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Seadrill Partners (NYSE:SDLP)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 10:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Seadrill Partners Q4 2018 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Mark Morris, CEO. Please go ahead.

Mark Morris -- Chief Executive Officer

Thank you, and good afternoon, and welcome to the Seadrill Partners fourth-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 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 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 cover this quarter's financial performance in more detail. And then we'll open up for Q&A. So summarizing the quarter. Revenues of 220 million were up 7% relative to the third quarter, mainly related to more activity and better uptime.

Operationally, we had a good quarter, too, with uptime on the working fleet at 98%. While revenue was up 7%, adjusted EBITDA remained flat, reflecting higher costs because of commencements, reactivations and slightly higher G&A. In relation to the reported loss of 108 million, a large element of this is related to a provision we have taken in respect of the recent changes in U.S. tax legislation.

We believe this issue is not unique to us or is industry specific. We are seeking clarification from the U.S. tax authorities. Since our last report in November, we have added 52 million in backlog, comprising of 11 million for the West Capella with Petronas in Malaysia, a 20 million contract for the West Vencedor in the Ivory Coast and 21 million for the West Aquarius with Exxon in Canada.

During the quarter, we reduced the distribution to $0.01 per common unit, down from $0.10. The reduction reflects the slower-than-anticipated recovery in day rates and our desire to preserve liquidity ahead of debt maturities in the second half of 2020 and the first quarter of 2021. We took this step as the refinancing of our term loan becomes our primary focus. You'll recall that over the last 18 months, we've deferred our bank maturities, amended certain covenants and paid down debt, all as a package of measures to help extend our financial runway while maintaining a healthy cash balance with over 800 million that you see today.

We continue to evaluate options with regard to refinancing our balance sheet. With regard to the market outlook. We continue to see the market improving but not at the pace we had expected. We continue to see improving activity levels, and the prospects for certain of our idle rigs or those that will become available shortly are good.

A combination of increased tendering activity, including more direct customer negotiations, market consolidation scrapping and utilization up across the board versus a year ago are all good signs that the market is steadily tightening. With that, I will hand over to John who will take you through our financial performance. John?

John Roche -- Chief Financial Officer

Thanks, Mark. Overall, we had a stronger-than-expected quarter. This was mainly due to the West Aquarius working a bit longer than we had included in our guidance and better-than-expected uptime on our other rigs in operation. Looking at some of the sequential movements.

The increase in revenue was mainly due to the West Capella commencing its contract with Shell in Malaysia; higher uptime in the West Vela after completing its classing survey in the third quarter, which were partially offset by the West Aquarius completing its contract in December. Adjusted EBITDA was flat sequentially as the increase in revenue was offset by higher costs related to the West Capella commencing operations; reactivation costs for the West Vencedor, which will return to service in Q1; and G&A reverting to its normal run rate after the release of certain accruals in Q3. Turning now to other main movements on the P&L below EBITDA. In addition to the operating items just mentioned, we wrote off about 3 million of goodwill related to the adoption of accounting standards that simplifies the testing of goodwill.

A derivatives loss is a typical movement you expect to see when forward interest rates fall during the period. Most of the 21 million loss is unrealized with only about 1 million of this amount being realized in the period. In terms of tax expense, as Mark mentioned earlier, the 73 million expense is primarily due to a provision taken for an uncertain tax position relating to the recent changes in U.S. tax legislation.

We don't think this is unique to us, and we continue to assess this issue with the relevant authorities. This has all resulted in a net loss of around 108 million for Q4 and around 59 million after taking out minority interests. Turning now to the main balance sheet movements. The decrease in current assets reflects lower cash due to debt service and the mark-to-market impact of our derivatives portfolio.

These were partially offset by an increase in working capital related to the West Capella returning to work and higher uptime on the West Vela. In terms of noncurrent assets, the decrease is primarily due to the normal amortization of our drilling units and favorable contract intangibles. In noncurrent liabilities, the increase was mainly due to the uncertain tax provision previously mentioned, which was partially offset by normal quarterly amortization of our debt facilities. And finally, equity declined sequentially, reflecting distributions paid and the net loss for the quarter.

