Sevan Drilling's (SDRNF) CEO Scott McReaken on Q1 2016 Results - Earnings Call Transcript

| About: Sevan Drillings (SDRNF)

Sevan Drilling ASA (OTCPK:SDRNF) Q1 2016 Earnings Conference Call May 26, 2016 5:00 AM ET

Executives

Scott McReaken - CEO

Scott McReaken

Welcome to Sevan Drilling Limited’s First Quarter 2016 Earnings Call. My name is Scott McReaken, I am the CEO for the Company, and I’ll be hosting the call today.

I’ll provide an update of the Company’s recent events and then go through the first quarter financial performance and open up for some questions. Please note that most of the discussion today will consist of forward-looking statements that are subject to risks and uncertainties. If you look at on page two of our presentation, you can see some of these key items. For additional information and to view our Oslo Board’s filings, please visit our website at sevandrilling.com.

The highlights for the quarter include our fleet technical utilization at 94% on the two rigs in operations, the Sevan Brazil and Sevan Louisiana. We experienced some downtime on the Sevan Brazil related to marine equipment and have had a relative good performance on the Sevan Louisiana. Revenues for the quarter were $52.8 million, EBITDA came in at $12.7 million, and our net loss per share was $0.69.

This quarter, we concluded negotiations with Petrobras that had begun in mid-2015. We agreed to a commercial deal where the Sevan Driller contract was mutually agreed to be cancelled effective from December 1st. And at Sevan Brazil, contract day rate was reduced for the remainder of its term. We accepted these terms as it was a preferred alternative to potentially having both contracts terminated and exposing the Company to a protracted legal challenge with an uncertain outcome.

With the Sevan Driller now available earlier than June 2016, we are able to secure a new client. We are awarded a contract with Shell in Brazil for non-drilling services. We’ll assist Shell in maintenance of subsea equipment in their BC-10 development. The firm term of the contract is for 60 days, which commenced on May 19. We have two 30-day options that can be exercised with the contract, and we’re happy to have this opportunity to expand our client base and further demonstrate the versatility of the Sevan design.

After the quarter, we have also recently extended the Seven Developer delivery deferral agreement. The terms are in line with the first extension where we added six months under the deferral period running out to October 2016. We amended the final installment by 5% and now have 90% due upon delivery, and Cosco refunded the difference in May. We continue to market the rig for a contract that can support financing for the delivery and installment, and its extension provides us more time to find suitable work in addition to improving our balance sheet.

Also in late April, we extended the revolving credit facility with Seadrill to December 2017 and we amended certain financial covenants that are measured at Seadrill’s consolidated level. These amendments are part of a broader package of measures our majority shareholder is undertaking to refinance and recapitalize the Group’s business. The covenant amendment is extended to June 2017 and includes resetting leverage covenant, revising the definition of the equity ratio to exclude the impact of any change to the market value of our rigs, and suspension provision that allows lenders to receive a prepayment if the rig value declined below minimum value relative to loan balance outstandings.

As part of this agreement, we have agreed to set milestones, which provided time table for advancing discussions around longer term solutions. By resetting the covenants and removing the risk of the facility prepayments related to the declining rig value, more stable platform was established to pursue and conclude negotiations with stakeholders. We’ve been very pleased with the support shown by the banking group and by Seadrill. We continue to make progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge [ph] us to recovery in the sector. We expect to communicate this broader package of measures by the end of the year.

I’ve touched on most of the fleet update already, but we will run through the rigs briefly to summarize the recent changes. Sevan Driller commenced May 19th with Shell in Brazil on a 60-day contract that has two 30-day options. The driller will operate with reduced crew and running costs as it will not be using the drilling or subsea equipment. Sevan Brazil continued to work for Petrobras in the quarter at a reduced rate of 250,000 per day effective from February 26, and it’s going to remain on that contract term through July 2018.

Sevan Louisiana continued to work for LLOG in U.S. Gulf of Mexico and has a remaining term until May 2017. As we’ve disclosed and discussed previously in November 2014, LLOG has agreed to extend the term for one year, which was cancelled with the 365-day notice. We received that notice in late April, which is within the cancellation period at the amendment.

Sevan Developer remains [indiscernible] in Cosco Shipyard in China ready to work and actively being marketed. We’re providing management services to assist Cosco in the deferral period. With the contracts today not considering options, we have approximately 360 million potential contracted revenue backlogs.

Now let’s run through the fourth quarter financials in more detail. Revenues from operations were $52.8 million for the quarter compared to $83.1 million for the same period in 2015. Revenue decreased overall from the Sevan Driller being idle, the reduced rate on the Sevan Brazil offset by operating efficiencies compared to last year’s first quarter. Total operating expense for the first quarter was $57.5 million compared to $63.3 million last year. The reduction is from the lower operating cost at $33.7 million, which was mainly reduced from the Sevan Driller being idle with reduced crude and also realizing continued benefits from lowering our operating cost across the Company.

General and administrative expenses were increased this quarter as we required some additional support from external advisors in Seadrill through the management service agreement as we dealt with the major activities that I outlined and highlighted. Net financial items were $16.8 million for the fourth quarter compared to $17.4 million in the same quarter last year, which is driven from our normal interest on the bank facility and slightly lower cost from the revolving credit facility to Seadrill. We had tax credit for $1 million and the Company had a net loss for $20.4 million for the quarter and loss per share of $0.69.

Turning over to the balance sheet, we have $1.6 billion of total non-current assets, mainly comprised of our rig fleet including the investment on the Developer. Cash is at $36.1 million and we did draw down the revolver for $30 million because we had an outstanding receivable in Brazil. We had some administrative issues with the import authorities in later part of the fourth quarter. And since then, we’d be able to resolve this matter and collect the $34 million. Additionally at quarter end, we’ve received -- or after the quarter end, sorry, we received the $26 million refund plus interest from the Sevan Developer and we plan to repay a portion of the revolver of these funds. The bank debt outstanding is just over $1 billion and the revolver has $200 million outstanding. We paid our regular [ph] $35 million on amortization of the bank facility and a total of $11.5 million of interest was paid on those facilities.

Operator, this concludes my prepared remarks. You could go ahead and open the lines for some questions.

Question-and-Answer Session

[Operator Instructions] We have no questions from the telephone at this time. [Operator Instructions] I am just confirming that we have no questions in the queue. So that will now conclude today’s question-and-answer session. And I’d like to turn the call back to you, Mr. McReaken, for any additional or closing remarks.

Scott McReaken

Thank you. Thank you everyone for listening today for Sevan Drilling’s first quarter call. We appreciate the interest and look forward to speaking to you again.

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