SeaDrill's Newest Contract Illustrates Company's High Dayrates Competitive Advantage

| About: Seadrill Limited (SDRL)

On June 28, 2012, SeaDrill Ltd. (NYSE:SDRL) announced that its 74%-owned subsidiary North Atlantic Drilling Ltd. (OTCPK:NATDF) has secured an extension of its current contract with ExxonMobil (NYSE:XOM) for the West Alpha offshore rig. The contract extension has a firm period of two years over which time it is expected to generate $410 million in total revenue. This extension will begin immediately following the end of the current contract in the third quarter of 2014. As a result of ExxonMobil's extension, the West Alpha rig has now locked in employment contracts that last until 2016.

The West Alpha is a 1986-built harsh-environment midwater semi-submersible offshore drilling rig that is capable of drilling wells up to 23,000 feet deep in up to 2000 feet of water. The West Alpha is currently operating under contract to a consortium of companies led by BG Group (OTCQX:BRGYY). The rig was responsible for drilling three appraisal wells for the Consortium in the Bream field located off of the Norwegian coast in the North Sea.

Source: SubseaIQ

West Alpha's contract for this assignment ends in July 2012. The rig will enter into its contract with ExxonMobil in August, immediately following the expiration of the previous one.

North Atlantic Drilling first announced the contract with ExxonMobil for West Alpha on May 18, 2011. However, the company did not specify that ExxonMobil was the customer at the time. This announcement stated that the contract was only for a firm period of 210 days. The rig's original assignment was for the drilling of two wells in the Balder field on the Norwegian Continental Shelf. The contract was later extended to last until July 2014. The dayrate for the rig throughout the duration of this contract is $476,000. This is lower than the $501,000 dayrate that the BG Consortium was paying and so this may cause North Atlantic Drilling's revenues and cash flows to be lower than they would be under the current contract. With that said, the dayrate that North Atlantic Drilling will be collecting from ExxonMobil during the duration of its contract is certainly a very good one considering the capabilities of West Alpha and the date that the contract was locked in.

This extension though showcases a major competitive advantage that the SeaDrill/North Atlantic Drilling organization has over its peers. That advantage is its dayrates. As previously mentioned, this contract extension is for two years and has estimated contract revenue of $410 million. That works out to approximately $561,600 per day of average contract revenue. It is important to remember that this calculated number is average contract revenue and not strictly dayrate. Although, it is likely that the actual contractual dayrate is very close to this figure. This is because this contract is an extension of ExxonMobil's current one for the use of the rig in the Balder field. Therefore, there is unlikely to be a mobilization fee (since the rig is not moving) nor are there any client modifications or fees associated with that.

The dayrate under this contract extension appears to be comparable to the dayrate that Pacific Drilling (NYSE:PACD) recently received from Chevron (NYSE:CVX) for the use of the Pacific Sharav. The Pacific Sharav, however, is one of the newest and most technologically-advanced ultra-deepwater drillships in the world. West Alpha is a 26-year old midwater semisubmersible. In general, newer rigs tend to receive higher dayrates than old ones. Additionally, ultra-deepwater rigs typically carry much higher dayrates than midwater rigs. This illustrates the major advantage that the SeaDrill/North Atlantic Drilling group has. The organization's ability to extract higher dayrates from customers results in higher per rig profits than many of its peers have.

Disclosure: I am long SDRL.