F-1/A 1 d412047df1a.htm AMENDMENT NO. 3 TO FORM F-1 Amendment No. 3 to Form F-1
Table of Contents

As filed with the Securities and Exchange Commission on October 17, 2012

Registration Statement No. 333-184023

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Amendment No. 3

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Seadrill Partners LLC

(Exact name of registrant as specified in its charter)

 

 

 

Republic of the Marshall Islands   1381   66-0789360

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

13th Floor, One America Square, 17 Crosswall, London, EC3N 2LB, United Kingdom, +44 20 7063 7900

(Address and telephone number of Registrant’s principal executive offices)

 

 

 

Watson, Farley & Williams (New York) LLP

1133 Avenue of the Americas

New York, New York 10036

(212) 922-2200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

 

Catherine S. Gallagher

Adorys Velazquez

Vinson & Elkins L.L.P.

2200 Pennsylvania Avenue NW, Suite 500W

Washington, DC 20037

(202) 639-6500

 

Sean T. Wheeler

Divakar Gupta

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

 

 

If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED OCTOBER 17, 2012

P R E L I M I N A R Y    P R O S P E C T U S

LOGO

Seadrill Partners LLC

8,750,000 Common Units

Representing Limited Liability Company Interests

$         per common unit

 

This is the initial public offering of our common units. We currently expect the initial public offering price to be between $20.00 and $22.00 per common unit. We are selling 8,750,000 common units. To the extent the underwriters sell more than 8,750,000 common units in this offering, the underwriters have an option to purchase up to 1,312,500 additional common units.

We are a Marshall Islands limited liability company formed by Seadrill Limited, or Seadrill, a leading offshore drilling contractor providing worldwide offshore drilling services to the oil and natural gas industry, to own, operate and acquire offshore drilling rigs. Immediately following this offering, we will own a 30% interest in Seadrill Operating LP and a 51% interest in Seadrill Capricorn Holdings LLC (collectively referred to as OPCO), which own and operate our modern and technologically advanced offshore drilling rigs. We are organized as a limited liability company and have elected to be treated as a corporation for U.S. federal income tax purposes. The common units have been approved for listing on the New York Stock Exchange under the symbol “SDLP,” subject to official notice of issuance.

 

We are an “emerging growth company” and we are eligible for reduced reporting requirements. See “Summary—Implications of Being an Emerging Growth Company.” Investing in our common units involves risks. Please read “Risk Factors” beginning on page 18.

These risks include the following:

   

Because our ownership interest in OPCO currently represents our only cash-generating asset, our cash flow initially will depend completely on OPCO’s ability to make distributions to its owners, including us.

   

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our units.

   

OPCO must make substantial capital and operating expenditures to maintain the operating capacity of its fleet, which will reduce cash available for distribution.

   

OPCO’s debt levels may limit its or our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to unitholders.

   

Seadrill’s failure to comply with covenants and other provisions in its existing or future financing agreements could result in cross-defaults under OPCO’s existing financing agreements, which would have a material adverse effect on us.

   

Any limitation in the availability or operation of OPCO’s four drilling rigs, or the inability to obtain new and favorable contracts for the drilling rigs upon any termination could have a material adverse effect on us.

   

We depend on certain affiliates of Seadrill, including Seadrill Management, to assist us and OPCO in operating and expanding our business.

   

Unitholders have limited voting rights, and our operating agreement restricts the voting rights of the unitholders owning more than 5% of our common units.

   

Seadrill and its affiliates own a controlling interest in us and have conflicts of interest and may favor their own interests to your detriment.

   

You will experience immediate and substantial dilution of $13.36 per common unit.

   

U.S. tax authorities could treat us as a “passive foreign investment company,” which would have adverse U.S. federal income tax consequences to U.S. unitholders.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Common Unit      Total  

Public offering price

   $                                     $                            

Underwriting discount(1)

   $         $     

Proceeds to Seadrill Partners LLC (before expenses)

   $         $     

 

(1)   Excludes an aggregate structuring fee of $     million payable to Citigroup Global Markets Inc.

The underwriters expect to deliver the common units to purchasers on or about                    , 2012 through the book-entry facilities of the Depository Trust Company.

 

Citigroup

  Morgan Stanley   Wells Fargo Securities

 

Credit Suisse

   
  Deutsche Bank Securities  
    RBC Capital Markets

 

ABN AMRO

  BNP PARIBAS   DNB Markets

 

                        , 2012


Table of Contents

LOGO

West Aquarius

   LOGO  

West Capricorn

 

LOGO

West Capella

 

LOGO

West Vencedor


Table of Contents

We are responsible for the information contained in this prospectus and in any free-writing prospectus we prepare or authorize. We have not authorized anyone to provide you with different information, and we take no responsibility for any other information others may give you. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than its date.

