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Executives

Alf Thorkildsen - CEO

Esa Ikäheimonen - CFO

Livar Voll - Group Controller

Jim Daatland - Vice President, Investor Relations

Analysts

Lukas Daul - Enskilda

Ian Macpherson - Simmons

(Christian Mannick) - Deutsche Bank

Monroe Helm - Barrow Hanley

George Berman - JP Turner & Company

Peter Tester - One Investments

Dave Wilson - Howard Weil

Judd Bailey - Jeffries

Fiona Maclean - Merrill Lynch

Kenan Najafov - Citi

Ole Slorer - Morgan Stanley

Eliecer Palacios - Maxim Group

Arun Jayaram - Credit Suisse

Seadrill Limited (OTC:SDRLF) Q3 2010 Earnings Call November 30, 2010 9:00 AM ET

Operator

Good day and welcome to the Seadrill Third Quarter 2010 Results Presentation. Today’s conference is being recorded. At this time I’d like to turn the call over to your host today, Mr. Jim Daatland, Vice President, Investor Relations. Please go ahead sir.

Jim Daatland

Thank you and welcome to Seadrill’s Third Quarter 2010 earnings conference call. A copy of the quarterly report has been posted on our Web site seadrill.com along with supporting material for this call. Firstly today we have our CEO Mr. Alf Thorkildsen, our CFO, Mr. Esa Ikäheimonen and our Group Controller Mr. Livar Voll.

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

Please note that such statements are made under the Safe Harbor provisions provided by the federal securities regulation. For further and more detailed information on all the risks associated with our company and industry, please see our most recent Form-20F as well as 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 may materially vary from this information indicated.

I’ll also remind people that today we have the opportunity for you to ask one question but please limit your follow up questions to one question. Thank you. That concludes the preliminary details. I’ll now turn the call over to Alf.

Alf Thorkildsen

Thank you so much and good afternoon and good morning to some of you. I would start with some overall comments to the results and company developments through the quarter including subsequent events. Esa will then take us through the finer details of our financial accounts. I will thereafter discuss our market review over recent new bill orders, our contract backlog, dividend distribution and close with some summary remarks. Next page please.

We are pleased to deliver a record EBITDA of some US$560 million, the highest in the Seadrill story so far. Our net income for the quarter was US$358 million corresponding to earnings per share of 85 cents, up from 77 cents in the previous quarter. We continue our payout of regular quarterly cash dividends and the board decided to increase the payout from 61 to 65 cents per share.

The third quarter was characterized by further two deep water new builds commencing operations, a full quarter of contribution from the acquired seven jack-up rig company Scorpion and reasonable operational performance from oil rigs in operation. We saw improved economic utilization rates for all rigs (leased) quarter on quarter with 95% up time for our floaters, 97% for our jack-ups, whereas the utilization of the tender rigs was more or less unchanged at 87. And that is due to the T-8 being idle.

We were not able to maintain the same extent, the reduction in operating expenses we delivered in second quarter. However, we remain focused on this issue and further progress should be expected as the size of the fleet increases. Next page please. In October we took advantage of improved conditions in the debt market by issuance of a $350 million bond and a $650 million convertible bond at attractive prices to position the company for new investments and further growth.

Our strategy has since incorporation in 2005 been to focus our fleet on new and premium off-shore drilling units through new bill orders and targeted acquisition of modern assets. Earlier this year we took advantage of prevailing uncertainty and acquired a new harsh environment jack-up rig under construction and the seven jack-up rig company Scorpion Offshore Limited at what has proven to be favorable prices.

Since then the market for premium jack-up rigs has continued to strengthen with renewed focus on enhanced technical capabilities and operational reliability. This development in combination with attractive yard prices supported by high oil prices led us to order four new premium jack-up rigs for an all-in price of US$790 million. Also the Macondo incident has increased the focus and requirement for new and more advanced equipment for deep water operations significantly. At the same time yard prices for deep water units have fallen by some $200 million, taking us back to 2005 prices adjusted for improved specifications.

This change in market demand sparked us to order the first two seventh generation ultra deep water drill ships from the Samson Shipyard at an all-in price of US$600 million a piece to (use those) units but improve order debt, increase accommodation capacity, higher crew capability and the first new bill to be outfitted with seven RAM configuration of the blow up prevention pack.

We view these events to be unique opportunities to position the company for further growth superior to any corporate or asset acquisitions. At the same time as we increase our exposure to new rigs, we took the opportunity to (hybrid) our fleet through sale of the 1984 built jack-up West Larissa for a total consideration of $55 million. I’m also pleased to announce that we today have acquired the 2009 built 370-foot jack up rig Petrojack IV for a total consideration of $180 million. The unit has a 3-1/2 year contract with PTT in Thailand at a day rate of 109,500.

Finally, we are pleased to see that our old service subsidiary Seawell is listed on the Oslo Stock Exchange. With that I’ll turn the call over to Esa to take us through the Q3 accounts.

Esa Ikäheimonen

Next slide please. Good afternoon and good morning to all of you from my side as well. Thanks for joining us today. I’ll give you a few highlights on our quarterly financial performance. Generally speaking, I could call this a slightly less eventful quarter certainly at least from a financial reporting point of view.

When in the second quarter the results were significantly impacted by the Scorpion consolidation, the third quarter was a bit more normal, perhaps a little bit easier for me to navigate you through as well. However, the financial performance continued to be strong. Revenues grew by 15% from the second quarter and now we are at a level well above the $1 billion mark on a quarterly basis.

