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Seadrill Limited (NYSE:SDRL)

Q1 2010 Earnings Call

May 27, 2010 10:00 a.m. ET

Executives

Jim Daatland, VP of IR

Alf Thorkildsen - CEO and Acting CFO

Analysts

Fiona Maclean - Merrill Lynch

Ole Slorer - Morgan Stanley

Lukas Daul - SEB Enskilda

David Phillips - HSBC

Phil Lindsay - RBS

Andreas Stubsrud - Pareto

Kenan Najafov - Citi

Karen Finerman - Metropolitan

Kjetil Garstad - Artic Securities

Geoff Kieburtz - Weeden

Operator

Good day and welcome to the Seadrill quarter one 2010 results presentation conference call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Jim Daatland, Vice President of Investor Relations.

Jim Daatland

Thank you and welcome to Seadrill's first quarter 2010 earnings conference call. A copy of the first quarter report is posted on our website, seadrill.com, along with the reporting material for this conference call. Joining me today on the call is Mr. Alf Thorkildsen, Chief Executive Officer and Acting CFO; Mr. (Liva Rolle), Group Controller.

As announced in April, we have hired Esa Ikaheimonen as new Financial Officer in Seadrill Management AS. Mr. Ikaheimonen is not present today, but will join us in August in time for our second quarter earnings release.

Before I turn the call over to Alf, I would like to remind everyone that during the course of this conference call, we may make certain forward-looking statements regarding various matters related to our business, our company that are not based on historical facts. These can include future financial performance, operating results and the prospects for the contract drilling business in general.

Any such statements in addition to other information discussed in this call are given within the Safe Harbor provisions provided by the federal securities regulation. For further and more detail description of all the risks associated with our company and industry, please see our most recent Form-20F and other filings with the U.S. Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results should differ materially.

In order to give as many people as possible an opportunity to ask questions, please limit your questions to one initial question and one follow-up. Thank you.

That concludes the preliminary details, and I'll hand the call over to Alf.

Alf Thorkildsen

Thank you, Jim. Next page please. On the content today, I would start with some overall comments to the results and company developments through the quarter, walk you through the financial results in more detail, talk about our current operations and in particular the performance of our deepwater newbuilds. I will further discuss our contract backlog and market outlook, updated dividend policy, future opportunities and close with some summary remarks.

Next page please. The highlights of first quarter 2010. First of all, it's an honor to host our first earnings conference call as a New York Stock Exchange listed company. The listing has been an ambition since the incorporation of our company, and we were thrilled to have the trading in our common share start on the New York Stock Exchange on April 13.

It was a special day during the opening day on the stock exchange that day. In that respect, I would like to take the opportunity to thank all of our employees that are listening for a job well done in taking Seadrill to where we are today.

I'm here today to share with you the quarter with an EBITDA of $434 million and the net income of $217 million. The corresponding earnings per share were $0.49 compared to $0.95 in previous quarter.

We are somewhat disappointed that we missed the EBITDA consensus estimate. I will try to explain you the delta. First of all, the quarter was characterized by improved performance by our new deepwater units, which average utilization reaching our target of 97%. However, in spite of the strong utilization for our deepwater newbuilds, we had off-hire period related to submersible rigs as well as relatively high operating expenses compared to our target.

We also made some adjustments related to sales tax in Brazil that impact our EBITDA performance. The earnings per share were further impacted by a non-cash mark-to-market loss on interest rate swaps.

We have had strong influx on new term contracts this year. So far, we have been awarded $2.7 billion on new contracts. I will come back to the various fixtures later, but we are extremely proud to have grown our backlog to $12.2 billion in what many would argue it's a tough business climate.

The contract signings have contributed to further strengthening our earnings visibility and the breadth of the dividend distribution. In response to our development, the Board has resolved to increase our regular cash dividend to $0.60 per share, up from $0.55 last quarter.

We continue to be optimistic of the long-term outlook for our industry. As such, we have decided to issue 30 million new shares in April to pursue investment opportunities in our sector.

We subsequently launched a mandatory offer for the outstanding shares in the jack-up company, Scorpion, and also seized the opportunity to acquire a harsh environment unit under construction in Singapore. That is backed with a five-year contract with Statoil in Norway that will repay the investment over the same contract.

