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Marine Log

June 5, 2008

Seadrill on $850 million jack-up spree

John Fredriksen's Seadrill says it has entered into agreements with Keppel FELS and SembCorp's PPL Shipyard in Singapore for the construction four jack-up newbuilds with delivery in 2010.

According to Alf C Thorkildsen, CEO Seadrill Management AS, the Seadrill Board has concluded that the $850 million newbuilding program is a more attractive way of adding jack-up capacity than increasing Seadrill's offer for Scorpion Offshore Ltd.

Seadrill said on April 29 that it owned 36 percent of the outstanding shares in Scorpion and followed this up with a NOK 80 a share mandatory tender offer for the remaining outstanding Scorpion shares.

The reaction of the Scorpion board was that "the combination of Scorpion`s high specification jackups and other growth opportunities with the modern Seadrill fleet could create significant synergies but those synergies would benefit only Seadrill, not Scorpion shareholders, if the Mandatory Offer is successful." It also said it did not believe the offer reflects the true value of Scorpion."

Now, it seems, Seadrill would rather go the newbuilding route than sweeten the take-over pot.

According to Mr. Thorkildsen, the newbuild orders "are the best way to increase Seadrill's near term earnings potential in the offshore drilling market. We are convinced that the market for offshore drilling units in general will remain tight in the years to come. The decision to initiate the US$850 million building program was taken based on expected high return on invested equity due to the following factors; the current jack-up order book is less than 20 percent of the existing ageing fleet (which has an average age of 23 years), the jack-up newbuild capacity before 2011 at first class yards is limited and the number of term contract for jack-ups is increasing."

The two units to be built at KFELS will be based on the KFELS Mod V 'B' design.

The two units to be built at PPL Shipyard will be based on the Baker Marine Pacific Class 375 Deep Drilling design.

The KFELS Mod V 'B' rigs have a rated water depth of 400 ft and drilling depth of 30,000 ft. Deliveries are scheduled in June and November 2010 and the total contract price for the two units is approximately US$420 million.

These jack-ups will be the fifth and sixth jack-up orders that Seadrill has placed with KFELS. The previous units have all been delivered on time and budget and are all in operation for various oil companies.

The two units to be built at PPL Shipyard will be based on the Baker Marine Pacific Class 375 Deep Drilling design. The rated water depth is 375ft and drilling depth is 30,000 ft. Deliveries are scheduled in March and November 2010 and the total contract price for the units is approximately US$430 million.

These jack-ups will be the second and third jack-up orders that Seadrill has placed with PPL Shipyard. The first unit, the West Triton was delivered on time and budget in early January this year and is currently operating for Apache in Victoria, Australia.

Seadrill has in addition received option agreements for further jack-up newbuildings in 2011.

Mr. Thorkildsen says that the combination of deliveries, pricing and expected return is attractive compared to other investment alternatives within the offshore asset market as well as corporate opportunities. "The Seadrill Board has specifically concluded that this opportunity is superior to increasing the bid for Scorpion in order to achieve a potential higher acceptance. The four jack-up newbuilds will grow the Seadrill high quality jack-up fleet from eight to 12 units. It is not expected that the newbuildings will significantly reduce Seadrill's short-term dividend capacity. Longer term, dividend is expected to increase as a function of the orders. Seadrill's shareholders should be assured that Seadrill's focus will continue to be on the deepwater segment. However, the Board will continue to work opportunistic in order to seek to maximize return to shareholders based on investments limited to modern drilling assets."


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