Turning to our outlook for the first quarter. Adjusted EBITDA is expected to be around 105 million. This is due to the full quarter of idle time on the West Aquarius prior to commencing its contract with Exxon in May, which is expected to be partially offset by the full quarter of operations for the West Capella and the West Vencedor. And with that, I would like to turn over to our operator to assemble the queue for Q&A. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Ben Fader Rattner with Canyon Capital. Please go ahead.

Ben Fader Rattner -- Canyon Capital -- Analyst

Was hoping you could give a little more color on the tax provision? And what the timing of resolving that might be and what's the reason? And has the cash -- what's the status of the cash associated with that $73 million provision?

John Roche -- Chief Financial Officer

Yes. Ben, cash is still with us. This was a rather unique situation. As we mentioned in our prepared remarks, it does relate to certain features of the recent changes in the U.S.

tax legislation. This is actually something that the tax planning industry picked up around about February of this year. I think there are some questions around the drafting of certain provisions that we need to get answered from the relevant authorities. The rules around U.S.

GAAP require us to take provisions based on a point in time, and that point in time being year-end. We did not know about this issue at year-end. However, it did exist nor do we have mitigation, of course, on account of us not knowing it existed. So U.S.

GAAP says, look, take the charge, take the provision. And we expect to learn more over the coming weeks from the authorities. I do think I'd put this in the unintended consequence of a rather complex piece of legislation that has gone through. We continue to monitor it and, of course, taking advice on the topic.

Ben Fader Rattner -- Canyon Capital -- Analyst

Can you give us more detail on exactly what in the tax code is causing this? Is it related to your corporate structure? Just a little more detail would be helpful.

John Roche -- Chief Financial Officer

Well, of course, it is related to our structure. It is not related to any changes in our structure that have occurred. It's more related to changes in the tax code. And I think, again, without getting into excruciating detail of a rather complex area, I will say the -- first and foremost, before discussing what the structure is or what the potential here is of this coming to fruition, we're more in the understanding phase and which is where we are.

So unfortunately, we can't provide a whole lot more color around this one and what it relates to for obvious purposes. But, I guess, as soon as we have further understanding of this, we will update the market.

Ben Fader Rattner -- Canyon Capital -- Analyst

OK. And then as it relates to the revolver, which matured in -- I guess, last week, what's kind of the current thinking about replacing that?

John Roche -- Chief Financial Officer

Yes. Ben, I think looking at our current liquidity balance, it didn't make a whole lot of sense to -- of course, in relation to the cost of maintaining a revolver, it didn't make a whole lot of sense to us to do it. So as it currently stands, with the liquidity balance we have, I don't think you should expect us to replace that revolver. It's hard for us to paint a scenario where drawing on it would be required.

Therefore, it doesn't make sense to move for it.

Ben Fader Rattner -- Canyon Capital -- Analyst

Thanks John. That's all I have.

John Roche -- Chief Financial Officer

OK. Thank you. Ben.

Operator

Our next question comes from Priya Rangarajan with MidOcean Partners. Please go ahead.

Priya Rangarajan -- MidOcean Partners -- Analyst

Just following up with the last question that was asked. So given that you had 50 million outstanding on the revolver, so should we assume that your cash would be reduced by 50 million this quarter, at the very least, to account for that?

John Roche -- Chief Financial Officer

So yes, we did pay down the 50 million outstanding on our revolver, that's correct. And it matured in February, yes.

Priya Rangarajan -- MidOcean Partners -- Analyst

OK, got it. And then I had a question on your cash flow statement. You had -- as of December 31, you said that cash distributions, they're 55.4 million. And as of third quarter, you had 40.7 million.

So this 15 million that was paid for this quarter, that does not match with the distributions that you declared for the quarter. So can you just explain what the remaining is?

John Roche -- Chief Financial Officer

Yes. So the cash flow statement you're looking at reflects actual cash paid in the quarter. So of course, the third-quarter dividend is actually paid in the fourth quarter. So that still reflects the $0.10 level.

