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Executives

Scott McReaken – Chief Executive Officer

Analysts

Lukas Daul – ABG Sundal Collier

Sevan Drilling AS (OTCPK:SDRNF) Q2 2014 Earnings Conference Call August 27, 2014 5:00 AM ET

Scott McReaken

Thank you and good morning everybody welcome to the Sevan Drilling Second Quarter 2014 Earnings Call. My name is Scott McReaken, I’m the CEO of Sevan Drilling, I'll be hosting the call today.

Before we get started, I need to comment that much of today’s discussion will consist of forward-looking statements that are subject to risk and uncertainty. If you look on our Page 2 of the presentation, you can see some of these key items and for additional information to view our other board filings please visit the website at sevandrilling.com.

Today we’ll start with the highlights for the quarter, walkthrough the financials, provide a company update and then open it up for some questions. The Second quarter result all about continued success and operations through improving utilizations, reducing operational risk and cost discipline. We can now see that these goals achieved within our financials. Revenue for the quarter was at $88.6 million and we achieved record EBITDA of $40.8 million, which results in a net profit of $9.2 million or $0.02 earnings per share.

Highlights include 95% technical utilization for the three rigs that are in operations and which is Sevan Louisiana was at 90% for the first 34 days of the new three year contracts in the Gulf of Mexico. Sevan Developers approximately 97% complete today and deliveries now expect in October 2014 and quoted to the yard’s latest estimates.

Moving to the financials for the quarter, revenues from the three rigs in Brazil and the US Gulf totaled $88.6 million, compared to $63.9 million in the same quarter last year. This increase is attributable to higher utilizations in Brazil resulting in five months of bonus awarded on the two rigs and the addition of the Sevan Louisiana and the Gulf for 34 days.

We call that last year in that same period we had about seven days downtime on the Sevan Driller replacement of the main shaft bearing, which impacted the 2013 revenue. The total operating expense for this quarter is $42.4 million compared to $36.6 million in 2013, the addition of Sevan Louisiana is driving the increase in operating costs, which is offset by $1.7 million of higher cost due to the repairs associated for the downtime last year.

General and administrative costs for the second quarter were at $5.6 million, which is 18% lower than the same quarter in 2013. This quarter also includes the onetime charge for $1.2 million for front end engineering and design study where we also around $1.6 million of related revenue this quarter.

Please note that we’ve now concluded the formal process of the Seadrill integration and recognized the loss for the workforce reductions in this quarter. With all this we achieved a record EBITDA of $40.8 million, which is more than double when compared to the same quarter last year.

Depreciation came in at $16.5 million and net financial items were $14.4 million, financing costs compared to 2013 are mainly due to the write-off of deferred financing expense from the anticipated debt restructuring that took place last year. In addition, we had lower interest expenses this year.

Tax expense $6.7 million and for the quarter we have a net profit of $9.2 million bringing our EPS to $0.02 per share. Under the balance sheet, as of June 30, we had $2,006 million of total non-current assets, which increased as a result to deferring the payment of the second milestone of a Sevan Developer which was settled through a net liability with the yard bringing the CIP for the Sevan Developer to $130 million at June 30, which includes 20% of the contract price paid through the milestones interest from deferred payments and some capitalized interest and committed variation orders. The cash balance at the end of June is $30.2 million which is mainly reduced from year-end by a $105 million repayments of the bank facility, $30.9 million in interest costs and funded mobilization costs for the Sevan Lousiana along with normal working capital.

We have $1,265 million of bank debt outstanding under the current facility, after we completed the principal repayments this year, we’d use $30 million on the revolving credit facility to assist and funding the mobilization and construction this quarter. Other movements in the balance sheet includes settlement of the deferred liability in direct costs due to the senior management agreements. Now I’ll provide you with a company update in comparative to Q1 operating performance.

