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North Atlantic Drilling Ltd. (NYSE:NADL)

Q2 2014 Results Earnings Conference Call

August 27, 2014, 11:00 AM ET

Executives

Tore Byberg - VP Commercial Finance

Alf Ragnar Lovdal - CEO

Ragnvald Kavli - CFO

Analysts

Jacob Ng - Morgan Stanley

Anders Bergland - RS Platou Markets

Lukas Daul - ABG

Richard Haydon - Tipp Hill Capital Management LLC

Nathan Gantcher - EXOP Capital LLC

John Reardon - Merriman Capital

Andreas Stubsrud - Pareto Securities

Operator

Good day and welcome to the Q2 2014 North Atlantic Drilling Ltd. Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Tore Byberg. Please go ahead sir.

Tore Byberg

Thank you, operator, and good afternoon, everybody. Welcome to North Atlantic Drilling second quarter 2014 earnings call. With me in the room today, we have our CEO, Alf Ragnar Lovdal; Ragnvald Kavli, who is the CFO and also [Anton Meyer] (ph) our COO.

Before we continue, I would like to remind everyone that some of the discussion today will not be based on historical facts, but rather consists of forward-looking statements that are subject to uncertainties. We have laid out some of the key items on Page two of our presentation. For additional information, please visit our website at nadlcorp.com.

I would now like to turn the call over to our CEO, to take you through the first part of our presentation. Alf Ragnar, please go ahead.

Alf Ragnar Lovdal

Thank you, Tore and welcome everyone to North Atlantic Drilling's second quarter earnings call. I would like to thank all of our employees onshore and offshore for the quarter's results with no safety incidents to report and a very solid financial result.

We'll shortly summarize the second quarter financial results and the highlights from the quarter. I will then also go through our order backlog and the market and outlook. After that Ragnvald will take you through the financials for the quarter before we'll be ready to take some questions at the end of today's call. I'll just make a few remarks about our financials since Ragnvald will cover the details later.

Our EBITDA came in on $154 million for the second quarter, which is a margin of 57% on revenues excluding reimbursable. Net income was $59.7 million, resulting in an earnings per share of $0.24. Our Board decided to maintain the dividend for the quarter at $0.24.

Just as a remark and as you can see on the slide, we have by that paid out $2.88 per share in cash dividends since our inception in February 2011. So let's look at what has happened operationally over the quarter.

So aside from a very good operational quarter in general, I would like to make a few comments on some key items on the quarter.

West Linus commenced its contract on May 25 and has since then delivered outstanding performance with 97% economic uptime. For a new rig that has just entered operations, that is a fantastic result. It is also a good example of what you get by focusing on quality training and careful planning on the yard in Singapore and during the time to Norway.

Also West Alpha left Norway to start operations for ExxonMobil and Rosneft in Kara Sea. It is currently drilling up there and everything is going according to the original plan.

And we're obviously very pleased to tell you that we are back on track with delivering on our target of high economical utilization 98% for the second quarter. There are several factors contributing to the employment from the first quarter mainly that the weather conditions to no broken equipment and also no yard space without revenue for the quarter.

I should add however that keeping our utilization at this level requires a constant focus on health, safety, quality and environment. Without that focus, it will have a negative impact on our utilization almost instantly. So you'll probably appreciate that this is our first priority always.

Then let's move over to the Rosneft deal. So as we announced back in May, we entered into an Investment and Co-operation Agreement with Rosneft for drilling operations offshore and onshore Russia. This agreement is for a period lasting until at least 2022.

And in addition to North Atlantic Drilling, entering the land drilling market in Russia, their agreement also covers contracts for offshore drilling and on July 30, we were finally able to deliver on the first part of this deal when we announced new drilling contract for six offshore rigs, which excluding the GustoMSC design jack-up, which we don't have any ownership in '13 at $4.1 billion to our order backlog.

In the current market environment, we are extremely pleased with locking in long-term contracts for our available rigs.

