bergland of Platou Markets. Please go ahead.

Anders Bergland – RS Platou Markets AS

Yes, good afternoon. I have three questions, the first one relates to further dropdowns into potential SeaMex, and could we have some color on potential sea brass, some color on the potential Petrobras contract extensions?

Rune Magnus Lundetrae

Either on those, I will try to remember now then to answer each of those items starting with SeaMex, obviously I think that depends on further contracts in Mexico. We think that the SeaMex partnership is very exciting because it put us in a very strong position for more contracting activity both for jack-ups and floaters in that Mexican surface. As you know that market is now opening up, and will open up more also for the floating segment in the next couple of years.

I think we are actively pursuing all opportunities and I think, we will be in Mexico for the long run and hopefully we can add through the five contracts that we now have plus the Pegasus. But I think it’s difficult to give any firm sort of commitments to more drop downs asset quality into SeaMex. But I think it’s a good vehicle for more units definitely.

Anders Bergland – RS Platou Markets AS

Okay, on the Seabras, that used to be a potential future vehicle?

Rune Magnus Lundetrae

Yes, I think Seabras is not totally off the table, but I think our focus right now is on keep telling the individual investors and I think then we will start working on Seabras as and when we are more comfortable with the activity level in Brazil I’m obviously referring to the extension I think that’s important and we are confident that we will extend the three contracts that we have down there. we have added the Sevan business. So I think we are slowly developing that business. but I think right now, the focus is on the extension of the current activity down there, not on Seabras.

Per Wullf

If I can add on a little bit, this is – we’re talking about extension and we have discussed and we have finished with the technical part of all that stuff on Eminence and Taurus and that is two units that are coming available in 2015 – mid-2015, and then we talk extension from that point in time.

Anders Bergland – RS Platou Markets AS

Okay. thank you very much.

Operator

Thank you. We will now move to Lukas Daul of ABG. Please go ahead.

Lukas Daul – ABG Sundal Collier Norge ASA

Thank you, and good evening. My first question refers to West Saturn and West Jupiter. for many quarters now, you have been saying that those rigs have been spoken for. you are basically reiterating that today. But then you included the sentence that there are no assurances that this will end up in a finalized deal. The reason why I’m asking is that historically when you said that you are in an advanced discussion, it always materialized in a firm contract. Can you just sort of give us a little bit more color on what is going on and how confident you are that these fixtures will sort of turn into firm contracts?

Per Wullf

Yes, I can. To take Saturn to start, Saturn and Jupiter, they’re both coming in full already from the shipyard. Just as you know, this is, take Saturn, we have discussed Saturn with this customer since late 2009 actually. So this is something that is building up over long period, it was one of our major customers. And the contract has been negotiated long-time ago technically, economically and everything, okay. we are waiting on the final signature and I’m sorry I couldn’t do that. in the third quarter, I could still not do it. I would love to do it right now. I cannot do that.

What we’re doing as we speak right now is that we are sitting together with the customer for both Saturn and Jupiter. we are sitting and we are talking operation startup. we are down to what sort of Schlumberger units we have on, what sort of equipment shall we have on. That is the detail level, we are not – we have parked the contract that’s done long-time ago. It’s just not signed. And unfortunately, we are facing administratively challenges in certain parts of the world, that’s what I can say.

Tor Olav Troim

I think it’s important to add on one thing. I think we mentioned the Pemex contract in a similar way that was mentioned before it was actually signed off year later. In this case I think we can say as much as if this contract doesn’t go through, Seadrill will receive a significant amount of money which is a confirmation for us that this is real business.

So if any of these contracts doesn’t go through, then we will end up with a significant amount of money which is probably too large to pay for an oil company to not do anything. I think we have reasonable good comfort that both these contracts as Per said, will be executed.

Lukas Daul – ABG Sundal Collier Norge ASA

Okay. And then when it comes to the new builds, as you commented you are sort of sitting tight right now watching the space. But when you look across your peers, do you think they will do the same because I mean you have built your fortune by not following the industrial leader.

Per Wullf

Yes, we were not go on following the industrial leaders going forward because Seadrill will do it in the Seadrill way, that’s way we have the success we have. But like Tor Olav said we hope they will take a pause now in the ordering. We want to see what’s going on here, but underestimate we actually have 20 new buildings coming over the next couple of years.

