Seadrill - Sevan Drilling Delayed Again Delivery Of The Sevan Developer To April 15, 2017

| About: Seadrill Limited (SDRL)

Summary

Sevan Drilling Delayed Again Delivery Of The Sevan Developer to April 15, 2017. Seadrill owns 50.11% of the shares outstanding.

The delivery can be deferred until October 2017. Sevan Drilling will receive a second payment of $26.3 million from Cosco at the end of 4Q'16.

Seadrill will eventually acquire the remaining stake of Sevan Drilling that it doesn't own, on a share swap basis.

Click to enlarge

Courtesy: Sevan Drilling.

This article is an update to my preceding article on Seadrill (NYSE:SDRL) published on March 30, 2016.

What has changed regarding the semi-submersible Sevan Developer?

Today, October 17, 2016, OffshoreEnergyOnline indicated the following:

Sevan Drilling, an Oslo-listed drilling contractor, has decided to delay the delivery of the Sevan Developer drilling rig once again.

The handover of the rig, which was originally scheduled for delivery in 2014, has now been postponed to April 15, 2017. This means Sevan Drilling Ltd and China's rig builder Cosco have agreed to exercise the third six-month option to extend the deferral agreement.

Also, Sevan Drilling said, the final delivery installment has been amended to $499.7 million, representing 95% of the $526.0 million contract price.

Cosco, the rig builder, will refund $26.3 million, or 5% of the contract price, plus other associated costs within the fourth quarter 2016.

"The Company continues discussions with Cosco regarding the remaining interest in the Sevan Developer," Sevan Drilling said.

Note: According the 2Q'16 results a total of $78.9 million has been paid initially.

In October 2014, the Group entered an agreement with Cosco to defer the delivery date for 12 months with options to extend the date for subsequent periods of 6 months until October 2017. At the end of the deferral period and if options to extend are not exercised, the construction contract will terminate and the USD 78.9 million initial investment will be refunded and the investment impaired. Refund guarantees have been provided for the full deferral period. Delivery will occur if and when a contract that can support financing of the final delivery installment is secured.

On April 16, 2016, Sevan Drilling and China's Cosco shipyard have agreed to exercise the second six-month option to delay the delivery of Sevan's newbuild rig, the Sevan Developer.

Sevan Drilling and Cosco have agreed to exercise the second six-month option to extend the deferral agreement to October 15, 2016. The delivery was previously delayed in October 2015 when it was pushed back to April 15, 2016.

According to the drilling contractor, the final delivery installment has been amended to $473.4 million, representing 90% of the $526 million contract price and Cosco will refund $26.3 million, or 5% of the contract price, plus other associated costs to Sevan Drilling by May 25, 2016.

The agreement can be amended further upon the expiration of the option period, Sevan said.

On October 2014, the drilling contractor and the shipyard agreed to delay the delivery of the rig. Under that agreement, the delivery was deferred by a year with mutually agreed options, exercisable at 6-month intervals, to extend the delivery for up to a total of 36 months from October 15, 2014. The agreement would terminate at the end of each deferral period, unless the option to extend was mutually agreed by both parties.

In short, has already refunded $26.3 million in May 2016 and will refund another $26.3 million at the end of the 4Q'16. Another $26.3 million will be refunded -- the last one -- after April 15, 2017.

According to the last 2Q'16 results:

Sevan Drilling Rig VI Pte Ltd has the option to cancel the construction contract on each of the deferred delivery dates. Cosco will, in such case, refund the installments paid under the construction contract. Cosco provided

Sevan Drilling Rig VI Pte Ltd security through bank refund guarantees, effective for the 36 month potential deferral period beginning in October 2014.

Sevan Developer will remain in China at the Cosco Shipyard and the Company will continue marketing the rig for an acceptable drilling contract where financing can be obtained to allow delivery.

Backlog Estimated for SDRL and Sevan Drilling.

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Note: Only a fraction of the $245 million above is indicated in the SDRL backlog that I have estimated at roughly ~18%.

Seadrill is the largest shareholder and 14,897,069 shares or 50.11% of the total shares outstanding. The 20 largest shareholders are indicated here.

Sevan Drilling is trading today at 3.29 NOK or $0.40. Total market cap is approximately $11.7 million.

Commentary:

This is not truly a surprise, considering that Sevan Drilling has basically nothing to lose by extending the delivery until October 2017. Cosco shipyard is cold-stacking the rig at its own expense, and Sevan Drilling only apparent task is to eventually find a long-term contract for the semi-submersible that allows the financing of nearly $500 million of the rig.

Cosco is about to refund the second installment of $26.3 million to Sevan Drilling, and will refund the last $26.3 million probably around June 2017.

This is another case involving Seadrill, similar in many ways to the West Rigel deferral by North Atlantic Drilling (NYSE:NADL) that I have commented on October 5, 2016.

NADL recently extended the delivery the standstill of the West Rigel period by a further three months to September 2, 2016.

The extension of the standstill period allows the parties to continue to explore commercial opportunities for the Unit. In the event no employment is secured for the Unit and no alternative transaction is completed, the Company and Jurong will form a Joint Asset Holding Company for joint ownership of the Unit, to be owned 23% by the Company and 77% by Jurong.

In short, NADL is off the hook for the $455 million, it had to pay initially for the rig delivery. Furthermore, NADL/SDRL is not paying for cold stacking costs, which means the decision to delay the JAHC has no direct effect on SDRL/NADL, and the delivery date can be pushed indefinitely, as far as SDRL/NADL are concerned.

Note: SDRL owns 169,663,723 shares or 70.36% (majority holder) of NADL.

What is the financial relationship between SDRL and Sevan Drilling?

Seadrill has guaranteed the bank facility... Seadrill is also providing the RCF (in the amount of USD 300 million) of which USD 160 million was outstanding as of June 30, 2016. Seadrill charged the Group interest on the RCF and guarantee and commitment fees in a total amount of USD 7.5 million and USD 13.2 million during the three and six months ended June 30, 2016 respectively.

As a consequence of being responsible for the day-to-day operation of the Group's rigs, Seadrill entities incur direct costs on behalf of the Group. Seadrill also provides management support and administrative services to the Group. The total fees charged for operating and management services were USD 4.7 million and USD 11.4 million for the three and six months ended June 30, 2016.

On August 25, 2016 Birgitte Ringstad Vartdal and Svend Anton Maier resigned as Directors of the Company. Per Wullf, CEO of Seadrill, was appointed Chairman and Georgina Sousa was appointed as Director.

The relationship between Seadrill and its different subsidiaries such as Sevan Drilling, Archer -- SDRL owns 39.9% of the shares outstanding -- or NADL for example, will be affected by the debt refinancing that the company will announce early December. It is thus important to understand what is the basic financial connection between Sevan and Seadrill.

In my opinion, Seadrill will eventually acquire the remaining stake of Sevan that it doesn't own, on a share swap basis.

Important note: Do not forget to follow on SDRL and other offshore drillers. Thank you.

Disclosure: I am/we are long SDRL.

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.

Additional disclosure: I own a small LT position and trade frequently SDRL.