 

 

 

TABLE OF CONTENTS

 

SUMMARY

     1   

Seadrill Partners LLC

     1   

Our Relationship with Seadrill and the Fredriksen Group

     3   

Business Strategies

     4   

Competitive Strengths

     4   

Risk Factors

     5   

Implications of Being an Emerging Growth Company

     5   

Formation Transactions

     5   

Simplified Organizational and Ownership Structure After this Offering

     7   

Our Management

     8   

Principal Executive Offices and Internet Address; SEC Filing Requirements

     8   

Summary of Conflicts of Interest and Fiduciary Duties

     9   

The Offering

     10   

Summary Financial and Operating Data

     15   

RISK FACTORS

     18   

Risks Inherent in Our Business

     18   

Risks Inherent in an Investment in Us

     41   

Tax Risks

     51   

FORWARD-LOOKING STATEMENTS

     53   

USE OF PROCEEDS

     55   

CAPITALIZATION

     56   

DILUTION

     58   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     60   

General

     60   

Forecasted Results of Operations for the Twelve Months Ending September 30, 2013

     62   

Forecast Assumptions and Considerations

     67   

Cash Available for Distribution

     73   

Quarterly Forecast Information

     77   

HOW WE MAKE CASH DISTRIBUTIONS

     81   

Distributions of Available Cash

     81   

Operating Surplus and Capital Surplus

     82   

Subordination Period

     85   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     87   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     87   

Seadrill Member Interest

     87   

Incentive Distribution Rights

     87   

Percentage Allocations of Available Cash From Operating Surplus

     88   

Seadrill Member’s Right to Reset Incentive Distribution Levels

     89   

Distributions From Capital Surplus

     91   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     92   

Distributions of Cash Upon Liquidation

     92   

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     94   

 

i


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     97   

Overview

     97   

Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects

     99   

Factors Affecting Our Results of Operations

     101   

Important Financial and Operational Terms and Concepts

     101   

Customers

     104   

Inflation

     104   

Results of Operations

     105   

Liquidity and Capital Resources

     109   

Contractual Obligations

     116   

Off-Balance Sheet Arrangements

     116   

Critical Accounting Estimates

     116   

New Accounting Pronouncements

     118   

Quantitative and Qualitative Disclosures About Market Risk

     118   

INDUSTRY

     120   

Overview

     120   

Types of Offshore Rigs

     120   

Outlook

     121   

Dayrates

     122   

Crude Oil Fundamentals

     126   

BUSINESS

     129   

Overview

     129   

Our Relationship with Seadrill and the Fredriksen Group

     130   

Business Strategies

     131   

Competitive Strengths

     131   

Fleet and Customers

     132   

Contract Backlog

     135   

Drilling Contracts

     136   

Joint Venture, Agency and Sponsorship Relationships

     137   

Seasonality

     137   

Customers

     137   

Competition

     138   

Principal Suppliers

     138   

Crewing and Staff

     138   

Risk of Loss and Insurance

     139   

Environmental and Other Regulations in the Offshore Drilling Industry

     139   

International Maritime Regimes

     140   

United States

     141   

Canada

     143   

Nigeria

     146   

Angola

     146   

Other International Operations

     146   

Regulation of Greenhouse Gas Emissions

     147   

Properties

     147   

Legal Proceedings

     147   

Taxation of the Company

     148   

MANAGEMENT

     149   

Management of Seadrill Partners LLC

     149   

Directors

     151   

Executive Officers

     152   

 

ii


Table of Contents

Reimbursement of Expenses

     152   

Executive Compensation

     153   

Compensation of Directors

     153   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     154   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     155   

