Seadrill Partners' (SDLP) CEO Graham Robjohns on Q2 2014 Results - Earnings Call Transcript

| About: Seadrill Partners, (SDLP)

Seadrill Partners LLC (NYSE:SDLP)

Q2 2014 Earnings Conference Call

August 27, 2014 1:15 pm ET


John Roche - Investor Relations Director

Graham Robjohns - CEO and Director


Sameed Musvee - Wells Fargo

Sunil Sibal - Global Hunter Securities


Good day, ladies and gentlemen, and welcome to the Q2 2014 Seadrill Partners LLC Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Roche. Please go ahead, sir.

John Roche

Thanks, Suzanne, and good afternoon everyone. Thank you for joining us on Seadrill Partners' second quarter earnings conference call. With me today I have Graham Robjohns, our Chief Executive Officer, and Rune Magnus Lundetrae, our CFO.

Before we do get started, I'd like to remind everyone that much of the discussion today will not be based on historical fact but rather consist of forward-looking statements and are subject to uncertainty. We articulate some of the key items on Page 2 of the presentation, and for additional information, view our SEC filings, please visit our Web-site at

And with that, I'd like to turn the microphone over to Graham Robjohns to kick off our call.

Graham Robjohns

Thank you, John, and good day to everybody. So starting on Slide 3, we set out the agenda and today we'll cover highlights and recent activity for the second quarter 2014, then we'll have a brief look at the market outlook, growth opportunities, and financial overview, before we return for a Q&A session.

So turning over to Slide 4, we are very pleased to report net income attributable to Seadrill Partners Members for the second quarter of $31.2 million and net operating income of $168.6 million. Very good operational quarter with economic utilization for the second quarter at 94% and we generated distributable cash flow of $51.9 million with a coverage ratio of 1.09. We declared an increased distribution for the second quarter of $0.5425 per unit which is an increase of 7% over the first quarter of 2014.

Towards the end of the second quarter, we completed a $1.1 billion add-on to our term loan B, the majority of the proceeds of which were used to refinance an existing debt on two of our deepwater rigs, the West Capricorn and the West Auriga, and to increase our general liquidity. And we used those surplus funds together with the funds from the issuance of 6.1 million common units to the public and 3.2 million common units to Seadrill to acquire an additional 28% interest in Seadrill Operating LP, one of our OPCOs, for $373 million shortly after the end of the second quarter.

Turning over to Slide 5, we've made some significant progress since the IPO of Seadrill Partners. We've grown our distributions now 40% since IPO with as I've just mentioned a 7% increase for the second quarter. We've added five rigs to the fleet, so we're up to now at a fleet of nine assets, and we've restructured a large portion of debt with the original $1.8 billion term loan transaction in February and a $1.1 billion term loan just at the end of June.

And as I've said, our most recent transaction of course is the acquisition of an additional 28% in Seadrill Operating LP, which takes our ownership of that operating company up to 58%. This transaction was accreted and will lead to further distribution increases in the coming quarters.

I think as we've said in the results release, that we set out a target of distribution growth at the time of the IPO of 15%, we have obviously overachieved that and we will continue to try to overachieve that growth target in the medium-term.

Turning over to Slide 6, we have a summary of the 28% OPCO acquisition transaction. I think we've said several times before that our initial focus post-IPO was to increase the number of rigs in our fleet, and that's gone over from four to nine, which puts us in a much better position to be able to acquire additional units in OPCO because we've reached a level of diversification.

Having said that, I think this transaction of itself provides an effective diversification because we did have a situation where we were overexposed to one of the OPCOs that we owned 51% of, and so now the 30% OPCO is now increased to 58%, so we have 58% and 51% as opposed to 30% and 51%, and thereby effectively creating an element of diversification.

Moving over to Slide 7, the summary of the term loan, as sort of I've said this is a $1.1 billion add-on to our existing facility. It was priced at the same rate as the initial term loan at LIBOR plus 3%. We've swapped virtually 100% of that term loan to an approximate all-in cost of around 5.5%.

These two transactions have been important for us as they have increased debt independents from Seadrill and also reduced dramatically our debt amortization which allows us now rather than using replacement CapEx reserves, which we – cash we hold back every quarter to replace our rigs at the end of their useful life rather than using that to pay down debt, we can now use a large portion of it to invest in new assets.

And then on the chart, you can see of course the three operating companies that Seadrill Partners own; Seadrill Partners Operating LLC which is 100% owned, and owned and owned for two smaller tender rigs; Seadrill Operating LP that we now own 58% of; and Seadrill Capricorn Holdings which holds all the U.S. Gulf rigs that we own 51% of.

Turning to Slide 8 and looking at the market for a minute, it's obviously being well-documented that we are in a softer floater market at the moment with low rates and reduced contracting activity. What's important however from Seadrill Partners' perspective is that we do not have any ultra-deepwater rigs available for re-contracting until the end of the first quarter of 2017, by which time we believe that the market could be significantly stronger than it is today.