Over to the land drilling part, on August 22, we announced that we are acquiring a land drilling business from Rosneft consisting of approximately 150 land rigs along with five-year contracts for each rig.

As settlement for the acquisition, Rosneft will receive new primary shares in North Atlantic Drilling, resulting in them owning about 30% of our outstanding shares after the close of the transaction. These shares will be issued at $9.25 in line with our agreement with them for May and in line with the IPO price from January this year.

In addition to the land rig business, North Atlantic Drilling will receive a cash balance for their 30% ownership stake, reflecting that value of the shares in North Atlantic that Rosneft will be receiving is higher than the value of the land rig business.

We intend to use these proceeds to secure more drilling capacity to meet our backlog. Rosneft will also be entitled to appoint two members to the North Atlantic Drilling Board of Directors.

We should underline that even though Rosneft is coming on Board as a new major shareholder, Seadrill still intends to maintain their majority ownership after the close of the initial transaction.

Both North Atlantic Drilling and Seadrill are very pleased to be there welcoming Rosneft as a new shareholder and we're confident that this partnership will continue to create value for all of the company's shareholders.

And with that, as the quarter highlights let's spend a few moments on our backlog and share some market commentary. So on the fleet contract coverage, you see West Alpha is working for ExxonMobil with a firm contract till the third quarter 2016 and Exxon has a one-year option possibly expanding this contract into 2017.

Regardless of whether the option is exercised or not, their recently announced five-year contract with Rosneft will be in direct continuation of their existing contract. This secures West Alpha work until 2021 or 2022.

Operationally West Alpha is currently in the Kara Sea drilling the University-1 well for a joint venture between ExxonMobil and Rosneft. The focus has been according to plan so far and we are very excited about drilling the first well in this area for 30 years.

West Alpha will return to Norway for work here later this fall and will return to the Kara Sea next summer.

West Venture, Venture keeps on delivering top-class performance for Statoil on oil field. Its firm contract expires in July, end of July 2015 and we are working on several alternatives for new contracts including short-term.

West Phoenix is drilling west of Shetland for Total and the expected expiry of its contract is at the end of third quarter 2015.

West Hercules is currently mobilizing to Canada, where the rig was handed over to Seadrill yesterday to commence an estimated 18 months drilling campaign. The rig is also scheduled to return to Norway to drill at the Oster Hunstan field, also for Statoil.

West Navigator is finalizing its contract with Shell and will commence its minimum 70 days contract with Centrica directly thereafter. After the five-year classification service scheduled to start late December or early January next year, the rig will commence its five-year contract with Rosneft.

West Epsilon continues to deliver well for Total and its contract expires at the end of 2016. West Elara has a firm contract till the spring of 2017. Total has options to extend the contract by two years into 2019.

West Linus as mentioned commenced its contract with ConocoPhillips on May 25 and has since then had outstanding performance. We will come back on the details for the jack-ups contracts with Rosneft later.

That sums up the contract status of our fleet and moving over to our order backlog slide; you will see that the challenges since the last quarter are significant.

With a contract from Rosneft, we have added $4.1 billion to our contract backlog, so that our total backlog has matured at the end of the second quarter and now stands at $6.3 billion. That is a record high and we are very pleased to have achieved this in the current market.

It is also a good sign of Rosneft’s ambitions and ability to commit to their plans for developing the Russian Arctic and this cannot be said too often, our backlog is with an attractive margin, which should continue to support growth while we are still committed to creating profitable returns for our shareholders through our quarterly cash dividend distributions.

So, as you can see from this slide, our position now is that we're sold out in 2014. More the 90% sold out in 2015 and we have 75% contract coverage in 2016 and we have about 70% contract coverage for 2017.

The increased visibility from the attractive backlog we have ahead of us, gives us the flexibility, which we need to be opportunistic with regards to our remaining open position, and when considering the market we expect in the near term, we believe that we are uniquely positioned compared to our competitors.