Distributions and Payments to the Seadrill Member and Its Affiliates

     155   

Agreements Governing the Transactions

     156   

OPCO Operating Agreements

     162   

Sponsor Credit Facility

     162   

Rig Financing Agreements

     162   

Contribution Agreement

     163   

West Aquarius Bareboat Charters

     163   

Other Related Party Transactions

     163   

Joint Venture, Agency and Sponsorship Relationships

     164   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     165   

Conflicts of Interest

     165   

Fiduciary Duties

     168   

DESCRIPTION OF THE COMMON UNITS

     171   

The Units

     171   

Transfer Agent and Registrar

     171   

Transfer of Common Units

     171   

THE OPERATING AGREEMENT

     173   

Organization and Duration

     173   

Purpose

     173   

Cash Distributions

     173   

Capital Contributions

     173   

Voting Rights

     173   

Applicable Law; Forum, Venue and Jurisdiction

     175   

Limited Liability

     176   

Issuance of Additional Interests

     176   

Tax Status

     177   

Amendment of the Operating Agreement

     177   

Merger, Sale, Conversion or Other Disposition of Assets

     179   

Termination and Dissolution

     180   

Liquidation and Distribution of Proceeds

     180   

Withdrawal or Removal of the Seadrill Member

     180   

Transfer of Seadrill Member Interest

     182   

Transfer of Ownership Interests in the Seadrill Member

     182   

Transfer of Incentive Distribution Rights

     182   

Change of Management Provisions

     182   

Limited Call Right

     183   

Board of Directors

     183   

Meetings; Voting

     184   

Status as Member or Assignee

     185   

Indemnification

     185   

Reimbursement of Expenses

     185   

Books and Reports

     185   

Right to Inspect Our Books and Records

     186   

Registration Rights

     186   

UNITS ELIGIBLE FOR FUTURE SALE

     187   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     188   

Election to be Treated as a Corporation

     188   

U.S. Federal Income Taxation of U.S. Holders

     188   

 

iii


Table of Contents

U.S. Federal Income Taxation of Non-U.S. Holders

     192   

Backup Withholding and Information Reporting

     193   

NON-UNITED STATES TAX CONSIDERATIONS

     194   

Marshall Islands Tax Consequences

     194   

United Kingdom Tax Consequences

     194   

UNDERWRITING

     196   

Notice to Prospective Investors in the European Economic Area

     198   

Notice to Prospective Investors in the United Kingdom

     199   

Notice to Prospective Investors in Germany

     200   

Notice to Prospective Investors in the Netherlands

     200   

Notice to Prospective Investors in Switzerland

     200   

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

     201   

LEGAL MATTERS

     201   

EXPERTS

     201   

EXPENSES RELATED TO THIS OFFERING

     202   

WHERE YOU CAN FIND MORE INFORMATION

     202   

INDUSTRY AND MARKET DATA

     203   

INDEX TO FINANCIAL STATEMENTS

     204   

APPENDIX A — Form of First Amended and Restated Operating Agreement of Seadrill Partners LLC

     A-i   

 

iv


Table of Contents

SUMMARY

 

This summary highlights information contained elsewhere in this prospectus. Unless we otherwise specify, all references to information and data in this prospectus about our business and fleet refer to our business and fleet immediately after the closing of this offering. You should read the entire prospectus carefully, including the historical financial statements and the notes to those financial statements. The information presented in this prospectus assumes, unless otherwise noted, (i) an initial public offering price of $21.00 per common unit, and (ii) that the underwriters’ over-allotment option is not exercised. You should read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units. Unless otherwise indicated, all references to “dollars” and “$” in this prospectus are to, and amounts are presented in, U.S. Dollars.

 

All references in this prospectus to “Seadrill Partners,” “we,” “our,” “us,” and “the Company” refer to Seadrill Partners LLC and its subsidiaries, including Seadrill Operating LP and Seadrill Capricorn Holdings LLC, unless the context otherwise indicates. Seadrill Operating LP will own: (i) a 100% interest in the entities that own the West Aquarius and the West Vencedor and (ii) an approximate 56% interest in the entity that owns and operates the West Capella. Seadrill Capricorn Holdings LLC will own 100% of the entities that own and operate the West Capricorn. We refer to Seadrill Operating LP and Seadrill Capricorn Holdings LLC collectively, as “OPCO.” All references in this prospectus to “OPCO” when used in a historical context refer to OPCO’s predecessor companies and their subsidiaries, and when used in the present tense or prospectively refer to OPCO and its subsidiaries, collectively, or to OPCO individually, as the context may require. Upon the completion of this offering, we will own (i) a 30% limited partner interest in Seadrill Operating LP, as well as the non-economic general partner interest in Seadrill Operating LP through our 100% ownership of its general partner, Seadrill Operating GP LLC, and (ii) a 51% limited liability company interest in Seadrill Capricorn Holdings LLC.

 

References in this prospectus to “Seadrill Member” refer to the owner of the Seadrill Member interest, which is a non-economic limited liability company interest in Seadrill Partners, which initially will be Seadrill Member LLC. Certain references to “Seadrill Member” refer to Seadrill Member LLC, as the context requires. References in this prospectus to “Seadrill” refer, depending on the context, to Seadrill Limited (NYSE: SDRL) and to any one or more of its direct and indirect subsidiaries, other than us. References in this prospectus to “Seadrill Management” are to Seadrill Management AS, a wholly owned subsidiary of Seadrill. References in this prospectus to “ExxonMobil,” “Chevron,” “Total” and “BP” refer to subsidiaries of ExxonMobil Corporation, Chevron Corporation, Total S.A. and BP Plc, respectively, that are OPCO’s customers.

