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Seadrill Partners (NYSE:SDLP)
Q3 2018 Earnings Conference Call
Nov. 20, 2018 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Seadrill Partners third-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Mark Morris, chief executive officer.

Please go ahead.

Mark Morris

Thank you and good morning or good afternoon, and welcome to Seadrill Partners third-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 consistent 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. So moving on to the agenda. I will cover the main highlights for the quarter and then hand over to John, who will provide some market commentary and cover this quarter's financial performance in more detail, and then we'll open up for Q&A.

So summarizing the quarter, revenues of $206 million were down relative to the second quarter mainly due to the $250 million West Leo litigation judgment being recognized in the second quarter of which $204 million was recognized as revenue. Excluding the West Leo litigation proceeds, revenue would have been down $8 million, a 4% decrease over the previous quarter, primarily due to the scheduled downtime on the West Vela for its SPS and the completion of the West Capella contract with Repsol in Aruba. Operationally, we had a good quarter with uptime and the work completed 98%, excluding the downtime for planned maintenance on the West Vela. Similar to the revenue movements, adjusted EBITDA of $130 million was down due to the inclusion of the West Leo settlement in the prior quarter.

Excluding this, adjusted EBITDA has increased by $14 million, improvement of 12% reflecting lower costs while the West Capella is between contracts, lower stacking costs for the West Leo, and slightly lower G&A. Overall, we had a stronger-than-expected quarter, mainly due to the West Aquarius exploration work taking longer than expected and the West Vela classing finishing faster than we expected. We had originally forecast the West Aquarius to conclude its current contract in August. However, we now expect the well to be completed later this month or early next.

Since our last report in August, we added about $40 million in firm backlog for the West Aquarius, which relates to two wells for Exxon in Canada commencing in May 2019. Lastly, we have paid the distribution of $0.10 per unit for the quarter. With that, I will hand over to John, who will take you through our financial performance. John?

John Roche

Thanks, Mark. Looking at some of the sequential movements. The biggest changes related to the West Leo litigation judgment being recognized in the second quarter and not repeating in the third. In terms of volume, the decrease is due to the West Capella completing its contract.

After completing its contract and during the quarter, it was mobilized to Malaysia and it commenced work with Shell a few days ago. It was on time, it was on budget, and it was a great result. Utilization declined due to the planned SPS for the West Vela. This is partially offset by higher utilization for the West Auriga as its planned SPS was completed during the second quarter.

The improvement in cost was mainly due to lower CAPEX on the West Capella well between contracts, lower stacking costs for the West Leo, and slightly lower G&A. The result in improvement in adjusted EBITDA should be considered one-off, and we expect higher cost next quarter as units return to work or prepared to do so and the West Leo stacking costs lack level off. Turning now to other movements on the P&L below the operating lines. The decrease in interest income is related to the portion of the West Leo litigation proceeds that was recognized in the prior quarter.

The decrease in interest expense reflects debt paid down in the quarter, which I will touch on in a moment. The smaller derivatives gain is the typical movement you expect to see when interest rates increase less than in a prior period. And finally in terms of tax expense, the $14 million expense relates to taxes payable in the third quarter and provisions taken for the expected tax expense for the rest of the year. This all resulted in a net loss of around $19 million for Q3 and around $9 million after taking out minority interests.

Turning now to the main balance sheet movements. The decrease in current assets is primarily due to lower receivables after receiving the cash from the West Leo litigation in the quarter, which is partially offset by an increase in cash. In terms of noncurrent assets, the movements were primarily due to the normal amortization of our drilling units as well as favorable contract intangibles. In current liabilities, the main movement was a decrease in the current portion of long-term debt related to the $120 million TLB prepayment, which was made as a result from the West Leo judgment as well as the final $25 million prepayment on our bank facilities, which we agreed to as part of the amendments completed in 2017.

In noncurrent liabilities, the decrease is mainly due to normal quarter of amortization of our debt facilities and equity declines sequentially, reflecting distributions paid and a net loss for the quarter. Turning now to our outlook for the fourth quarter. Adjusted EBITDA is expected to be around $115 million. This is due to the West Aquarius coming off contract in late November.

Higher cost related to commencement of the West Capella on its contract with Shell in Malaysia and reactivation cost for the West Vencedor as it prepares for its contract with Petronas in Myanmar. These are expected to be partially offset by fewer plant classing surveys expected next quarter. And with that, I'd like to turn it back over to the operator to assemble the queue for Q&A. Operator? 

Questions and Answers:

Operator

[Operator instructions] And our first question today will come from Andrew Mees of Barings. Please go ahead with your question.

Andrew Mees

Yes. Thanks for taking the questions. Just curious, can you talk about maybe the contracting prospects out there for a few of the rigs, notably the Aquarius, the Polaris, and then the West Leo? I guess, on the Aquarius, is there any opportunity or sort of interim work between kind of the end of the current contract and then the start-up with Exxon?

Mark Morris

No. But, Andrew, I would say it's not a terribly long amount of time between the two contracts. When we originally reported the contract back in, I think it was September, we were expecting start-up in -- around June. Exxon did exercise an option, which actually came ahead of the firm terms and now it's going to -- we expect it to commence in May.

So like I said, not a whole a lot of time to complete the ops prep and a couple of things we need to do ahead of contract. It's also winter term, which makes things a bit more challenging up in Eastern Canada, but we're looking at future opportunities for that unit. I mean, if all options are exercised, we could see that unit employed through 2020. And of course, if you look at our fleet status, the -- a few of the later options are market rate index.

