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Summary

  • The agreement with Rosneft shows that the Russian company is committed to long-term offshore operations.
  • Seadrill will get increased exposure to one of the most exciting regions.
  • As Rosneft increases its stake in Seadrill overtime, Seadrill's exposure to the Russian assets will increase.

My last article about Seadrill (NYSE:SDRL) was at the start of the last month when the company sold some of its stake in SapuraKencana - the deal was intended to enhance the balance sheet of the company by bringing in more cash, in my opinion. Yesterday, Seadrill announced an agreement with the Russian giant, Roseneft, involving Seadrill subsidiary, North Atlantic Drilling (NYSE:NADL). The financial details of the deal are yet to be finalized - however, the business impact of this deal will be massive in the medium-long term. I will try to briefly explain the impact of this deal in this article.

First of all, this agreement is more than just contract wins for 9 rigs of NADL - the agreement is an "investment and co-operation" agreement - according to the agreement, NADL will provide services onshore and offshore till at least 2022 and almost all of NADL's rigs (9) will be employed by Rosneft (OTC:RNFTF) with a total commitment of 35 rig years. At the same time, Rosneft will buy a substantial stake in NADL (explained later). North Atlantic Drilling is solely focused on the Arctic and its rigs have the capability of operating in the harsh environment. Recently, Russia has been increasing its efforts to extract oil and gas from the region and North Atlantic Drilling is the perfect partner for Rosneft to go offshore. The image below shows the oil and gas rich Arctic region.

(click to enlarge)Source: U.S. Energy Information Administration and U.S. Geological Survey

Russia has substantial assets in the region and NADL will be working on two wells initially in the Kara Sea, these wells are for the venture between Rosneft and Exxon Mobil (NYSE:XOM). The agreement also covers the future contracts for newbuilds, which means the future of most of the rigs of NADL is secured. The following image shows the estimated oil and gas reserves in the region.

Clearly, Russia is the biggest player in this region and has more than 50% of the total assessed assets. Tapping into these resources will allow the Russian majors to control a considerable portion of the global oil and gas supply. Rosneft is planning to double its production by 2033, and offshore assets will certainly play a vital role in reaching that milestone.

Moving onto Rosnesft's investment in NADL - at the moment, Rosneft does not have any offshore drilling assets. Usually, a major oil and gas company will offer the contract to offshore drillers like Seadrill or Transocean (NYSE:RIG) for a specific period of time. However, here, the company is investing in the offshore driller, which clearly shows that Rosneft wants to have a long-term commitment to its offshore drilling operations and wants to develop its own assets through a partnership with Seadrill. At the moment, Seadrill owns 70% of NADL, and the subsidiary was recently listed in the US through an IPO, which raised about $125 million. After Rosneft's investment in NADL, Seadrill will still remain as the majority shareholder. However, there are rumors that the Russian giant wants to take its stake in Seadrill to about 50% over time. According to Interfax news agency, Igor Sechin, the Rosneft boss said this.

"We're becoming Seadrill shareholders. At this stage we're discussing combining our service company RN Bureniye with Seadrill and handing it some of our orders. In time we could increase our stake to 50 percent."

Working with one of the major Russian players will allow Seadrill to have security regarding its contracts for its newbuilds as well as the current rigs in operation. If Rosneft increases its stake in Seadrill over time, then it will give Seadrill increased exposure to the Arctic and the Russian assets. Furthermore, in the short-term, the Rosneft investment in NADL will likely result in increased cash position of Seadrill, which will be helpful in the assessment for the upcoming appraisal for credit ratings of the company (I have explained the need to increase cash for ratings in the article linked at the start of this article).

Bottom Line

The agreement between the two companies is expected to be finalized in the second half of the year. This agreement is hugely positive news for the Seadrill shareholders, and it should go some way in alleviating the fears about the sector. This is a unique deal where a major oil and gas company is trying to be a partner in the offshore driller in order to take on its offshore operations. Rosneft clearly wants to develop its offshore assets, and future production levels should have a considerable portion coming from the offshore segment.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Rosneft Deal Is A Major Step Forward For Seadrill