 

Seadrill Partners LLC

 

We are a growth-oriented limited liability company recently formed by Seadrill Limited (NYSE: SDRL) to own, operate and acquire offshore drilling rigs. Our drilling rigs are under long-term contracts with major oil companies such as Chevron, Total, BP and ExxonMobil with an average remaining term of 4.1 years as of September 30, 2012. We intend to grow our position in the offshore drilling market by continuing to provide excellent service to these customers with our modern, technologically advanced fleet. We also intend to leverage the relationships, expertise and reputation of Seadrill to re-contract our fleet under long-term contracts and to identify opportunities to expand our fleet through acquisitions. Seadrill is one of the world’s largest international offshore drilling contractors, and we believe Seadrill will be motivated to facilitate our growth because of its significant ownership interest in us.

 

Upon the completion of this offering, we will own (i) a 30% limited partner interest in Seadrill Operating LP, as well as the non-economic general partner interest in Seadrill Operating LP through our 100% ownership of its general partner, Seadrill Operating GP LLC, and (ii) a 51% limited liability company interest in Seadrill Capricorn Holdings LLC. We will control Seadrill Operating LP through our ownership of its general partner and

 

 

1


Table of Contents

Seadrill Capricorn Holdings LLC through our ownership of the majority of the voting rights. Seadrill will own the remaining 70% limited partner interest in Seadrill Operating LP and the remaining 49% limited liability company interest in Seadrill Capricorn Holdings LLC.

 

The following table provides information about OPCO’s initial fleet:

 

                                Current Contract  

Rig Name

  Year
Built
    Water
Depth
(feet)
    Drilling
Depth
(feet)
    Location    Customer    Start   Expire   Dayrate
(US$)
 

Semi-submersible:

                 

West Aquarius

    2009        10,000        35,000      In transit    ExxonMobil    July 2012   December 2012     Transit (1) 
        Canada    ExxonMobil(2)    January 2013   June 2015   $ 530,000   
        Options    ExxonMobil    June 2015   June 2017   $ 530,000   

West Capricorn(3)

    2011        10,000        35,000      USA (Gulf of
Mexico)
   BP    July 2012   July 2017(4)   $ 487,000   
        Options    BP    July 2017   July 2019(4)   $ 487,000   

Drillship:

                 

West Capella(5)

    2008        10,000        35,000      Nigeria    Total    April 2009   April 2014   $ 544,000   
        Nigeria    Total    April 2014   April 2019(6)   $ 580,000   

Tender Rig:

                 

West Vencedor(7)

    2010        6,500        30,000      Angola    Chevron    March 2010   March 2015   $ 206,500   

 

(1)   While in transit, the West Aquarius receives a reduced moving rate instead of its standard dayrate under its drilling contract.
(2)   Once the West Aquarius arrives in Canada it will operate under a sub-contract to Statoil ASA. Please read “Business—Drilling Contracts.” The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.
(3)   Excludes estimated amortized rig rate charge payable by the customer of approximately $29,000 per day relating to lump sum mobilization fee, contract revenues and reimbursables prior to the commencement of contract, and a $5,000 per day catering and accommodation rate.
(4)   BP has an option to extend the expiration date of the contract for up to two years from July 2017 to July 2019.
(5)   OPCO will own an approximate 56% interest in the entity that owns and operates the West Capella. The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.
(6)   Total has committed to a five year extension with respect to the West Capella beginning in April 2014. Total has the option to reduce the term of the extension to three years in exchange for an increase in the dayrate to $627,500 or to four years in exchange for an increase in the dayrate to $615,000. Total must exercise any option to reduce the extension period prior to July 31, 2013.
(7)   This drilling contract is denominated in U.S. Dollars, but approximately 27% of the dayrate is received in Euros. This table assumes an exchange rate of one Euro to 1.27 U.S. Dollars. The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.

 

We intend to leverage our relationship with Seadrill to make accretive acquisitions of drilling rigs from Seadrill and third parties. For example, pursuant to the omnibus agreement that we will enter into with Seadrill at the closing of this offering, we will have the following purchase rights:

 

   

a right of first offer to purchase additional interests in OPCO; and

 

   

a right to purchase any drilling rigs acquired or placed under contracts of five or more years after the closing date of this offering.

 

In addition, we will have the right to purchase the following two tender rigs from Seadrill, either directly or through OPCO, at any time within 24 months after their respective acceptances by their customers:

 

   

T-15, a tender rig barge due to be completed in the first quarter of 2013, which is capable of drilling in water depths of up to 6,500 feet. The T-15 is expected to enter service in April 2013 with Chevron under a five-year drilling contract; and

 

   

T-16, a tender rig barge due to be completed in the first quarter of 2013, which is capable of drilling in water depths of up to 6,500 feet. The T-16 is expected to enter service in June 2013 with Chevron under a five-year drilling contract.

 

 

2


Table of Contents

Our Relationship with Seadrill and the Fredriksen Group

 

One of our principal strengths is our relationship with Seadrill and the Fredriksen Group of companies. We expect our relationship with Seadrill to give us access to Seadrill’s relationships with major international oil companies and shipbuilders. We will have access to Seadrill’s customer and supplier relationships and its technical, commercial and managerial expertise, which we believe will allow us to compete more effectively when seeking additional customers.