So, it’s not that we are passive on the new building market. And we committed to four drill ships last year in August and they will come out in the end of 15 perfectly suited for the future. And we will of course take any opportunistic and we are opportunistic in Seadrill and if we see opportunities going forward, we will grab them and that's both [indiscernible] it is new builds and what have you but obviously we're a little cautious right now. We want to see where the market is moving.

Tor Olav Troim

If you take our competitors, I think what we have observed and you observed this probably as well, you've seen statements unofficially or officially from Enskilda that they will not order. You've seen it from [NADL] that they will not order. You've seen it from [indiscernible] that they will not order. You've seen it from Pacific that they will not order. So, the only people you really left with here you can order capacity and you have take and they want to do it. And there have been some question marks about the ocean rig. But otherwise I think pretty much known coming ahead with anything for the time being. We felt this would be great at the end of two, three years from now where there will be few rigs coming to the market.

Lukas Daul – ABG Sundal Collier Norge ASA

And the given your sort of [upbeat] comments on 2016 and 2017 or into at least a little tempted maybe to sort of a secure some capacity for that market if it really comes back?

Per Wullf

If you look back at what we historically we have done, we stopped ordering in 2008 when everybody else started to do. We came back to the market in 2010 as the first player and everybody followed us then we came back again in 2012, and people followed us. I think we are a little bit afraid of the fact that if we go ahead and all the people will follow the gain. And I think for the (inaudible) 20 new buildings coming, we feel we have secured the growth at least until 2017 and the 17 slopes are still on the table. So if you want to grow in 2017, we can still do that for the next six months I would say.

Lukas Daul – ABG Sundal Collier Norge ASA

All right, thank you.

Operator

Thank you. We will now move to Ryan Kauppila of Citi. Please go ahead.

Ryan W. Kauppila – Citigroup Global Markets Ltd.

Yes, thanks. Couple of questions; firstly, on your 2015 statement that you are seeing a slight increase in inquiries for 2015 availability, just wondering if there were any geographies that featured prominently in that?

Secondly, in West Africa, you’ve highlight the approval process can lead to delays, has that improved or deteriorated or changed at all in the last 12 months or 18 months clearly been a dearth of activity in West Africa and just wondering how the operating environment has changed recently?

And then finally, again you highlight that oil company activity may push rates higher in 2015, but notice that there is not a day rate commentary in the statement this time, just wondering where you are seeing leading edge day rates in ultra deepwater?

Per Wullf

Yes. Let me take our challenge, it is a fact when we sit and negotiate these contracts and often this is not tenders we are doing. This is direct negotiation with oil companies and we use years on this to be honest, okay. So operationally we are fine in West Africa administratively it is a challenge, I cannot go closer than that, but that part of the world is really challenging. When we look at where we see growth and we see and we also stimulate in one of the slides to you, we see that the 2014 are pushed into 2015, 2016 and that both West Africa and U.S. Gulf for that sake. And we also actually see interest comes from Petrobras here in the recent rounds that they could be interested in more capacity based on dialogue we had with them yesterday. So it is a triangle we are talking about in general, okay.

When we look at the rates as such, we don’t have enough data points. We sold the commitment in the U.S. Gulf few months ago, then rumors are going with rates in Brazil from Transocean and that is as we see it is not a straight rate and they do not reflect the rate on deepwater unit, because it consisted of a package of units as we understand it, where I even think there’s some maybe older units and you should have actually (inaudible) what I’m talking about, older units fifth generation being offered us well intervention vessels and what have you. So I don’t think this is a rate that reflects the reality, otherwise I would be very surprised though. So we cannot talk about rates based on the data point in the U.S. Gulf and then this rumor in Brazil.

Ryan W. Kauppila – Citigroup Global Markets Ltd.

Okay, hopefully, we’ll get some more data points in the coming months.

Per Wullf

Unfortunately that is the fact, yes.

Ryan W. Kauppila – Citigroup Global Markets Ltd.

Yes. All right, appreciate it.

Operator

Thank you. We’ll now move to [indiscernible] of Goldman Sachs. Please go ahead.

Jason A. Gilbert – Goldman Sachs & Co.

Hey, it’s actually Jason Gilbert. thanks for taking my question. I think most of mine have been answered and I think someone asked that a derivative of this question earlier, but where do you think and I know that the big players are not ordering deepwater rigs at the moment. but just from a purely mathematical standpoint, where do you see deepwater rig rates needing to fall in order to deter incremental new building just from a purely mathematical standpoint for six and seven?

Per Wullf

From a mathematical point of view, we have spent the whole of last year, both Board members and us here sitting in Seadrill management, we have spent a lot of time on the deepwater market. we have done it together, we wish that we have really spent time on this, and we – I think we also explained that we have a production in the ultra-deepwater at 1 million.

