Seadrill Limited and Ship Finance International Limited have agreed a combined sale and leaseback arrangement whereby Seadrill sell the ultra-deepwater semi-submersible rigs West Hercules and West Taurus for a total consideration of US$1.7 billion and simultaneously lease the units for a 15-year period. The up front cash contribution from the sale adjusted for remaining newbuild instalments is estimated to US$1 billion at delivery of the two semi-submersible rigs.
Seadrill has with this lease arrangement in combination with future cashflow generation secured necessary financing of the entire newbuild program including the recent orders of one ultra-deepwater semi-submersible rig, one semi-tender and four jack-ups.
As the sale and leaseback transaction for the two deepwater units is an important step in realizing Seadrill's leveraged financing strategy, the Board has resolved to distribute an extraordinary cash dividend of US$0.30 per share. The shares of Seadrill Limited will be trading ex-dividend on September 22, 2008.
Seadrill has this year completed sale and leaseback arrangements for three of its deepwater units. The remaining newbuilding program that extends until mid 2011 includes 15 units of which eight are deepwater units available for similar structures. If Seadrill were able to apply similar arrangements for all the remaining eight deepwater units, the Company could release cash in excess of US$5 billion. This is however dependent on availability of debt financing sources and relevant covenant structures. In addition, the Company is considering similar or alternative financing structures for other ongoing newbuilds as well as for some of the existing rigs.
Seadrill is determined to continue implementing its strategy to optimize the return on equity. The significant order backlog of more than US$12 billion and the modern rig fleet provides a superb opportunity to maximize Seadrill's debt to equity ratio and thereby lowering the weighted cost of capital and releasing cash that will be available for both dividend purposes and further growth of the Company.
The lease structure with its repurchase options and free cash flow provides flexibility for future increases in dividend distribution without limiting further growth of the Company.
Chairman John Fredriksen says in a comment, "This sale and leaseback arrangement confirms the attractiveness of the Seadrill deepwater assets and associated future cash flow from already committed long-term contracts. The positive reception of this Seadrill credit and the tight pricing in a difficult banking market proves our Company's credibility and good standing in the banking market. The sale and leaseback arrangements improve our flexibility for increased dividend distribution without adding material financial risk. It further contributes strongly to our efforts in optimizing the equity return as we have promised our shareholders. In addition to the immediate cash which is freed up when the deals are completed, significant additional cash will be generated based on the difference between the charter rate and the lease rate plus operating cost. To be able to pay a fourth consecutive cash dividend since February 2008 with a cumulative distribution of US$1.75 per share is an important visualization of the robustness of Seadrill's position in a very strong offshore business environment. The Board targets further increases in normalised dividend capacity going forward. The timing of the planned replacement of major parts of Seadrill's equity with long term structured debt is progressing in line with the original plan, however, the Board will be sensitive to developments in the financing markets."
Seadrill will not record any gain from the sale of West Hercules and West Taurus in the accounts, and the semi-submersible rigs continue to be recognized as assets in the Company's balance sheet.
Seadrill has under the sale and leaseback arrangement five options to repurchase the unit during the charter period and a repurchase obligation at the end of the term. The first repurchase option may be exercised after three years at US$580 million, while the repurchase obligation after 15 years is at US$135 million.
The aggregate net lease payment for the first three years totals US$420million, which equals an average daily charter rate on bareboat basis of some US$383,000 per day. For the remaining lease period, the aggregate net lease payment is approximately US$745 million or an average daily charter rate on bareboat basis of some US$170,000 per day. The lease payments will be adjusted according to the development in the three months US Libor floating interest rate, currently at approximately 2.9 percent p.a.
West Hercules is in its final stages of commissioning at the Daewoo yard (DSME) in Korea and is expected to be delivered in September. The semi-submersible is chartered to Husky under a three-year contract at an estimated dayrate of US$524,000 and start-up of operations is scheduled subsequent to delivery and a short transit period to drilling location offshore China.
Seadrill has under the sale and leaseback arrangement four options to repurchase the unit during the charter period and a repurchase obligation after 15 years. The first repurchase option may be exercised after six years at US$418 million while the repurchase obligation will be at US$149 million.
The aggregate net lease payment for the first 75 months totals US$713 million, which equals an average daily charter rate on bareboat basis of some US$313,000 per day. For the remaining lease period, the aggregate net lease payment is approximately US$454 million or an average daily charter rate on bareboat basis of some US$142,000 per day. The lease payments will be adjusted according to the development in the three months US Libor floating interest rate, currently at approximately 2.9 percent p.a.
West Taurus is currently under construction at the Jurong Shipyard yard in Singapore. The commissioning and testing of the equipment is well underway and the unit is scheduled for delivery in December this year. The semi-submersible rig is chartered to Petrobras for operations in Brazil under a six-year contract at an estimated dayrate of US$630,000. Commencement of operations in Brazil is targeted in February 2009 following transit from Singapore.
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