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Edited Transcript of SDLP earnings conference call or presentation 20-Aug-19 2:30pm GMT

Q2 2019 Seadrill Partners LLC Earnings Call

London Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Seadrill Partners LLC earnings conference call or presentation Tuesday, August 20, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John T. Roche

Seadrill Partners LLC - CEO & Director

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Conference Call Participants

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* Brian Hook

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Seadrill Partners Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Roche, CEO. Please go ahead.

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John T. Roche, Seadrill Partners LLC - CEO & Director [2]

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Thanks, Ben. Good morning, good afternoon to you all. Welcome to Seadrill Partners' Second Quarter Earnings Call.

Before we get started today, I'd like to remind everyone that much of the discussion will not be based on historical fact, 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 seadrillpartners.com.

Now turning to the second quarter performance. The main item to make note of this quarter is the West Auriga downtime. This was related to challenges encountered while changing out critical parts on the BOP for maintenance. It ultimately took us 38 days to get her back online and was not our proudest operational moment. And that being said, nobody was hurt and there were no environmental impacts. When dealing with a critical piece of equipment, such as a BOP, there is no room for doing things halfway and we shut down the operation until it's 100% ready to go back online. We're back up and running and expect a normal operation in the third quarter.

With that out of the way, the rest of the fleet performed well with an average uptime of 95%. We had some important contract wins, 2 units commenced operations and 2 units became idle.

Turning first to new business. Since our last report in May, we secured $91 million in additional backlog. 2 of the contracts are for the West Polaris and it's great to see this unit getting back to work. After completing its last contract in early 2018, we took the decision to keep her in the marketed fleet and complete a 10-year classing without having firmed up work. These 2 contracts were a long time in the making and keep the unit employed for the next 18 months.

We also have some visibility for follow-on work in Southern Asia, so we're quite happy with how all this played out. The unit is now on rate as of Sunday in Gabon and we had a great commencement.

Additionally, the West Capricorn picked up a couple short-term contracts in the Gulf of Mexico after finishing up with BP a bit earlier than anticipated. This has been quite a turn of events for us. Late last year, we spent some time reviewing stacking locations in preparation for a period of idle time after the BP contract completed. At that point in time, we thought the likelihood of a semi finding work was very small and we're planning for an extended period of time with that work. Fast-forward to today and we filled in the available days created by the early termination and the unit should be employed until about the end of the year. It's a far cry from where we thought we would be about late last year and it also leaves us with a warm rig being sold into a strengthening 2020 market, a far better position to be in than trying to market an idle unit.

To put the new contracts in context, the additions this quarter are about 50% of what we added over the prior 4 quarters and about equivalent to what we did in the past half a year. This is a good trend and are examples to the acceleration activity we're experiencing in the floater market. While rates are competitive for short-term work, the forward curve is in contango and we see higher rates for longer-term work. The overall utilization for marketed units remained stable at around 80%, and there are pockets of strength in the markets for harsh environment units and high-end ultra-deepwater drillships. The improvements in forward pricing and pockets of strength are leading indicators that the recovery is progressing and expect benign environment floaters, floater fixtures made in 2018 to mark the low point in the market.

Now moving on to some of the detail in the second quarter performance. In terms of volume, 2 units came off contract, the West Capella and the T-16. The idle time on the West Capella is a gap between contracts and it is expected to commence a new contract with Petronas in September. The idle time on the T-16 is related to the transfers of its remaining contract term to the T-15. This unit will be stacked while it is marketed for new opportunities.

These were broadly offset by 2 units commencing contracts, the West Aquarius with Exxon in Canada and the West Capricorn with LLOG in the Gulf of Mexico. There were no dayrate changes in the period and the major item to note in utilization was a downtime on the West Auriga.

In terms of costs, operating expenses rose due to the commencement of the West Aquarius and T-16 demobilization cost. G&A was flat quarter-over-quarter.

One item to make note of is the treatment of the early termination of the West Capricorn. While payments are received over the remaining contract term, we've recognized the full amount of the termination fee as other revenue in the second quarter.

Turning to other movements on the P&L below EBITDA. The main item here is the tax credit for the quarter. You'll recall in the fourth quarter of last year we recognized a $70 million uncertain tax position related to recent changes in U.S. tax legislation. In the second quarter, we released about 2/3 of this position, with mitigation steps taken ahead of receiving guidance from the U.S. Treasury. We continue to evaluate further steps that can be taken to release the remainder, and as we said in prior quarters, we expect no cash payments to be made related to this.