We know and we can see that if we got – this will go and increase to 5 million barrel over – from now on, on to 2020. sitting with that knowledge and we all know that, it simply takes a lot of ultra-deepwater units to do that. so there will not be an undersupply if we don’t do anything. obviously, we’ll all take a pause right now to see what’s going on, and who is the first one to trigger on further new buildings, but in order to go from 1 million to 5 million barrel and the complexity in drilling at ultra-deepwater will take more units going forward.

We have said before that we see a lot of units being missing, and I think we will up to – that we should see up to 20, 25 units a year. this has all gone through a broad stop right now, and we have also claimed before that we want to have a portion of these new buildings. So I think we’re all sitting right now, waiting on this and see what happens. but this is typical, we will now end up in an undersupply in a couple of years and then we will enjoy that obviously, especially we will because we have a fantastic coverage in both 2014 and 2015 to be honest.

Jason A. Gilbert – Goldman Sachs & Co.

Fair enough. I guess I was just wondering if you assume call it $700 million to build a new drill ship, and what’s your IRR threshold limits 13% what’s on your math, what’s the rate you need back some to hit that IRR?

Rune Magnus Lundetrae

Hi Jason its Rune here. I think what we are looking at as the rule of thumb is to have return on the equity of about 50% is that what we based historical orders on at least, I think you have two numbers then, you have obviously the cost for the new builds and you have the day rate level, when we stopped building rigs in the first let’s say cycle in 2008, we stopped because we thought it was getting too expensive, then we start ordering in when the rates came down, and the math worked for us again. I think what we have seen lately is of course that the cost of the equipment has come down and so you are not as sensitive to the day rate level.

I think based on today’s work, the last order we did, which was in the low 500s not ready to drill, but that could, it take us to 600 ready to drill, we could name with day rate thumb to 525, if we wanted that in the Gulf of Mexico cost level, if we wanted that math to work. But it’s not an exact science. But that’s been the rule of thumb for the floaters. For the jack-up side it’s been typically around seven years payback, when you take into account tax and EBITDA, but before funding.

Per Wullf

We could live with And we don’t have $700 million on a drill ship ready to drill; we have $600 million ready to drill and when we spoke about $700 million, when we were on first day rate EBITDA wise. So often the delta between $600 million up to $700 million that’s covered in mobilization pay and what have you and requirements from a customer, we actually built drill ships cheaper today, the way we secure rigs, we prepare them, and we make them greatest run is significantly cheaper than when we built Polaris five years ago.

Jason A. Gilbert – Goldman Sachs & Co.

That’s superb helpful guys. I guess last one is Rune maybe its just for you, but with respect to the credit ratings, you are not going to do it by mid March, what’s the sort of timeframe we should expect you to do it and is that something you want to comment on?

Rune Magnus Lundetrae

I want to be a little bit careful to guide on timing, I think as you saw in our comments today, we are -- we do recognize that it is part of our, let’s call it evolution in Seadrill. I think we did think long and hard about whether or not we should do the right thing at this time within the current timeframe, which was March 14 to avoid the uptick in the coupon. I think what we – where we wanted to develop Seadrill Limited further was when it came to the balance sheet and specifically, the CapEx commitments in the next 24 months, the 20 new business, so it does provide a challenge for the agencies when they do assess the company. and I think we have learned a lot having been back to the agencies two, three times over the last 18 months.

So then you came down to let’s see if we can strengthen Seadrill further and put us in an even stronger position, and get a decent rating for the company. But it is part of our development and we will consider it on a continuous basis going forward, but I’m not going to give you a timeframe right now.

Jason A. Gilbert – Goldman Sachs & Co.

Okay, thank you. I’ll turn it back.

John Roche

And operator, I’d like to – before we do conclude today, take one more question.

Operator

Thank you. The final question will come from Christyan Malek of Nomura. Please go ahead.

Christyan F. Malek – Nomura International Plc

Hi, good evening gentlemen. just one question regarding supply additions this year and next, in the context of the major and their exploration budgets and their own outlooks in a scenario where they do cut deeper and demand is down. I know we talked about the base case where day rates are softer near-term, presume higher. where do you see day rates in this sixth generation market falling to? Clearly, there’s a low end of the range, what is your worst case scenario analysis, and I say in the context of major cutting spend and also with supply additions this year, just want to know?