Like Alf already said, Seadrill delivered a new record in earnings. EBITDA was up by 14% from the second quarter results and I’ll explain shortly what the key drivers were. Similar growth in operating profit and a slightly smaller growth in net income due to the impact of financial items where we continued to see some volatility from one quarter to another. Although the financial items do show a negative variance compared with the second quarter, after we exclude the impact of Scorpion consolidation the variance is actually significantly positive.

And I’ll explain this also in a little bit more detail shortly. The cash flow from operating activities was US$390 million for the three-month period compared to a dividend distribution of 251 million. That’s the cash dividend paid during the third quarter, effectively the second quarter dividend or on a year to date, nine-month basis cash flow was $927 million versus a dividend distribution of 720 million during the same period of time. So very strong cash generation continuing. Next slide please.

As already said, EBITDA was about 67 million or 14% higher than the second quarter comparable number. And that was mainly due to an increase in mobile units as you will see whenever the picture turns up. That was especially driven by the deep water rig West Orion commencing drilling in Brazil in mid-July but also because of a significantly higher by the Scorpion rigs, which now contributed for the entire quarter. And finally the third sizable contributor to this growth was another deep water rig West Venture, which continued on a new day rate from first of August onwards. This unit also had a yard stay in the second quarter.

Just for clarity the deep water rig West Gemini as well as the two new jack-ups West Callisto and West Leda only started on contract towards the end of the reporting period and therefore made virtually no contribution to the earnings yet. Obviously these start ups will have a contribution in the ongoing fourth quarter. Next slide please. The table shows the development in operating income from 384 million in the second quarter to 431 million in the third quarter. There is nothing much to add to what was already said previously and the three big contributors just repeating were the deep water unit West Orion and the other deep water unit West Venture and the full quarter contribution from the Scorpion rigs.

Expenses by and large developed in line with the growth in the fleet of rigs although this is an area of continuous focus in this company going forward as well. Next slide please. Interest expenses raised significantly by about $40 million. It’s worth pausing here for a moment and just going through that variance in a little bit more detail, just to make sure that we are roughly on the same page on that one. About a third of the increase relates to Scorpion loans. Another third is the fact we are mixed back including a reduction in capitalized interests and the impact of new loans.

The remaining third has to do with a change that took place in two variable interest entities of VIEs. Those entities own rigs operated by Seadrill under a lease agreement. Under US GAAP the VIEs are consolidated to Seadrill and changes in the balance sheet therefore impact Seadrill’s consolidated financials. I’ll explain this more when we look at the balance sheet but it’s important to note here that the interest expenses associated with this change include also accruals from the beginning of the year and therefore the third quarter impact is higher than it would otherwise be.

This extra accrual impact is in the region of $10 million so the comparable increase in interest expenses from one quarter to another is about 30 million or a little bit less than that. Further down the slide you can see that there is a big variance relating to the second quarter consolidation of Scorpion and the one of gain reported at that stage. No such gain this quarter obviously. The other financial items include and I’ll just go through the most significant items, the foreign exchange loss of about $33 million, which relates to the strengthening of Norwegian Krona by some 10% against the dollar and because of our Krona-denominated lending a translation difference occurred during the quarter.

Another smaller foreign exchange impact is due to a translation difference in Seawell relating to depositing proceeds from the share issue, which also generated an FX impact. So as I said, with some other minor items, by and large those two components generated an FX loss of about $33 million. In Q2 we had a sizable loss on derivatives versus a net gain on derivatives in quarter 3 of about US$75 million. And again, that is included in other financial items on the slide that you just saw. We’ll move on to the next slide with the title Assets on top of it.

The size of Seadrill’s balance sheet continues to grow in accordance with the company’s previously communicated growth strategy. In addition to the growth, we already see reflected on the balance sheet the latest announcements on new build orders are not impacting this balance sheet yet. Next slide please. On the debt side the net interest bearing debt increased by about 1 billion to some 8.5 billion. There is a fairly detailed explanation on the movements in the quarterly report so I’ll focus on the most material single item.

As I already mentioned when I explained the increase in interest expenses, two of Seadrill’s variable interest entities or VIEs were a set of transactions including dividend distribution to their parent and subsequent loan arrangements, rearranged their balance sheets and as a result converted equity into debt. As Seadrill is the primary beneficiary of those VIEs, although not the owner, we consolidate these entities in accordance with US GAAP. This led to a reduction of $435 million in our non-controlling interests, i.e. equity, and a corresponding increase in loans to related parties.

The fixed interest rate associated with these arrangements is 4.5% and that is fully reflected in our P&L with the effect from first of January as I explained earlier. So in summary, really a (poor) accounting issue on Seadrill’s side. Finally, I’d like to say a few words about growth financing before I transfer back to Alf. Seadrill have actively and successfully used syndicated loans loan market to finance rigs. The combination of new assets and excellent contract coverage has been attractive to banks.

Therefore we have enjoyed excellent relationships with banks and ECAs. We have recently secured about $3 billion in new contracts this year and we have a total of 15 units if you include the recently ordered new builds available as security for further financing. Furthermore, we have a significant amount of convertible debt in money at the moment and some liquid investments representing a significant potential for cash contribution. So in summary, we have been able to build a lot of financial flexibility and optionality to support further growth and Alf will complement this when he talks about the dividend policy. So with this I would like to hand back over to Alf please.

Alf Thorkildsen

Thank you so much Esa for that financial review. I will just go on to the (board right operation U graph) so next (U graph) please. There have been only minor changes to our geographical footprints since our reporting in August. But as I mentioned in my initial comments, we have commenced operation with two new units.

We have added one rig in West Africa as the new drill ship West Gemini commenced operations in Angola for PTT in September. And we commenced operations for the new jack-up rig West Leda in Indonesia in early November. The start up of West Leda was a bit delayed due to punch through experienced in the jacking operation in preparation for the assignments on drilling location. The jack-up rig West Prospero was moved from Africa to Vietnam where it started operations in November, replacing the disposed jack-up West Larissa on its job for VSP.

