Seadrill: $1.4 Billion In Contracts With ConocoPhillips

Seadrill: $1.4 Billion In Contracts With ConocoPhillips

Seadrill announces major contracts for West Elara and West Linus.

I discuss short-term and long-term implications.

The stock remains a playground for short-term traders.

Seadrill (NYSE:SDRL) has just announced that its majority owned subsidiary North Atlantic Drilling (NYSE:NADL) has just secured 10-year contract awards for the jack-ups West Elara and West Linus. The client is ConocoPhillips (NYSE:COP), while the additional backlog is estimated at $1.4 billion.

Here's the deal. First, West Linus dayrate for the existing contract will be adjusted from April 2017 to May 2019, resulting in a $58 million backlog reduction. The previous rate was $326,000, the new one is approximately $250,000. Then, West Lunus will work from May 2019 to the end of 2028 at a market indexed dayrate, and Seadrill believes that the backlog will be $706 million.

The company stated that estimates for market indexed rates were based on assumptions used in its presentation to bondholders and also included an agreed percentage discount. The West Lunus dayrate after May 2019 calculates at roughly $200,000, in line with the assumptions used in the presentation.

We should also keep in mind the costs of operating harsh-environment jack-ups as highlighted in the same presentation:

West Elara will begin to work for ConocoPhillips in October 2017 and will work at a fixed dayrate until March 2020, addition $160 million of backlog. The numbers here are once again in line with the assumptions in the presentation, as the rig's dayrate will be roughly $165,000. Then, the rig will work until October 2027, adding an estimated $530 million to the backlog which reflects a dayrate of about $190,000. As you can see, Seadrill assumptions reflect their view of dayrates in 2020 and account for the agreed discount. The backlog assumptions do not reflect any upside in dayrates after 2020 should it happen.

This news is a very important development for Seadrill, which has recently announced that common shareholders should expect minimal recovery in the restructuring. The news is of course good for business in the longer-term, but I won't be too much enthusiastic if I was a shareholder.

What Seadrill now needs is cash flow, and cash flow took an immediate $58 million hit which will not be recovered by the addition of West Elara contract. The math is simple. West Elara starts at a dayrate of about $165,000, so it will contribute about $15,000 per day, assuming that Seadrill cost estimate presented above is correct. That's just $11 million in two years. Conclusion: the contracts, while looking massive at first glance, actually make the short-term situation worse for Seadrill.

There is also no change in the outlook for North Atlantic Drilling, which I believe will be reabsorbed by Seadrill in restructuring. The company is not a viable business with the current debt load, and nothing has changed with this contract, which even makes things worse in the short-term.

The trading outlook is different. Speculative bottom-pickers are definitely rubbing their hands now as Seadrill will likely see a significant bump due to the major backlog addition. The tactics for those without a position depends on how high Seadrill shares will open. A relatively low open will justify a long entry, while a high open may open the possibility to short shares if there will be any to borrow.

For investors, the news may present an opportunity to bail out of Seadrill. I'm sure that we will again see many interpretations of the words "minimal recovery" used in recent press release, but the contract does not change the short-term dynamics for the company.

Creditors are at driver's seat and shareholders are at their mercy. I'd argue that the company is already preparing for the post-reorganization period. This is definitely not a last-ditch attempt to save the situation as the contract decreases cash flows in the shorter term. In my view, Seadrill remains a firm avoid for investors. At the same time, the company will continue to present opportunities for short-term traders. I'm sure that's not the last surprise from Seadrill.

NADL, a subsidiary of Seadrill, has secured ten-year contract awards for the jack-ups West Elara and West Linus with ConocoPhillips in the North Sea Ekofisk.This new contracts worth $1.4 billion in new backlog, will certainly play a positive element in the restructuring negotiations.This news will probably give a positive boost to SDRL and NADL today confirming my trading theory.

This is an update of my preceding article on North Atlantic Drilling (NYSE:NADL) published on March 3, 2017, about the Q4'16 results.

Please read also my recent article on ConocoPhilips (NYSE:COP) published on March 30, 2017. Please click here.

Investment thesis:

North Atlantic Drilling is a subsidiary of Seadrill Ltd. (NYSE:SDRL). SDRL owns 16.966 million shares or 70.36% (majority holder). [Total shares outstanding is 24.11 million].

Note: NADL Reverse split 1:10 - 12/31/15.

Seadrill and North Atlantic Drilling have struggled with their large debts, and are working hard to get all the lenders and the stakeholders on the same page and agree to a practical solution, in which shareholders will eventually avoid a bloodbath. No less than 42 banks are involved in the process...

As we all know, These two companies are controlled by the self-made billionaire John Fredriksen -- with a net worth is now $9.8 billion as of March 2017 -- who is directly involved with Seadrill recapitalization plan indicated in the 6F 01/2017.

On April 4, 2017, we learned from Seadrill that another delay has been agreed to complete the restructuring plan. The company announced the following:

These extensions provide additional time for the Company to further advance the ongoing negotiations with its banks, potential new money investors, and the advisers to the ad hoc committee of bondholders regarding the terms of a comprehensive restructuring plan, which may include the infusion of new capital. While no definitive terms have been reached, based on stakeholder and new money investor feedback, as well as the Company`s existing leverage, we currently believe that a comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment, losses or substantial dilution for other stakeholders. As a result, the Company currently expects that shareholders are likely to receive minimal recovery for their existing shares.