In the first quarter of 2014, the technical utilization was 90% which suited the stable compared to last three quarters of operations. In Q2 2014, we were able to improve on this and achieve 95% for the fleet, which resulted in earning a 5 months of performance bonus on the two rigs in Brazil include the start-up of the Sevan Louisiana at 90% utilization for the quarter. Operating costs per day averaged to $197,000 for the fleet where we had higher costs for the start up of the operations on the Louisiana and expect cost per day to reduce as we get further in operations and the utilization of the rig became stable on our expected mid 90% range. We are satisfied with this lower cost base achieved in last two quarters and continue to look for improvements as we settle into the Seadrill cultured management systems.

Considering these operating achievements, we should look at the EBITDA contributions from Q1 to Q2 in 2014 to illustrate how we achieve this $40.8 million of EBITDA. Largest contributor to the addition of the Sevan Louisiana, which only work for 34 days and we are looking for greater contributions as we get through the break in period and the rig operates in the Gulf for the next three years. The next largest increase from Q1 is the expectational performance on the two Brazil rigs. We are very pleased with the crews that have accomplished down there and look forward to continuing the success.

Lastly we were fortunate to have the FX benefits this quarter and you could see we have very limited severances in Q2. My next focus is on the backlog position of our fleet which is important to discuss as we are seeing a slowdown in ultra deepwater market in 2014 assumingly into 2015 now. We have $1.4 billion in contracted backlog which equates to approximately 8.6 contracted rig years for the operating fleet. In another words the Sevan rigs that are working this quarter are fully contracted through mid 2016 at a minimum regarding the Sevan Developer, our last new build in uncontracted rig.

Seadrill has put forward a tremendous marketing effort for the unit in last several months while there is been interest in the rig and we have been participating in active bids in Brazil, West Africa and other regions. We still don’t have contract at this time. With the soft ultra deepwater market resulting from pullback of new key spending a lack of subsequent award so in 2014, we continue to see the reminder 2014 and into 2015 to be challenging for the Developer.

Sevan Developer is approximately 97% complete and the yards now indicating that will be delivered on October 2014. Further delays from Cosco are the results of delays for subsea intervention system equipment with the exception of these delays we continue to progress well and operations preference and in accordance with our usual procedures. The current plan is to begin Sea trials in early October and delivery later that month if possible.

We had a final installment commitment of approximately $424 million and we estimate approximately the total investment needed to take delivery at $130 million to $140 million this includes the paid milestones, operating prep cost, variation orders and remaining interest expense to be paid. Since the new expected delivery days approaching I will walk through the alternatives that we’ve been focusing our evaluation on. If we are able to secure a drilling contract prior to delivery we have the ability to draw on Tranche B of the existing bank facility, with only a specific conditions are matched which are day rate of 440,000 a day for a minimum 18 months.

However, with the current marketing conditions where they are at today and our progress in active tenders we still must consider other alternatives of this contract is not available by delivery, which brings us to the second alternative days to reach a later delivery date as mutually agreed we will need to agree satisfactory terms with Cosco including logistics and cost per potential warm stacked location where the rig can be moved to safer waters until a contract can be secured. Another alternative is to cancel the contract, the construction contract provides us the ability to cancel due to the significant delays and delivery and will allow us to claim a refund of the milestone payments which is a about $105 million and releases from other cost that are estimated for delivery.

We will continue to keep close communication with the yard and work to find an optimal solution for the company. We have been closely involved in the project management and monitoring the delay situation as it has evolved over the last several months. And this time we have evaluate alternatives and consider potential risk rewarding exposure that each scenario creates. We expect to make a decision in the short to medium-term and I will not be able to provide too much more comment on these alternatives as those many contingent factors driving each in the conservations with the yards still need to happen that can change the assumptions or acquisitions.

Finishing on today’s prepared remarks I will leave you with a couple of summary and outlook items. We had a substantial achievements in this quarter to operating performance and the financials directly reflect the improvements. We’re very pleased - will be able to achieve the $40.8 million in EBITDA and profit for the quarter. We have the three rigs with firm contracts to mid 2016 and look forward to maintaining our positive working relationships with our clients. The Sevan Developer continues to be actively marketing, construction is nearly completed 97% and will have a decision soon on delivery as the October delivery date of purchase.