As such, our largest percentage in terms of number of rigs is currently in the far east where we have 24 units. Then we have seven units in South America and five units in West Africa and also five units in the North Sea. We continue to have only one rig in the US Gulf. The deep water rig (West Sirius) that has been on full day rate since the Macondo incident in April, has received the necessary certifications and third party acceptance and is approved for new drilling assignments for BP in the US Gulf.

Furthermore, we have increased our new bill order book at Asian yard from four to ten units, which I will come back to on the next slides. Next page please. Market view - we have throughout the recent market volatility maintained an optimistic long-term view on the market and prospects for premium rigs. This view has been founded on the belief that the global demand for oil will remain stable or increase, providing for attractive oil price levels. We continue to be optimistic on the prospect of overall industry. Mature oil basins struggle with decreasing production.

Exploration takes place in more remote areas and more challenging environments and the recent oil spills have imposed more strict regulations and tougher standards. The combination suggests the need for more new and more advanced rigs. At the same time the oil industry is experiencing huge exploration success in new areas that will lead to growth in demand for rigs. Next page please. Oil customers have lately increased their focus on enhanced technical capabilities and operational reliability for both shallow waters and ultra deep waters.

This in combination with sound outlook for oil prices, attractive yard pricing and favorable markets led us to one, to order four new premium jack-up rigs for a total consideration of 790 million, increasing our fleet of jack-up rigs built after 2006 to 19 units. And two, to order the first two seventh generation ultra deep water drill ships from the Samson Shipyard for a total cost of $600 million a piece. Common for the new builds is that they will be more advanced rigs than our existing, very modern units and will meet the requirements of tomorrow.

However, they are not prototypes but will benefit from equipment upgrades since the previous building period. Next page please. The new drill ships are equipped with the dual derrick and have several improved capacities compared to its latest 2010 build, sister vessel West Gemini. The water depth capacity has been increased to 12,000 feet. Accommodation capacity has improved to 200 people. The higher workload capability has been upped to some 1250 (jotons) and the units of the first one to be outfitted with seven RAM configuration of the blow up preventive tank.

These rigs will be capable of drilling the toughest and most demanding well ever and particularly well suited for the challenging (pre-soft) deep water wells. In addition to the two firm orders we have reserved the right to order a further two units at the same terms and conditions. Next page please. On the jack-up side, the bifurcation of the market has emerged mainly due to the difference in drilling requirements as well as efficiency gained by new equipment. Oil companies have showed a willingness to pay for higher work loads, extended cam deliver reach and increased flexibility for offline activities that the new units can offer.

This was an essential backdrop where we made our decision on the specification of the four new units. We wanted to build rigs to fit the most requirements with focus not only on water depth but in general more drilling and storage capacity to target drilling longer wells in more challenging environments. We also focused on more automation from an HSC perspective and offline activity from an efficiency point of view. We have in addition to the units ordered the right to place a further six rigs at similar terms and conditions.

Next page please. There are no changes to our contract back level flow through since August other than the (unintelligible) - has elapsed. The removable of the US offshore drilling permit moratorium in October has positively impacted demand for ultra deep water drilling units in the Gulf as well as internationally. The stronger focus from oil companies on new, dynamically positioned deep water units and reduced interest for moored and upgraded deep water vessels has positively impacted the interest for our available rigs, including the new units we ordered. Furthermore, the continued exploration successes in Brazil and West Africa as well as an expanding number of new deep water basins globally provides for strong fundamentals going forward.

We are comfortable about our open position in 2012 and expect day rates to stay or improve from the high end of the recent observed range from low 400,000 up to new rigs and close to 500,000 for warm rigs. We have already received some inquiries related to our newly ordered ultra deep water drilling ships. Page please. For our jack-up rigs we have since last reporting secured two new contracts, an extension of the contract for West Ariel for DSP in Vietnam throughout December 2011 at 122,500 a day and an eight-well contract for West Triton with SeaPac for operation in Malaysia at US$119,500 a day.

Furthermore, West Prospero has replaced the disposed West Larissa for the VSP job in Vietnam as mentioned earlier. For the harsh environment jack-up rigs under construction we have moved the anticipated start up to October based on the latest construction schedule. We are currently in advanced discussions regarding new assignments for the new build West Juno to be delivered later this week and the Offshore Resolute, which had been idle in Vietnam since early October. In our opinion the market for premium jack-up rigs continues to show positive development with tendering activity improved quarter on quarter, keeping day rates at steady levels.

However, seasonality effects in certain geographic areas and the shorter nature of jack-up rig contracts could impose some uncertainty related to back to back contracts. And so a shorter period of employment can be experienced. Next page please. For our tender rigs we continue to see strong interest from oil companies. We recently signed a new three-year contract extension for West Pelaut, a Brunei shell, at a day rate of $120,000. We are currently also in advanced discussion with a number of oil companies following public tenders and through direct negotiation for additional rigs.

However, we do not expect West Menang in Kuwait to start a new contract before late first quarter or early second quarter next year. In addition to the traditional geographic markets for tender rigs, i.e. West Africa and Southeast Asia, we are seeing increased interest for assignments also in the Gulf of Mexico, South and Central America and Australia. As for other rig types, we are also seeing an increased customer focus on equipment quality and operational experience for tender rigs. We are optimistic about the long-term outlook and potential for our existing fleet and are considering adding further capacity to this attractive segment.

