Seadrill Part 1: New Jackup Contracts Promise Revenue Growth And Improve Forward Earnings Visibility

| About: Seadrill Limited (SDRL)
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Seadrill recently announced that it has secured contracts for four of its existing jack-up drilling rigs.

Three of these four contracts carry higher dayrates than the rigs' existing contracts.

The higher dayrates will result in forward revenue growth.

These new contracts also increase Seadrill's forward earnings and cash flow visibility.

The improved forward cash flow visibility provides confidence that Seadrill can maintain its high dividend.

On Wednesday, April 2, Seadrill (NYSE:SDRL) announced that it has secured new contracts for four of its jack-up rigs. These contracts will serve to provide significant visibility into the company's revenue and cash flow going forward. The announcement also resolves some of the concerns that I have discussed in previous articles regarding the large number of expiring jack-up contracts that Seadrill has this year. I will discuss each of these contracts in turn in this article.

West Tucana

The West Tucana is a 2012-built high-specification jack-up rig using the Friede & Goldman JU2000E design. The rig is one of the more capable jack-ups in the world, being able to drill wells up to 30,000 ft. deep in up to 400 ft. of water. The rig is currently operating off of the coast of Vietnam for PVEP at a dayrate of $167,000. This contract will end in October 2014 and the rig will then be moved to West Africa where it will begin work on its new contract with Chevron (NYSE:CVX).

The contract that the West Tucana has secured with Chevron is for a two-year period. This is actually rather long for a jack-up contract but it does serve as supporting evidence for Seadrill's past statements that oil and gas companies are contracting jack-up rigs for longer periods of time than what they normally do. This is due to the relatively tight supply-demand balance that still exists in the market for jack-up rigs. The shallow-water market, where jack-up rigs operate, has not seen the same recent weakness as the ultra-deepwater market. This has resulted in oil and gas companies securing longer contracts for jack-up rigs than they normally would because that is the only way that the company can ensure that it has the rig available to it when it needs the rig.

Chevron, through its wholly-owned subsidiary Cabinda Gulf Oil Company, will pay Seadrill a maximum of $168 million over the term of this contract. This amount does, however, include a mobilization fee of $8.5 million. As the mobilization fee is merely a reimbursement of Seadrill's costs to move the rig to its new location, it does not truly represent new money coming into the company. Therefore, we need to exclude it from the maximum potential revenue when calculating the dayrate. This brings the total new revenue for Seadrill down to $159.5 million over two years. This works out to a dayrate of approximately $218,500 per day. Clearly, this is substantially above what Seadrill is receiving for the rig now. Therefore, it should result in a substantial revenue increase for Seadrill once the rig begins its work for Chevron in the fourth quarter of this year or the first quarter of next year, depending on how long it takes to move it. Unfortunately, Seadrill did not state whether the total potential revenue included things such as a performance bonus. If it does then the rig's actual dayrate would be less than I calculated here but the contract still should provide Seadrill with a significant revenue boost.

West Telesto

The West Telesto is a 2014-built high-specification jack-up rig using the same Friede & Goldman JU2000E design as the West Tucana rig. As such, its capabilities are very similar and it is also one of the most technically-capable jack-up rigs in the world. The rig is capable of drilling wells that are up to 30,000 ft. deep in up to 400 ft. of water. West Telesto is currently working off of the Vietnamese coast at a dayrate of $149,500 for Premier Oil. This dayrate will increase to $156,975 in July where it will remain either until September or October depending on whether or not Premier Oil opts to extend its contract.

The contract that Seadrill has just secured for the rig is for a much shorter period of time than the one that the West Tucana received. This contract, with Origin Energy Limited, is for 102 days of operation during which time the rig will drill two wells. Origin Energy will also have the option to extend the contract so that the rig can drill another two wells. Seadrill did not state how long this option term is for but we can make an educated guess. The company said that it is expected to take 51 days to drill each of the first two wells in the contract. Presumably, the second two wells will be located in the same general area and have the same geology as the first two wells. Thus, it is likely that it will take about 51 days to drill each of the second two wells, assuming that Origin Energy exercises its option. The exercise of this option would thus double the length of the contract.

Seadrill stated that the new contract for West Telesto has a maximum potential revenue of $31 million for the first two wells inclusive of mobilization. Unfortunately, the company did not say what the mobilization fee is so this makes it difficult to definitively state what the dayrate is on this rig under this contract. A maximum potential revenue of $31 million spread out over the expected time required to drill the two wells gives us a total potential contract revenue of approximately $304,000 per day. The amortization of the mobilization fee would need to be deducted from this in order to arrive at the dayrate but it does seem obvious that the West Telesto will carry a much higher dayrate under this contract than it does under its current one and that should lead to a jump in Seadrill's revenue and cash flow once the rig starts working under this contract.

(Here is Part 2 of the discussion on Seadrill)

Disclosure: I am 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.