In the last two articles in this series (found here and here), I discussed the positive impacts that the start-up of three new rigs would have on SeaDrill's (SDRL) second quarter earnings. There are also a few factors that are going to have a negative effect on the company's second quarter earnings. Chief among these are three rigs that will spend much of the quarter between assignments and downtime of ultra-deepwater rigs due to maintenance on the blow-out preventers.
First, I will discuss the impacts of the three rigs that were between assignments in the second quarter.
West Triton is a 2008-built Baker Marine Services Baker Marine Pacific Class 375 benign-environment jack-up that is currently under contract with KJO in Saudi Arabia. The rig is capable of drilling wells of up to 30,000 feet deep in up to 375 feet of water. West Triton completed its prior assignment at the end of the first quarter and was in mobilization to its new one throughout much of the second quarter. As a result, SeaDrill would not be collecting dayrate during this time and that will have a negative impact on revenues in the second quarter. SeaDrill did collect a mobilization fee during the mobilization period but this will be amortized over the three-year contract term and so will not have a significant impact on the second quarter as the fee will only be recognized during the days that the rig is on assignment.
West Triton's previous assignment commanded a dayrate of $119,500. As the rig completed this assignment at the end of the first quarter, it started its mobilization at that time and was in this state for the entire months of April and May. That represents $7,289,500 of revenue that the rig could have earned were it collecting the dayrate that it was in the first quarter. A more realistic estimate of the decreased revenues is $7,143,710 as this one assumes that West Triton averaged 98% revenue efficiency (SeaDrill's jack-up average in the first quarter). West Triton started its new assignment at the beginning of June at a dayrate of $145,000. Assuming that it operated for the full month of June, then that represents $4,350,000 of potential contract revenue. If we assume that the rig achieved 98% revenue efficiency then it would generate $4,263,000 during the second quarter. Thus, this would represent a quarter over quarter decline of approximately $3 million in contract revenue. The rig should, however, generate more revenue in the third quarter than it did in the first quarter due to the higher dayrate under this contract than under the previous one.
Offshore Defender is a 2007-built LeTourneau LeTourneau Super 116 benign-environment jack-up rig that is currently under contract with Shell (RDS.A) in Brunei. The rig is capable of drilling wells of up to 30,000 feet deep in up to 350 feet of water. Offshore Defender is another rig that completed its previous assignment at the end of the first quarter and so was in mobilization during the early part of the second quarter. Therefore, the rig did not collect any revenue during this period. As with West Triton, SeaDrill did collect a mobilization fee while the rig was in transit to its new location but this will be amortized over the entire four-year contract term. This will limit the impact that the mobilization fee will have during the second quarter.
Offshore Defender's dayrate is slightly lower under its current contract than it was under the previous one. Shell is paying SeaDrill a dayrate of $130,000 for the rig over the four-years that it has leased the rig. Offshore Defender commanded a dayrate of $131,000 under its previous contract. The rig started its assignment with Shell in May and was in mobilization during the month of April. Therefore, if we assume that the rig spent only the entire month of April in mobilization, then this would cause SeaDrill's revenue to decline by $3,930,000 in the second quarter compared to the first as this is the money that the rig would have earned had it operated all April under the previous contract. If we assume that Offshore Defender achieved the company's fleet-wide 98% revenue efficiency (for jack-up rigs) then the lost contract revenue works out to $3,851,400 quarter over quarter. Additionally, SeaDrill's contract revenue will be slightly lower under this contract than under the previous one due to the lower dayrate and this will also have a negative impact on revenue of $91,000 quarter over quarter, assuming 100% revenue efficiency. At the 98% revenue efficiency figure for jack-up rigs, the revenue decline drops to $89,180 quarter over quarter.
Offshore Vigilant is a 2008-built LeTourneau LeTourneau Super 116 benign-environment jack-up rig that is currently being repositioned and is not currently under contract. The rig was previously contracted to BHP Billiton (BHP), an assignment which it completed in April. The rig, like Offshore Defender, is capable of drilling wells of up to 30,000 feet deep in up to 350 feet of water.
Offshore Vigilant commanded a dayrate of $139,500 while on assignment with BHP Billiton, an assignment that ended in April. Therefore, the rig stopped earning dayrate at that time and did not earn any in May and June. Therefore, the revenue decline caused by this rig being repositioned is $8,509,500 for just the months of May and June. Assuming that the rig achieved the fleet-wide jack-up average of 98% revenue efficiency, then the actual revenue hit would be $8,339,310. Please note that these calculations assume that the rig was working on its previous assignment until April 30. If the rig stopped working prior to that then the actual quarter over quarter revenue decline would be larger.
The final factor that could have a negative impact on SeaDrill's second quarter earnings is rig downtime due to blow-out preventer maintenance. This is something that has been plaguing the entire offshore drilling industry ever since the Macondo incident of 2010 and so is most certainly not indicative of any company-specific problems at SeaDrill itself. The first quarter ended on March 31, 2012. As of the date of company's earnings report (PDF) on May 14, 2012, the company had seen a total of 20 days of downtime on four rigs due to blow-out preventer maintenance. If we assume that the downtime caused by this was relatively consistent throughout the quarter, then we can assume that the company had roughly 40 rig days of downtime during which time the affected rigs did not earn any dayrate. As the rigs that are being affected by this downtime are SeaDrill's high-earning ultra-deepwater rigs, it should be easy to see that the loss of revenue from these rigs could be rather significant.
Investors who have read this entire series will be quick to note that the additive revenue and cash flows from SeaDrill's new rigs West Elara, West Leo, and West Capricorn is more than enough to offset the revenue declines caused by the rigs profiled here not operating for the entire quarter. The downtime caused by maintenance on the blow-out preventers is the wildcard here as it could swing revenue pretty easily in either direction depending on just how many of days of downtime that occur. This is something that affected SeaDrill in the first quarter as well and for that reason, I am not as worried by it. Overall, I expect SeaDrill to report somewhat higher revenues compared to the first quarter when the company reports its earnings on Monday, August 27.
Disclosure: I am long SDRL.