So, let’s look at how we see the market for the moment. We are excited about being the first mover into the Russian Arctic. As I said earlier, West Alpha is currently working in the Kara Sea drilling the University-1 well for Rosneft and ExxonMobil. The three blocks in this area are established to contain approximately 46 billion barrels of recoverable oil and more than 14 billion cubic meters of gas.

The resource estimates for other areas of the Russian Arctic shelfs are similar in terms of both oil and gas volumes and with Rosneft, now delivering on their plans to explore and develop these areas by securing drilling capacity, we are confident that we are in full position to grow our business in Russia.

For comparison, we could add that the number of wells drilled in Norway since the beginning in the 1960s to today is 5,463 wells. This should indicate that 100 wells that need to be drilled in Russia over the next decade in order for the oil companies to retain their licenses could result into several thousand wells being drilled over the next 20 to 30 years.

Such a market opportunity does not come up very often. And we are determined to keep our lead position in Russian offshore drilling market, simply because we believe that this will be one of the best markets globally over the next years.

Looking at our historical market however, the aging fleet in Norway and in the U.K. seems to finally lead to older capacity being phased out. In addition rigs are leaving this region for work in other harsh environment.

Recent examples are Polar Pioneer, West Alpha and West Hercules. The problem rig – the problem rig operators face these days is difficult decisions whether to upgrade and maintained their oldest rigs, when the current market day rates don’t seem to give the necessary payback over the contract terms offered.

We believe that the trend of older units leaving the region or being stuck eventually scrapped will continue for some time. There are 15 floaters older than 30 years, which will roll off their current contract in Norway and in U.K. in 2015 and 2016. The future for these units in Norway or in the U.K. seems very uncertain at the movement.

We believe that the market fundamentals will be positively affected over time with these older units, effectively being removed from the supply side. Once the oil companies resume their exploration and development, the marketed fleet will be smaller and consist of more modern rigs.

As such with a very limited short-term market exposure we have, we will continue to play the market with our fleet and be ready to act on opportunities, which we consider attractive.

The prospects in the pipeline are certainly managed. So let’s have a look. As seen lately, majors in the region like Statoil and Shell are postponing several projects previously planned to be start-up in 2015 and 2016.

As most of you know almost all of the major oil companies are facing challenges with having their free cash meet their dividend commitments to shareholders while still keeping up the exploration and development levels.

With their sustained high energy prices however we do expect that a majority of the projects currently under review will be explore and develop. It is difficult to be very specific on timing for this, but we know from history that if they wait too long it will impact the oil companies booked resources and harm their share price that way.

What we do now for certain is that it will need a lot of drilling for the oil companies to develop and explore these resources. So in combination with older rigs being effectively removed from the supply picture in our region we maintained our positive review – our positive view on the fundamentals for our business.

With that, I would like to hand the word over to Ragnvald for him to take you through the financials.

Ragnvald Kavli

Thank you, Alf Ragnar. Good afternoon or good morning everybody and let’s start with having a look at the financial highlights for the quarter.

The company recognized an EBITDA of $164 million in the second quarter, an increase of $35 million compared to the previous quarter. The increase is mainly related to improved operational performance for the entire fleet compared to the first quarter, as well as contribution from the new harsh environment jack-up West Linus that commenced operation under its median contract on 25th of May with ConocoPhillips.

Net income and corresponding earnings per share increased quarter-on-quarter. In addition to the improved EBITDA, our net financial cost decreased with $6 million for the last quarter. This was largely related to a settlement premium paid in the first quarter for the prepayment of the $500 million bond that was somewhat offset by losses on derivative instruments such as interest rate swap agreements and cost currency swaps during the second quarter.

Our cash flow from operating activities decreased from $32 million in the previous quarter to $12 million in the second quarter. This was mainly due to increased long-term maintenance investments and increased account receivables offset by better operational performance in the second quarter and also mobilization fee received for the West Linus.

In terms of dividend quarterly cash dividends remains the same at $0.24 in line with the first quarter.

