May 19, 2008
Seadrill and Ship Finance in $850 million drillship sale and leaseback
Two John Fredriksen controlled companies--Seadrill Limited and Ship Finance International Limited-- have agreed a sale and leaseback arrangement under which Seadrill sells the ultra-deepwater drillship West Polaris for a consideration of US$850 million and simultaneously leases the unit for a 15-year period.
Seadrill (OSL:SDRL) has six options to repurchase the unit during the charter period. The first repurchase option may be exercised after 51 months at US$548 million while the last repurchase option may be exercised after 15 years at US$177.5 million.
The aggregate lease payment for the first 51 months totals approximately US$491 million, which equals a bareboat day rate of some US$330,000 per day. For the remaining lease period, the aggregate lease payment is approximately US$631 million or an average bareboat rate of some US$161,000 per day.
Seadrill will not record any gain from the sale of West Polaris in the accounts, and the drillship will remain an asset in the company's balance sheet.
West Polaris is in its final stages of commissioning at Samsung Heavy Industries' yard in Korea and is expected to be delivered in line with the June 30, 2008 contractual delivery date. The drillship is chartered to Esso Exploration Inc., a subsidiary of ExxonMobil Corp., under a four-year contract at a dayrate of US$544,000 for the first three years and a dayrate of US$602,000 for the fourth year.
Seadrill says its Board is implementing a strategy that seeks to optimize the return on equity. This will be achieved through maximizing the debt against the company's US$12 billion order backlog and modern rig fleet, thereby lowering the cost of capital. The lease arrangement provides Ship Finance a stable secured income stream financed at a lower cost of capital than the return on investment targeted by the Board of Seadrill.
The arrangement will at delivery of the drillship contribute some US$600 million in cash liquidity up front. In addition, the difference between the received client dayrate less the lease rate plus rig-operating expenses will provide a cash flow that will strengthen and grow Seadrill going forward. If the repurchase option is executed after year four, the purchase price will be US$302 million lower than the agreed sales price.
If Seadrill uses similar financing for all the eight deepwater units due for delivery this year, which are all on long-term contracts, the company will release in excess of US$4 billion in cash after adjusting for remaining yard instalments, interest expenses and supervision costs. This cash will be available for dividend purposes or further growth. Seadrill says that additional cash can be raised through executing similar structures on the remaining rigs in the Company.
Commenting in his role as Chairman of Seadrill, John Fredriksen says: "The West Polaris financing agreement creates a unique opportunity for Seadrill to optimize the return on equity. The significant order backlog of US$12 billion has given Seadrill a strong position to maximize financing without taking material financial risk. The repurchase option structure and the free cash flow adjusting for the lease rate and rig-operating expenses provide flexibility for dividend distribution as well as further growth. The cash released through such arrangements will make it possible for us to deliver on our promise to return to shareholders a substantial part of Seadrill's market capitalization without limiting the future growth of our company."
Ship Finance International Limited (NYSE: SFL) said that with a total acquisition cost of approximately $850 million, the deal is a record-breaking sale/leaseback transaction in the maritime industry.