Next page please. Distribution of regular cash dividend is one of our key objectives. For the third quarter we have increased the cash dividend to 65 cents per share, up from 61 cents in the second quarter. The decision to increase our distribution is backed by our strong order backlog, increasing free cash flow and improved market prospects. When ordering the six new units we put emphasis on matching the payment profile with our cash flow profile and dividend payout policy. The initial installments were financed through the bond and the convertible bond issuance in October.

We expect the final installments due on delivery of the units to be financed through a combination of bank financing, available credit financing and other debt arrangements. Furthermore, we have nine units that are free of any pledge or alliance and available as collateral for new debt arrangements with an aggregated market value of more than $2 billion. If we include the new builds we will have more than $4 billion worth of assets that are unpledged. This offers financial flexibility. In addition to our rig fleet we have also various holdings in other listed offshore drilling and oil service companies such as Seawell Limited, Pride International, (Dehook) and (Saturewakels), which at current market prices could free up more than 1 billion in cash.

We are the offshore driller that has paid out the highest total amount in cash dividends over the last four consecutive quarters and are positive to maintaining a high payout ratio. Next page please. So if I try to sum up where we are, we are pleased to continue to deliver growth in earnings as rigs under construction come on contract. I think we have improved our operational performance over the course of the year, bringing more predictability to our earnings. However, there is still room for improvement and that is something we focus on every day.

In addition to utilization rates, we also have a tremendous focus on our daily operating expenses and quality of the final product we deliver to our customers. We have been able to put together the finest offshore drilling company over the last years based on new rigs. I’m very pleased that we are able to build our company along the same lines with the new orders we have placed in the fourth quarter. Timing and price on our entry ticket have always been important for us in order to make sure we create value for our shareholders. We believe the timing of the new investment with the yard prices down to 2005 levels and delivery schedules, which we think will match the forecast in increase in demand is the right recipe to create substantial shareholder value.

I look forward to reporting our 4Q number in February of next year. This concludes our presentation. Operator, we are now open for the Q&A session.

Question-and-Answer Session

Operator

Thank you sir. If you’d like to ask a question at this time please press star or asterisk key followed by the digit 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered you may remove yourself from the queue by pressing star, 2.

Once again, please press star, 1 to ask a question. We’ll now pause for just a moment to allow everyone to signal. Before we take our first question as a reminder please limit yourself to just one question. We’ll now move to our next question now from Lukas Daul from Enskilda. Please go ahead. Thank you.

Lukas Daul

Yeah. Thank you. Hi guys. Alf, you were previously concerned about what the newcomers in the (alternate motor) market could do at the direct level. Given what we have seen in terms of fixtures recently, are you less concerned today than you were a few months back? Or what is your view on the uncontracted 2011 capacity?

Alf Thorkildsen

I am less concerned because I have seen that all the new capacity coming to the market have so far been absorbed. If you look into what is left to be delivered, we’re talking about 10 to 11 units, which don’t have a contract including one from Sweden. I see that the market is firming up. I see that the newcomers are holding on and also they had to hold on because of their financial obligations.

So my concern previously has been I think as we change to a more favorable market condition, which are helping both the new comers and we grow.

Lukas Daul

Okay. I guess that was my one question.

Operator

Thank you. We’ll now move to our next question today from Ian Macpherson from Simmons. Please go ahead.

Ian Macpherson

Hi. Thank you. You mentioned that the performance with cost reductions was not on par with what you achieved in the second quarter. Can you elaborate on what happened, where the shortfalls may have arisen relative to your expectations for Q3 and speak a little bit about the coming quarter or coming couple of quarters in terms of moving parts besides just incremental rigs coming into the fleet for the cost side? Thank you.

Alf Thorkildsen

I think we saw a significant reduction in costs from Q1 to Q2 and what we have said here is that we have not been able to continue that partly because there are some operating difficulties in some areas, which have cost us some more than normal operation. And secondly that there are general sum cost pressure in this industry due to the fact that we have seen a significant increase in number of units.

I think that’s the fundamentals of this business. What I should say is that our long-term contracts have reasonable cost escalations so we longer term should be neutral even if there is cost pressure in some area of the world in our industry.

Ian Macpherson

Thanks. Any view on what we should look for in the fourth quarter besides the incremental fleet additions with regard to efficiencies or disefficiencies?

Alf Thorkildsen

We have mentioned that we have had in October/November, we had two or three rigs, which have had some BOP issues. And that’s the issue you will see also reflected in fourth quarter. I don’t think we had mentioned number of days but we are two to three weeks is the down time for the three units we are talking about.

Ian Macpherson

Okay.

Alf Thorkildsen

Apart from that we should be well covered in the whole fleet.

Ian Macpherson

Thanks Alf.

Operator

Thank you. We’ll now move to our next question from (Christian Mannick) from Deutsche Bank. Please go ahead.

(Christian Mannick)

Hi. Good afternoon gentlemen. Just two questions please. First, in terms of the new assets that you’re bringing online, they’re obviously leading in terms of complexity. And as I guess the balance of your revenues move towards those types of assets if it’s longer term, how does that change the level of OPEX that you’re paying towards those types of vessels because presumably they’re going to be more complicated and more expensive to run?

And also in light of what happened in Macondo, to what extent will you share the brunt of that cost increase that you’re talking about in light of all the regulations? And just a second question - you talk about flight to quality, better rigs and then you talk about M&A transactions. Can you do M&A transactions on a large scale without - are there companies that you could look at that have that type of asset quality given the new - you’ve shared some of the best rigs and everyone else has sort of mid- to shallow-water types of rigs.

Alf Thorkildsen

Could I ask you to repeat the first part of the question as you were breaking up there?