We expect the implementation of a comprehensive restructuring plan will likely involve schemes of arrangement or chapter 11 proceedings, and we are preparing accordingly.

I highly recommend to read my preceding article about the most recent restructuring plan involving SDRL and NADL published on April 2, 2017. Please click here.

TODAY NEWS: (From offshore Energy Today)

NADL, a subsidiary of Seadrill, has secured ten-year contract awards for the jack-ups West Elara and West Linus with ConocoPhillips Skandinavia for work in the Greater Ekofisk Area offshore Norway.

NADL said on Tuesday that the total additional backlog for the new contract awards is estimated at $1.4 billion excluding performance bonuses.

As part of the agreement, the company has agreed to a dayrate adjustment on the existing West Linus contract effective from April 2017, resulting in a $58 million reduction in current backlog.

The company also said that the new West Elara contract, which is expected to start in October 2017, includes a period of fixed dayrates until March 2020 and contributes approximately $160 million of contract backlog. A market indexed rate is applicable thereafter until October 2027, which will contribute an estimated $530 million of contract backlog.

The contract on West Linus has been extended from May 2019 until the end of 2028 at a market indexed dayrate, which will contribute an estimated $706 million of contract backlog.

According to the company, the backlog estimate indicated for the market indexed rate period for each rig is based on the third party dayrate assumptions presented in the Seadrill Limited release dated January 31, 2017 and includes an agreed percentage discount. The estimates are subject to changes based on market conditions.

The awards are subject to ConocoPhillips receiving partner approvals for the contracts.

Quick remarks:

1. The Jack-up West Linus is now contracted until May 2019 at a day rate of $326k/d (plus $12.43K/d for mobilization cost amortized through the contract). The company said that $58 million has been cut in backlog which represent a day rate reduction of about $73k/d based on 791 days remaining. The new day rate will be about $253K/d (+12.43K/d). Furthermore, the West Linus contract has been extended until end December 2028, at a market indexed day rate contributing to $706 million in Backlog. Based on an extra 3503 days the day rate is about $202k/d for the extension. I estimate the total backlog for the West Linus at about $916 million.
2. The Jack-up West Elara has been awarded a new contract with COP starting October 2017 and ending October 2027. Two parts in this contract. [a] From 10/17 to 3/20 day rate is fixed at about $175k/d or a total backlog of $160 million (913 days~). [b] From 3/20 to 10/27 market indexed day rate at about $191K/d (2771 days~) or a total backlog of $530 million. I estimate the total backlog for the West Elara at about $745 million (Including remaining backlog with Statoil).

The total additional backlog is $1.4 billion for the two Jack-ups (with total backlog remaining for the 2 Jack-ups at about $1.66 billion.)

We are talking significant numbers here. Please look at SDRL/NADL backlog below (click graph to enlarge). Note: SDRL and NADL backlogs are estimated the best to my ability and may not be totally correct due to the complexity.

Complete Fleet Analysis as of February 28, 2016 (updated April 11, 2017 by Fun trading.)

Here's an overview of the fleet status:

#	Name	Type Year Built	Contract End	Current Day Rate K$	Information Location
1 - Drillship
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	- 5/17 5/17-9/17	Available 145 125?	[Total] [Nexen] UK
3	West Venture	5th-HE 2000		stacked ($10k/d)	Norway - Skipavik
4	West Rigel	6th-HE 4Q2015	Under-construction- See deal with the shipyard
3 - Jackups
1	West Elara	Heavy-duty-HE 2011	6/17 6/17-8/17 10/17 - 3/20 3/20 - 10/27	318 (+$24 million taken to income - Mobilization) 138 175~ 191~	[Statoil] Norway [ConocoPhillips] Norway
2	West Epsilon	Heavy-duty-HE 1992		Available	Norway
3	West Linus Owned by SFL	Heavy-duty-HE 2014	5/19 5/19-12/28	326 253 (+12.43k/d) 202~	[ConocoPhillips (NYSE:COP)] Norway

Conclusion:

This is an extremely positive news for both Seadrill and North Atlantic Drilling, which shows that the Jack-up segment in the North Sea sector is showing signs of life again. As I have explained in my April article about the global offshore fleet, Jack-up utilization is higher than the floater utilization and the shallow water segment is the most likely to recover first with oil prices around $55 a barrel.

I recommend to read my article published yesterday. Please click here.

I said:

The rising of Jack-up utilization provides an explanation as to why the "distressed" rig market focuses now primarily on the jack-ups. The jack-up segment has been more active recently with a number of acquisitions from newly created companies such as Borr drilling (acquisition of Hercules Triumph and Hercules Resilience and acquisition of the entire Jack-up fleet from Transocean) or Northern Drilling, created by John Frederiksen en relation with Seadrill (NYSE:SDRL), and acquisition of the semisub West Mira.

This new contracts will certainly play a positive element in the restructuring negotiations and may eventually push Seadrill to re-incorporate NADL faster, by acquiring the 29.64% the company doesn't own, based on a share swap deal similar to the one Transocean (NYSE:RIG) and Transocean Partners LLC (NYSE:RIGP) have completed last year. In which SDRL will offer a share exchange based on a ratio NADL-SDRL to be determined close to 1:To be determined.

Important note: Do not forget to follow me on the Offshore drilling Industry. 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.