Let's look at profit and loss statements, contract revenues increased from the first quarter mainly impacted by excellent operational performance for all our fleets and added contribution from West Linus. The increase in vessel and rig operating expenses is also attributable to the West Linus commencing.

Reimbursement revenue and cost increased quarter-on-quarter mainly related to the plan yard stay that Alpha went through preparing the rig for operations in the kara Sea. Excluding reimbursable cost and revenue, our overall EBITDA margin was approximately around 57% for the quarter, which we’re quite proud of being back at.

Net operating income increased with $24 million quarter-on-quarter for the same reasons as previously mentioned…

We'll further look at income statement our losses from financial items in the second quarter amounted to $42 million compared to $48 million in the first quarter.

As previously mentioned the decrease is mainly related to the settlement premium paid for the prepayment of the $500 million bond in the first quarter, but also again offset by losses on derivative financial instruments that interest rate swaps and cost currency swaps. Tax expenses were in line with what we have in first quarter.

If we move ahead to the balance sheet and have a look at the assets side, not too many things to highlight, but a couple. We've seen an increase of $74 million on our account receivable, which is mainly due to the West Alpha yard stay and on our new buildings was a decrease of $556 million, which is related to the reclassification of the West Linus as a drilling unit. Other than that, really no events to highlight, so let's move to the liability side.

Couple of things to highlight here and may be on the long-term interest-bearing debt side as well. We on our $2 billion credit facility in addition to the right quarterly installment of $42 million; we also drew down a further $80 million during the quarter leaving the outstanding amount on the facility at $1.380 billion.

On the West Linus we drew down to $40 million on their lease per ship finance and they drew down $40 million on their $475 million credit facility, drawing that facility down in full and we also drew down $12 million on the $85 million revolving credit facility with Seadrill. So at the end of second quarter we had $193 million available on our various credit facilities for further drawdown.

Otherwise on the liability side, the increase in other noncurrent liabilities was mainly due to mobilization revenue of the West Linus, which will be amortized over the contract period.

I think that was it on the financing side and the financials, I’ll now handover the call back to Alf Ragnar to sum it up for you.

Alf Ragnar Lovdal

Thanks Ragnvald. So let's sum it up before we move to the question section. Our background is a record high at $6.3 billion and keep in mind that this is a backlog with an attractive margin. Thus we have a background that gives us visibility of earnings for several years ahead. This gives us the flexibility to act opportunistically short-term.

Our dividends capacity remains firm. This is the 12th consecutive quarter with regular cash dividends to our shareholders.

While still we are also a Gulf company demonstrates by West Linus entering operation this year, West Rigel entering operation next year and with two deck-up starting up in 2017.

In total this constitutes a growth in annualized estimated of EBITDA of $375 million and of course let's not forget about the Russian opportunity, with new contracts, which added $4.1 billion in backlog, this is something which naturally will be a key factor in deciding the company’s future.

We are very excited about this new markets opening up and we are equally excited about having Rosneft as our partner and new major shareholder. We really look forward to making this a profitable partnership for all shareholders.

That sums up our presentation for the second quarter. So operator, we are now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll now take our first question Jacob Ng of Morgan Stanley. Please go ahead.

Jacob Ng - Morgan Stanley

Hi. Thank you for taking my question and congratulations on moving forward with the Rosneft deal. I want to first address how you might be planning to move up the learning curve associated with the land rig business. Would you consider tapping on other resources within the Fredriksen groups here, given your limited operating experience here

Alf Ragnar Lovdal

May be you should answer on that.

Ragnvald Kavli

As you know we're buying into an existing operating that's been quite successful for the last 30 to 40 years. So there is a lot of experience that already exists. What we are doing now is working on the integration plan and keep all the learning and the experience within the Group.

Jacob Ng - Morgan Stanley

Okay. Well I was referring specifically to Archer given Archer has got experience there. Could Archer be roped in as well?

Ragnvald Kavli

At the moment Archer is not a part of this arrangement.