(Christian Mannick)

It was just regarding kind of the absolute level of cost that you’re going to put towards those better assets you’ve got and how does your OPEX evolve over the mid- to longer term given you’re going to be running better rigs but equally more expensive rigs. And also what does it mean in terms of Macondo? Will you be sharing the brunt of those costs or will the industry, the operator, be sharing that cost?

Alf Thorkildsen

Let me start with what we have done. On the deep water side we have ordered two more, which is the next generation of Samsung 10000. It’s now 12000 and it’s an upgraded version with different capabilities. What we have seen from the delivery of the first Samsun rig, which was the West Polaris, we have seen significant improvements both in cost and performance on Capella and thereafter Gemini, which started operating in Angola in September.

We are still having cost issue with the first one mainly due to that it was the first prototype and we are seeing required upgrades and required maintenance on a rig like that, which is different to the second and the third ones delivered. We believe that when we take delivery of the two new Samsun drill ships we are taking all the learnings from the first three ones delivered to this one and we are much more confident of the cost development and operational performance on the later ones than what we were when Polaris was the prototype.

I think that’s the intent of the question that it comes to. So we should see more efficiency and a more predictable cost performance on the new units. When it comes to Macondo we are seeing that there is significant requirement when it comes to testing our equipment. We see that the oil companies are much more strenuous and much more strict when it comes to accepting new rigs. Some of that will fall to us as a drilling operator. When it comes to rigs we have under contract we are covered that if there are changes to regulation that is covered by the client.

I think if we see significant increases in cost over time then that will be reflected in the day at the normal circumstances.

(Christian Mannick)

Right. Thanks for that. And just in terms of sort of the transactions that you’re looking at and sort of in the context of a large scale deal potentially, are you willing to look at companies that have a mixed type of fleet given as a company you’re now right at the top of surpassing quality and complexity? Would it not be dilutive to do something that doesn’t have the kind of quality that you’re looking at?

Alf Thorkildsen

I think we can see a future for both the very modern and that’s what we have been pursuing. But we also see there is a mid-market for rigs, which have maybe lower standards. What we have taken advantage of is of course a fantastic market for new builds in the way of yard prices, which are back to 2005 levels and have included a specification, which we could not get in the market. But there is room for both. We have chosen the organic route so far. I should also say that today we bought an older unit. It was one-year old. It was a jack-up but it fit our specification very well and it was an attractive price and it had an attractive long-term contract in front of it. That was the reason for that. So we are doing both organic growth and I would say selective M&A depending on the assets and the order backlog attached to it.

(Christian Mannick)

Thanks. Thank you very much.

Operator

Thank you. We’ll now move to our next question from Monroe Helm from Barrow Hanley. Please go ahead.

Monroe Helm

Yes. Just recently Petrobras opened the bids for the rigs that they would like to have built in Brazil and I just wondered if you had any comments on the bidding and any thoughts on how that might fit your ability to operate in Brazil going forward, any opportunities it may create. Obviously they haven’t opened or obviously they haven’t accepted the bids but I’m just wondering what your comments are on what we’ve seen so far.

Alf Thorkildsen

I’ll try to make some comments but they are - let’s put it at that. They are to kind of some distance from Brazil, my comments. But I will try to give you some comments any way. First of all Petrobras had the intention maybe to order up to a total of 28 units, four in four different lots. I think - we fail to see that they would order so many but we are relatively convinced that they will be built, rigs in Brazil.

What they said was that within the first rig from the order will come to the market within 48 months. We believe that that may be stretched because they will not make up their mind where they would go. So if you are a bit optimistic I would say that the first rig, which could come out of such an exercise is in 2016 built in Brazil. None of these rigs are very cheap. Secondly, we see that there are yards, which have not built rigs before and some of them have to have major upgrades to be able to deliver those drill ships they have quoted for. But I am of the opinion that the market in Brazil will absorb that and also to a large extent the sum of the available capacity in the world and take some of that.

But I agree with you that I think still the uncertainty is around Brazil. But with the development and the need to develop the fields in a timely fashion I think we will see demand internally in Brazil but also from those providing services like Seadrill.

Monroe Helm

Thanks.

Operator

Thank you. We’ll now move to our next question, which comes from George Berman from JP Turner & Company. Please go ahead.

George Berman

Good morning gentlemen. Congratulations to a great quarter.

Alf Thorkildsen

Thank you.

George Berman

I’ve got a quick question. You recently completed the acquisition of Seawell Incorporated and you’re now folding in Aliss-Chalmers, essentially creating a very large company operating worldwide. What are your intentions with this asset down the road? Are you possibly contemplating a dividend spin-off to shareholders of Seadrill Corporation?

Alf Thorkildsen

Let me just try to clarify. The Seawell was a subsidiary. At one stage we owned 100% of them. We put it on the over the counter list in Oslo and we reduced our share to some 70%. And when we had a last share emission we are now down to 52%. When they merge with Aliss-Chalmers we will be in the range of some 25-30% range. So that will be our ownership position of what was previously 100% our own subsidiary. Current market value for that unit or our value of it is around $600 million. That’s the Seadrill value of the current position.

We have not made any decision as to what we will do with it but clearly that has a very favorable future and it could be spun off. It could be dividended out or it could generate a cash contribution to Seadrill. No decision has been made a part from that we are optimistic about the company and therefore have held on to the position as such.

George Berman

Okay. Thank you.

Operator

Thank you. We’ll now move to our next question now, which comes from Peter Tester from One Investments. Please go ahead.

Peter Tester

Hi. I firstly just wanted to clarify an answer to an earlier question. When you talked about the assets, which are the two to three deep water assets with some technical issues and then you also mentioned that the West Evidence and the West Navigator will be having the BOP repaired during fourth quarter, are those the same assets that you’re talking about?

Alf Thorkildsen

Yes.

