North Atlantic Drilling - The West Phoenix Gets A Contract Extension Estimated At 90-Day (1 Well)

| About: North Atlantic (NADL)
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Summary

NADL announces a new contract extension, basically a repeat of the preceding contract. One well contract at @ $188.9k/d for 90-day.

This new contract extension is adding $17 million to the actual backlog estimated at ~$335 million as of January 17, 2017.

Technically, NADL is in a "wait and see" situation due to the announced restructuring of Seadrill. Thus, it is very important to trade NADL with extreme caution until April.

This is an update of my preceding article on North Atlantic Drilling(NYSE:NADL), published on November 2, 2016.

NADL is a subsidiary of Seadrill (NYSE:SDRL) -- SDRL owns 16.966 million shares or 70.36% (majority holder) -- and the company operates exclusively in the North Sea.

Today, January 17, 2017, the company announced the following:

North Atlantic Drilling Ltd ("the Company") has been awarded a one well contract for the semi-submersible West Phoenix for work in the United Kingdom West of Shetland.The contract is in direct continuation with the West Phoenix` existing contract and the total backlog is estimated to be $17 million.

The contract extension is basically a repeat of the preceding contract. One well contract at @ $188.9k/d for 90-day or $17 million in contract backlog.

The West Phoenix [worked previously] for Total UK until August 2016 -- 6-month contract at a day rate of $275+k/d -- which has been revised down to $188.9k/d now. The previous contract was already a contract extension at the time and was awarded at an effective discount of 40% from the original contract day rate of $458k/d.

Total - Laggan and Tormore gas fields near the Shetland Islands in the North Sea. 70 miles off the coast of Shetland.

Total is Laggan-Tormore's operator, owning 60 percent in the installations there, with Denmark's Dong Energy and Britain's Scottish and Southern Energy holding 20 percent each. Interesting article [here.]

Complete Fleet Analysis as of January 17, 2017. (non official)

Here's an overview of the last official September [fleet status]:

# Name

Type

Year

Built

Contract

End

Current

Day Rate

K$

Information

Location

1 - Drillships
1 West Navigator

UDW-HE

2000

Cold stacked

Norway (Skipavik)
2 - Semi-Submersibles
1 West Alpha

4th-HE

1986

Available

Norway (Skipavik)

2 West Phoenix

6th-HE

2008

Mid 4/17~

188.9

[Total]

UK Shetland

3 West Venture

5th-HE

2000

stacked($10k/d) Norway
4 West Rigel

6th-HE

Under-construction - See 1/9/2017 deal with Jurong shipyard click here.

3 - Jack-ups
1 West Elara

Heavy-duty-HE

2011

3/17

318

[Statoil]

Norway

2 West Epsilon

Heavy-duty-HE

1992

Available

Norway

3

West Linus

Owned by SFL

Heavy-duty-HE

2014

5/19

5/21 Option

326(+12.43/d)

326

[Conoco Phillips]

Norway

This new contract extension is adding $17 million to the actual backlog estimated at ~$335 million as of January 17, 2017.

Conclusion:

It is unquestionably a positive for the struggling company and its parent Seadrill (NYSE:SDRL). As I explained before the recent oil price recovery to about $55 per barrel now, is only an appetizer for the offshore drillers and it will take many months to deliver some meaningful effects (increase in tendering in shallow and deepwater).

What we are experiencing now is an increase in exploration capex by major oils such as Exxon Mobil (NYSE:XOM), BP Plc. (NYSE:BP) or Hess Petroleum (NYSE:HES) that I covered recently.

If you want more details about the recent E&P capex 2017 for Hess please read my article.

These E&P companies are still committed to offshore drilling to a certain extent (oil price must be above $60 a barrel). Recently, Wood MacKenzie released a positive study showing some signs of growth for the Deepwater upstream segment. Please read my article here.

However, Wood Mackenzie added a cautious note for the pre-FID Deepwater projects, that need a solid $65 per barrel instead: "Deepwater projects remain more challenged. Many of the projects slated for FID in 2017 are competitive with tight oil, but many longer-term deepwater pre-FID developments are still out of the money. Of the 40 larger pre-FID deepwater projects, around half fail to hit a 15% IRR at US$60/bbl."

Oil prices are always there but the positive momentum has stalled recently because the market needs to see if OPEC and nonOPEC pledge for 1.8 MBOPD in December will result in a significant production cut, and it will be difficult. EIA forecasts $53 per barrel in 2017 on average and $58 per barrel in 2018 (WTI).

On January 12, 2017, EIA wrote that Crude oil prices are expected to increase slightly through 2017 and 2018.

Bildresultat för Price of oil in 2016-2017

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2017

Note: Confidence interval derived from options market information for the five trading days ending Jan. 5, 2017. Intervals not calculated for months with sparse trading in near-the-money options contracts

Technically, NADL is in a "wait and see" situation due to the announced restructuring of Seadrill. Thus, it is very important to trade NADL with extreme caution and avoid any large bet until SDRL and NADL unveil what has been agreed with the banks. Seadrill announced that restructuring will be done in April 2017.

Still, it doesn't stop us to trade the stock, and I see some opportunities until April 2017. NADL graph above shows a falling wedge which is potentially a bullish pattern. The stock is now at almost breakout level at $3.70, at which point it would be logical to take some profit off the table.

However, we can also interpret the graph as a descending triangle, which is bearish, with a support around $2.75 and a break out to the $1 area.

The question of a paramount importance is the oil prices the next few months, and I believe they will fluctuate at around $55+ a barrel, but will not show a strong momentum to go higher or above $60 per barrel.

One recent article on OffshoreTechnology see a turning tide in the North Sea investment which can help establish a better strategy with NADL? I recommend to read the interview.

Important note: Do not forget to follow me on NADL/SDRL. Thank you for your support.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I now trade NADL/SDRL and wait for the restructuring news due in April.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.