Jacob Ng - Morgan Stanley

Okay, well, I'll shift gears to West Venture, which has a special survey when her current contract ends next July. Do you see currently longer term opportunities that justify proceeding with potentially expensive work scope for this slightly older rig?

Alf Ragnar Lovdal

Well West Venture has been performing very well and doing excellent work for Total. And yes its now close to 15 years. Of course we do that and we have done with that rig for years continuous class survey of that rig that will of course continue and I have t o add going forward we are looking at both long-term and short-term work.

Jacob Ng - Morgan Stanley

Okay Thank you.

Alf Ragnar Lovdal

Thank you.

Operator

Thank you. We will now take our next question from Anders Bergland of Platou Markets. Please go ahead.

Anders Bergland - RS Platou Markets

Thank you and good afternoon and thank you for taking my questions. A little bit follow-up on the land rigs deal. Could you give some economics on those land rigs i.e. day rates, OpEx, or just at least the average age of the fleet?

Secondly, is there any reason why Venture shouldn’t be moved to Rosneft in Russia? Is there any reason or does it need any upgrade to relocate for instance to Russia and thirdly navigators I think you have an SPS coming up fairly soon. Can you give some guidance on duration and cost? Thank you.

Alf Ragnar Lovdal

Anders, I can take the first part of your question. So good afternoon to you. In terms on the land drilling business, I think it's definitely sure that this land rig business will give us a solid earnings and a contribution going forward and it will be at very accretive multiples to the current share price as well. So the earnings that the land drilling business will be accretive to the existing shareholder base need is structured.

However, when we come to the specifics of this deal in terms of what was the revenue in OpEx and such will be and what the age profile will be we have to wait for the specifics to the nature of the deal as well. So we will revert back to that I think more upon the closing of this contraction rather than giving any further details at the moment and since that, we're currently progressing with that integration phase of this land drilling business.

Anders Bergland - RS Platou Markets

Okay, and the Venture and the Navigator?

Alf Ragnar Lovdal

For the West Venture yes we are all looking at both long-term and short-term work and obviously opened for us and I discussed that. With regard to Navigator and the classification of that one, that's for first quarter next year. There we are in the range of $35 million to $50 million that range for classification cost of that.

Anders Bergland - RS Platou Markets

And duration is that 60 days or something?

Alf Ragnar Lovdal

For the classification part of it, it's less than that.

Anders Bergland - RS Platou Markets

Okay. So I just had one question on the Venture and that was, does it need any upgrade to relocate to Russia, or is it good to go as it is.

Alf Ragnar Lovdal

For Venture to go directly to, for example, Kara Sea, then it need to be upgraded, but work in the Borgland, not necessarily.

Anders Bergland - RS Platou Markets

Okay. And if I could just one final question that's more on the jack-ups that you were about to order, should we see a firm order linked to the success of the drilling of the unit in the Kara Sea? Is that what we’re waiting for, is it to sign the firm deal before you order it had it been ordered.

Alf Ragnar Lovdal

We’re just communicating now and are in the process of placing orders.

Anders Bergland - RS Platou Markets

Okay. Thank you very much for taking my questions.

Alf Ragnar Lovdal

Yeah. Thank you.

Operator

Thank you. We will now take our next question from Lukas Daul of ABG. Please go ahead.

Lukas Daul - ABG

Hi, thank you. Good afternoon, guys. A couple of questions. You’re talking about looking at the markets in an opportunistic way. You’re talking about all the rigs being permanently removed from the fleet. At the same time you see demand going forward. So what’s going to trigger you in order to add more capacity to your fleets i.e. doing a new build either on spec or against the firm contract.

Alf Ragnar Lovdal

Yeah. Also we’re getting with Rigel next year and we are now looking into building two new units to be delivered in '17 and obviously we follow closely and prepare to expand even more, but obviously we will take step-by-step there, Ragnvald?

Ragnvald Kavli

Hi Lukas, I'll just add something here that we have really strong growth base already in place with the Linus just starting now and we’ll have some more quarters for that next year.