So with that, let's walk through the accounts. Next page please. The EBITDA contribution; first, let me start with an overview of our EBITDA development on the quarterly basis. As mentioned, the first quarter number of $434 million is down $52 million from the fourth quarter last year. The decrease was related to the $50 million gain on the sale of assets that was included in the previous quarter. In addition, there are plus and minus for the various business segments that I will walk you through.

Next page please. Mobile units. This we'll start with the mobile units, which covers our drillships, semi-submersibles and jack-ups. The operating profit decreased from $338 million in the fourth quarter to $285 million in the first quarter of 2010. Again, the gain on the sale of assets in the fourth quarter explains the decrease in operating profit.

However, there are other aspects to mention as well. Revenue in the first quarter was reduced by approximately $60 million due to sales taxes for our Brazilian operation. Of this amount, $10 million relates to revised estimates for such taxation in 2009. While this tax on sales will affect reported operating profit in the future, the tax expense will be reduced by a similar amount, leaving the net income unchanged.

Our performance in the first quarter was adversely impacted by the downtime of the drillship West Navigator and the semi West Hercules. We also had the jack-up rig West Triton out of operation for most of the quarter. The semi West Alpha that had a yard stay in part of the fourth quarter returned to a full quarter in operation as well as lower OpEx.

In addition, West Prospero commenced under the new contract in the Red Sea and as such contributed to increased operating profit. On the cost side, we were somewhat disappointed with our average higher costs than contemplated.

Next page please. Tender rigs. For tender rigs operating profit, that increased from $29 million in the fourth quarter to $35 million in this quarter. The main reason for the increase was, West Alliance on a new contract at a higher day rate, and the commencement of two new units, West Vencedor and T12 late March.

However, we experienced somewhat lower utilization on the West Setia operation in Angola that reduced the expected increase in operating profits from the segment.

We have not prepared a separate slide for well services. As you may know, this division is reflecting the financial results of Seawell, over 74% owned well services company. In short, the operating profit was $12.1 million, which was down from ($14.5) million in the previous quarter mainly due to fluctuations in currencies.

Next page please. Let me then turn to the consolidated income statement. The consolidated operating profit from our three business segments totaled $332 million. Financial items amounted to a net loss of $86 million. This compares to a gain of $20 million in the previous quarter.

Interest income amounted to $90 million that in the main was related to our PetroMENA bond holding, loans to related parties, and interest on our cash deposits. Total interest cost amounted to $68 million; of these, some $30 million was capitalized, leaving $48 million expense in the income statement. The reduction in the interest expense is mainly related to lower interest rates.

Income from associated companies was $18 million representing our share of earnings from our holdings in Varia Perdana, SapuraCrest and Scorpion Offshore. The remaining financial items add this up to a net loss of $75 million compared to a gain of $36 million in fourth quarter.

The most significant factors are, $12 million loss on our total return swaps in our own shares, and $58 million loss on interest swap contracts.

Net income taxes in the quarter amounted to $29 million.

Net income amounted to $217 million, equivalent to $0.49 per share.

Next page please. Balance sheet: Changes to the various balance sheet items are moderate over the quarter. Cash added up to $449 million at the end of the first quarter, down $160 million compared to the year 2009.

Accounts receivables showed a slight reduction of $50 million in the first quarter and ended up at $402 million. The non-current assets the most significant change is the delivery of the two tender rigs, West Vencedor and T12. Other than that there has only been minor movements related to the fixed assets.

Next page please. Balance sheet with liability and equity: Net interest bearing debt at the end of the quarter totaled $6.7 billion, an increase from $6.4 billion at end of December. At the end of the quarter, we also had undrawn amounts available under various facilities to the magnitude of $479 million. Shareholder equity decreased by $62 million in the first quarter after the distribution of approximately $220 million in dividends in March, partly offset by the net income in the quarter.

Next page please. Worldwide operations: So if we then go back to the operational side of the company, we currently have 32 units in operation, 7 units under construction, 1 in transit to its first assignment, and one idle in Malaysia. Since our last reporting, we have taken the delivery of the new ultra-deepwater semi-submersible unit, West Orion that currently is in transit to Brazil to start its six-year contract with Petrobras.

