Seadrill Update: Standby Agreement Reached With BP For The West Capricorn Until April 2017 - A Positive Development

| About: Seadrill Partners, (SDLP)

Summary

SDLP and BP reached an agreement for the West Capricorn. The rig will be kept on standby at $316k/d until April 2017.

The West Capricorn will be warm stacked during the standby period.

I believe it is a positive agreement for SDLP.

Click to enlargeImage: The submersible West Capricorn.

Seadrill Partners, LLC (NYSE:SDLP)

Seadrill Partners is a limited liability company. The company was formed primarily to own, operate and acquire offshore drilling units from Seadrill Ltd. (NYSE:SDRL).

The company's subsidiaries, including Seadrill Operating LP, Seadrill Capricorn Holdings LLC and Seadrill Partners Operating LLC, own 100% interest in the drilling units.

Seadrill Ltd. owns 42,819,100 total common (26,275,750 shares) and subordinated shares (16,543,350 shares) of SDLP, or 46.6% (Minority holder).

This article updates my preceding article on SDLP on April 20, 2016, regarding the West Capricorn.

Today, June 29, 2016, Seadrill Partners announced the following:

Has reached an agreement with the current operator to remain on an extended standby rate of $316,000 per day with expected recommencement of work in late 2017 at the full operating rate of $526,000 per day. The unit had been down-manned in May and will be warm stacked during the extended standby period. As part of this agreement the operator must indicate its intention to recommence work by April 2017.

On April 18, 2016, Seadrill Americas Inc., the Houston-based arm of London-based Seadrill Management Ltd., said it plans to cut 112 offshore oil rig jobs.

The jobs are supporting the operation of the West Capricorn Rig in the Gulf of Mexico. The cuts are due to BP Exploration & Production Inc. extending its standby period services for the rig.

"The extended standby of this major contract with a principal client is sudden, unexpected and outside of Seadrill's control," the company said in a letter to the Texas Workforce Commission.

The job cuts will begin on May 1 and are expected to be complete by May 13. All affected employees have been notified, and they do not have bumping rights, meaning workers with more seniority cannot take the jobs of those with less seniority.

This is a positive development for SDLP, in my opinion. The semi-submersible West Capricorn will be warm stacked -- already job cuts and preparations have been completed in May -- and will stay on standby status at least until April 2017.

The West Sirius and the West Capricorn (Reminder).

On March 30, 2015, we learned from Offshoreenergytoday.com the following:

British oil giant BP has terminated a contract for the West Sirius semi-submersible drilling rig, owned by Seadrill Partners.

Prior to the cancellation notice, the dayrate and term for the West Sirius and West Capricorn contracts were swapped.

The West Sirius dayrate was decreased by $40,000 per day and the term was decreased by two years to expire in July 2017 while the dayrate for the West Capricorn was increased by $40,000 per day and the term was extended by two years to expire in July 2019.

Amortized payments for the West Capricorn such as mobilization and upgrades will continue on the original schedule ending in July 2017. In accordance with the cancellation provisions in the West Sirius contract, Seadrill Partners will receive payments over the remaining contract term, now expiring in July 2017.

SDLP: Fleet Status as of February 2016

Semi-submersibles
#

Name

Class

Year built

Client

Location

Day rate in $K End of contract Special Information
1

West Sirius

6th HE

2008

[BP]

USA

297 paid by BP over the contract terminated.

7/17

Cold-stacked

($10k/d cost)

2

West Capricorn

6th HE

2011

[BP]

USA

526 316

526

~10/17

~10/17 - 7/19

Includes the mob. fee of $30 million. Contract swapped with the West Sirius.
Click to enlarge

Backlog loss consideration:

1 - Assuming end of contract on 31/7/2019 and as of today, the West Capricorn has 1,128 days contracted at $526k/d. Backlog is $593.3 million remaining (6/29/16).

2 - Standby period is from 6/29/2016 to 10/31/2017 or 490 days at $316K/d instead of $526K/d. Backlog loss is 490(526k-316k) = $103 million.

3 - New backlog for the West Capricorn is now $490.3 million or $435k/d for the entire duration of the contract until 7/19.

SDLP 6/29/2016 2016 2017 2018 2019 2020 D/R
West Sirius 6 6,2 0,0 0,0 0,0 297
West Aquarius 6 3,5 0,0 0,0 0,0 615
West Capricorn 6 12,0 12,0 6,2 0,0 435
West Leo 6 12,0 5,5 0,0 0,0 605
West Capella 6 3,2 0,0 0,0 0,0 0
West Auriga 6 12,0 12,0 12,0 9,2 562
West Vela 6 12,0 12,0 12,0 10,2 525
West Polaris 6 12,0 2,2 0,0 0,0 450
T15 6 12 12 6,5 0 110
T16 6 12 12 7,5 0 110
West Vencedor 1 0 0 0 0 100
61,0 96,9 67,7 44,2 19,4
Click to enlarge

Conclusion:

I see this situation as a great development for SDLP, who will get 60% of the day rate during the standby period ending ~10/17 or at least for 490-day. Yes, it will be a loss of backlog as I have shown above, but it is irrelevant because operating costs will be lower as well.

SDLP intends to warm stack the semi-submersible West Capricorn where the West Sirius is actually cold stacked, most likely. It will certainly help reduce costs by synergy.

The West Sirius is cold stacked at about $10k/d (read last SDLP conference call), and I believe the West Capricorn will be warm stacked at approximately $50K/d or even a little less. It leaves an operating income of over $250k/d, which is great, especially after reporting the day rate negotiated with ONGC for two floaters. You can read my recent article on it here.

One question is: why is SDLP keeping the West Capricorn on warm stacked status when the company knows very well that the rig will not be used at least until ~10/17 which is about a year away?

I would have cold stacked the rig and reduced costs further - unless BP required it as a prerequisite of the standby agreement?

One final comment is about the West Vencedor which will roll off contract the latest in 8/16 with Petronas.

Disclosure: I am/we are long SDRL, SDLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.