The vehicle coming into operation and also with the Rosneft transaction now as well and potential new builds we’ll have there and we have a strong base but for other projects as well, we don’t have like an unlimited capital base, but we look at everything on an opportunistic manner and we’ll consider all the options to us and ex-sourcing all the financial flexibility as well that we have within the company.

Lukas Daul - ABG

Okay, thanks and then with regard to the dividend, obviously one of the elements affecting and this is your backlog, which now with the Rosneft deal is record high, so the question is how do you think of that in terms of -- how is it going to influence the near-term dividend distributions if any at all?

Ragnvald Kavli

You’re right and that’s we’ve always said that our dividend level as well is dependent on the current market outlook or earnings visibility and backlog we have and we have a strong earnings visibility with the Rosneft transaction. We have a very strong margin on the backlog we have as well, but we’ll also like to see the timing of the transaction as well maybe before you can expect anything further development on the dividend side.

Lukas Daul - ABG

Okay, and finally you mentioned the spend that you have on the maintenance of the rigs, which affected your cash flow from operations, but I was wondering if that is a cash outlay for you if you’re reimbursed for that by the client in case it’s an upgrade.

Ragnvald Kavli

Yeah. In the cash from operations, it’s not reimbursable cost from the client, but of course it's based on sample rigs as well. It is not attributable to one rig.

Lukas Daul - ABG

Okay. And then you gave a number for Navigator regarding the SPS next year. Can you give us a number for Venture as well?

Ragnvald Kavli

Venture is in the same range for the classification.

Lukas Daul - ABG

All right. Okay. Thank you.

Ragnvald Kavli

Thanks.

Operator

Thank you. We will now take our next question from Richard Haydon of Tipp Hill.

Richard Haydon - Tipp Hill Capital Management LLC

Thank you. A very brief numbers question. Is it fair to assume that your equity to total capitalization ratio will go from roughly 25% to slightly over 40% with the cancelation of the Rosneft transaction?

Ragnvald Kavli

I don’t have the numbers here in front of me right here now, but -- and I think -- I don't think have that in front of me right now, so I can’t comment on that as such. I’ll have to wait a bit depending on the finalization of that deal.

Richard Haydon - Tipp Hill Capital Management LLC

Okay. And I know this question is probably unanswerable at this juncture, but is there any comfortable range of debt to total capitalization that you are thinking about in terms of the new company?

Ragnvald Kavli

No, not yet however, I think we’ll have to investigate that further but of course, it’s not the same as we financed a year ago short drilling business that we financed -- the land drilling business but we don’t look at that ratio. We look at what’s the optimal portfolio of debt compared to our backlog as well and compared to our revenues and the earnings we’ll have and how we'll serve that and so it is part of a total cash flow discussion and not capitalization number.

Richard Haydon - Tipp Hill Capital Management LLC

Okay.

Ragnvald Kavli

But debt to capitalization or debt to…

Richard Haydon - Tipp Hill Capital Management LLC

It will give both of us something to think about now. Thank you for your time.

Ragnvald Kavli

Thank you.

Operator

Thank you. Our next question comes from John Reardon of Merriman Capital.

John Reardon - Merriman Capital

Hi. Good afternoon and thanks for taking my call. Most of my questions have already been answered, but I wanted to stay on the line to congratulate management on the excellent job you’ve positioned the company on a going forward basis.

One thing that I was kind of curious about, you mentioned about a rig if always in Barents Sea it didn't need to be upgraded, but if it went to the Kara, it did need to be upgraded. Is that to imply that the Kara Sea environment is a harsher environment than the Barents Sea? I was just curious.

Alf Ragnar Lovdal

Yes, first of all, thanks a lot for your feedback, but going over to the Kara Sea, it’s a bit colder there and Barents sea is open water throughout the year and during the summer season nothing special is required, although up until 1st of November -- early spring to 1st November, no winterization is required.

John Reardon - Merriman Capital

Okay. Thank you.