The new-built semi-tender West Vencedor arrived in Angola in February and commenced operation under a five-year contract with Chevron in March. Same month, we had the other tender rig new-built, the T12 start on a one-year contract in Thailand. We also had the jack-up rig West Triton commence work for Twinza. That was complete in April, and the rig is now in Indonesia to work for Anadarko.

Next page please. Utilization: A critical part of our continued development is the optimization of the operational performance, including HSE and economic utilization of our rigs.

In the first quarter, the economic utilization rate for our new ultra-deepwater units was 97%, up from 93% in the previous quarter. The improvement is in line with the expectation that was communicated in connection with our last reporting and our targeted utilization rate going forward.

This development is a testimony to our emphasis on systematic improvement of work processes, adheres to procedures and awareness of potential dangers and hazards through transfer of experience in order to reduce downtime risk.

However, during the quarter we still have one rig that is delivering up-time below our expectation, the West Hercules. As we also have mentioned in the quarterly report under section, the Next Quarter Operational Events, we have in the second quarter experienced one month of down-time on the drillship West Polaris due to BOP repair work.

This just shows that there is always room for improvement in efficiency, and we're working closely with our customers to maximize the drilling performance, as we believe that not only up-time, but also drilling efficiency for our client will be important in order to create a competitive edge in the industry in the future.

For the other floaters, excluding West Polaris and West Venture, which is having a 10-year classification survey, the utilization rate to-date in the second quarter is approximately 97%.

I am pleased to see the continued improvement performance for our fleet, but a bit disappointed that we had not been able to reduce our operating cost at the same time and at the same pace. The spreads in operating expenses between our best performing rig and our poorest performing rigs is too wide. We are putting every effort into improving the lower performing rigs through learning from best practice.

There is a strong focus on effective cost control, and due to actions we have taken over the development of operating cost in the second quarter shows an encouraging trend.

Next page please. Newbuilds: We have, in addition to our units in operation, still a number of newbuilds under construction. Following the on-time and on-budget delivery of West Orion in April, we have seven units remaining; two ultra-deepwater units for jack-ups and one tender rig.

The next expected delivery is the drillship West Gemini to leave the Samsung yard for West Africa in July on-time and at original cost. Then we have two jack-ups, the West Leda and West Callisto to be finished late the same month. Whereas there is a third jack-up in fourth quarter this year.

We have a semi-tender newbuild in January 2011, the newly acquired harsh environment jack-up rig in the second quarter, and the deepwater semi-submersible rig, West Capricorn in the fourth quarter.

All projects are on time and at cost and will provide for further EBITDA growth this year and next year.

Next page please. Investment in new harsh environment jack-up rig: Late last year, we secured an option to buy a harsh environment jack-up rig. The rig was, and is currently under construction from the Jurong shipyard in Singapore. The jack-up rig is of Gusto MSC CJ70 150A design, has water capacity of 150 meters and is tailor made for harsh environment and Norwegian waters.

In April, we were able to secure a five-year contract with Statoil. In response, we decided to exercise our right to acquire the jack-up rig. The yard contract price is $356 million, excluding owner furnished equipment, loose drilling equipment, capitalized interest and project management and is scheduled for delivery in the second quarter 2011.

The assignment with Statoil will repay our investments over the initial contract term.

Next page please. Deepwater market outlook: The oil price as of May 2009, traded between $60 and $80 per barrel. This has significantly improved tender activities in most rig segments. We have over the last months, in particular, seen growth in activity in the high specification jack-up rig segment, a development that is positive for tender rig market as well.

In the ultra-deepwater market, the activity has been slower, but it has been promising to see that the demand is picking up in other regions than Brazil, which recently has been the main driver for demand in this market segment.

The Macondo oil spill in the U.S. Gulf of Mexico has introduced uncertainty to future drilling activity in the U.S. Gulf of Mexico. Although it's hard to estimate the effect of this oil spill, it is most likely that it will increase the emphasis on operational experience and make it more challenging for new operators, which is also having their access to financing made more difficult these days.

