Seadrill Partners LLC (SDLP) Q1 2019 Earnings Call Transcript

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Seadrill Partners LLC (NYSE: SDLP)Q1 2019 Earnings CallMay 23, 2019, 10:30 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Seadrill Partners' First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Mark Morris, CEO. Please go ahead, sir.

Mark Morris -- Chief Executive Officer

Thank you, and good afternoon, and welcome to Seadrill Partners' First Quarter Earnings Call. 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 two of the presentation is a comprehensive list covering forward-looking statements. For additional information and to review our SEC filings, please visit our website at seadrillpartners.com.

So moving onto the agenda. I will cover the main highlights of 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 to summarize the quarter, revenues and adjusted EBITDA were down relative to the fourth quarter, mainly related to changes in operating status which John will take you through shortly. Operationally, we had a good quarter with uptime on the working fleets at 97%. And, finally, we have maintained the distribution for the quarter.

Turning to market outlook. Since our last report in February, we have signed up $35 million of new business. Two fixed price options were exercised by Petronas for the West Capella in Malaysia adding $22 million in backlog. The contract is now expected to run until the second quarter of 2020. Following the early termination of the West Capricorn, we secured a one well contract with LLOG in the US Gulf of Mexico. Backlog is expected to be $10 million and the contract commenced earlier this month.

And, finally, a fixed price option was exercised by Petronas for the West Vencedor adding $3 million in backlog. Contract is now expected to run until the second quarter of 2019, with follow on work in the Ivory Coast.

We continue to see increased contracting activity in the deepwater market, in many instances, with improved contract term such as mobilization payments and certain CapEx being paid for by the customer. While the spot market for short-term work remains competitive, forward rates and rates for longer term work are improving. We now believe there is enough volume in the market to keep our working fleet employed without extended periods of idle time and improved prospects for future refinancing.

Refinancing of our debt maturing in the second half of 2020 and the first quarter of 2021 is currently being evaluated. Our good liquidity position allows us -- allows adequate time prior to the debt becoming due. We aim to be in a position to engage with stakeholders and/or capital markets later this year and will provide updates as appropriate.

With that, I will hand it to John, who will take you through our financial performance.

John Roche -- Chief Financial Officer

Thanks, Mark. Now looking at some of the main movements in the quarter. A decrease in revenue was primarily due to a full quarter of idle time on the West Aquarius prior to commencing its contract with Exxon in Canada, which was partially offset by the West Capella working for a full quarter and the West Vencedor commencing its contract with Petronas in January.

Adjusted EBITDA was down due to the topline movements just mentioned and also higher costs related to the West Capella and West Vencedor operations.

Turning now to the other movements on the P&L below EBITDA. The derivatives loss is the typical movement you expect to see when forward interest rates fall during a period. In terms of tax expense, the decrease is primarily due to an uncertain tax position recorded in the fourth quarter relating to changes in US tax legislation. We expect additional guidance from the tax authorities and, in the meantime, are evaluating approaches to mitigate this liability. We expect no cash payments to be made at this stage.

The decrease in tax expense for the quarter was partly offset by the impact of a separate provision of US tax reform, commonly referred to as BEAT. In the first quarter, we've recognized an income tax expense of approximately $7 million related to BEAT. Based on the current legislation in effect, we expect the full year 2019 BEAT impact to be around $20 million. The terms of our drilling contracts include a change in law -- change in tax law provision, which we believe makes this expense reimbursable to us. This all resulted in a net loss of around $51 million for the quarter and around $25 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 repayment of the $50 million drawn balance of the revolver that matured, lower receivables as the West Aquarius completed its contract in the prior quarter, and the mark-to-market impact of our derivatives portfolio.

In terms of non-current assets, the decrease was primarily due to the normal amortization of our drilling units and favorable contract intangibles. The decrease in current liabilities was primarily due to the repayment of the outstanding balance of maturing RCF. And in non-current, the decrease was mainly due to the normal quarterly amortization of our debt facilities.

Turning now to our outlook for the second quarter. Adjusted EBITDA is expected to be around $80 million. This is mainly due to downtime on the West Auriga related to unplanned maintenance, the early termination, a new lower day rate for the West Capricorn, idle time on the T-16 relating to the transfer of its remaining work to the T-15, and idle time on the West Capella prior to commencing its contract with Petronas in the third quarter.

