Update: North Atlantic Drilling Sells 30% Equity Stake To Rosneft In Exchange For Onshore Drilling Assets In Russia

Aug.22.14 | About: North Atlantic (NADL)

Summary

On August 22nd, North Atlantic Drilling announced that the company would be selling a 30% equity stake to Rosneft in exchange for onshore drilling assets in Russia.

This continuation of North Atlantic Drilling's partnership with Rosneft is an important step and will likely benefit both companies over the long term.

The equity stake exchange for onshore drilling assets in Russia is one of the most important aspects of the partnership and its finalization should be encouraging to investors.

On August 22nd, North Atlantic Drilling (NYSE:NADL) announced that the company would be selling a 30% equity stake to Rosneft (OTC:RNFTF) in exchange for roughly 150 onshore drilling rigs in Russia and a cash consideration. This transaction is a significant step and is part of the strategic agreement that the two companies announced in late May. In recent weeks, many have grown concerned about the rising tensions and various economic sanctions between Russia and the west; however, this transaction highlights the commitment the two companies have made towards their partnership. As part of the 30% equity stake, Rosneft will be able to appoint two of the seven members of North Atlantic Drilling's board of directors. The transaction is expected to close in the fourth quarter of this year. In the press release, North Atlantic Drilling noted the following specifics about the equity aspect of the transaction:

"Following the preliminary Investment and Cooperation announcement in May and the completion of the binding offshore contracts in July, NADL today has agreed to acquire a significant portion of Rosneft's land drilling fleet. Rosneft will receive as consideration an approximate 30% stake in NADL by receiving primary shares at the price agreed upon in May of US$9.25 per share, with the balance being paid to NADL in cash. Following the transaction Seadrill Limited will continue to own more than 50% of NADL." -North Atlantic Drilling Press Release

After the closing of the transaction, more than 80% of North Atlantic Drilling's shares will be held by two entities: Seadrill (NYSE:SDRL) and Rosneft. This will likely restrict the free float and trading volume in North Atlantic Drilling's shares, which could enhance volatility. While North Atlantic Drilling has not yet provided the specific economics in relation to the land drilling rig acquisition, the roughly 150 rigs that the company will acquire are on contract with Rosneft for five years as part of a new contract award. The exchange of drilling rigs for an equity stake in North Atlantic Drilling is one of the most important aspects of the initial partnership agreement between North Atlantic Drilling and Rosneft announced back in May and the execution of this part of the agreement is a significant step. North Atlantic Drilling is creating a strong relationship with one of the world's most powerful energy companies and this latest announcement signifies both companies' commitment to enhancing their partnership.

In earlier articles about North Atlantic Drilling, I focused on different aspects of the company's prospects in relation to its partnership with Rosneft. In my May 27th article titled "North Atlantic Drilling: Rosneft Deal Provides Powerful And Stable Partner For Future Strategic Opportunities," I highlighted the importance and potential benefits from the then recently announced agreement between the two companies. In my July 17th article titled "Update: North Atlantic Drilling's Agreement With Rosneft Should Not Be Materially Impacted By Latest US Sanctions, But Headline Risk Remains," I discussed US sanctions against a number of Russian individuals and entities including Rosneft and how it would likely not have a significant impact on the partnership between North Atlantic Drilling and Rosneft. Additionally in my August 1st article titled "Update: Clarity On North Atlantic Drilling's Contracts With Rosneft Reveals Potential For Drop-Downs From Seadrill," I wrote about the offshore drilling contracts that had been signed with Rosneft. North Atlantic Drilling's management team will likely focus heavily on its partnership with Rosneft in the company's Q2 earnings release and conference call on August 27th which could provide further clarity. While the partnership between North Atlantic Drilling and Rosneft remains young, the two companies appear committed to furthering their relationship, which should be beneficial to both parties over the long term.

Disclosure: The author is long NADL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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