Furthermore, we believe that any additional government requirement related to deepwater drilling will only support the demand for new and modern equipment. As a result of this, Seadrill sees possibilities for further consolidation of the ultra-deepwater drilling market.

Next page please. Contract Backlog: As I mentioned early on, we have this year added $2.7 billion in contracts to our order backlog of which $2.3 billion has been secured since our last reporting late February. The main fixtures since February are the re-contract with Statoil and one with Total.

With Statoil, we signed a four-year contract at $266,000 a day for the jack-up West Epsilon, a five-year contract at $411,000 a day for the deepwater semi West Venture, and a five-year deal for a new jack-up under construction at a dayrate of $340,000. With Total, we entered into three-year contract at a dayrate of $445,000 for operating in the U.K.

The average EBITDA margin on these contracts before G&A is roughly 64%.

Next page please. Contracts for floaters: Our recent contracting strategy has been to secure employment for the open deepwater positions in 2010 and 2011. For the latest fixtures, we now have secured 100% contract coverage for our deepwater fleet in 2010, 99% in 2011, and 80% in 2012.

We are already in specific discussions regarding further extensions of other contracts. The strong contract coverage puts us in a unique position to seek opportunistic investments.

Next page please. Contract backlog for jack-ups: We have seen a strong uptick in demand for new and modern high capability jack-up rigs this year. Although there still is a large number of new jack-ups being delivered from yards without secure employment and rigs coming off existing contracts, the pattern seems to be that the operators are replacing older equipment with new equipment with higher specification and more water depth capacities.

We currently have all our jack-up rigs in operations and have secured employment from date of delivery for three out of four newbuilds we have under construction. As the majority of our jack-up rig fleet is on contracts that expire later this year, we hope and expect to benefit from this favorable development with increased contract backlog.

However, the recent turmoil in the financial market and the decrease in oil price could cause some short-term disturbances in the market for jack-ups.

Next page please. Tender rigs backlog: The market for tender rigs has more or less experienced the same market conditions as jack-up rigs since the drop in oil prices in 2008. The number of enquiries is up significantly this year compared to last year, and the fixtures that have been announced give us expectations of continued improvement in the demand for tender rigs going forward.

At the moment all our 100% owned tender rigs are contracted until 2011 with the exception of the T8. We are currently entertaining several contract discussions and see strong contract opportunity for units that are available early next year and onwards. For T8, we expect to secure employment in the latter part of this year.

Regarding contract opportunity for units that are available from 2011 onwards, we are reasonably optimistic.

Next page please. Dividend policy: Our objective continues to be to generate competitive returns for our shareholders supported by regular cash dividends. The Board has for the second quarter resolved to pay cash dividend of $0.60 per share, up from $0.55. The increase comes after a thorough evaluation of our underlying business, current investment opportunities and capital commitments.

We continue to see potential for further growth in dividend as the capital expenditure tapers off in 2011 and 2012. However, further increases are to a large extent dependent on the development in the capital markets, solid operational performance as well as our ability to generate accretive deals and further extend the order backlogs.

Next page please. Equity. The ambition is to continue to grow Seadrill through the acquisition of modern high-specification drilling units. In line with this strategy, we have increased our exposure to the offshore drilling market by investing in the new harsh environment jack-up rig under construction, and we have made a bid for Scorpion at NOK36 per share. Ensco has today launched a competing bid at NOK39.5 per share. We take this into consideration as we evaluate our option regarding our position in Scorpion.

Our main focus continues to be to develop the world-leading fleet of the modern deepwater floater assets. The recent oil spill in the U.S. Gulf is likely to increase emphasis operational experience and make it more challenging for new operators. This is further spurred by limited access to financing for the same operators. As a result of this, Seadrill sees possibilities for further consolidation of the ultra-deepwater drilling market.

So let me try to summarize this presentation and the latest developments. Before that, by the way, let me say next page please. I'm on the last page of this presentation. So let me try to summarize. We have this year added significant term contract to our order backlog. We have taken delivery of three rigs on time and on cost. We have reactivated two jack-ups. And we have invested new capital in the new harsh environment jack-up rig.

We still have some challenges related to optimizing our cost structure that is getting our full attention, but we have significantly improved the regularity in utilization of our new deepwater fleet.

