Alert investors shouldn't be all that surprised that despite a weak offshore drilling market, a Seadrill Ltd (NYSE: SDRL ) subsidiary signed a landmark deal. In this case, relatively new spin-off North Atlantic Drilling Ltd (NYSE: NADL ) reached a large deal to work with Rosneft, a large Russian energy producer. The deal was significant enough that Vladimir Putin is raising some red flags about its long-term validity.
North Atlantic Drilling is a pure-play, harsh environment firm with eight offshore rigs and a focus on the North Sea in Norway and now the Arctic Shelf aspirations of Russia. The company has a ninth rig under construction with a delivery date of 2015 and a likely destination of the Russian Arctic. The harsh environments of the Arctic are expected to contain vast amounts of energy resources, and North Atlantic Drilling happens to have a young fleet focused on the sector.
Remember, Seadrill recently signed a massive deal in Mexico with Pemex for up to six jack-up rigs. This again signals that companies with new rigs can find significant deals.
Both Rosneft and North Atlantic Drilling issued separate press releases providing slightly different details. According to North Atlantic, the deal involves initial deployment of up to nine offshore rigs with a total commitment of 35 rig years. Rosneft suggests that the deal involves a letter of award for six harsh environment offshore drilling rigs and North Atlantic Drilling entering the onshore market.
Both agree that the deal involves a significant investment in North Atlantic Drilling by Rosneft, though still keeping Seadrill as the majority owner.
The deal starts with the recently upgraded West Alpha rig drilling a Kara Sea well in Aug. The rig is currently working for Rosneft partner ExxonMobil Corp (NYSE: XOM ) and will drill a joint venture well. Interestingly, the rig was built in 1986 and is by far the oldest in North Atlantic Drilling's fleet. It also brings up the point that the company only has eight operating rigs at present and several of those under long-term contracts that last into 2018 and 2019; this suggests that a significant new build growth phase may begin to meet the demands of this deal.
North Atlantic Drilling investors obviously benefit the most if the deal is implemented on favorable terms and the Russian government doesn't muddle in the deal down the road. The actual dayrates and purchase price aren't listed making it difficult at this point to analyze.
Assuming that Seadrill wouldn't enter into a long-term deal of this manner without favorable terms, the best way to play this sizable working relationship with a contentious party without taking outsized risk is through the majority owner that has diversified assets. The company's 70% investment is now worth more knowing that it has long-term contracts for existing and new rigs, but Seadrill also offers an investment diversification away from the political risks in Russia.
Currently, Seadrill has a market valuation of around $17.5 billion with the North Atlantic Drilling position worth around $1.5 billion, or slightly less than 10% of the whole company. In addition, Seadrill benefits from having a substantial amount of rigs off the market going forward providing potential better rates for its fully owned rigs.
Aggressive investors can invest directly in North Atlantic Drilling to benefit from this high-risk proposition regarding a substantial level of work from Russia. For more risk-adverse investors, Seadrill is the best way to play the growth in Arctic demand and overall offshore growth due to the company's consistent ability to position assets for the big deals. If ExxonMobil has any position in the deal, then considering its work with Rosneft it might reduce the risk of dealing with the Russian government.
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