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Seadrill (NYSE:SDRL) Delivers One of Their “Best Quarterly Operating Profits Ever”

Rob Almeida
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November 30, 2011

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Alf C Thorkildsen, Chief Executive Officer, Seadrill Management AS

“At a point in time when there is turbulence in the financial markets we are very pleased to deliver one of our best quarterly operating profit ever reflecting solid performance and operation of our rig fleet. The market uncertainty has resulted in a significant drop in interest rate levels. This has adversely impacted our earnings in the quarter as we have booked an unrealized loss on interest rate swaps that we entered into in order to cap our interest expenses at attractive long-term levels. We have since our last reporting secured US$2.5 billion in new contracts bringing our order backlog to a record US$13.5 billion. This provides for a solid operating profit performance going forward. The outlook for our business continues to be strong and we have resolved to increase our cash dividend to US$0.76 per share for the quarter.”

Rig Utilization At or Above 2nd Quarter Figures

Seadrill had 44 offshore drilling units in operation during the third quarter (including five tender rigs owned by Varia Perdana) in North Europe, US Gulf of Mexico, Mexico, South Americas, West Africa, Middle East and Southeast Asia.
For our floaters (drillships and semi-submersible rigs) the economical utilization rate in the third quarter averaged 97 percent inline with the second quarter.

For our jack-up rigs, the economical utilization in the third quarter was 91 percent compared to 89 percent in the second quarter as Offshore Resolute was in transit to its next drilling assignment and West Cressida had a yard-stay to repair one of its legs.

For our tender rigs, the average economic utilization for the third quarter increased to 94 percent compared to 88 percent in the second quarter as West Menang commenced operations in August after completing a mandatory survey and upgrade partly paid for by the customer.

4th Quarter Looks Strong…

Our fourth quarter earnings is expected to be favorably impacted by a full quarter in operations for the new ultra-deepwater semi-submersible rig West Pegasus, the new semi-tender West Jaya commencing operations for BP in late November and the harsh environment jack-up rig West Elara commencing operations in Norway during December, subject to weather conditions. However, the quarter will be adversely affected by an aggregated 60 days of off hire for our ultra-deepwater units due to repair and maintenance of the BOP equipment. In addition, we will have a further 30 days at yard for the jack-up
rig West Cressida to complete the repair work on one of its legs. Furthermore, the quarter is expected to include a US$47 million gain on sale on completion of the disposal of the jack-up-rig West Janus.

Newbuilding program – 14 Rigs Under Construction

We currently have 14 units under construction following the completion of construction of the semi-tender West Jaya and the harsh environment jack-up rig West Elara in Singapore in the third quarter. The remaining newbuild program includes five ultra-deepwater units, one harsh environment jack-up rig, four premium benign environment jack-up rigs, three
tender rigs and one semi-tender rig.
In late December this year, we are scheduled to take delivery of the ultra-deepwater semisubmersible rig West Capricorn. The delivery of the ultra-deepwater semi-submersible rig West Leo is slightly delayed and the unit is now expected to be completed in January 2012. Further 12 units are under construction and scheduled for delivery between the fourth quarter 2012, and third quarter 2013. The total remaining payable yard installments are approximately US$3.1 billion.

3rd Quarter Highlights

  • Seadrill generates third quarter 2011 EBITDA of US$612 million
  • Seadrill reports third quarter 2011 net income of US$58 million and earnings per share of US$0.07
  • Seadrill resolves quarterly cash dividend per share of US$0.76
  • Seadrill completes the divestment of the jack-up rig West Juno and records a US$23 million gain on sale
  • Seadrill secures two three-year contracts for two jack-ups with a revenue potential of US$348 million
  • Seadrill secures a four-year contract with a revenue potential of US$787 million for the ultra-deepwater semi-submersible rig West Hercules
  • Seadrill acquires a 33.75 percent ownership stake in Asia Offshore Drilling Ltd through a private placement
  • Seadrill participates in two private placements in Archer Limited and increases its ownership to 39.9 percent

Subsequent events

  • Seadrill secures contracts with a total revenue potential of US$1.6 billion for the ultradeepwater rigs West Capricorn, West Leo and West Aquarius
  • Seadrill secures contracts with a total revenue potential of US$115 million for the jackup rigs West Ariel, West Callisto and West Prospero
  • Seadrill raises US$950 million in debt through two new secured credit facilities

Condensed consolidated income statements

Third quarter results
Consolidated revenues for the third quarter of 2011 amounted to US$1,029 million as compared to US$995 million in the second quarter. Operating profit for the quarter was US$480 million, up from US$430 million in the preceding quarter. The improvement is related to an increase in the number of units in operation and sale of the jack-up rig West Juno.

Net financial items for the quarter showed a loss of US$372 million compared to a gain of US$264 million in the previous quarter. The adverse contribution is mainly related to a loss of US$330 million on derivative financial instruments for the quarter whereas the second quarter had a gain of US$416 million on realization of holdings in the former offshore
drilling company Pride International Inc offset by a loss on derivative financial instruments of US$90 million.
Income taxes for the third quarter were US$50 million in line with previous quarter. Net income for the quarter was US$58 million and basic earnings per share of US$0.07.

Balance sheet
As of September 30, 2001, total assets amounted to US$18,321 million, an increase of US$198 million compared to June 30, 2011. Total current assets decreased from US$1,965 million to US$1,883 million over the course of the quarter primarily related to a reduction in accounts receivables.

Total non-current assets increased from US$16,158 million to US$16,438 million mainly due to installments paid on newbuilds as well as further investments in associated companies.
Total current liabilities increased from US$2,066 million to US$2,459 million.  Long-term interest bearing debt increased from US$8,264 million to US$8,378 million over the course of the quarter and net interest bearing debt increased from $8,711 million to US$8,879 million.
Total equity decreased from US$7,077 million to US$6,772 million as of September 30, 2011. The decrease is mainly related to dividends paid during the quarter.

Cash flow
As of September 30, 2011, cash and cash equivalents amounted to US$464 million, which corresponds to a decrease of US$24 million as compared to the previous quarter. Net cash from operating activities for the period was US$627 million whereas net cash used in investing activities for the same period amounted to US$505 million, primarily related to
payment of yard installments on new rigs and investments in associated companies. Net cash used in financing activities was US$146 million mainly due to payment of cash dividend of US$351 million, partly offset by proceeds from debt.

Outstanding shares
As of September 30, 2011, the issued common shares in Seadrill Limited totaled 467,099,774 adjusted for our holding of 2,151,159 treasury shares. In addition, there were 4.3 million options outstanding under various share incentive programs for management, out of which approximately 1.7 million are vested and exercisable. The Board has approved new share incentive programs reserving 1.7 million shares for allocation to senior management. As such, the number of shares outstanding under various share incentive programs may increase to 6 million shares. The new program is for five years with ¼ vesting after 18, 36, 48 and 60 months. The strike price for the new incentive scheme will be the average volume weighted share price for the next three trading days on the Oslo Stock Exchange. The primary insiders, Alf C Thorkildsen, Per Wullf and Esa Ikäheimonen, will be grated 100,000, 60,000 and 60,000 share options respectively under the new incentive program.

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