We are confident of the continued solid development in earnings for our company over the next years and continue to look for and evaluate business opportunities to create values for our shareholders.

This concludes our presentation. Operator, we are now open for the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) We'll take our first question from Fiona Maclean of Merrill Lynch.

Fiona Maclean - Merrill Lynch

I've got two questions. Firstly, can I ask about your West Sirius rig in the Gulf of Mexico? Could you explain to us what happened with your sublet contract with Exxon and then your full-on contract with Devon (inaudible)? Can you just walk us through the technicals of that? So what is the risk to the day rates? How low can it go and what is the potential for a complete cancellation of that unit? And if it does get cancelled, what you do with the rig?

And then secondly, I want to talk about a comment that you had at the back of your release today where you're saying that you are looking at possibly different options for the listing of your European shares. Could you just expand on that as to why you'd possibly be looking to move your listing away from Norway?

Alf Thorkildsen

Let me try to start with the Sirius. West Sirius has a six-year contract with Devon. And we have so far been close to two years of it now with Devon. And we are currently on a sublet to Exxon. And on April 27, there was a moratorium on drilling, and that also affected the Sirius.

We had a discussion with Exxon regarding force majeure, and we are in discussion with them in this respect. We don't know exactly what their plans are, and I guess it depends on when they lift the moratorium. And I can't speculate on that much more than that.

What I can say that is that there is a force majeure close which lasts for 120 days. And in that period of time, we're getting somewhat reduced rate. Thereafter, each party can terminate the contract; however, Exxon has no right to terminate their contract in the sublet.

On accounts to listing, we're just looking at opportunities to create both variation and liquidity in the shares. And one option could be London Stock Exchange?

Fiona Maclean - Merrill Lynch

And just going back to the ban on the drilling, there seems to be indications in the market that the U.S. government is going to come out later today and say they're going to extend that ban by six months. Can you just give your reaction to that? And also, a follow-on to that, in terms of your dividend, can you just state that if there is some change in your contract on the West Sirius, your dividend policy is still going to be very firm and you're not planning to cut the dividend?

Alf Thorkildsen

What I can confirm that our policy will be the same. We will not change the policy. But of course, if there are dramatic changes to our future earnings, we need to always everyday realize and review that story. But our policy remains the same. We have an ambition to pay out a substantial part of all the earnings in Seadrill. So that's the kind of the dividend policy. What was the other question?

Fiona Maclean - Merrill Lynch

The other question is just a reaction to a possible six-month extension to this drilling ban.

Alf Thorkildsen

Depending on the already defined deepwater, there are between 25 and 35 rigs which should be impacted by this in the Gulf of Mexico. That of course is a serious event. We are however reasonably confident that even though Exxon may even put the rig back to Devon, there is a need for this rig in the licenses which have been bought by BP.

I don't want to speculate much more than that on this issue. When it comes to termination and so on, that's uncharted territory. And now I don't want to speculate on it as we speak.

Operator

We move on to our next question which comes from Ole Slorer from Morgan Stanley.

Ole Slorer - Morgan Stanley

Alf, could you give us a little bit of color on operating costs for the second quarter? You said a little higher than expected in the first quarter. Is that the new level or was there something that will be reduced?

Alf Thorkildsen

There are costs there which we expect to be non-recurring. I would say that we have had start-up which had lasted longer and had costs incurred which are more significant. In particular, when we had started up things, in the last quarter we had 97% utilization. At the same time, we have had air freights into countries like Brazil to U.S. Gulf to make sure that we have utilization high. But that of course has cost us more than we had expected. When we have more stable operations, and we are getting there, we will see reductions in those new areas.

Ole Slorer - Morgan Stanley

You're starting a number of rigs in this quarter as well. So is this sort of a fourth quarter event when you expect costs to normalize, or will they come down somewhat in the near term?

Alf Thorkildsen

I think we would see it near term. When we look at our own forecast for second quarter, we see significant reductions already. When it comes to startup, we are starting up West Orion in third quarter, most likely end of July in Brazil, and we are taking the learnings from the two previous rigs of the same caliber, West Sirius and West Taurus, going into West Orion. I expect to see significantly less trouble starting up West Orion compared to those two previous rigs.