 

Upon completion of this offering, Seadrill will own the Seadrill Member interest, all of our incentive distribution rights and an additional 78.8% limited liability company interest in us as well as a 70% limited partner interest in Seadrill Operating LP and a 49% limited liability company interest in Seadrill Capricorn Holdings LLC, and thus will have significant incentives to contribute to our success.

 

Seadrill is one of the world’s leading international offshore drilling contractors, providing offshore drilling services to the oil and natural gas industry. As of September 30, 2012, Seadrill owned and operated a fleet of 43 offshore rigs (including OPCO’s drilling rigs), and had an additional 19 rigs under construction. Seadrill’s drilling rig fleet is comprised of jack-up rigs, tender drilling rigs, semi-submersible rigs and drillships, which operate from shallow to ultra-deepwater areas as well as in harsh and benign environments and are contracted to customers throughout the world. Seadrill reported total operating revenues of approximately $4.2 billion in fiscal year 2011.

 

In addition to our direct relationship with Seadrill, we believe there are opportunities for us to benefit from operational, customer and shipyard-based synergies due to our broader relationship with the Fredriksen Group. Seadrill’s main shareholder, Hemen Holding Ltd., or Hemen Holding, and other related companies are also the main shareholders of a number of other large publicly traded companies involved in various sectors of the shipping and oil services industries, which we refer to together as the Fredriksen Group. In addition to Seadrill Limited, the Fredriksen Group includes the following companies, among others:

 

   

Golar LNG Limited, an owner and operator of a fleet of seven liquefied natural gas, or LNG, carriers, with 11 LNG carriers and two floating storage and regasification units, or FSRUs, on order;

 

   

Golar LNG Partners LP, a master limited partnership that owns and operates a fleet of two LNG carriers and four FSRUs;

 

   

Archer Limited, an oil services company specializing in crewing offshore rigs and onshore land rigs, including associated wireline and well services;

 

   

Frontline Ltd., a crude oil tanker company which operates a fleet of 44 tankers;

 

   

Ship Finance International Limited, a marine leasing company, with a fleet of 62 vessels, including crude oil tankers, chemical tankers, oil/bulk/ore vessels, dry-bulk carriers, container vessels, offshore supply vessels, one jack-up drilling rig and three ultra-deepwater drilling rigs;

 

   

Deep Sea Supply PLC, an owner and operator of 24 anchor handling tug supply and platform supply vessels, operating in the North Sea spot market, West Africa, the Mediterranean, South East Asia and Brazil;

 

   

Northern Offshore Ltd, an owner and operator of six offshore drilling rigs and a floating production unit operating in Asia, Europe and the Northern U.K. North Sea; and

 

   

Golden Ocean Group Limited, a dry bulk shipping company that owns a fleet of 17 ships, and manages an additional 11 ships.

 

We can provide no assurance, however, that we will realize any benefits from our relationship with Seadrill or the Fredriksen Group.

 

 

3


Table of Contents

Business Strategies

 

Our primary business objective is to increase the quarterly cash distributions to our unitholders over time. We intend to accomplish this objective by executing the following strategies:

 

   

Grow Through Strategic and Accretive Acquisitions.    We intend to capitalize on opportunities to grow OPCO’s and our fleet of drilling rigs through acquisitions of offshore drilling rigs from Seadrill, either by us or by OPCO, and acquisitions of offshore drilling rigs from third parties. We will have opportunities, pursuant to the omnibus agreement, to acquire additional interests in OPCO, to acquire certain of Seadrill’s other drilling rigs with drilling contracts of five or more years, and to purchase the T-15 and the T-16 tender rigs.

 

   

Pursue Long-term Contracts and Maintain Stable Cash Flow.    We and OPCO will seek to maintain stable cash flows by continuing to pursue long-term contracts and focusing on minimizing operating downtime. Our focus on long-term contracts improves the stability and predictability of our operating cash flows, which we believe will enable us to access equity and debt capital markets on attractive terms and, therefore, facilitate our growth strategy.

 

   

Provide Excellent Customer Service and Continue to Prioritize Safety As A Key Element Of Our Operations.    We believe that Seadrill has developed a reputation as a preferred offshore drilling contractor and that we can capitalize on this reputation by continuing to provide excellent customer service. We seek to deliver exceptional performance to our customers by consistently meeting or exceeding their expectations for operational performance, including by maintaining high safety standards and minimizing downtime.

 

   

Maintain a Modern and Reliable Fleet.    OPCO has one of the youngest and most technologically advanced fleets in the industry, and plans to maintain a modern and reliable fleet.