The tax credit, along with several smaller movements, resulted in a net loss of around $39 million and around $50 million after taking out minorities.

Turning now to the main balance sheet movements. A decrease in current assets mainly reflects lower cash due to normal quarterly debt amortization and CapEx and lower receivables due to the downtime on the West Auriga. In terms of noncurrent assets, the decrease was primarily due to the normal amortization of our drilling units and unfavorable contract intangibles. The decrease in current liabilities was primarily due to our debt facility related to the tender barges becoming current. The balloon there is about $26 million. In terms of noncurrent liabilities, the decrease was mainly due to normal quarterly amortization of our debt facilities, the tender barge becoming current, as I just mentioned, and the release of the UTP also mentioned previously.

Equity declined sequentially, reflecting the net loss for the quarter.

Turning now to our outlook for the third quarter. Adjusted EBITDA is expected to be higher at around $90 million. This is mainly due to the West Auriga returning to normal operations, the West Aquarius working for a full quarter, early termination revenues for the West Vencedor contract and the West Polaris having commenced a new contract this week. These are expected to be partially offset by the early termination revenues for the West Capricorn recognized in the second quarter and not being repeated and finally a full quarter of idle time on the T-16.

And with that, this concludes my prepared remarks and I'd like to turn over back to Ben to compile the roster for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brian Hook with Barclays.

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Brian Hook, [2]

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With respect to the West Capricorn termination payments, can you help us understand what amount of cash will be realized during the third quarter?

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John T. Roche, Seadrill Partners LLC - CEO & Director [3]

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So the original contract term expired July 24. So we -- for the second quarter, we effectively pulled forward the revenue. I'm not going to get into specific contract terms around what percentage of headline dayrate that was. What I will say, on a quarter-over-quarter basis, the revenue generated for the Capricorn was about flat quarter-over-quarter when you take into account the termination payment, the pull forward of the July revenue along with the new contract with -- that we commenced during the quarter with LLOG.

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Brian Hook, [4]

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Okay. So it's basically the July revenue that was pulled forward and recognized during 2Q. That cash will be realized during the third quarter?

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John T. Roche, Seadrill Partners LLC - CEO & Director [5]

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Cash will be received over the remaining contract term. So yes, cash will be received in the third quarter, but revenue was recognized in the second.

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Brian Hook, [6]

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Okay. Got it. And then when I look on the cash flow statement, I guess it's a cumulative 6-month number, but the $58 million outflow for other liabilities, can you help us break out what is going into that number?

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John T. Roche, Seadrill Partners LLC - CEO & Director [7]

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Sure. Sorry, which one are you looking at there?

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Brian Hook, [8]

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I'm looking at your new 6-month cash flow statement and the changes in other liabilities, it's a negative $59.7 million outflow.

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John T. Roche, Seadrill Partners LLC - CEO & Director [9]

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Yes, just bear with us for one moment here. I'll tell you what, Brian, why don't we take that up off-line. That other bucket has several line items going through it, but happy to help you understand it off-line.

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Brian Hook, [10]

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Fair enough. And if I could just get one last one in. Can you give us a sense for where the cost structure for the Polaris will be once it begins work in Southern Asia?

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John T. Roche, Seadrill Partners LLC - CEO & Director [11]

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Sorry, where the cost structure will be?

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Brian Hook, [12]

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Yes. Can you give us like some guidance on operating expenses per day?

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John T. Roche, Seadrill Partners LLC - CEO & Director [13]

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Yes. So look, direct OpEx, you're talking about the Southern Asia contract now, yes?

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Brian Hook, [14]

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Correct.

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John T. Roche, Seadrill Partners LLC - CEO & Director [15]

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Yes. That's going to be in the 1 10 to 1 15 range, direct OpEx.

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Operator [16]

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(Operator Instructions) Okay. If there are no further questions, this concludes our Q&A answer session. I would like to turn the conference back over to John Roche for any closing remarks.

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John T. Roche, Seadrill Partners LLC - CEO & Director [17]

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Thanks, Ben, and thanks, everyone, for joining. This concludes Seadrill Partners' Second Quarter Earnings Call. Thanks, everyone.

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Operator [18]

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