And that concludes our prepared remarks. Before I turn it over to the operator to assemble for -- the queue for question-and-answers, as most of you are aware, this is Mark's last quarter with us. He will be departing the company at the end of next month. We will be making announcement to the market in due course about Mark's replacement. I'd like to thank Mark for being a leader, a mentor, a great business partner over last four years. I certainly speak for myself and probably countless others in the organization to say, it's been great to work alongside you. So, thank you.

Mark Morris -- Chief Executive Officer

Thank you.

John Roche -- Chief Financial Officer

And, with that, I'd like to turn over to the operator to assemble the Q&A.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. (Operator Instructions) And today's first question comes from Brian Hook of Barclays. Please go ahead.

Brian Hook -- Barclays -- Analyst

Hi. Good morning. Thanks for taking my question. Could you give us an update on where the recontracting prospect stand for the West Leo?

Mark Morris -- Chief Executive Officer

Yes. So, as you're probably aware, the West Leo came off contract some time ago. We took the decision to cold stack her based on the outlook we have at the market at the time due to semi-submersible. We do think it was the right decision to cold stack her based on how we've seen the demand develop since then. She's currently not being marketed. But we are evaluating what it would cost to get her into the harsh environment. Day rates do not make sense as of yet. If we're backed by a firm contract perhaps, but we're just not there yet. So we are evaluating what it would take to bring her back, but not currently actively being marketed.

Brian Hook -- Barclays -- Analyst

And can you give us a sense of what the order of magnitude of those upgrade costs would be?

John Roche -- Chief Financial Officer

Taking the UK market, it's probably something in the neighborhood of $50 million total, including the reactivation.

Brian Hook -- Barclays -- Analyst

Sure. Thank you.

Operator

And our next question today comes from Ben Fader-Rattner of Canyon Partners. Please go ahead.

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

Hi. I was hoping you could expound on what you're seeing that's giving you encouragement around the refinancing of the capital structure? And as you kind of see the tendering activity, can you comment on the prospects for some of your other vessels, which include West Polaris, for example?

Mark Morris -- Chief Executive Officer

Yes, absolutely, Ben. So as you probably read in our report and guide from our prepared remarks, I mean, yes, we are seeing improved contracting activity. This obviously improves the prospects for refinancing, in particular some idle units that are currently idle. And I think you picked up on probably one that's quite important to us, which is the West Polaris. It's important for a reason, not only is it idle but we did take the decision over a year ago to class her speculatively, to keep her warm stacked and these are not cheap decisions to make.

About a year ago, we were bidding her on one opportunity at 120 and we're currently looking at rates in the spot market and in the high-100s, low-200s with significantly improved amount of volume. So we do think that was the right decision to make and we're hopeful for forgetting her on contract at some point in the near future.

In addition to that, I think, you've seen us filling some of the available days on the West Capricorn that were made available by an early termination. I characterize the early termination as things that happen at the end of the contract, so that the well finished early that she was working on and so we wrapped up there. We'll continue to get paid out at a percentage of the day rate, but it's great to find some filler work.

We do see further spot opportunities nearby in the Gulf of Mexico to keep that rig warm, continue to actively market the T-15 and T-16. Obviously, we've gotten ourselves some time on the T-16 with the transfer of the work on the T-15, but that's a market with shorter lead times.

We're also seeing some opportunities in Eastern Canada. There's been these couple of recent discoveries there that we are quite well positioned for having a hot rig. If you look at the current contract, the one we expect to conclude, having a hot rig in the West Aquarius to pursue some of that work.

So, look, the market volume and pricing is improving. In terms of refinancing, we'd love to see the capital markets better than where they are today. I think it's an interesting observation that the capital markets do not appear to be reflecting either the improved oil price off cut of year-end levels, continued stability, as I mentioned improved pricing and volume in our market, but we don't control that, OK. What we are control of is our operations, deploying our fleet wisely and making the right investment decisions, which we are doing, which I think helps our prospects for refinancing.

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

So on the T-15 and T-16, can you explain a bit further? What you're doing with those two assets and kind of the thought process there?

Mark Morris -- Chief Executive Officer

Yeah. Well, at the moment, we're pulling up anchors and one into port. But, look, this is primarily -- that market's primarily development work is Southeast Asia, short lead time and the difference between cold and warm stack isn't all that great. So we can crew up, man up, man down, in a relatively efficient manner. But, look, I'd expect a gap in service on the T-15 after transferring the work or could continue to be actively marketed and we're looking at a couple of opportunities.