Ole Slorer - Morgan Stanley

And I am sorry to get back to the West Sirius again, but you highlighted that there are potential use for this rig under the BP leases. So do you think that this rig could get extended therefore to some of Devon's old acreage in Brazil?

Alf Thorkildsen

That could also be the case, but it's too early to speculate. What happens under a force majeure is that the oil company had to mitigate the force majeure issues, and that of course has a global reach. So it's too early to speculate on this issue.

Ole Slorer - Morgan Stanley

Okay. I'm not going to push anymore on that, but you highlighted that jack-up market was a little uncertain because of near-term oil price weakness Sounds like this comment was drafted a couple of days ago. I mean oil prices are back up in the 70s again. So does it mean that you are now more confident in the near-term development of the jack-up market or do you see risks that Gulf of Mexico rigs might spill into international markets?

Alf Thorkildsen

I don't think that there are many jack-ups left in the Gulf of Mexico, and I think that has a limited effect. What is affecting it is of course the uncertainty. It's not the level itself. It's the uncertainty with oil prices which impacts the activity; also the financial issues. But when we are seeing more solid oil prices going forward, we see that the companies, particularly the smaller independent, are more confident to start new activities.

The jack-up is the first one to see it and also the first one to see the reduction. The uncertainty to some extent could impact it. But from Christmas and through now, we have seen significant increases in activity in this market.

Operator

We move on to our next question which comes from Lukas Daul of SEB Enskilda.

Lukas Daul - SEB Enskilda

First question is regarding your comment on the consolidation. You are saying that you have an ambition to consolidate the ultra-deepwater segment. I believe a quarter and two ago, you were also talking about an ambition to create a significant jack-up player with a modern fleet. Has any thing changed there?

Alf Thorkildsen

I guess everybody is aware that we have in fact had a mandatory offer on Scorpion. So that's the first one which is there. And then also Ensco has provided a competitive bid.

When it comes to consolidation of the ultra-deepwater business, there will be consolidation. We see the market changing. There are more players in the market. Some of them have more financial difficulties. There are also difficulties in getting their rigs on job and get a contract with an oil company. And that is the thing which we believe will create opportunities for further consolidation.

Lukas Daul - SEB Enskilda

And then more on the operational side. When you're talking about West Polaris having a downtime in the second quarter, I think this is the third time you are guiding that there will be a downtime on Polaris. Is there something specific with that rig or with the area where it is operating? Could you elaborate on that?

Alf Thorkildsen

It's the first rig from Samsung of this class and another rig, similar one, for an (overall) competitive, but with a different upside. So this is one of the first ones. I would say that these are some initial startup issues which have lasted for somewhat longer. When we compared to the next rig, which was the Capella, we have seen significant improvements in that.

So to some extent, we see that the first of any class of rigs are having more startup issues, and the learnings both from an operational point of view, but also from the supplier and vendor point of view, this is a learning and the improvements in the second and third rigs. So yes, I think you are right. It was one of the first one. We see that we are taking some learnings both from vendors and from own operations on this rig.

Operator

We move on to our next question now which comes from David Phillips of HSBC.

David Phillips - HSBC

Just one question. Could you talk a little bit about what in your experience has been happening in recent months with market values of rigs, second-hand values, and also to quoted yard prices? Especially, what's happening with some of the Asian yards, given some of the pressures they have in backlog there?

Alf Thorkildsen

I haven't seen so many data points when it comes to second-hand rig market. We see that Sembcorp bought into a rig in Jurong. I think that was around $600 million. We have seen some PetroMENA rigs being sold. We are competing for one at $530 million.

When it comes to the yard prices in the Far East, we all see that there are no order backlog after 2012, and I think we see that our attractive prices to be (inaudible). I cannot speculate exactly on it, but around $550 million to $600 million yard price depending on what kind of equipment and what depth level you want it to reach is an estimate we see these days.

David Phillips - HSBC

Okay. And just out of interest, when you look at the balance of opportunities out there right now, let's say in the next six to 12 months, do the economics look better to you to investigate rigs that are already under construction or even that already exists or actually are the other yards looking a bit more interesting?