Alf Ragnar Lovdal

Thank you.

Operator

Thank you. Our next question comes from Nathan Gantcher of EXOP. Please go ahead.

Nathan Gantcher - EXOP Capital LLC

Yes, I was just -- thank you. What’s the timing to complete the Rosneft deal and what’s the risks between here and particularly the sanctions and all that?

Alf Ragnar Lovdal

The Rosneft deal, closing of that is end of fourth quarter this year. With regard to sanctions, obviously we have worked on that and we have established procedures and guidelines how to handle that and also we monitor the situation continuously because we obviously want to be in compliance with rules and regulations. So far that has been okay.

Nathan Gantcher - EXOP Capital LLC

Good. Thank you.

Alf Ragnar Lovdal

Thanks.

Operator

Our next question comes from [James] (ph) of Merrill Lynch.

Unidentified Analyst

Thank you. I am a retired Vice President of Merrill Lynch and an individual shareholder of Seadrill, but I’ve been following North Atlantic Drilling closely.

I would like to just have your -- a little more in-depth comments about the longer term geopolitical risk of the Rosneft deal. Rosneft pretty well advertised has been having difficulty in terms of putting in place long-term financing.

In one sense one could look at the Rosneft deal as giving a liquid quality asset in its 30% prospective ownership of North Atlantic drilling, a liquid asset, which they are being denied by the sanctions and possibly by the attitude of other financial sources at this time, perhaps they would find alternative sources in China or somewhere else. But what are your relationships with Rosneft up until this time?

Do you fully trust them as you said that you’re monitoring the situation closely but do you fully trust them in light of prior record of [BP Gnk] (ph).

Alf Ragnar Lovdal

Okay. Thanks a lot. We are very happy to work together with Rosneft and we look forward to develop this company together with them and we believe it's the right place to be for the next 20, 30 years, and not only there, but with the main activity there.

One really solid leg in that market with regard to sanctions and so on. Yes, we have had counseling of that and we are okay with the situation as of now.

Unidentified Analyst

But you do recognize a certain degree of risk, but you feel the risk award in the perspective deal and the opportunity is such that your long-term opportunity is such that you want to move forward in it.

Alf Ragnar Lovdal

I would leave word that to say that obviously we have follow the situation and we have implemented procedures how to make sure that we are within in compliance with rules and regulations and we monitor that situation every week and take needed actions.

Unidentified Analyst

Why is the cash portion of the deal so flat in relation to the 30% equity interest, which Rosneft will have in North Atlantic drilling? Why could you not negotiate it more of a cash proportion of the deal?

Alf Ragnar Lovdal

Ragnvald, you can answer that, we have sat up on closing of the transaction.

Ragnvald Kavli

I think -- hi there, I think, we haven’t really committed around the earnings or earnings from this, but you know on an increase of the enterprise value EBITDA basis and I think we don’t want to go into more detail of that at the moment.

And I appreciate you and other guys -- other who would like more details around this, but I’m afraid we can’t disclose anything further. And we’ll revert back to you upon more why the -- on why structure or open the structure of this deal. So we’ll revert back more on closing of this transaction, but we can’t say anything more at this given hour.

Unidentified Analyst

Okay. Well thank you very much.

Alf Ragnar Lovdal

Thank you.

Operator

Thank you. We will now take our next question from Andreas Stubsrud of Pareto Securities. Please go ahead.

Andreas Stubsrud - Pareto Securities

Thank you. Is there a lock-up on the Rosneft ownership?

Ragnvald Kavli

Andreas, this is Ragnvald. I think you know, as I said, we can’t comment once more on further transaction that we have as well. So there’s no point of going into that any more.

Andreas Stubsrud - Pareto Securities

Okay. Very good. Thank you.

Operator

Thank you. That will conclude today’s question-and-answer session. I would like to turn the call back over to the speaker for any additional or closing remarks.

Tore Byberg

Okay. Thank you all for listening in today. And we hope to see you again next quarter. Thank you.

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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