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

Okay. Just final question for me. Can you share the balance on the subsidiary facilities for Vela, Polaris and T-15 and T-16?

Mark Morris -- Chief Executive Officer

Sorry, the...

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

Can you share the amount of debt that was outstanding as of the end of the quarter for those three facilities, the Vela, the Polaris and T-15 and T-16?

Mark Morris -- Chief Executive Officer

I sure can, you just give me a quick moment here. So on the Vela -- on the Vela, at the end of the quarter, it was about $180 million. On the Polaris, $142 million. And then about $50 million on the $440 million facility, which finances the T tenders.

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

Thank you very much. That's all I had.

Mark Morris -- Chief Executive Officer

Okay, Ben. Thank you.

Operator

And our next question today comes from Peter Wollman of Invesco. Please go ahead.

Mark Morris -- Chief Executive Officer

Hi, Peter.

Peter Wollman -- Invesco -- Analyst

Hi. Hey, how's it going? Thanks for taking my questions. One of them just got answered actually. Can you also provide maybe a little bit more details on West Auriga downtime, the unexpected downtime? Do you have an expectation of how many days it will be down, or was this already down and you've already experienced in its backline?

Mark Morris -- Chief Executive Officer

We're still working on it. So this is related to a BOP pulls. BOP pulls are -- I mean they typically operate in the neighborhood of two week increments, so handful of -- call it five days up, five days fixed and five days down. So, look, we expect it to be somewhere in the neighborhood of 15 to 30 days. Hard to have an estimate at this stage just because there's -- it is maintenance work, we need to fix it, get it wet, test it, it's quite an important piece of kit as we are all aware of.

Peter Wollman -- Invesco -- Analyst

Yes.

Mark Morris -- Chief Executive Officer

So it's hard to give an exact estimate, but I think it's a safe bet somewhere between, yes, 50 and 30 days.

Peter Wollman -- Invesco -- Analyst

So, it's down right now?

Mark Morris -- Chief Executive Officer

Yes.

Peter Wollman -- Invesco -- Analyst

And so how long has it been down?

Mark Morris -- Chief Executive Officer

About two weeks.

Peter Wollman -- Invesco -- Analyst

Okay. So you don't know if it's going to be very quick that you're back up at this point you're still uncertain that it could be another two weeks out?

Mark Morris -- Chief Executive Officer

I'm giving you increments, OK. I mean until we pressure test it and start tripping back down that's when we have a view. So when I say two weeks, we are on the tail-end of that first run. So I'm just giving you the increments. So until it's done, I'm not going to tell you it's done.

Peter Wollman -- Invesco -- Analyst

Fair enough. No, I understand the importance. Thanks. Appreciate your time, guys. Thanks for the update.

Mark Morris -- Chief Executive Officer

Absolutely. Thank you.

Operator

And our next question today comes from Andrew Mees of Baring. Please go ahead.

Andrew Mees -- Baring Asset Management Limited -- Analyst

Thanks for taking my questions. Most of them have been answered here. But just on the West Capricorn, just wanted to confirm, are you still receiving kind of the standby termination payments in regards to the prior contract?

Mark Morris -- Chief Executive Officer

Yes. No impact.

Andrew Mees -- Baring Asset Management Limited -- Analyst

Okay. And then you'll also be receiving payments under the new contract as well.

Mark Morris -- Chief Executive Officer

That's correct, yes. We capably don't work for free, yes. The new contract had no impact on the ETF payments and we will -- we are earning data -- we're actually on right now . These are good one. I mean, the lead time just picking through the market and you look at one great lead indicator here is shrinking lead times. This is a piece of work. I mean, you saw we made the announcement about the termination and the lead time in this was quite quick and we could move it next door. Very little cost cutting there, we are able to retain the same crew, and so it's a great little data point. Yes, so no impact on the ETF payment.

Andrew Mees -- Baring Asset Management Limited -- Analyst

Any estimation on how long that one well will take?

Mark Morris -- Chief Executive Officer

Usually, you're in the neighborhood of 60 days.

Andrew Mees -- Baring Asset Management Limited -- Analyst

And just -- can you just remind me when do the -- when does the prior standby rate runoff again?