And then you'll see the $0.01 reflected, of course, in our first-quarter numbers.

Priya Rangarajan -- MidOcean Partners -- Analyst

OK, got it. That's helpful. And then you had a statement for run rate for long-term maintenance. That is actually just long-term maintenance -- payment for long-term maintenance.

That increased from last quarter, like it was 60 million, which kind of suggested a run rate of 20 million. And then now that's like 91.6, which suggested -- like which suggest like fourth quarter, you had like a higher payment. Was that like a timing-related stuff? Or was it something else that makes it -- the run rate higher?

John Roche -- Chief Financial Officer

Primarily related to the Polaris. Remember, we are -- last year, we are spending some money in classing her in anticipation for -- well, not in anticipation, we are actually actively marketing her. So look, through the year, in 2018, clearly, this was a lumpy year. We had classed a lot of our rigs.

And Polaris is really the last major one. So that's why you see the bump in the end of the year.

Priya Rangarajan -- MidOcean Partners -- Analyst

Got it. And how should we be thinking about the recent JV that Seadrill Limited signed with Sonangol. Is Polaris going to be a vessel that's going to be considered? Like can you give us some more clarity around that?

Mark Morris -- Chief Executive Officer

Well, I think the first thing to say is it's early days in the JV with Sonangol in terms of actual rig selection. We certainly believe that from a Seadrill Partners perspective, the West Polaris is a good potential fit. But like I said, it's still early days. But certainly, it will be one of the rigs that's being marketed to and offered out for the joint venture.

Priya Rangarajan -- MidOcean Partners -- Analyst

Got it. OK.

Operator

[Operator instructions] Our next question comes from Andrew Mees with Barings. Please go ahead.

Andrew Mees -- Barings LLC -- Analyst

John, can you just maybe walk us through kind of the other cash movement here over the quarter? I know that looks like it was down about 31 million. What was the other main use of cash in 4Q?

John Roche -- Chief Financial Officer

So just during the quarter, we serviced about 95 million in debt, roughly 40 million in LTM and CAPEX. And we had some distributions and working capital that's -- those are really the main components.

Andrew Mees -- Barings LLC -- Analyst

All right, thanks. Some of my questions were answered. Thank you.

Operator

Our next question comes from Anna Callener with Brookfield.

Unknown speaker

Guys, I wanted to ask the contingent consideration that you have been paying pretty regularly. It looks like it's been reduced to about 20 million on the balance sheet. Should we expect for that to be fully paid within one or two quarters and then those payments to stop?

John Roche -- Chief Financial Officer

So that relates to -- you're correct, it has been reducing. And I suspect if you're looking back over a broader time frame and looking at the runoff, what you're picking up is a portion of the Polaris and the Vela contract. The Polaris contract that had contingent consideration on it has concluded. So now the only outstanding amount relates to the West Vela.

We're running off about 7 million or so per quarter. And the West Vela contract matures -- completes toward the end of 2020. So if you straight line it from today running off 7 million a quarter, that should get you to about there.

Unknown speaker

Got you. So that would be if -- through the end of 2020, that would be more than the $20 million on the balance sheet given there's around seven quarters left or eight quarters?

John Roche -- Chief Financial Officer

Yes. There's a -- it's not face value because there will be some discount. When you bring it on to the balance sheet, there is going to be a calculation involved in terms of present value. So you can't just add up the amount, but yes.

Unknown speaker

Got you. And then I wanted to follow up on an earlier question on the tax liability. So I understand that you're still early on in assessing that. But based on the expense, should we be thinking about that as kind of a zero to $70 million cash payment for taxes this year and where that comes in from zero to 70 is still unknown?

Mark Morris -- Chief Executive Officer

Yes. I mean, it's an uncertain tax position, which is why we put a number on it based on where we think. But I mean, it could end up being anywhere in between that, depending on where we get on further clarification with the relevant U.S. tax authorities and mitigation.

If we had a more accurate assessment, we would have put the number in.

Unknown speaker

Thanks. That's all for me.

Operator

Our next question comes from Joshua Katzeff with Deutsche Bank. Please go ahead.