Peter Tester

Okay. So and then the question I had was just you make the point about unplaced assets in financial flexibility for dividend for flexibility for both operations and dividend capacity. This is something, which has been present for quite some time. But you also, thinking forward, you have some options, which are coming up early next year for exercise and you have obviously some views about Pride with your concern over the Pride investment.

Can you help us understand how the decision making process is being put in place taking account to the various different assets that you have and also potential options you have on the other side just to give a sense on how you view the assets being used to fund the opportunities?

Alf Thorkildsen

Why don’t I Livar and Esa to just talk about the availability of assets?

Esa Ikäheimonen

Okay. Well, first of all the financing model that is focusing first and foremost on asset financing and leveraging the assets we’ve got has served us very well. That’s a good starting point for our financial planning and we will certainly continue doing that. In terms of all the other components of essential acquisition or growth, currency that we’ve got in our position at the moment is - the utilization of that is really dependent on the opportunities that come our way. You’ve probably seen that we have been fairly capable of financing our new build orders and asset acquisitions through syndicated bank financing and that is likely to continue.

So what we are basically saying here is that we have got flexibility and optionality in our tool box and that’s all we are saying.

Livar Voll

And let me just make a comment on M&A activity. Hopefully if it comes along we will use all the tools we have including debt financing, make use of order backlog if the M&A asset or company has that. So these are the things we may use going forward.

Peter Tester

Okay. Maybe - sorry, if I could just be clear. For example when you have options coming up, which would require some exercise and say that call that the 20% part may be paid. Is that something you would be looking to use or cover by syndicated bank loans?

Livar Voll

Yes. So when it comes to assets we have under order from shipyards we are relatively confident that there is a bank market out there to cover the remaining installments. Again, it would depend on the market situation for our rigs. But we are relatively confident of that going forward.

Peter Tester

Okay. Very good. Thanks so much.

Operator

Thank you. We’ll now move to our next question, which comes from Dave Wilson with Howard Weil. Please go ahead.

Dave Wilson

Good afternoon gentlemen. Thanks for taking my call. This is kind of a follow up question to an earlier one but in the press release you mentioned concern over the lack of performance in your Pride investment. Given that statement and your recent new build announcements, should we be reading anything between the lines here? You mentioned definitely cheaper to build right now than to buy. And so does that mean that the interest level in Pride is maybe not what it once was?

Alf Thorkildsen

I think we are holding our position. We are hedging our bet with very attractive new build orders and we are evaluating those options against the others. Of course it is a question of Pride and what is possible to do.

Dave Wilson

Okay. Thank you.

Operator

Thank you. We’ll now move to our next question, which comes now from Judd Bailey from Jeffries. Please go ahead.

Judson Bailey

Thank you. A couple of questions on your jack-up fleet. Alf, you’ve been investing quite a bit and acquiring or now building jack-ups. Two questions - is there an optimal size for that fleet as you move forward? And also how do you view the opportunities between deep water and jack-ups? Do you have a mix in mind as you’re allocating growth dollars whether you’d like it more focused on deep water going forward? Or do you see it more balanced over the next couple or three years?

Alf Thorkildsen

I think we’ve taken advantage of attractive jack-up market by ordering four new units, which have a specification, which you could not get to the price before. So it’s kind of we believe that this is kind of the next generation, very advanced tech up fleet. And as you saw today we also took and bought a one-year-old unit with a 3-1/2 year contract attached to it. These are the things we will still continue to do.

I am still very optimistic when it comes to the deep water market and as we said, we ordered two new units and we also have the right with the same price to order two more units. So I’m still optimistic about the deep water. But we will play all three markets. The third is the tendering market. So this is more of a belief that the offshore drilling market shallow water and deep water is on the rise as we can see it going forward. But there is a change from low-spec rigs to advanced units in all three segments.

Judson Bailey

Okay. And on the deep water side how do you think about exercising the options on your existing options now for additional deep water units versus purchasing assets that are either already existing or are currently under construction and have an earlier delivery date? I guess there is obviously price but also a difference in specification. How do you balance those issues when you’re thinking about ordering new again or purchasing existing rigs?

Alf Thorkildsen

We have always said that 2010 and ’11 would be years of uncertainty when it comes to demand and supply and that the balance would be and the new builds would be absorbed late ’11, beginning ’12. I am still of that belief. But I’ll be positive surprised how well those new orders and rigs without contract have been absorbed in the market. What we have seen as we have looked at rigs, which are currently under construction and had an early delivery, the premium for those units compared to building new units with more specification and better equipment was too high to make it interesting to us so far.

Judson Bailey

Okay. And then my last question and I apologize if I missed this but did you elaborate at all on the BOP problems on the Navigator and the Eminence? Could you give us any detail on the potential problem?

Alf Thorkildsen

They are not that of a concern apart from that when you are in 2000 meters of water depth it takes you a week to get them up and a week to get them down. That’s the issue where you get 14 days without even the smallest failure. In these days you cannot run with any small failure on your blow operators. So where maybe there was a different borderline before, these days whatever the indication of a failure is you will pull the BOP back to surface and have a check on it.

That’s what you’re seeing to some extent. And they are not major, they are relatively easy to repair. But it’s the time it takes from retrieving them from the bottom and getting them up and down again, which is the issue. We have three puts on some of our contracts and I’m sure that’s going to be our lesson learned going forward as well.

Judson Bailey

Okay. Yeah. I guess if that’s going to be an ongoing issue you’ll start to negotiate that in the contract in terms of down time it sounds like.

Alf Thorkildsen

Definitely.

Judson Bailey

Yeah. Okay. Thank you.

