Update: Clarity On North Atlantic Drilling's Contracts With Rosneft Reveals Potential For Drop-Downs From Seadrill

| About: North Atlantic (NADL)


North Atlantic Drilling has announced the execution of contracts for six offshore drilling units with Rosneft covering 27.5 rig years.

This development is an important milestone and adds significant weight to North Atlantic Drilling's backlog and provides an avenue for accelerated growth.

As discussed in my original article the progression of the cooperation agreement between these two companies is an important step.

On July 30th North Atlantic Drilling (NYSE:NADL) issued a press release that outlined the signing of contracts for six offshore drilling units with Rosneft (OTC:RNFTF) following up on a cooperation agreement from late May. This latest agreement includes the six rigs for 27.5 rig years through 2022 with a total value of $4.25 Billion. North Atlantic Drilling noted the following details in the press release:

"The executed contracts include 5 year contracts for the West Navigator, the West Rigel, the West Alpha, two newbuild CJ-54 class rigs, and a 2.5 year contract for a Gusto class Jack-up rig. These contracts commence in Russian waters from 2015 through 2017."- North Atlantic Drilling

The mention of three previously unannounced rigs, the two CJ-54 newbuilds and the Gusto class rig is particularly interesting. These new jack-up rigs could materially alter North Atlantic Drilling's results and while specific day rates, construction details and financing sources remain unclear, it will be important to monitor for impact on the company's bottom line. These new rigs will likely come from one of two sources: direct negotiations with shipyards for near-term deliveries of the rigs or more likely an asset drop-down from 70% parent, Seadrill (NYSE:SDRL). Seadrill currently has no fewer than eight jack-up rigs on order with Dalian Shipbuilding Industry Offshore in China with delivery dates ranging from Q1 2015 to Q3 2016. A potential rig drop-down could be announced soon and the accompanying financing will likely have a large effect on the relative earnings accretion that the drop-down has the potential to produce. These newly announced rigs will turn North Atlantic Drilling into a 12 unit company with an even greater hold over the harsh environment drilling segment. It is difficult to forecast the specific accretion from these rigs without knowing the purchase price and financing costs, however, if the rigs are dropped down from Seadrill the deal would be subject to extra scrutiny given that North Atlantic Drilling is a subsidiary of Seadrill and the price for the rigs would likely be near Seadrill's investment in them.

While this announcement for the contracts of these six rigs represents a large portion of the initial cooperation agreement between North Atlantic Drilling and Rosneft, there are two main outstanding considerations to be made. Firstly, the original agreement called for a total commitment of 35 rig years. Wednesday's announcement covers 27.5 rig years so there remains space for further contract agreements. Secondly, the market awaits an update regarding Rosneft's proposed equity stake in North Atlantic Drilling in exchange for a number of Rosneft's onshore drilling rigs in Russia. The partnership between the two companies is young and North Atlantic Drilling will likely provide an update on their relationship and progress on these two considerations along with the company's Q2 earnings report on August 29th.

My original article about North Atlantic Drilling titled, "North Atlantic Drilling: Rosneft Deal Provides Powerful and Stable Partner For Future Strategic Opportunities" outlined the significance of the partnership and my follow-up article titled, "Update: North Atlantic Drilling's Agreement With Rosneft Should Not be Materially Impacted By Latest US Sanctions, But Headline Risk Remains" evaluated the risk of the initial US sanctions against Rosneft. This latest signing of drilling contracts for six rigs is a significant step and should reassure the market that the two companies intend to continue their cooperation and develop their relationship. Look for updated information relating to North Atlantic Drilling's newbuilds as well as additional contracts with Rosneft and clarity on Rosneft taking an equity stake in North Atlantic Drilling in exchange for some onshore Russia drilling assets.

Disclosure: The author is long NADL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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