Alf Thorkildsen

That is a question I could not answer. But to be fair, of course, we are screening both opportunities.

Operator

We move on to our next question which comes from Phil Lindsay of RBS.

Phil Lindsay - RBS

In light of the Macondo oil spill, do you envisage insurance premiums increasing significantly? And if so, will that be absorbed by yourself or tossed on to the operator?

Alf Thorkildsen

I think it's fair to say that we will see increases and to some extent significant increases in insurance. There is no doubt about that. In most of our contracts, we have a mechanism where we get compensated for increases in insurance cost, not on all, but on some of them.

I guess approximately half of our contracts have such a close where we have a direct kind of increase in our day rate if the insurance increases. On other contracts, we have it under the general clause and general provisions that as an operating cost goes up there is escalation according to some indices, normally American indices, for labor and other aspects of that. But for at least half of our rigs, we have specifically for insurance.

Operator

We take the next question from Andreas Stubsrud of Pareto.

Andreas Stubsrud - Pareto

Could you just give us some more details please on the $1.2 billion loan facility? It looks like you have secured for West Orion, West Gemini and West Vencedor?

Alf Thorkildsen

You are correct. We have secured it. It's a committed loan secured through a number of banks and through Eksportfinans and guaranteed by GIEK. That is the $1.2 billion. And as a collateral, we have West Orion, West Gemini and West Vencedor. It's a five-year loan with (the wallet).

Andreas Stubsrud - Pareto

Could you please give us some details on the cost of this loan?

Alf Thorkildsen

It’s a bit more than 200 basis points.

Operator

Our next question comes from Kenan Najafov of Citi.

Kenan Najafov - Citi

Just one of the questions about the jack-up rigs. Could you elaborate on the status of West Leda please? I've seen some changes today in the fleet report suggesting that it's been contracted from August this year.

Alf Thorkildsen

As we've said, we are in a process of finalizing contracts of both West Callisto and West Leda. I don't think there is much more to say. I think it is a 120 to 140 days job in Indonesia.

Operator

We take the next question from Karen Finerman of Metropolitan.

Karen Finerman - Metropolitan

On April 12, when you bid for SCORE, which actually didn't have any Kroner exposure, but trades that way, the bid was equivalent to 611. But now, with the move, it's 39.5, that bid would be 604. So if it made sense for you then, would it not make sense for you now to compete with the Ensco bid?

Alf Thorkildsen

I think you're right on the math. We are evaluating all our options.

Karen Finerman - Metropolitan

So you're not in the market right now buying SCORE?

Alf Thorkildsen

I didn't say that. I just say that we are evaluating all our options.

Operator

(Operator Instructions) Move on to our next question which comes from Kjetil Garstad of Artic Securities.

Kjetil Garstad - Artic Securities

Hi, it's Kjetil from Artic. You were saying that you were in specific discussion of further extension for some of your deepwater rigs. And I'm guessing you're talking about Hercules, Alpha and potentially also Navigator. Am I right? And could you elaborate a little bit on potential timing of contract announcements, please?

Alf Thorkildsen

Yes, I think you are approximately right. And I did not elaborate on the timing as such. But I would be disappointed if we couldn't announce another contract within the next quarter presentation.

Kjetil Garstad - Artic Securities

And then, on to your Norwegian floaters including Epsilon. Can you remind me how much is outstanding on the $1.5 billion debt facility that you have against those rigs? And could you also talk a little bit about a potential refinancing or a increasing of that facility once you have added backlog to Alpha and the Navigator?

Alf Thorkildsen

You're referring to the $1.5 billion credit facility?

Kjetil Garstad - Artic Securities

Yes. Sorry, yes.

Alf Thorkildsen

If I recall correctly, I think we have repaid of that. And I don't have it in front of me, but approximately $400 million is paid back of that amount.

Kjetil Garstad - Artic Securities

So it's either the 1,178 or the 8,888. So I guess it's the 1,178 left, or that is outstanding on that?

Alf Thorkildsen

Yes. Something like that. That's correct.