Looking into Q3, we’re now expecting Louisiana to have 30 days downtime in August. As we released earlier this month, the rig had a leak in the control system on the BOP resulting in the rig safely closed in the well and pulling part of the BOP to the surface for repairs.

We’ve completed the repairs now and reconnecting to the well and borrowing with any further complications, we expect to be back online this Saturday the 30th. Last comment is that we’re going to call a general meeting soon to look forward a proposal and effectively migration of company from Norway to Bermuda. The migration is expected to reduce task and provided benefits to the shareholders.

With that Mary can we open it up some questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Lukas Daul of ABG. Please go ahead.

Lukas Daul – ABG Sundal Collier

Hi, good morning Scott. A couple of questions on obviously on Developer, but this is the first time you’re mentioning the possibility of canceling the contract and actually recover the initial installment. Can you just set some more color on why is it popping up now and hasn’t been sort of mentioned in the past?

Scott McReaken

Well, it was matter of the contract reaching the significant delay, I think in a past releases it has been included the details around there. And we were mentioning it before, because we did know how likely it was now that we are near the trigger point to build and execute the cancellation is something that we felt was necessary to disclose because we are evaluating at the board level.

Lukas Daul – ABG Sundal Collier

Okay. And then when I read your report on basically what you’re saying about the near-term market remaining challenging. This seems to be probably a more possible option. But, when you mentioned the threshold on the contract for the developer, did you say 440?

Scott McReaken

Yes, it’s a 440 with 18 months.

Lukas Daul – ABG Sundal Collier

Okay. And I’m surprised that what you call a tremendous effort by Seadrill,

I would expect the Seadrill puts a tremendous effort into something. It results in the contract is it really that (indiscernible) in terms of the demand.

Scott McReaken

Yes, like I said we’ve had active interest in active tenders we’ve been participating in. And I mean you look back in July; there were no ultra deepwater awards. So yes, it’s a product of the marketing we’ve been putting a big effort in kind of get this thing under contract.

Lukas Daul – ABG Sundal Collier

Okay. And just trying to understand, how much more cash except of the final installment or you going to spend on Developer until delivery.

Scott McReaken

So, you can see what we have invested on the balance sheet now in to…

Lukas Daul – ABG Sundal Collier

Yes. It had a book value of $131 right?

Scott McReaken

Right. And there is some additional pre-ops cost that we need to complete under the buyers allowance contracts that was previously funded. So it puts us in that range of 130 to 140 like we’ve said.

Lukas Daul – ABG Sundal Collier

Okay, okay. So it’s not that significant.

Scott McReaken

Yes, it’s 97% complete.

Lukas Daul – ABG Sundal Collier

And can you – I didn’t catch what you said about the reversal on the insurance. Can you clarify that?

Scott McReaken

Reversal on insurance I am not...

Lukas Daul – ABG Sundal Collier

Yes, so sorry the severance that was something.

Scott McReaken

Yes, so we had a – the plan workforce reduction is that we had, I think it was about a $100,000 of cost that we expensed this quarter. So we had I think in total it was the 2.6 in total when you take in first quarter. So we went through that – we announced a plan in actually went into Q3 earnings call that we’re going to look at how we integrated in – on the offshore side as well as the staff levels on the onshore. And so we’ve put a plan forward that would reduce those costs and those were severances that were either over the period or final termination that we had complete in this quarter. So the big workforce reductions complete now.

Lukas Daul – ABG Sundal Collier

Okay. So you’re basically where you want to be?

Scott McReaken

Correct.

Lukas Daul – ABG Sundal Collier

Okay. Thank you very much.

Operator

(Operator Instructions) There are no further questions in the phone queue at this time. As there are no further questions in the queue I would like to turn the call back to Mr. McReaken for any closing remarks.

Scott McReaken

Thank you everyone for joining us today. And I guess we will talk you again in about 90 days.

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