Pacific Drilling's New Rig to Significantly Increase Earnings

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On December 17, Pacific Drilling  (NYSE: PACD  ) announced that its newest drillship, the Pacific Khamsin, has begun operating off of the coast of Nigeria. The rig was originally expected to begin its work on its first contract on December 1 but it was unable to begin on time due to the Nigerian authorities delaying the issue of a drilling permit. Shareholders and potential investors in the company should take this as excellent news as the start-up of operations of this rig will be accretive to both the company's top and bottom line in the fourth quarter. The rig's impact in the fourth quarter will be somewhat negligible, however, due to its relatively short operating time during the quarter.

What does this mean?
The most noticeable impact on the company's results that will come from this rig beginning operations will come in the first quarter of 2014. This is because the rig earns revenue (and thus profit) for the company every day that it operates and the first quarter of 2014 will be the first quarter that the rig spends every day (or nearly every day) in operation. Pacific Drilling itself actually states how much it will be paid for every day that the rig operates:

Source: Pacific Drilling January 2014 Fleet Status Report

As the chart shows, the Pacific Khamsin has a dayrate of $660,000. This means that the rig's customer, Chevron (NYSE: CVX  ) , will pay this much money to Pacific Drilling each and every day that the rig operates. This would be approximately $60.2 million per quarter assuming that the rig operates continuously. In reality, the rig won't operate continuously because it will incur downtime so that Pacific Drilling can perform maintenance on the rig's highly sophisticated machinery.

How will maintenance affect revenue?
In the third quarter, the operating rigs in Pacific Drilling's fleet averaged 96.9% uptime. While it is unlikely that the Pacific Khamsin will actually achieve this level of uptime in the first quarter (since offshore drilling rigs are less reliable during their first six months of operation than after this period), we can use this number to get an idea of the level of growth that the rig is capable of producing for Pacific Drilling.

If we assume that the Pacific Khamsin will spend 96.9% of its time operating during the first quarter, then it will generate approximately $57.5 million in revenue. This would be an increase of 29.7% over the company's third quarter revenue.

What about profit
However, as investors, we are more concerned with profits than with revenues. Fortunately, we can get a good idea of what the new rig's impact on Pacific Drilling's profits will be. In the third quarter of 2013, Pacific Drilling had direct rig operating expenses of $163,400 per day. This is the amount that Pacific Drilling directly incurred to operate one of its rigs. However, the company also incurs indirect expenses, such as onshore support costs, to operate its rigs. Pacific Drilling has quantified these expenses in the past and has stated in presentations given at various industry events that it costs the company approximately $180,000 per day to operate one of its rigs.

If we assume that Pacific Drilling will incur this cost to operate the Pacific Khamsin during each of the ninety days in the first quarter then the company would have total expenses related to operating this rig of $16.2 million. Thus, the start-up of operations of the Pacific Khamsin should increase Pacific Drilling's first quarter EBITDA by approximately $41.3 million over third quarter levels, assuming that the company's G&A expenses remain relatively static. This would be a 42.7% increase.

After-tax cash flow
Pre-tax numbers are all well and good, but what about after governments take their cuts? One of Pacific Drilling's larger peers, Seadrill  (NYSE: SDRL  ) , provided this chart in several of its presentations at industry events over the past two years:

Source: Seadrill Ltd

As this chart shows, Seadrill states that its tax rate is approximately 4% of revenue. It would be reasonable to assume that Pacific Drilling's tax rate would be relatively in line with this. In fact, it is. Pacific Drilling's forward guidance provided with its third quarter announcement states that its tax rate is 3%-4% of total contract revenue. In the case of Pacific Khamsin, this would be approximately $2.3 million. This will reduce the amount of money that the company actually pulls in from the rig after paying its costs and taxes to approximately $39 million per quarter. This amount is roughly analogous to operating cash flow and so would increase Pacific Drilling's operating cash flow by 20.1% over third quarter levels.

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Daniel Gibbs

Daniel is an independent research analyst whose focus is on tangible, income-producing assets. He primarily covers the energy sector for

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