Update: North Atlantic Drilling's Agreement With Rosneft Should Not Be Materially Impacted By Latest US Sanctions, But Headline Risk Remains

Jul.17.14 | About: North Atlantic (NADL)


The latest US sanctions against a number of Russian entities including Rosneft represent a significant headline risk.

While these sanctions may cloud the long thesis for North Atlantic Drilling, the company remains well-positioned to benefit from their recent agreement and developing relationship with Rosneft.

While this headline risk was not discussed in my original article, these recent sanctions should not have a material impact on North Atlantic Drilling's fundamental business.

North Atlantic Drilling (NYSE:NADL) is a market leader in the harsh water drilling segment and has strong expertise operating in such environments. The Bermudan-domiciled offshore drilling company Seadrill (NYSE:SDRL) owns roughly 70% of North Atlantic Drilling. On May 26th of this year at the St. Petersburg International Economic Forum, Rosneft (OTC:RNFTF) announced the company's partnership with North Atlantic Drilling and Seadrill that would see Rosneft taking a substantial portion of North Atlantic Drilling's capacity through at least 2022 that would include up to nine rigs for a total of 35 rig years. The deal is expected to close in the second half of this year, but the latest sanctions from the Treasury Department may create additional headline risk for this substantial agreement.

On July 16, 2014 the US Department of Treasury announced new sanctions against a number of Russian entities including Rosneft, Novatek and a number of Russian financial institutions. The specific wording of the restrictions relating to Rosneft is noted below:

"The following transactions by U.S. persons or within the United States are hereby prohibited: transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of these persons (listed below), their property, or their interests in property. All other transactions with these persons or involving any property in which one or more of these persons has an interest are permitted, provided such transactions do not otherwise involve property or interests in property of a person blocked pursuant to Executive Order 13660, 13661, or 13662, or any other sanctions programs implemented by the Office of Foreign Assets Control."-Office Of Foreign Assets Control Sectoral Sanctions Identifications List, July 16th, 2014

These new sanctions represent a significant symbolic step for the US to take and it will likely have a negative impact on US-Russian relations. However, given the specific language of these restrictions they will likely not impact the deal between North Atlantic Drilling and Rosneft. Firstly, North Atlantic Drilling is domiciled in Bermuda and conducts a large portion of its business from Norway, yet while it does have a large shareholder base and an equity listing in the United States, these sanctions specifically relate to US persons and transactions within the United States. Additionally, these specific sanctions against Rosneft target debt transactions, which North Atlantic Drilling is not expected to be involved with. It has been anticipated that Rosneft would take an equity stake in North Atlantic Drilling in exchange for some of the Rosneft's drilling assets in Russia.

While these sanctions do create significant headline risk, without further escalation they should not impact the transaction between North Atlantic Drilling and Rosneft. The sanctions seem somewhat symbolic and Rosneft remains well capitalized and has strong support from the Russian government. Rosneft has a strong desire for the utilization of North Atlantic Drilling's rigs in the coming years and North Atlantic Drilling has a very strong financial incentive to close the deal. Neither of these companies are domiciled in the United States and most executives of the two companies would not be considered US persons, therefore these sanctions would not likely apply to these parties. Additionally, even if the sanctions did apply, North Atlantic Drilling is not expected to be transacting in Rosneft debt and should Rosneft need additionally capital funding, there are a number of available sources both inside and outside of Russia. While these latest sanctions do create significant headline risk, the deal between North Atlantic Drilling and Rosneft should not be materially impacted. I initially published an article about North Atlantic Drilling on May 27th of this year titled, "North Atlantic Drilling: Rosneft Deal Provides A Strong And Stable Partner For Future Strategic Opportunities" which highlighted North Atlantic Drilling's agreement with Rosneft and its significance. My original article included the following summary:

  • North Atlantic Drilling's agreement with Rosneft provides potential for a strong long term partnership that will be beneficial for both companies.
  • Their high specification and young harsh weather fleet is well suited for the Russian Arctic.
  • The company trades for a cheap earnings multiple of under 8.2x TTM earnings.
  • North Atlantic Drilling also sports a dividend yield north of 10.8%.

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