Seadrill's Angolan Joint Venture Gets First Drillship Contract, Dayrate Is Above $200,000 Again

About: Seadrill Limited (SDRL), Includes: SDLP
by: Vladimir Zernov

Seadrill's Angolan joint venture gets its first contract.

Drillship Sonangol Libongos is the first to be employed at an estimated dayrate of $204,000.

It looks like the remaining two spots in the joint venture will go to Northern Drilling rigs.

Seadrill (SDRL) is constantly in the news this month. We have just discussed its new drillship contract which came at a dayrate of $200,000, and now, the company has reported another very material development - its Angolan joint-venture, Sonadrill, has secured its first contract.

Drillship Libongos will drill in Angola from late Q3 2019 to early 2021. The estimated total contract value is $101 million. Bassoe Offshore estimates that the rig will drill for 495 days at a dayrate of $204,000 (interestingly, Bassoe's first estimate was a dayrate of $215,000 as they estimated shorter duration of the contract). Seadrill commented:

"The Libongos is the first of two Sonangol-owned drillships to be bareboat chartered into Sonadrill along with two Seadrill-owned or managed units. Seadrill will manage and operate the four units on behalf of Sonadrill".

The key part of this comment is "Seadrill-owned or managed". In the article on the Angolan joint venture to which I linked above and which was written at the beginning of this year, I speculated that Seadrill's West Gemini and Seadrill Partners' (SDLP) West Polaris were good candidates for the joint venture. This speculation was proven wrong. West Polaris got a spot job in Gabon followed by a one-year contract in Southern Asia. West Gemini got a longer-term job in West Africa. Seadrill's managed drillships include Seadrill Partners drillships and Northern Drilling's drillships (that's another John Fredriksen venture). Now that all Seadrill Partners drillships are booked, the choice will be between Seadrill's own drillships and Northern Drilling newbuild drillships, which are of the same DSME 12000 design as Sonangol Libongos and Sonangol Quenguela that are contributed to the joint venture from the Angolan side. In this regard, I'd speculate that Seadrill-owned drillships will not be contributed to the joint venture and that Northern Drilling's rigs will be transferred to Angola.

For the industry in general, the first contract award in Angola is surely a positive development. Three more contracts will ultimately follow, removing those rigs from the international market. A second fixture above $200,000 in a row is also a positive sign. We should, of course, keep in mind that the contract is awarded to a newbuild rig which belongs to the upper tier of the fleet, but still the importance of dayrate upside cannot be underestimated. At the same time, the pace of this upside is materially below Seadrill's own projections during restructuring and below what's necessary for the industry to first survive and then thrive in the longer term.

At this point, the near-term fate of Seadrill shares will be impacted by oil prices and the general sentiment towards the industry. The whole offshore drilling segment consists of high-risk stocks, and Seadrill is riskier than the average offshore drilling company as it exited its restructuring with plenty of debt based on very optimistic dayrate projections that did not come true. At the same time, the company has financial runway, so it's too early to discuss the second restructuring, although a number of commenters here on SA believe it's already a done deal. I'm a bit more cautious regarding making the final call, but the situation is indeed very dangerous - Seadrill's shares are suitable solely for trading at this point.

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