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Edited Transcript of SDLP earnings conference call or presentation 24-May-18 2:00pm GMT

Q1 2018 Seadrill Partners LLC Earnings Call

London Jun 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Seadrill Partners LLC earnings conference call or presentation Thursday, May 24, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John T. Roche

Seadrill Partners LLC - CFO

* Mark Morris

Seadrill Partners LLC - CEO

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Conference Call Participants

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* Andrew Mees

Barings - Analyst

* Benjamin Fader-Rattner

Canyon Capital Advisors - Analyst

* Matthew Gruppo

CIFC Asset Management - Analyst

* Piotr Ossowicz

Ironshield Capital Management LLP - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Seadrill Partners First Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mark Morris, Chief Executive Officer of Seadrill Partners. Please go ahead, sir.

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Mark Morris, Seadrill Partners LLC - CEO [2]

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Thank you, Chad. Well, good afternoon, and welcome to Seadrill Partners' First Quarter Earnings Call. My name is Mark Morris. I'm the CEO of Seadrill Partners. And with me today, I have John Roche, our CFO.

Before we get started, I'd like to remind everyone that much of the discussion today will not be based on historical facts but rather consist of forward-looking statements that are subject to uncertainty. Included on Page 2 of the presentation is a comprehensive list covering forward-looking statements. For additional information and to view our SEC filings, please visit our website at www.seadrillpartners.com.

Moving on to the agenda. I will cover the main highlights of the quarter and then hand over to John, who will cover this quarter's financial performance in more detail. And then we'll open up for Q&A.

So turning to the quarter. Revenues of $194 million were down versus the fourth quarter, mainly due to a full quarter of idle time for the West Polaris, the West Vencedor becoming idle during the quarter and idle time in the West Auriga related to planned maintenance.

Operationally, performance continued to be strong with 93% utilization across our operating fleet. The decrease is primarily due to the downtime related to the West Auriga [SPS]. Excluding this downtime, we would have achieved around 98% utilization.

Adjusted EBITDA of $97 million was down due to lower revenue, partially offset by lower operating costs from several of our units and lower stacking costs on the West Leo. Our adjusted EBITDA was slightly higher than guided for Q1, reflecting the SPS work on the West Auriga turning out to be shorter than planned and the West Vencedor contract finishing later than expected due to a well in progress.

During the quarter, we secured a contract worth approximately $6.5 million in backlog for the West Capella with Repsol in Aruba.

Finally, I'm sure you're all interested to understand how we are progressing with the litigation with Tullow regarding the West Leo, given the case started on the 8th of May. The case is ongoing at the moment. It is scheduled to conclude today, but this does not mean there'll be an outcome immediately, nor do we know when a judgment will be made. It will be inappropriate for us to comment any further while the case is ongoing, but we will update you as and when there are any material developments.

With that, I will hand it over to John, who will take you through our financial performance in more detail. John?

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John T. Roche, Seadrill Partners LLC - CFO [3]

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Thanks, Mark. As Mark mentioned in his opening remarks, the declines in revenue and adjusted EBITDA were mainly related to 2 units coming off contract and downtime for planned maintenance on the West Auriga. Partially offsetting these declines were the release of revenue provisions that added about $5 million to both revenue and EBITDA in the quarter. These relate to various billings that we feel is prudent to have customer agreement on before recognizing. This is very common when contracts are coming to an end or there are payments related to discrete activities, for example, managed pressure drilling.

In terms of the operating costs, about $12 million of the $18 million improvement was due to lower costs for idle units, and the remainder was due to lower costs on several operating units.

Turning now to other movements on the P&L. Operating income was $18 million compared to $60 million in the prior period. The decrease was primarily due to the top line and cost movements we just discussed and no benefit realized on the write-down of a contingent liability this quarter. You'll recall that as part of the West Polaris acquisition, there were deferred payments owed to Seadrill based on the follow-on contract for the unit. Last quarter, we wrote off the remainder of this balance, and we are no longer carrying this liability.

The other main movements were in interest expense, the interest rate hedge book and other financial items and taxes. The increase in interest expense reflects the 3% margin increase on the Term Loan B agreed to in mid-February as part of waiving the leverage covenant and total loans maturity in 2021. The derivatives gain is the typical movement you would expect to see when interest rates increase, and the $3 million in other financial items relates to fees incurred as part of the Term Loan B covenant waiver. Finally, in terms of tax expense, the $8 million reflects taxes payable in the quarter and provisions taken based on expected profits for the year.