 

We can provide no assurance, however, that we will be able to implement our business strategies described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

Competitive Strengths

 

We believe we are well positioned to achieve our primary business objectives and execute our business strategies based on the following competitive strengths:

 

   

Relationship with Seadrill.    We believe Seadrill will facilitate our acquisition and growth strategy, and we also expect to benefit from Seadrill’s operational expertise and relationships with suppliers and shipyards.

 

   

Long-term Contracts with High Quality Customers.    All of our revenues and associated cash flows are derived from OPCO’s existing multi-year contracts. As of September 30, 2012, our contracts have an average remaining term of 4.1 years, and we believe these contracts enhance the stability and predictability of our revenues.

 

   

Modern, Technologically Advanced Fleet.    We believe that OPCO has one of the most modern, technologically advanced and efficient fleets in the offshore drilling industry, which enables customers to drill wells more efficiently and more reliably than older drilling rigs. All of OPCO’s rigs were built after 2007, with an average age of approximately 2.75 years.

 

   

Financial Flexibility to Pursue Growth Opportunities.    Upon the closing of this offering, OPCO will have an undrawn $300 million credit facility with Seadrill and we expect to have access to the debt and equity markets, which will facilitate the execution of our acquisition strategy and enable us to pursue other expansion opportunities.

 

 

4


Table of Contents

We can provide no assurance, however, that we will be able to utilize our strengths described above. For further discussion of the risks that we face, please read “Risk Factors.”

 

Risk Factors

 

An investment in our common units involves risks associated with our business, our limited liability company structure and the tax characteristics of our common units. Those risks are described under “Risk Factors” beginning on page 18 of this prospectus.

 

Implications of Being an Emerging Growth Company

 

Our predecessor had less than $1.0 billion in revenue during its last fiscal year, which means that we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

the ability to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of their initial public offering;

 

   

exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting;

 

   

exemption from new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies; and

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board, or the PCAOB, requiring mandatory audit firm rotation or a supplement to our auditor’s report in which the auditor would be required to provide additional information about the audit and our financial statements.

 

We may take advantage of these provisions until the end of the fiscal year following the fifth anniversary of our initial public offering or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common units held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of these reduced burdens. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies. We are choosing to “opt out” of the extended transition period relating to the exemption from new or revised financial accounting standards and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Formation Transactions

 

General

 

We were formed in June 2012 as a Marshall Islands limited liability company to hold an interest in OPCO and its subsidiaries, which own and operate a fleet of offshore drilling rigs.

 

 

5


Table of Contents

Prior to the closing of this offering, Seadrill Operating LP will acquire from Seadrill (i) a 100% interest in the entities that own and operate the West Aquarius and the West Vencedor, and (ii) an approximate 56% interest in the entity that owns and operates the West Capella, and Seadrill Capricorn Holdings LLC will acquire from Seadrill a 100% interest in the entities that own and operate the West Capricorn.

 

At or prior to the closing of this offering, the following transactions will occur:

 

   

we will acquire a 30% limited partner interest in Seadrill Operating LP and a 100% interest in Seadrill Operating Partners GP LLC, which holds the non-economic general partner interest in Seadrill Operating LP;

 

   

we will acquire a 51% limited liability company interest in Seadrill Capricorn Holdings LLC;

 

   

we will issue to Seadrill 16,065,025 common units and 16,543,350 subordinated units, representing a 78.8% limited liability company interest in us;

 

   

we will issue to Seadrill Member LLC, a wholly-owned subsidiary of Seadrill, the Seadrill Member interest, which is a non-economic limited liability company interest in us, and all of our incentive distribution rights, which will entitle the Seadrill Member to increasing percentages of the cash we distribute in excess of $0.4456 per unit per quarter;

 

   

we will issue 8,750,000 common units to the public in this offering, representing a 21.2% limited liability company interest in us, and will use the net proceeds of this offering, estimated at $167.3 million, as consideration for the acquisition of our interest in OPCO. See “Use of Proceeds;” and

 

   

we will grant the underwriters a 30-day option to purchase up to additional 1,312,500 common units to cover over–allotments, if any.

 

In addition, at or prior to the closing of this offering:

 

   

we will enter into an omnibus agreement with Seadrill, the Seadrill Member and others governing, among other things, our and OPCO’s right to purchase the T-15 and the T-16, our rights of first offer on additional equity interests in OPCO, the extent to which Seadrill may compete with us and certain rights to purchase drilling rigs operating under contracts of five or more years;

 

   

we will enter into certain management and administrative services agreements pursuant to which Seadrill Management and Seadrill UK Ltd. will agree to provide us with significant management, administrative, financial and other support services and/or personnel;

 

   

operating subsidiaries of OPCO will enter into advisory, technical and administrative services agreements with affiliates of Seadrill pursuant to which such affiliates will agree to provide OPCO’s operating subsidiaries strategic consulting, advisory, technical and/or administrative services; and

 

   

OPCO will enter into a $300 million revolving credit facility with Seadrill, as the lender.

