Seadrill Limited (SDRL) will be announcing its second quarter 2012 results on Monday, August 27. These results will likely show growth in both EBITDA and operating cash flow when compared to the preceding quarter. One reason for this is the positive contributions that will be made by three of Seadrill's new rigs. The three rigs that I am referring to are the West Leo, the West Capricorn, and the West Elara.
The West Elara is a 2011-built independent leg cantilever jack-up rig. The rig is capable of drilling wells up to 40,000 feet deep in up to 450 feet of water. This makes the West Elara one of the most advanced and technically capable jack-up rigs in the world. Additionally, West Elara is one of SeaDrill's three heavy-duty harsh-environment jack-ups, built for operating in regions that suffer from harsh weather such as the North Sea. This allows the rig to command substantially higher prices that jack-ups that are not build for these environmental conditions.
The West Elara was originally supposed to begin its current assignment with Statoil ASA (STO) at the end of last year. However, unusually harsh weather delayed the start-up by four months. West Elara began operating on March 22, 2012. As a result, the first quarter did see a very small effect from this rig as it operating for nine days during that quarter. The second quarter, however, will benefit from having the West Elara in operation for the entire quarter.
West Elara is operating under a five-year contract with Statoil at a dayrate of $358,000. Thus, the rig should bring in $32,578,000 in revenues during the second quarter, assuming 100% revenue efficiency. The total revenue from the rig assuming a more realistic revenue efficiency of 97% is $31,600,660. The rig brought in $3,222,000 in revenue over its nine days of operation in the first quarter. Thus, the company is looking at approximately $28 million in new revenue from West Elara compared to the preceding quarter.
Investors would be advised to note that West Elara is owned and managed by Seadrill subsidiary North Atlantic Drilling Limited (NATDF.PK). SeaDrill owns 74% of North Atlantic Drilling.
The West Leo is a 2012-built Moss Maritime Moss Maritime CS50 Mk II harsh-environment semi-submersible offshore drilling rig. West Leo is capable of drilling wells up to 35,000 feet deep in up to 10,000 feet of water. The West Leo is likely to have the largest impact on Seadrill's bottom line (and top-line for that matter) of any of the three rigs that are being discussed in this article. Additionally, the West Leo's contract illustrates just how great the demand for rigs is currently and how high dayrates are climbing in areas such as West Africa.
The West Leo began its assignment with Tullow Oil (TUWLF.PK) near the beginning of the second quarter, in the month of April. The rig started operations around the middle of the month so its full impact won't be felt until the third quarter; however it was operating for long enough to have a significant impact. The rig's current contract has a dayrate of $525,000 per day. If we assume that West Leo has been operating since April 16, then the rig would add $39,900,000 in new contract revenue to Seadrill's top-line in the second quarter if it achieves 100% revenue efficiency. At 97% revenue efficiency, the rig would add $38,703,000 in revenue to Seadrill's top line in the second quarter. Additionally, the current contract with Tullow Oil includes a performance bonus of up to 10%. This could result in an additional $20 million in top-line revenue for Seadrill over the next year. This works out to approximately $5 million of additional revenue per quarter. This is not guaranteed income, however.
Tullow has the option to extend the contract for three years after its one-year assignment ends in April 2013. The contractual dayrate, should this option be exercised, increases to $625,000. This would be the highest dayrate of any rig in Seadrill's fleet and is one of the highest in the worldwide fleet. This high dayrate points to the continuing strength in the ultra-deepwater drilling market.
The West Capricorn is a 2011-built Fried & Goldman ExD benign-environment semi-submersible ultra-deepwater drilling rig. The rig is capable of drilling wells up to 35,000 feet deep in up to 10,000 feet of water. The West Capricorn was being mobilized throughout much of the second quarter and so Seadrill will not see the full financial impact of this rig until the third quarter. However, the rig did enter operation during the quarter and began generating revenues during the latter part of the second quarter.
The contract announcement for this rig states that start-up of operations was in May 2012. However, Seadrill's fleet status report (PDF) states that the rig began operating in June. For the sake of being conservative then, we will assume that the rig began operating on the first of June. This would give the rig thirty operational days during the second quarter.
The West Capricorn will be collecting a dayrate of $487,000 under its five-year contract with BP p.l.c. (BP). Therefore, this rig will contribute $14,610,000 to SeaDrill's top-line during the second quarter, assuming the June 1 start-up date. This is an additional source of revenue that was not present in the first quarter. This will thus serve to increase Seadrill's top-line by approximately $14-$15 million quarter over quarter.
West Capricorn will have a much greater impact on Seadrill's third quarter results. Under its contract, West Capricorn will produce $44,804,000 in top-line revenue for Seadrill over the course of the third quarter, assuming 100% revenue efficiency. At a more realistic 97% revenue efficiency, the rig will produce $43,459,880 in revenue for SeaDrill over the course of the quarter. This would represent a revenue increase of approximately $28-$29 million over the second quarter (conservatively rounded).
This article discussed the impact that these three rigs should have on Seadrill's second quarter results. In the next article in this series, I will discuss the impact that these three new rigs should have on Seadrill's cash flows and net income. The company will be announcing its second quarter results on Monday, August 27.