Operator

Thank you. We’ll now move to our next question, which comes from Fiona Maclean from Merrill Lynch. Please go ahead.

Fiona Maclean

Thank you. It’s Fiona Maclean at Merrill Lynch. I have a question about the commentary and the statement this morning on Pride and you were talking about your concerns about the lack of performance there. Could you maybe talk to us about what are the options you have here, whether you think you have some influence to be able to improve the performance either at the company or get them to start paying a dividend or something?

Or are you actually telling the market that this is now an investment that just hasn’t worked for you and you do see better opportunities now elsewhere and you are potentially looking for an exit strategy? Just some clarity there. And then secondly, you’ve talked about the interest you’ve been receiving from oil companies for your new generation of rigs. Can you just give us a little bit more clarity in these, what those inquiries are like? Who are the inquiries coming from? Is it the IOCs or the NOCs and what regions specifically? Thank you.

Alf Thorkildsen

Maybe I should start with the last one, which is the easiest one first, which is the inquiries.

Fiona Maclean

Okay.

Alf Thorkildsen

What we have seen and what we have discussed with, this is particularly the global international oil companies, we have seen that when they are for example in the Gulf of Mexico they need more capacity to develop the pre-salts. And they need more margins when it comes to their drilling requirements. A seven RAM will provide three RAMs, which will share and an additional attached RAM. So we are kind of providing for the generation after Macondo. That of course is interesting and it creates efficiency gains for an oil company compared to having a six RAM where three RAMS would share. That’s the first thing.

Secondly, of course when you see what they are building, we think there is a clear both safety but also efficiency gains by the latest development. But some of those wells they are drilling, which are for 40,000 (depth) are very difficult to get to with the 1000 tons top drive just to give you an example. On one of our rigs, which we’re currently working on in the Gulf of Mexico we had to upgrade it to 1250. That’s the only one there at the moment with a 1250. But this is the thing we have seen and therefore we see interesting inquiries from in that region in particular.

We also see that West Africa and this is related to Angola and outside Angola, the new potential exploration venues in Angola are very challenging. This is the thing we have seen. Of course delivering those units in two years and a bit we have no detailed discussion but more they are positively both surprised and very enlightened that we are so early to build those new units. When it comes to Pride we have 9-1/2% of Pride. We are disappointed with our own - with the performance of that rig compared to our own shares. I think that’s the first clear statement that we have said that publicly.

This performance is not close to what Seadrill has done in the same period of time. We still keep all our options open when it comes to the Pride shareholding.

Fiona Maclean

But maybe you could just give us a bit more clarity on what are the options because the very obvious option is you just sell your holding. But other than that what is it you can do to improve the performance? Or are you looking to improve the performance?

Alf Thorkildsen

I think we don’t have a board position. I think we can discuss with the management of Pride but that’s where we - what we can influence so far. We don’t have a board position at Pride. So I think to be fair, I think we can have some discussion. We can but it’s limited but some we can do but that’s very limited. And Pride is a competitor and that’s what limits the discussion with the performance of Pride.

Fiona Maclean

Okay. That’s very clear. Thank you.

Operator

Thank you. We’ll now move to our next question, which now comes from Kenan Najafov from Citi. Please go ahead.

Kenan Najafov

Hello. Just a specific question on the daily OPEX that we can assume for the seventh generation. Is it close to the current drills that you have?

Alf Thorkildsen

I don’t think there will be differences as such apart from general inflationary pressure in this industry. I think they will be the same. There are no additional requirements when it comes to manning and I think the maintenance will be improved compared to some of the prototypes by the way. So I see no difference in costs. I think what you should be aware of, of course, there are major differences in costs depending on what country you’re in. So the cheapest area to be in is most likely Gulf of Mexico and the more expensive ones are Brazil and less modern and less expensive is West Africa.

Kenan Najafov

Okay. And in terms of day rates that you would be looking at for this, I understand it’s a difficult question. What’s the ballpark?

Alf Thorkildsen

I think it’s difficult to give you any - we have dreams but the current market is around 400-500 depending on rig and type. Hopefully we can see some improvement particularly for those highly-spec rigs going forward.

Kenan Najafov

Thank you very much.

Operator

Thank you. We’ll now move to our next question from Ole Slorer from Morgan Stanley. Please go ahead.

Ole Slorer

Yes. Thanks Jim for making room in the queue there. Alf, wonder if you could clarify something you said. You highlighted that you wouldn’t mind necessarily making acquisitions of companies or asset groups containing an element of older rigs. At the same time you’re selling some of your own older rigs like West Larissa and you’re going out on the other end and ordering seventh generation rigs, which of course would be the latest and greatest. So how does that square with your comments on being room in your portfolio for older rigs?

Alf Thorkildsen

I didn’t say older rigs. I said not so new. But I think the issue would be around older backlog, things like that, which could be attractive to us. But generally I would say that we are high-grading our fleet. We have one old jack-up left. How long that’s going to last is a question of the market conditions. But we are high-grading our fleet. There is no doubt about it and I think the future for us is around a very, very modern fleet.

If we can find some small assets we can buy and companies who have that kind of type of asset, we are looking at that. We are also of course ownership in Pride is a combination but I think the attractiveness with Pride is of course the order backlog.

Ole Slorer

Yeah. Sure, sure, sure. So just to clarify, you’re not looking at changing your strategy away from focusing on post-2000 built rigs as your core kind of asset base?

Alf Thorkildsen

No. I would say it’s the opposite in a way. We are even - this time we are high-grading even further and the seventh generation drill ships is an example of that where we really saw into the future and said we are not building prototypes but we are taking a combination of developed and very upgraded equipment into one unit. And we believe that is a very sustainable and very operational unit going forward.