 

For further details on our agreements with Seadrill and its affiliates, including amounts involved, please read “Certain Relationships and Related Party Transactions.”

 

Holding Company Structure

 

We are a holding entity and will conduct our operations and business through subsidiaries, as is common with publicly traded limited liability companies, to maximize operational flexibility. Initially, we will conduct all of our operations through OPCO and its subsidiaries.

 

 

6


Table of Contents

Simplified Organizational and Ownership Structure After this Offering

 

The following diagram depicts our simplified organizational and ownership structure after giving effect to the offering and related transactions described above, assuming no exercise of the underwriters’ over-allotment option:

 

     Number of
Units
     Percentage
Ownership
 

Public Common Units

     8,750,000         21.2   

Seadrill Limited Common Units

     16,065,025         38.8   

Seadrill Limited Subordinated Units

     16,543,350         40.0   
  

 

 

    

 

 

 
     41,358,375         100
  

 

 

    

 

 

 

 

LOGO

 

 

7


Table of Contents

Our Management

 

Our operating agreement provides that our board of directors has the authority to oversee and direct our operations, management and policies on an exclusive basis. We do not employ any of our executive officers and will rely on Seadrill Management, Seadrill UK Ltd. or their affiliates to provide us with personnel who will perform executive officer services for our benefit pursuant to management and administrative services agreements and who will be responsible for our day-to-day management subject to the direction of our board of directors. All references in this prospectus to “our officers” include those personnel of Seadrill Management, Seadrill UK Ltd. or their affiliates who perform executive officer functions for our benefit.

 

Our wholly owned subsidiary, Seadrill Operating GP LLC, the general partner of Seadrill Operating LP, will manage Seadrill Operating LP’s operations and activities. Our board of directors has the authority to appoint and elect the directors of Seadrill Operating GP LLC, who in turn will appoint the officers of Seadrill Operating GP LLC. Certain of our directors and officers will also serve as directors or executive officers of Seadrill Operating GP LLC. The partnership agreement of Seadrill Operating LP will provide that certain actions relating to Seadrill Operating LP must be approved by our board of directors. These actions will include, among other things, establishing maintenance and replacement capital and other cash reserves and the determination of the amount of quarterly distributions by Seadrill Operating LP to its partners, including us. In addition, we will own 51% of the limited liability company interests in Seadrill Capricorn Holdings LLC and control its operations and activities. Please read “Certain Relationships and Related Party Transactions—OPCO Operating Agreements.”

 

We will reimburse Seadrill Management and Seadrill UK Ltd. for their reasonable costs and expenses incurred in connection with providing management, administrative, financial and other support services to us. In addition, we will pay Seadrill Management and Seadrill UK Ltd. a management fee equal to 5% of the costs and expenses incurred in connection with providing these services to us. We expect that we will pay approximately $8.2 million in total under the management and administrative services agreements for the twelve months ending September 30, 2013. There is no cap on the amount of fees and cost reimbursements that we may be required to pay pursuant to the management and administrative services agreements. For a more detailed description of this arrangement, please read “Management—Directors,” “Management—Executive Officers” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Management and Administrative Services Agreements.”

 

In addition, certain operating subsidiaries of OPCO will enter into advisory, technical and administrative service agreements with affiliates of Seadrill pursuant to which such affiliates will agree to provide OPCO’s operating subsidiaries strategic consulting, advisory, technical and/or administrative services. We expect that OPCO’s operating subsidiaries will pay affiliates of Seadrill approximately $11.2 million in total under the advisory, technical and administrative services agreements for the twelve months ending September 30, 2013. There is no cap on the amount of fees and cost reimbursements that OPCO and such operating subsidiaries may be required to pay such affiliates of Seadrill pursuant to the advisory, technical and administrative service agreements. For a more detailed description of this arrangement, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Advisory, Technical and Administrative Services Agreements.”

 

Principal Executive Offices and Internet Address; SEC Filing Requirements

 

Our registered and principal executive offices are located at 13th Floor, One America Square, 17 Crosswall, London, EC3N 2LB, United Kingdom and our phone number is +44 20 7063 7900. We expect to make our periodic reports and other information filed with or furnished to the United States Securities and Exchange Commission, or the SEC, available, free of charge, through our website at www.seadrillpartners.com, which will be operational after this offering, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Please read “Where You Can Find More Information” for an explanation of our reporting requirements as a foreign private issuer.