Now turning to the balance sheet. It was a relatively quiet quarter, with not too much more than the typical variances you would expect to see in any given quarter. Some of the main movements behind the headline numbers relate to decreasing receivables as units came off contract and our derivatives position moving from a liability to an asset position due to the increase in interest rates during the period.

Turning now to our outlook for the second quarter of 2018. Adjusted EBITDA is expected to be slightly higher than the first quarter at around $105 million. This reflects a full quarter of operations for the West Aquarius, which is expected to be partially offset by fewer operational days for the West Capella and a full quarter of idle time for the West Vencedor.

So this concludes our prepared remarks, and I'll turn it over to Chad to compile the queue for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes today from Andrew Mees with Barings.

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Andrew Mees, Barings - Analyst [2]

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Just on the cost side, can you just put a little color around -- I mean, is there anything you're doing sort of differently in terms of the idle vessels or the operating vessels in order to bring those costs down? And is this kind of a good rate to think about going forward here as we model the next several quarters?

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John T. Roche, Seadrill Partners LLC - CFO [3]

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Yes. So I think it's a reasonably good rate. Obviously, as these numbers decline, any movement has a greater impact. But just kind of breaking down the $18 million improvement that we saw in the quarter, about -- as I mentioned, about $12 million of that was related to idle units. $10 million of the $12 million was the West Polaris. So you would expect as the unit comes off contract, immediately you do see an improvement. The West Leo, as we discussed in the past, is winding down towards a cold stack. So you'll see costs continue -- we expect to see costs to continue to improve there.

When you look at a unit, for example, say, the West Capella that's gone from Cyprus to Gabon, now it's starting up a contract in Aruba, there will be some volatility there. But that's more based on operating region, which is obviously difficult, outside looking in, to forecast. But I don't think there's material variance that we're seeing when I compare those 3 operating regions.

And then I think -- I have to say, when I look at normal operations, I think we probably hit our run rate. You're going to see some small variances. But if I look at the change over the last 2 years, I think you've probably seen the bulk of the costs come out of our business that you should expect to see.

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Andrew Mees, Barings - Analyst [4]

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Okay. That's helpful. And then can you just talk about the West Vencedor and just kind of contracting opportunities there? Is there anything sort of, in the near term, that we should be thinking about, any prospects for that rig?

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John T. Roche, Seadrill Partners LLC - CFO [5]

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It is being actively marketed. So yes, there are prospects. The business in Southeast Asia -- I mean, these tender rigs are primarily for development work. And there is an active market in Southeast Asia for these assets both for Vencedor. And of course, I mean, obviously, we're not marketing the T-15, T-16, given their long-term contract status. But those 3 units, it is -- it's not driven by the same fundamentals as the global floater market. There is more spot work. In some instances, there's term. But the good thing with these assets is they're easy to reduce costs on. There's not -- similar to a jack-up, there's not a whole lot of difference between cold and warm. There's not a big wind-down period or start-up period. So you can cut costs quickly, continue to market and then ramp it back up again pretty quickly.

But to summarize, actively being bid; yes, there are prospects; and we'll continue to try and get it on contract.

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Andrew Mees, Barings - Analyst [6]

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Can I just push a little bit and just maybe level of confidence around getting that rig back on contract, say, in this year? Or is that something that we should think about as maybe a potential in 2019?

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John T. Roche, Seadrill Partners LLC - CFO [7]

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I'm not going to hazard a guess because if I say it's hopeful, well, you know what, that might just jinx it. So actively being marketed, and we do see prospects.

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Operator [8]

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The next question will be from Tom Kilpatrick. Pardon me, Mr. Kilpatrick just left the queue. We have a question now from Matt Gruppo with CIFC.

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Matthew Gruppo, CIFC Asset Management - Analyst [9]

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Can you just give us a little more background on if you've seen any change in bidding activity over the last 6 months just given the runup in commodity prices?

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John T. Roche, Seadrill Partners LLC - CFO [10]

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I'd say -- I wouldn't -- the runup -- obviously, with the recent runup, it's too early to tell if there's -- if that will have any impact. I think, in a lot of instances, our customers are not going to be looking at these short-term movements. It's a question of do they think there's going to be stability in the oil price. That being said, you're absolutely right. There has been an uplift for some time. So yes, we have seen a change in activity. There is volume returning to the market. Dayrates, as you know, are low, bidding at a slight margin to kind of operational breakeven. I'd say that, that margin, again, depending on where you are, may or may not be consumed by overhead or financing costs, wherever it may be. But it's a very competitive market just given the low capacity utilization.