Ole Slorer

Okay. Thanks. Follow up question on the upgrading and maintenance of the BOPs, could you share a little bit more what was it specifically that you did this quarter? Was it Seadrill specific? Is it something the whole industry is facing? Could you just elaborate a little bit on what exactly you did with respect to the maintenance or the upgrade or repair of the BOPs?

Alf Thorkildsen

I think it’s general industry issues when you are at these water depths. You do encounter some issues around some of the BOPs. And it is kind of some of the rigs we have taken delivery of have very new BOPs, which have not been tested over time. And just to give you an example of Eminence, it’s a flange, which are because of the movements will have had a - it is worn out. We are changing that with something, which cannot be worn out by movements. These are some of the things we see in new ones and when they have been tested for some time we see that we are changing those with better parts in those components.

Ole Slorer

Okay. So the first one…

Alf Thorkildsen

I am convinced that we will do better going forward, that we have some of those first year issues on some of those units.

Ole Slorer

Okay. So the first one you learned by this thing failing. You replaced it and the next ones you’re now doing preventive maintenance? Would that be the right way of thinking about it?

Alf Thorkildsen

Yes. I think the improved parts who can stand the pressure better and where we have taken the learnings from the initial first 15,000 psi BOPs with six flanges, you know.

Ole Slorer

Okay Alf. Thank you very much for clarifying.

Operator

Thank you. We’ll now move to our next question, which comes from Eliecer Palacios from Maxim Group. Please go ahead.

Eliecer Palacios

Thank you very much. I have a quick question regarding the tender rigs. You have mentioned that you see incremental demand in the Gulf of Mexico and Central America and I’m curious if you expect to increase your presence there? Or do you remain focused on West Africa and Southeast Asia?

Alf Thorkildsen

No. We are trying very clearly to expand our fleet to that region. I think that will be very good for - it is a niche product. It will expand the niche by being utilized and used in that region. We are in discussion with oil companies to use it in the Americas and hopefully we in the not too far future can give you some news regarding that. That will be a good expansion of this kind of concept. When it comes to Southeast Asia we are seeing that this concept is very effective when it comes to shallow water. And we are also using it for the third and fourth time now on sparse with deep water and DLP, which is also in the region of 1000 meters of water depth.

Eliecer Palacios

Okay. Thank you. And just a quick follow up, do you expect to have acquisitions on that part on the tender rigs or have you been primarily focused towards jack-ups and deep water fleet?

Alf Thorkildsen

We are looking at not acquisitions. I think it would be the only thing we can do in that fleet is organic growth and we are looking at that.

Eliecer Palacios

Okay. Thank you very much.

Operator

Thank you. We’ll now move to our next question, which comes from Arun Jayaram from Credit Suisse. Please go ahead.

Arun Jayaram

Good morning gentlemen.

Esa Ikäheimonen

Good morning.

Arun Jayaram

I wonder Alf, if you could clarify in previous calls you had mentioned your interest in getting larger in terms of scale in Brazil and you talked about different opportunities maybe through new builds or further contracting opportunities. Can you talk about how you’re thinking about Brazil today and what your strategy is to get larger in that market?

Alf Thorkildsen

You know, so what we have done lately, one of the things that we did was to buy Scorpion. That added two jack-ups to the region to Brazil. So we now have six units, four deep water units and two jack-ups in Brazil. There is no doubt that Brazil is going to spend or Petrobras is going to spend some 270 billion on expansions of which half is offshore. And of course when you’re offshore a significant part of that is drilling.

We see that as a very interesting market. Also because they have the finds have already been discovered. So it’s a question of developing that into some effective producers. And drilling is of course a key element of that development strategy. Seadrill has the second most modern fleet of deep water units and it’s natural for us ot be in that region. There is a requirement to be more Brazilian and having local content and that is where we - that is the nut we are trying to crack at the moment by looking at anything from building. We have not done so so far but also alternatives together with maybe a Brazilian player or through other alternatives in Brazil. But of course what we see around the globe at the moment is when we have made the discoveries and developments of natural hydrocarbons, we see that localization is part of the equation to get access to that market.

Arun Jayaram

I get you. That’s interesting. And could you just comment, I know that you guys have participated in a pretty exciting discovery in Brazil I think with Anadarko is the jack-up market has been pretty small in terms of Brazil. But are you pretty optimistic about there being a reasonable growth in jack-up demand in Brazil?

Alf Thorkildsen

We are optimistic that Anadarko might use the rigs for longer. That’s for sure. I think it is too early to say if this is kind of more a general - but of course, you know, some of that OG excess and others are on shallow water and have discovered significant additional resources to what Petrobras originally discovered in similar areas. So I think we should - there is also potential shallow water in Brazil in addition to the fantastic finds they have deep water.

Arun Jayaram

Okay. If I could sneak in one more question, Alf, recently Seadrill has teed off quite a bit of speculative new build announcements. If you were going to focus on acquisitions, would you say that you’d have a preference to assets that were backed by backlog or are you still willing to make some acquisitions that are more speculative in nature?

Alf Thorkildsen

If the price was right we could do it on a speculative basis. We have looked at things, which were kind of offered for sale on speculative deliveries, which we had earlier deliveries than our current new builds. We could just not get the sums together. The pricing they had on them was significantly higher than what we could get by our own organic growth.

Arun Jayaram

Okay. Thanks a lot Alf.

Operator

Thank you.

Alf Thorkildsen

Operator.

Operator

Yes sir.

Alf Thorkildsen

If there are no further questions I think we will close the call.

Operator

We have no further questions. Thank you.

Alf Thorkildsen

Thanks all for participating. See you next quarter. Thank you so much.

Esa Ikäheimonen

Thanks a lot

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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