Mark Morris -- Chief Executive Officer

July 24.

Andrew Mees -- Baring Asset Management Limited -- Analyst

Great. Thank you.

Operator

(Operator Instructions) Today's next question comes from Anna Kalenchits of Brookfield . Please go ahead.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Hi, folks. Good morning. I had one follow-up question on the Capricorn termination payment. I'm wondering is that termination payment included in your estimate of second quarter EBITDA? Or is that something that's below the line?

Mark Morris -- Chief Executive Officer

It's included.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. And just for ease of calculation, do you have handy what that payment is for the second quarter?

Mark Morris -- Chief Executive Officer

No, we're not getting into contract terms. As much as we'd love to there are certain things that prevent us from doing so. So, no, unfortunately, we're not going to break down what the ETF is?

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. One other follow-up question. The provision for long-term maintenance was a little elevated this quarter. I'm wondering what was included in that? And if you could provide some guidance for, kind of, for the rest of the year what you expect for that to be?

Mark Morris -- Chief Executive Officer

So are you talking about in the distributable cash flow calculation?

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Yes. I think it was somewhere at $28 million of -- yes.

Mark Morris -- Chief Executive Officer

Yes. So this is more a provision, OK. This isn't true cash and essentially it is quite formulaic. So when you buy the assets, you have a runoff of expected maintenance in every year. We'll effectively roll forward that models fixed at the time we purchase it. There is several inputs to it. And so, the increase actually just reflects the roll forward of the assumptions. And then there's many components that go into it in terms of age of unit, so it's not a straight line reserve. So the roll forward has no impact on current cash. If you look at the cash flow statement, you could see the true underlying, but it's more just formulaic and of sticking true to some of the aspects of the model when we purchased our units.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. I think, maybe I misspoke, I was referring to the cash flow item not the accounting line item. So I think it was $22.8 million for the quarter and I think that is a true cash item, but correct me if I'm wrong?

Mark Morris -- Chief Executive Officer

Sorry. I thought you were referencing our distributable cash flow statements. Yes, so when I just look at the cash outlay, some of the items that you're seeing this quarter and the uptick relate to some SPSs. Now as this SPSs, although we call them five-year classing, it's not -- it doesn't take place all at year five. There will be certain interim items and when we have gaps in service, for example, the West Aquarius prior to going on contract in June, we did a bit of maintenance on the thrusters. Although we incurred most of the classing expense for this last gap, we left a little bit here. So it's more of just timing of classing. You also see a bit of that around the West Capella, small things around the West Vela. So, it's a bit of -- it's classing related work that is being optimized for our work plan contracting-wise.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. And is there any way to estimate what the remaining expenses for the year or kind of your expectation of what you're planning on spending?

Mark Morris -- Chief Executive Officer

No, we don't provide CapEx guidance. But I think, look, I think there has -- there haven't been any big classings this quarter, so I think if you look at this core, maybe it was a tad high. So, sure, it's 10% off and roll back for the remaining. I think you're going to probably be in the right zone.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. Thank you. And last question on the T-16. I'm wondering when that rig is not working, what is the -- what are the costs of that rig? Whether it's warm or cold stacked there?

Mark Morris -- Chief Executive Officer

We can get that down pretty quickly to -- in the neighborhood of 5 a day.

Anna Kalenchits -- Brookfield Asset Management -- Analyst

Got you. Thank you very much. That's all for me. Thanks, again.

Mark Morris -- Chief Executive Officer

Thank you, Anna.

Operator

And, ladies and gentleman, this concludes our question-and-answer session. I'd like to turn the conference back over to John Roche for any closing remarks.

John Roche -- Chief Financial Officer

Thank you, and thanks everyone for joining us today. This does conclude Seadrill Partners' first quarter conference call, and wish everybody a good day. Thanks, again.

Operator

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Duration: 25 minutes

Call participants:

Mark Morris -- Chief Executive Officer

John Roche -- Chief Financial Officer

Brian Hook -- Barclays -- Analyst

Benjamin Fader-Rattner -- Canyon Capital Advisors -- Analyst

Peter Wollman -- Invesco -- Analyst

Andrew Mees -- Baring Asset Management Limited -- Analyst

Anna Kalenchits -- Brookfield Asset Management -- Analyst

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