So we like the opportunities there but, of course, that's going to be dictated by work plans in the region and, of course, how successful the future wells and well drill are. In terms of the West Polaris, we are -- as we've discussed previously, we have taken a year to class her slowly, not cold-stack her in anticipation improving market. We are seeing volume return back to this market. I think this unit is well placed for some of the work we are looking at.

That being said, we don't want to get our SKUs and lockup at today's spot rates for a particularly long time. And I think now is actually a time to be patient and pick your spots and get the right contract versus just any contract, and that's what we're doing but that rig is warm, being marketed, and well-positioned. In terms of the West Leo, you may have picked up in my comments in relation to the stacking costs getting close to what we think is the run rate. This unit is cold stacked.

Currently, it's probably running around 30 a day. I'd expect it to probably drop around 20 a day -- to 20 a day, that is. And it's a -- although, it's got a harsh environment hall. It has been working in benign environment for some time, so consider this a benign environment cold-stack semi, which are not the most desirable units in the market.

I would compare and contrast that with a warm semi that we do have currently operating, which is the West Capricorn, completely different situation because it has been operating. We've also put more in units on her, we've put MPD equipment on her to try and make her as marketable as possible and she does roll off in mid '19.

Andrew Mees

Gotcha. Thanks. That's helpful. And then just curious, you talked about kind of the costs going back up a little bit next quarter.

Should we think of that the same way or G&A cost as well?

John Roche

Slightly. You're going to see a range of G&A somewhere in the range, I'd say, 10% to 13% a quarter. The one to be happen to be low for -- obviously, there's always several moving parts here. But yes, I would expect some drift back to your normal run rate that you have seen and like I said it's going to be in the range of, call it, 10% to 13%.

Andrew Mees

OK. Thank you.

Operator

Our next question will come from Ben Fader-Rattner of Canyon Capital. Please go ahead.

Ben Fader-Rattner

Hi. I was wondering if you could just provide an update in terms of how you're thinking about refinancing some of the subsidiary bank -- subsidiary facilities and then also how you're thinking about just the capital structure generally?

Mark Morris

Yes. So, Ben, I think we certainly accomplished what we said out to do in kind of getting where we are today, capital structure-wise, kind of rewind the clock back to kind of third-quarter '17. There's a matter of extending near-term maturities and insulating the company from -- for our parent company's restructuring, successfully did that. Obviously, earlier this year, we completed some amendments to the TLB to buy us -- to get us some covenant headroom and have Leo [Inaudible] with, call it, a little bit more than two years until our first maturity.

We are going through and looking at market opportunities to refinance the balance sheet. It's certainly something where it is a priority of ours. But with the time, we bought on account of the prior two transactions that I mentioned, we are trying to be disciplined about it. Look, in perfect world I'd love to put all this into one big facility, term it out, and -- both in terms of duration and also have a more manageable maturity profile.

Of course, we need to balance that Utopian state, if you will, with the cost of doing so. And so that is what we are currently evaluating. But I would class that as one of our higher priority items for the company.

Ben Fader-Rattner

And just a follow-up on that, can you remind me, I can't remember in the amendment or in this earlier this year, if you are able to use cash on the balance sheet to buy back Term Loan B on the market. I mean obviously, given the volatility in the last month or so that -- I don't know if that's clearly an opportunity for you, but would love to hear your thoughts.

Mark Morris

We have the flexibility to do so. But then I would stress that, we talk about an improving market, yes but we also talk about current rates not being where we want them to be. And I think liquidity, in our opinion, is still a valuable resource and probably outweighs seeing of these movements in the current market.

Ben Fader-Rattner

Understood. OK. Thank you.

Operator

[Operator instructions] Our next question will come from Tom Kilpatrick of Barings. Please go ahead.

Tom Kilpatrick

Afternoon, gents. Sorry it's a bit of a Barings fair right now. Just looking at the Capricorn, I think you may be already answered the question, John, but what are the prospects of BP extending that contract or looking to amending extension on that?

John Roche

It's a little bit of a -- look, it is, as you're well aware, it is budget season for a lot of our customers. So look, with this customer and other one, we're actively marking her. Not to repeat myself, with some of the work we've done and some of the equipment we've put on there, I think we've made her as marketable as possible to work down into the mid water and stay in the deep and yes, I think when we have a contract we'll announce it but we've done our best to put us in a position to win.

Tom Kilpatrick

OK. Understood. Thanks.  

Operator

[Operator instructions] Our next question today will come from Will Farr of Steele Creek Investment Management. Please go ahead.

Will Farr

Hi. Yes. Thank you. [Inaudible] There's been some pretty dramatic moves in oil prices in the near term.

I mean, do you see that [Inaudible] pretty immediately in terms of the activity that you see as far as contracting tenders? I mean, how much is that short-term volatility influence what when you see going on in the market?

Mark Morris

The short answer is not a lot. I mean, I think when you look at big oil and gas companies going through their budgeting processes, they will not be driven by short-term volatility. They'll be looking on their own views and planning their CAPEX accordingly and, of course, we will follow that. I mean, obviously, like all things, people look at around the sort of geopolitical situation but I think the short-term volatility won't affect the large oil companies' views on how they're setting their CAPEX projects for next year and certainly not affecting bidding activity at the moment.

Will Farr

OK. Very good. Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Morris for any closing remarks.

Mark Morris

Well, thank you for joining our Q3 2018 earnings call, and we will look forward to seeing you or talking to you for Q4. Thank you. Bye-bye.

Operator

[Operator signoff]

Duration: 19 minutes

Call Participants:

Mark Morris -- Chief Executive Officer

John Roche -- Chief Financial Officer

Andrew Mees -- Barings

Ben Fader-Rattner -- Canyon Capital

Tom Kilpatrick -- Barings

Will Farr -- Steele Creek Investment Management

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