In the comments section of my recent article at Seeking Alpha analyzing SeaDrill’s (SDRL) third quarter results, I stated that SeaDrill may be looking to spin off their Brazilian operations into a separate listed company. SeaDrill announced yesterday that they are doing just that. Seabras Servicos de Petroleo S.A., a wholly-owned indirect subsidiary of SeaDrill, made an initial filing of a Reference Form with the Brazilian Securities and Exchange Commission. This filing was made in connection with a potential future initial public offering of common shares on the Sao Paolo Stock Exchange. There is still much unknown about exactly which of SeaDrill’s assets are going to be transferred to Seabras so there could still be much changing but I wanted to provide a scenario about how this spin-off could ultimately play out when we consider how SeaDrill has done things like this in the past.
SeaDrill spun-off much of their North Atlantic operations into a separate listed company earlier this year. This spin-off is called North Atlantic Drilling Limited (OTCQB:NATDF). The spin-off of North Atlantic Drilling helped SeaDrill to increase their financial flexibility but still maintain a solid amount of cash flow from these operations. SeaDrill owns 75% of the total outstanding shares in North Atlantic Drilling. The company realizes approximately $129 million in cash flow annually from their position in this company.
It seems likely that SeaDrill would do something similar here, should it decide to spin off Seabras. SeaDrill will likely float a minority of the total shares in Seabras, keeping the majority of the shares itself. This will allow SeaDrill to control Seabras as they will retain voting control. It will also allow SeaDrill to collect the majority of the dividends paid by Seabras. Historically, SeaDrill has paid out most of their operating cash flow to investors in the form of dividends. It is quite likely that Seabras would do the same. Thus, by spinning off Seabras but keeping the majority of the shares, SeaDrill will increase their financial flexibility but still receive most of the cash flow from their Brazilian operations.
SeaDrill will also receive another benefit from the separation of their Brazilian operations into Seabras. This is because Seabras is a Brazilian corporation. Brazil is a hotspot for growth in the offshore industry. The country is attempting to keep this growth “in house” and so has put in place some local content requirements. As a Brazilian corporation, Seabras will be able to meet these requirements. This could give the company an advantage over their competition, who may not have these Brazilian subsidiaries or local operations in Brazil.
Disclosure: I am long SDRL.
Disclosure: I am long SDRL.