However, the important thing is that volume is returning, and you can see it an active spot market where we have empirical evidence. We've just put the Capella on -- I guess it's 3 short-term wells, 1 in Cyprus, 1 in Gabon and about to commence in Aruba, and she's continuing to be actively bid. Look, read between the lines on what we're doing with the West Polaris. We are not cold stacking that rig. We are doing -- we are classing her, so we're spending some money. And we think there are opportunities for that rig after she is classed and ready to work. We are done cold stacking drillships, so I think that should speak to the activities we see out there.

There's also pockets of activity that we see, in particular, in the harsh environment. And the West Aquarius is well suited for the U.K. market, so that's an area where we can benefit. We've also -- although I mentioned the West Leo is -- we are winding down costs there, don't forget that, that haul is also suitable for the harsh environment. It might take a little bit of money to get her there, but it sure is more competitive than some of the newbuilds we see out there going after that market. So that is a bright spot.

So yes, to answer your question, over the last 6 months, we did see an improvement.

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Matthew Gruppo, CIFC Asset Management - Analyst [11]

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Yes. Do you guys -- I mean, is there anything you guys track internally in terms of number of RFPs or anything around that you'd point us to, and how that's been trending?

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Mark Morris, Seadrill Partners LLC - CEO [12]

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Yes. I mean, we do track a number of what we see as leading indicators from CapEx spend to FIDs to just actually bid activity, how many phone calls are we getting or people looking for RFPs. And I think, as John said, there are potentially early signs of green shoots. I think there's no doubt that the movement in that oil price has helped. But until that stabilizes, I don't think it's going to change a lot. And there is still obviously a considerable oversupply, which means that whilst there is bidding activity, the rates are still low. We don't necessarily see that changing anytime soon, other than the harsh environment market where there has been clearly some pickup. But that's a smaller niche market, but that's clearly leading the way.

But -- so yes, the short answer is we are seeing more bidding activity. And when we look at those signs, they are looking more positive. But I don't think we're back to sort of the healthy times as before for anytime soon because, clearly, there's a lag for that stuff to translate to a sort of -- generally sort of a later cycle play, 12, 18 months later. So cautiously optimistic, I would phrase it at the moment.

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John T. Roche, Seadrill Partners LLC - CFO [13]

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And, Matt, I would just add, at this point in the cycle, differentiating factors are really important. Look, we all know fleet age and spec, these are all well understood by the market. But I think there's -- there are some finer points when you go down a level, whether it be managed pressure drilling or drill BOPs or -- and frankly, it doesn't have to be drill BOP on board, just access to spares if you need it; these are efficiency metrics. Also, more in units on semis, so you can work down into the mid-water.

Taking one example that we have done, we -- on the West Capricorn, we put more units on this unit. We put MPD capabilities all whilst it was on contract. In fact, we took the opportunity while we were -- while it was idle, while still on rate with BP, before it went back to full rate -- to do this work. And I think something like that is very well positioned. Obviously, it's contracted to 2019, but it's a matter of making your units as desirable and as versatile as possible to attack this, and this does make a difference in today's market.

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Operator [14]

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(Operator Instructions) The next question comes from Piotr Ossowicz with Ironshield Capital.

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Piotr Ossowicz, Ironshield Capital Management LLP - Analyst [15]

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I just wanted to ask, on tender activity, what we quite often hear these days from other operators is that they see a lot more tenders, but those tenders take longer or still to take time to convert into work. So -- well, we are losing the tenders, but the tenders are being continuously postponed in light of there's actually not much more awards. Is it something that you see as well? And if yes, what would you attribute it to? And do you see this trending? What do we need to have happen for this to change?

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John T. Roche, Seadrill Partners LLC - CFO [16]

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A lot of -- so yes, we do see that. I think a lot of this has to do with customers doing market checks. A lot of this happens during budget season because, obviously, if you're doing your budgeting for the year, you want to understand what rigs are available and at what price. And look, we've just gone through a couple of years of seeing a lull in activity. As activity picks up, I wouldn't characterize the fact that there's indications of interest, or market checks, call them what you will, whilst people are deciding whether to spend that incremental dollar, whether it be on development work or exploration. So yes, we see it, but it's not surprising at this point in the cycle.

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Piotr Ossowicz, Ironshield Capital Management LLP - Analyst [17]

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Okay. And are there any signs of actually increased activity? I mean, is there anything else that you are seeing in the market, any other interest other than the tenders?

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John T. Roche, Seadrill Partners LLC - CFO [18]

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I mean, yes, converting these indications into tenders, as I just mentioned on the last question, I think we have evidence of this when we look at the West Capella. We put the West Aquarius on contract. So yes, there is a conversion into real work happening.