Joshua Katzeff -- Deutsche Bank -- Analyst

Just wanted to start with the fleet status report. A couple of rigs coming off hire this year. Just wanted to get your thoughts -- actually, there's been a lot of talk around the Capricorn and the field that that's been working in. So I guess, what do you think about contract extension?

John Roche -- Chief Financial Officer

Yes. Thanks, Josh. You'll remember that -- you're correct. Capricorn is coming off around midyear.

It's currently employed at BP in the Gulf of Mexico. You'll remember we have spent a bit of money on this unit in the sense that we put MPD on it. We also bought some kit around -- haven't quite installed it yet. We want to do that at the right time for more units, try to make this as versatile and as attractive as possible.

And look, I think we've made the right investments. MPD investments have paid off for us in the past in relation to the West Capella. You've seen her string up five jobs together. And we do see an active market for more units.

And look, I'd also say, an improving market generally. So I think we've -- in my humble opinion, I think we've spent money wisely, made this unit as attractive as possible and continue to actively market her. And to the extent we have something material to announce, we will as and when. In terms of the tender units, again, becoming available in 2019, the lead times in this market are much shorter than what you'd be familiar with in the floater market.

So I'd say the lead times are shorter. There is a high degree of volume in this market and continue to actively market those rigs, but nothing firmed up just yet.

Joshua Katzeff -- Deutsche Bank -- Analyst

Got it. And then with regard to the debt paydown, you mentioned you paid down $30 million of debt in the quarter. Can you talk about what else was paid down? And if you have them on you right now, the outstanding balances for Vela and then...

John Roche -- Chief Financial Officer

So just in terms of what's paid down, my comments around what's paid down is in relation to -- it's just amortization. So our RTL runs off -- it's a 100-year profile, amortizing around about 30 million a year; and our bank facilities, round about 100 a year. So no lump-sum payments there. And sorry, your second question, outstanding on the...

Joshua Katzeff -- Deutsche Bank -- Analyst

On the Vela and then the Polaris balance.

John Roche -- Chief Financial Officer

So on the Vela, we've got around 190 million outstanding; and on the Polaris, about 150.

Joshua Katzeff -- Deutsche Bank -- Analyst

Got it. Thank you. That's all I had.

Operator

Our next question comes from Andrew Scheffer with Onex Credit Partners, LLC. Please go ahead.

Andrew Scheffer -- Onex Credit Partners, LLC -- Analyst

As it relates to the tax issue, I understand you guys -- you have the goalposts set forth. But as we think about going forward, how should we think about that? Is this something that is going to be recurring? Or is this -- was this a tax issue that's just affecting this year -- or this 2018 rather?

John Roche -- Chief Financial Officer

Yes. We -- it's a bit of a -- you flex two variables here. One in terms of what we've obviously provided for; and two, how we can potentially mitigate. And No.

2 is obviously intricately linked to No. 1. I think -- obviously, with -- looking at our revenue projections in the U.S., obviously, we have a meaningful portion rolling off this year. So that takes care of part of your forward-looking, but it's very hard for us to address the mitigation and potential future impacts without first understanding what the intended purpose of certain aspects of the legislation were meant for and gaining that clarity from the relevant authorities.

Mark Morris -- Chief Executive Officer

Andrew, just at a high level, it is largely one-off and largely this year.

Andrew Scheffer -- Onex Credit Partners, LLC -- Analyst

All right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Roche for any closing remarks.

John Roche -- Chief Financial Officer

Thanks, everyone, for joining us today. This concludes Seadrill Partners fourth quarter call. Thanks again. Bye-bye.

Operator

[Operator signoff]

Duration: 27 minutes

Call Participants:

Mark Morris -- Chief Executive Officer

John Roche -- Chief Financial Officer

Ben Fader Rattner -- Canyon Capital -- Analyst

Priya Rangarajan -- MidOcean Partners -- Analyst

Andrew Mees -- Barings LLC -- Analyst

Joshua Katzeff -- Deutsche Bank -- Analyst

Andrew Scheffer -- Onex Credit Partners, LLC -- Analyst

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