Per Wullf

I think we tried to say before that we cannot really comment on day rates, because of the pure speculation based on one rig that have been secured really since December and that was the Ensco rig in the US GOM. so that one I cannot really comment on. What I can say is that when we operate all the units and if you take a good figure as to, if you take all included and you say $230,000 a day, that is our total cost and we operate our unit. And then you can – you look yourself of your gap up to whatever rate you can get. That is what I can tell you, because I know our operating cost and I know we have the five-year cycle now, your running units in Seadrill and we have a very good picture of what our cost is.

So then you can figure out from there on, when it is worth running with these units or they have to be stacked, because we cannot really comment on the day rate as such, because that would just be pure guess work.

Christyan F. Malek – Nomura International Plc

Right, so you have a lower end, but the point you are making is that regardless of the prevailing day rates in CIRR on these rigs, which is key for you, and therefore as long as day rates stay far below, cash flow uptakes which is what $250, $300 you will be fine.

Per Wullf

Yes, I think we’ve said several times, in this market when it’s been good and when it’s been bad, we say that $450 low day rate, $650 is a high day rate, $550 is probably the level where we have a very good return when you are talking about the assets generating around five times enterprise value of the EBITDA. While you don’t see a lot of ordering if rigs are just about 600, you’ve seen that few times and then it leads to massive order increase pretty quickly, I think the $550 level, you have a limited amounted of ordering, you have a very decent return on the capital investment around 5x EBITDA.

And if you then can fill up, those contacts you get there into [their material], 10x to 12x EBITDA, you have a business mobility works over time. I think what’s important also to remind people about is what’s stated in your report when the oil companies smelt their wells and say you want to cut CapEx and they think day rates are too high.

I am almost tempted to say, it’s crap it’s not the day rates who kills oil production today, what kills oil production today yes we have added on 300 more rigs over eight years and we are effectively producing less oil offshore, I think for me that’s the strongest drill sign I’ve ever seen for a stock because it does tells you how much more capacity you need over rigs in order to bring that oil up off the ground, and you can do you like Statoil did kind of few weeks ago decided to cut CapEx I’ve said didn’t have to confess, then you don’t meet the production targets, I think that’s where we are today. and then I would say kind of for us long-term probably the rates around $550 level is to optimum size where you don’t still see a lot of new ordering. you have a very healthy return and with the kind of financial flexibility, they have been [indiscernible] MLP under we have a very, very sustainable and good business model.

Christyan F. Malek – Nomura International Plc

And so just also justifying onto make sure it’s clear to not put words in your mouth, but if day rates are so below the US $450 and again I understand it’s not a one day rates in aggregate but say the prevailing that would be marginal and that would be an incremental negative to return but above US $450 say between the US $500 and US $550 that would be a base case around of returns you are looking for.

Per Wullf

Yes, I mean since we launched the MMP originally I think the average rates on the MMP is going to be – around 520,000. I think we can comment on that during – uptick on the average rates we have on the MMPs.

Rune Magnus Lundetrae

In October 2012, it was in the low 500. We have all re-contracted several of those rigs now and gotten new day rates significantly above that level. I think, also looking back a little bit what we have done historically, look at, we have Gemini which obviously came in at the lower end of day rates level. I think it came in at 440,000. It certainly didn’t kill the company.

I think the important thing for Seadrill right now is, of course, to have most of the rigs exposed to and the market is good and that’s why we spent quite a bit of time to try to set the market and take an independent view on what’s going on. I think that’s where we have been successful. That’s why we have moved first and I think followers, but actually been taking charge in the market.

I think, we have subsidized that because of the other companies following us three times to four, we will be a little bit cautious now before we commit to more new builds. But as soon as we are comfortable with the 50 deliveries and also continue with the operation performance and the financial performance we have done lately then I think you can expect us to add more. But I think it's a little bit [hypothetical] to challenge us on what is one rig fall below 450 because I think we have demonstrated what we did before.

We have significant comfort around the 2014 exposure, and then it’s a little bit early to be specific where is the 2015 delivery is going to end up because it is in the end of 2015 early 2016 where those rigs are really exposed to.

So I think what we are try to get across today is that we are very confident about where we are position in the market. We are comfortable with exposure we have and we are comfortable with the current dividend level at $0.98 a quarter as a floor from this quarter and for the foreseeable couple of years.

Christyan F. Malek – Nomura International Plc

Very good. Thank you very much gentlemen.

John Roche

Operator, I turn it over to you. Thank you everyone for joining us on our fourth quarter call.

Operator

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

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