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Piotr Ossowicz, Ironshield Capital Management LLP - Analyst [19]

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Okay. That's really helpful. And so on a separate note, you mentioned that your clients still await to see a bit more stability in the oil prices. Do you have a sense around what oil price do they currently budget for? Is it like $50s? Is it $60s? And those are -- just following up on this, when you said that they are waiting to see how much more volatility we'll see, well, what really counts as volatility? I mean, for example, if we see oil dropping from, call it, high $70s into low $70s, is it really a volatility? Or it doesn't really matter as long as it stays above, I don't know, $60, $65, whatever the number may be?

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Mark Morris, Seadrill Partners LLC - CEO [20]

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Look, I would say -- I mean, obviously, we track various people's forecasts. I mean, what we're seeing at the moment is in the main, the majority of forecasts are below where the actual price is, and people are starting to reevaluate their oil prices. I think it's probably fair to say, certainly from what I've seen and those that we probably hang more credibility on, although this is always a difficult area, is that, generally, the budgetary assumptions that people have made have been on a lower oil price than where it is currently, probably in the $60s to $70s, generally.

And I think people are looking at the geopolitical situation and various other things that's been driving up prices: obviously, the sanctions in Iran and what's happening in Venezuela and so forth. And that's creating some uncertainty, which, of course, has resulted in what we see, I guess, in some of those price rises more recently. But I think the thought process around CapEx and, in particular, when you're looking at the reserve ratios and where people sit, but they need to start spending something soon in some of those areas just to replenish what they've got, not even taking into account any potential growth.

So yes, I don't think anything is going to change, whether it moves from $75 to $70 or even to $65. I think people have sort of recognized that they set it a bar lower than where it currently is. But obviously, to the extent it stays where it is, I think that's certainly helpful for us in the industry.

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Operator [21]

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The next question will be from Ben Fader-Rattner with Canyon Capital.

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Benjamin Fader-Rattner, Canyon Capital Advisors - Analyst [22]

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Just given what appears to be an improving outlook for your assets, I guess, has your views changed any bit on uses of the cash that's sitting on the balance sheet, specifically talking about potentially asset purchases or using the cash to reduce the debt outstanding?

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Mark Morris, Seadrill Partners LLC - CEO [23]

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I think probably the way for us to answer that question at the moment is, obviously, we evaluate all of the opportunities sort of all of the time. Our key sort of focus at the moment is getting our rigs back working. And those that aren't, I mean, obviously, we talked about the Sirius and the Leo. And the Sirius, obviously, is cold stacked. Leo, as John alluded to, we are thinking about and evaluating whether at some stage, it makes sense to spend some CapEx to upgrade it to make it harsh environment. We think it would prove quite a worthy competitor in that field. But the trade-off we're always making is, how can we sweat our assets? When does the market turn? And we don't want to lock in, clearly, long term at low rates if it's a question of waiting and getting better rates further down the road, and then, obviously, who may pay for the CapEx upgrades, whether it's us or whether it's the customers.

And so we know we have cash to deploy. We are thinking sort of very carefully about spending some CapEx on some upgrades potentially in our fleet to make them more marketable and to put them higher up the ranking list in terms of how we rank our units against everybody else's to give ourselves better prospects. But that decision itself is predicated also on our view as when we think the recovery is biting. And we certainly see -- we've seen dayrate improvements. In a harsh environment, we are yet to see it really. As John said, we're making sort of small margins above OpEx really on the drillships and then, of course, the sort of more the semis. So that is really where we're thinking. I mean, we certainly wouldn't dismiss asset purchases at the right price and the right opportunity came along.

And of course, you'll be aware that last year, we have made some payments in relation to paying down debt on the bank side, and of course, as part of the TLB as opposed to paying down, but results really in a case where we've increased the margins over the coming term, in return for waiver of the covenant. So yes, I think you read all of those items. But I think at the moment, we're probably more focused on what would be smart CapEx investment to improve the marketability of the units that are not working or are in and out of short-term work such as the Capella and the Aquarius and Vencedor.

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Operator [24]

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Ladies and gentlemen, this concludes our question-and-answer session. I would like to return the conference back to John Roche for any closing remarks.

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John T. Roche, Seadrill Partners LLC - CFO [25]

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Thanks, Chad. Nothing more from us, and thanks, everyone, for joining us this morning or this afternoon, depending on where you are. And this concludes Seadrill Partners' First Quarter Earnings Call. Thanks again.

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Operator [26]

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And thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.