We see this improvement coming from both the demand and the supply point of view. On Slide 8, you can see from the graph at the top of the slide that deep and ultra-deepwater have dominated discoveries offshore over the last 10 years. And the chart at the bottom of the slide also shows that the replacement ratio, particularly in ultra-deepwater, far outweighs other sectors and demonstrates I think that deepwater is highly likely to be a significant growth area for oil companies in the future in order for them to meet production targets.

Turning over to Slide 9, the chart at the top tells us that we do need or will need more rigs to be delivered before the end of the decade than are currently on order. However, largely as a result of the current soft market, you can see from the chart at the bottom that new build orders are tightening up. So taking into account the fact that it takes approximately three years to build and deliver a new rig into a contract, with rising demand for rigs and declining new deliveries, we believe that as I said the market for re-contracting our ultra-deepwater rigs in 2017 and 2018 could be strongly in our favor.

So moving through Slide 10 to Slide 11, we set our assets and contracts, and as you can see, the contract term is obviously shown and the two deepwater rigs that come up for re-contracting first are the West Aquarius and the West Capella. Of course the West Vencedor which is a smaller tender rig that comes up for contracting in 2015, but we're reasonably confident that that rig will be extended. Our current as of the end of August average remaining contract term is 3.5 years on average and the total order backlog $5.1 billion.

Turning over to Slide 12 and looking a little bit now at growth potential moving forward, this is the list of Seadrill Group's floaters. The rigs in black on the left-hand side are clearly the rigs that are already in Seadrill Partners, but as you can see there are a considerable number of other rigs that have contracts in excess of four years that provide us with a large pool of potential acquisitions.

I think one point we should make, and we've talked a little bit recently about it, that as an MLP we're of course very focused on trying to increase the average contract length of our fleet, obviously the longer the better, in terms of stability of cash flow. However, we are also focused on ensuring that our average contract rate in respect of the rigs that we buy is not above the rate that we think is sort of a long-term contract, right, and thereby – because if we go too much above that then we're facing a re-contracting risk, whereas if we are below that long-term rate we have potential re-contracting upside. So in terms of further rig acquisitions, we will as we move forward take both things into account, both the rates of the rig and the term that the rig has.

Turning over to Slide 13, obviously in addition to acquiring new rigs, as we've demonstrated, we have the ability to grow distributions by acquiring additional ownership interests in OPCOs. I think shareholders should expect us to be doing both over the next few years, buying some new rigs and also additional OPCO units.

And of course, not something that was in the sort of concept of the Company at the time of the IPO, but as the jack-up market has moved and as Seadrill have invested heavily in modern high-spec jack-ups which have as we've seen in Mexico achieved some long-term contracts, that is a sector that may be of interest for the MLP moving forward.

So moving through Slide 14, we take a look at the financial performance highlights. I'm very pleased to see that contract revenues, operating expenses, and net operating income most importantly I guess, increased quite substantially in the second quarter driven largely by the full quarters' contribution from the West Auriga and also significantly reduced downtime in particular in relation to the West Aquarius.

On Slide 16, we carry on with the income statement. Interest expense has also increased and that's as a result of the assumption of the debt associated with the West Auriga and our entry into the two term loan transactions. The loss/gain on derivative financial instruments is a loss again this quarter, a lesser loss than the first quarter, $27.8 million down from $49.2 million, but I should stress the vast majority of that is a non-cash charge related to the movement in the mark-to-market valuation of interest rate swaps and it's caused by of course declining long-term interest rate which I guess ironically actually is a benefit to us as we're effectively due to pay less on our debt as we move forward.

So as a result of the above, we end up with increased net income attributable to Seadrill Partners Members after non-controlling interests of $31.2 million as opposed to $19.8 million for the first quarter of 2014.

Moving over to Slide 17, balance sheet assets, the main item that's moved here is cash, up from $131 million to $523 million as at the end of the second quarter 2014. Obviously that increase has come from the equity that we raised, in addition to surplus funds from the term loan transaction, and of course $373 million of that was spent on the OPCO acquisition shortly after the quarter end.

On the liability side of the balance sheet on Slide 18, you'll see the balances with our parent Seadrill under 'other related party payables' has been cleaned up significantly, that's both on the payable and the receivable side. Those balances largely arise as a result of acquisitions, and as I said, that's been cleaned up.

You can see at the bottom of that sheet that as at the end of the quarter, total debt was $3.25 billion, and if you take Q2 EBITDA and annualize it, or times it by 4, that equates to a net debt-to-EBITDA of 3.6x. 97% of that debt is swapped to a fixed rate at an average rate of 2.4%.

On Slide 19, we have distributable cash flow schedule where we take EBITDA and run down to distributable cash flow. You'll note, and I was talking earlier about the non-cash element about our financial items, that the cash interest expense of $34.5 million excludes those non-cash movements in interest rate valuations. So there you can see distributable cash flow for the quarter at $51.9 million as opposed to $30 million for the first quarter of 2014, which would give us a coverage ratio of 1.09x.

