Seadrill Poised to Profit From Growing Asian Market

In a recent article titled "SeaDrill Focuses on Expanding Moat and Its Actions Will Benefit Stockholders", I discussed SeaDrill’s (SDRL) more than $50 million windfall that was received from the sale of the West Janus jack-up rig. In that article, I suggested that SeaDrill use this money to partially finance the construction of a new offshore rig, or pay down some of its outstanding debt. The company made an announcement recently that indicates that it intends to use the money in a way that has the potential to be far more beneficial to the company and shareholders than my suggestions.

In a press release dated July 1, 2011, SeaDrill stated that it has obtained a 33.75% stake in Asia Offshore Drilling Limited at a cost of $54 million. Asia Offshore Drilling Limited is a Singapore-based offshore drilling company and focuses on drilling in the waters of Asia and the Far East. Asia Offshore Drilling currently has two jack-up rigs with two more under construction at the Keppel FELS yard in Singapore. This is the same shipyard that has constructed many of SeaDrill’s premium offshore rigs and it has a history of quality construction.

In December of 2010, Asia Offshore Drilling Limited began construction on an additional two jack-up rigs. One of these two rigs will be complete in 2012 and the second will be complete in 2013. This will bring the total size of this company’s fleet to four jack-up rigs, all of which are relatively modern. Total construction costs of these two rigs are $360 million. Although the rigs will not be available for a year or two respectively, SeaDrill appears to have gotten an excellent purchase price based on the value of AODL’s assets.

As a part of this $54 million investment, SeaDrill has also secured an arrangement with AODL that could be the best aspect of this deal. According to SeaDrill’s press release (linked above), “SeaDrill will be responsible for the construction supervision, project management, and commercial management for all of Asia Offshore Drilling’s jack-up rigs.” This could benefit SeaDrill in a few ways.

• Asia Offshore Drilling will gain the benefit of SeaDrill’s extensive experience in building and running a fleet of premium jack-up rigs. As AODL becomes more successful, SeaDrill profits because of its ownership stake in the company.
• Presumably, SeaDrill will receive cash compensation for providing management services to Asia Offshore Drilling. This will provide SeaDrill with an additional source of cash flow. Shareholders in SeaDrill will directly benefit as the company makes more money.
• SeaDrill’s influence on management may encourage AODL to pay out a strong dividend to its owners. This would provide SeaDrill with a further source of cash flow as a result of this deal as it will collect the dividend payments on its stake in the company. Please note that at this time SeaDrill is simply providing rig management services to AODL. This potential benefit is simply a possibility that could arise from SeaDrill’s position as a major stockholder.

As I previously mentioned, Asia Offshore Drilling operates in the waters of Asia and the Far East. This is a resource-rich area and is a growing market for the offshore drilling industry. SeaDrill already has a number of its rigs in this area of the world, and a 49% ownership stake in Varia Perdana, which operates primarily in Thailand and Malaysia (SeaDrill also manages Varia Perdana’s rigs). The company has further expanded its footprint in this quickly growing area of the world through this deal with Asia Offshore Drilling. SeaDrill has positioned itself to be one of the major players in the emerging Asian offshore market and it will profit as this area continues to grow.

Disclosure: I am long SDRL.