Pacific Drilling's New Rig to Significantly Increase Earnings

Pacific Drilling's New Rig, Pacific Khamsin, began operations in December, and this rig will significantly increase the company's revenue, cash flow, and EBITDA.

Jan 8, 2014 at 11:49AM

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:

Screen Shot

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:

Screen Shot

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.

The best play on offshore drilling?
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!


Fool contributor Daniel Gibbs has a long position in PACD and SDRL. His research firm, Powerhedge, LLC, has a business relationship with a registered investment advisor whose clients may own shares in any of the companies mentioned. Powerhedge, LLC does not own shares in any company mentioned. The Motley Fool recommends Chevron and Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information