You'll also note that the gross distributions increased in the second quarter as a result of the increased distribution rate but also as a result of additional units because of the equity we raised that we did at the end of June. Had that equity raise taken place immediately after the declaration of the distribution, our coverage would have actually been 1.22x as opposed to 1.09x.

So in summary, on Slide 20, we've made really good progress since our IPO; we more than doubled the size of the fleet; we've diversified the fleet; we've shown a strong track record in distribution growth; and we've cleaned up our capital structure with the term loan transactions.

There are some headwinds obviously in the offshore drilling market but Seadrill Partners is protected from that really until 2017. This sort of current soft market is reducing new build ordering activity and because we think quite strongly the medium to long-term fundamentals are good, then in '17, '18, we could be looking at re-contracting rigs into a rising market.

And finally, of course we have a very visible growth path via acquisitions from Seadrill, strong distribution growth potential from that and from as I said acquisitions of additional rigs and acquisition of additional OPCO units.

Okay, thank you very much, and I'll turn the call back to John and the operator to handle question and answers.

John Roche

Thanks, Graham. Suzanne, before we pause here and queue up the roster for Q&A, I just would like to kindly ask everyone to limit questions to one question and one follow-up. Suzanne, if we could compile up a list here, that would be great.

Question-and-Answer Session


(Operator Instructions) We will now take our first question from Michael Webber from Wells Fargo. Please go ahead, your line is open.

Sameed Musvee - Wells Fargo

This is actually Sameed on for Michael. Just a quick question on the West Vencedor rig. I realize that's the one which has to go on re-charter in 2015 Q1. I remember the last quarter you mentioned, you are currently in discussions with the existing charter to re-charter the rig at the same rate. Just want to get an update on whether or not any progress on those discussions and whether or not it's still, is it the same rate, and if you're seeing some – if you guys are also talking to other third parties at this point as well?

Graham Robjohns

We're continuing discussions. It just takes time and the rate will not be materially different from current rate.

Sameed Musvee - Wells Fargo

Got it. And as a quick follow-up question to that, so in Page 12 of the presentation, you highlighted a serious amount of rigs at parent Seadrill for potentially being dropped down. My understanding is that one of those rigs, the West Vela, essentially there is a right to acquire but – the West Mira, sorry – but are there any potential rigs out there where given the new build activity at Seadrill parent that SDLP now has the right to acquire those rigs as well?

Graham Robjohns

We have the right to acquire the West Mira as you say, but we also have the right to acquire the West Jupiter. And in theory, the Rosneft rigs that were more than five-year contracted, we would also have the right to acquire whilst now to remain a subsidiary of Seadrill. But to be honest, this is a partnership in a sense between Seadrill and Seadrill Partners, and if there is a transaction to be done that's right for us both, and frankly usually what's right for the partnership is right for Seadrill, then we're not limited to just rigs that we happen to have an option to acquire.

Sameed Musvee - Wells Fargo

Got it. So that would be the West Rigel and the West Navigator.

Graham Robjohns

Those Rosneft rigs, yes.

Sameed Musvee - Wells Fargo

Okay, perfect. That's all of mine. I'll turn the call over.


We will now take our next question from Sunil Sibal from Global Hunter. Please go ahead, your line is open.

Sunil Sibal - Global Hunter Securities

Congratulations on a good quarter. A couple of quick questions from me. First, seems like G&A expense for the second quarter was down significantly sequentially. I was kind of curious if there was any one-time issue driving that drop or how should we think about G&A forward run rate basis?

Graham Robjohns

I think it's a little bit of both. G&A costs were just a bit lower in the second quarter, but also a part of the G&A cost comes from an allocation of those rig numbers in Seadrill increase. If you assume the element of economics of scale, then there's a little bit of cost reduction that comes through that as well.

Sunil Sibal - Global Hunter Securities

Okay. So then on a run rate basis, what you'll have…

Graham Robjohns

So guiding going forward, you may see some increase from the current quarter but there's probably on a pro rata basis given the number of rigs we have a little bit of cost saving as well.

Sunil Sibal - Global Hunter Securities

Okay, got it. And then on distribution growth going forward, as we look especially the higher 28% interest that you acquired recently, how should we be thinking about an accretion from that and potential distribution accretion from that in the near-term?

Graham Robjohns

We haven't gone and said what we think the accretion is from that transaction, and the fact that it is accretive obviously, and I think at the moment as I said we're kind of guiding to that. So we're hoping to overachieve that 50% target over the next couple of years. I think you should expect to see three to four transactions a year, which kind of gives you a rough idea of how accretive each transaction we would anticipate being.

Sunil Sibal - Global Hunter Securities

Okay, that's helpful. Thank you.


There are no further questions. (Operator Instructions)

John Roche

Suzanne, I don't see any other questions popping up here. I'd like to thank everyone for joining us this afternoon and this concludes Seadrill Partners' second quarter earnings conference call. Thanks everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!