Kjetil Garstad - Artic Securities

Could you then just talk a little bit about, if you add contracts to Alpha and Navigator, if this is a correct debt against those four rigs taking into consideration what you have announced today on the Gemini, Orion and the Vencedor, and potential timing of this?

Alf Thorkildsen

What you have is, of course we have added five years for West Venture. We added another four years for West Epsilon. We are confident that we are getting attractive contracts going forward for our current rigs. Too early to say what the right level is, but of course this visibility and earnings visibility on these rates and the rates we are achieving of course creates opportunities. We have not explored that yet.

Operator

We take our next question from Geoff Kieburtz of Weeden.

Geoff Kieburtz - Weeden

Just a couple of follow-up questions. In regards to the Scorpion deal, now that you're in the mandatory offer phase, are there any limitations or complications in terms of your ability to raise your offer?

Alf Thorkildsen

No. There are no complications as such. You would require it to extend the offer for some more period, I think for another 14 days. If you raised it, you would need to extend the offer period with approximately 14 days.

Geoff Kieburtz - Weeden

Okay. And your commentary in regards to the effect of the Gulf of Mexico incident, it seems that the current view is that it's likely to have a positive impact at this point. Could you elaborate a little bit on your thought process?

Alf Thorkildsen

To be clearer, I think short term, particularly if the rumors that there will be a six months moratorium is correct, then of course there will be a significant impact in the short term in the Gulf of Mexico, and it’s negative.

I think longer term, I think it is beneficial and advantageous to have modern equipment, then maintain modern equipment and deep competencies in the organization. I think those two things will be extremely important going forward based on what we see here.

Geoff Kieburtz - Weeden

Okay. So is really more of a segmentation of the market that you were referring to as opposed to an overall market positive impact.

Alf Thorkildsen

Yes, I think that's correct to say.

Geoff Kieburtz - Weeden

And just lastly, could you give us any comments on the Seadrill sort of perspective on the Petrobras orders, and does that represent an interesting opportunity in your view?

Alf Thorkildsen

If you look upon it, and these are our newbuilds from yards which have not been building any rigs before. I think what you see now in this stage is that these opportunities have a duration, and the rigs will be complete in a four-year timeframe; that is, the first rig will be available in 2014 and then going forward.

It could be interesting, but of course there are significant risks of building very advanced units in greenfield areas. We have always said that Seadrill should do from very experienced job because we know how difficult it is to build advanced deepwater units. And we have also said that we don't want to do prototypes because they are inherent with uncertainties.

So these are the things which were the guiding principle for Seadrill. If some of those risks can be mitigated, it could be interesting, but of course, there are risks attached here which are of course a concern to Seadrill.

Operator

We'll take the next question as a follow up question from Lukas Daul of SEB Enskilda.

Lukas Daul - SEB Enskilda

Just a quick one on your comment that you expect a contract for one of the rigs that were mentioned by Kjetil. I'm a bit surprised because you have put yourself in a very good position in terms of the contracting risk diversification, and now you are talking about fixing a rig that becomes available in 2012. Does it mean that you don’t expect the market to tighten going forward, or there are of course some more aspects to that? Could you comment on that?

Alf Thorkildsen

I think we fix contracts if we feel like the level is correct and the terms and conditions are attractive to Seadrill. I think we have so much exposure going forward and we have so many opportunities going forward that we have also attracted opportunities when the market improves, which I do believe in '13 or something around that.

I think we have to see that there are some new rigs coming to the market and there is some uncertainty in the short term. Longer term, if the old price keeps up, I have a very, very strong belief that the market will strengthen further. And at the same time, if we can achieve attractive rates in the next three, four, five, six months, we are of course also interested in that.

Lukas Daul - SEB Enskilda

Okay. And I guess asking what an attractive rate is would be premature?

Alf Thorkildsen

I think that is correct.

Operator

(Operator Instructions) As there are no further questions at this time, I would like to turn the conference back over to Mr. Thorkildsen for any additional or closing remarks.

Alf Thorkildsen

As there seems to be no further questions, I'll just like to take the opportunity to thank you everyone for participating today, and then will close the conference call for Seadrill. See you next quarter. Thank you.

Operator

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

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Source: Seadrill Limited Q1 2010 Earnings Call Transcript
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