 

 

8


Table of Contents

Summary of Conflicts of Interest and Fiduciary Duties

 

Our directors have a duty to manage us in a manner beneficial to us, subject to the limitations described under “Conflicts of Interest and Fiduciary Duties.” Several of our directors and all of our officers hold positions with Seadrill or its affiliates, resulting in those persons owing fiduciary or other legal duties to those entities. As a result of these relationships, conflicts of interest may arise between us and our unaffiliated members on the one hand, and Seadrill and its affiliates, including the Seadrill Member, on the other hand. The resolution of these conflicts may not be in the best interest of us or our unitholders. In particular:

 

   

certain of our current executive officers and directors also serve as executive officers or directors of Seadrill, Seadrill Management or their affiliates;

 

   

Seadrill and its other affiliates may compete with us, subject to the restrictions contained in the omnibus agreement; and

 

   

we have entered into arrangements, and may enter into additional arrangements, with Seadrill and certain of its subsidiaries, relating to the purchase of additional drilling rigs, the provision of certain services to us by Seadrill Management and other matters. In the performance of their obligations under these agreements, Seadrill and its subsidiaries are generally held to a standard of care to our members as specified in these agreements.

 

For a more detailed description of our management structure, please read “Management—Directors,” “Management—Executive Officers” and “Certain Relationships and Related Party Transactions.”

 

Although a majority of our directors will over time be elected by common unitholders, the Seadrill Member will likely have substantial influence on decisions made by our board of directors. Our board of directors will have a conflicts committee composed of independent directors. Our board may, but is not obligated to, seek approval of the conflicts committee for resolutions of conflicts of interest that may arise as a result between the relationships between the Seadrill Member and its affiliates, on the one hand, and us and our unaffiliated members, on the other.

 

For a more detailed description of the conflicts of interest and duties of our directors and officers, please read “Conflicts of Interest and Fiduciary Duties.” For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

9


Table of Contents

The Offering

 

Common units offered to the public

8,750,000 common units.

 

  1,312,500 common units if the underwriters exercise their over-allotment option in full.

 

Units outstanding after this offering

24,815,025 common units and 16,543,350 subordinated units, representing a 60.0% and 40.0% limited liability company interest in us, respectively.

 

Use of proceeds

We intend to use the net proceeds from this offering as consideration for the acquisition of our interest in OPCO.

 

  The net proceeds from any exercise of the underwriters’ over-allotment option will be used to redeem common units from Seadrill.

 

  See “Use of Proceeds.”

 

Cash distributions

We intend to make minimum quarterly distributions of $0.3875 per common unit ($1.55 per unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to the Seadrill Member. In general, we will pay any cash distributions we make each quarter in the following manner:

 

   

first, to the holders of common units, until each common unit has received a minimum quarterly distribution of $0.3875 plus any arrearages from prior quarters;

 

   

second, to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $0.3875 ; and

 

   

third, to all unitholders, pro rata, until each unit has received an aggregate distribution of $0.4456.

 

  Within 45 days after the end of each fiscal quarter (beginning with the quarter ending December 31, 2012), we will distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the minimum quarterly distribution for the period from the closing of the offering through December 31, 2012 based on the actual length of the period. Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

 

 

If cash distributions to our unitholders exceed $0.4456 per unit in a quarter, holders of our incentive distribution rights (initially, the Seadrill Member) will receive increasing percentages, up to 50%, of the cash we distribute in excess of that amount. We refer to these

 

 

10


Table of Contents
 

distributions as “incentive distributions.” We must distribute all of our cash on hand at the end of each quarter, less reserves established by our board of directors to provide for the proper conduct of our business, to comply with any applicable debt instruments or to provide funds for future distributions. We refer to this cash as “available cash,” and we define its meaning in our operating agreement. The amount of available cash may be greater than or less than the aggregate amount of the minimum quarterly distribution to be distributed on all units.

 

  We believe, based on the estimates contained in and the assumptions listed under “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution,” that we will have sufficient cash available for distribution to enable us to pay the minimum quarterly distribution of $0.3875 on all of our common and subordinated units through September 30, 2013. However, unanticipated events may occur which could adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned to not place undue reliance on the forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

  Please read “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution.”

 

Subordinated units

Seadrill will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period the subordinated units are entitled to receive the minimum quarterly distribution of $0.3875 per unit only after the common units have received the minimum quarterly distribution and arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages. The subordination period generally will end if we have earned and paid at least $0.3875 on each outstanding common and subordinated unit for any three consecutive four-quarter periods ending on or after September 30, 2017.

 

  For purposes of determining whether the subordination period will end, the three consecutive four-quarter periods for which the determination is being made may include one or more quarters with respect to which arrearages in the payment of the minimum quarterly distribution on the common units have accrued, provided that all such arrearages have been repaid prior to the end of each such four-quarter period. If the subordination period ends as a result of us having met the tests described above, all subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages.

 

 

11


Table of Contents
  In addition, at any time on or after September 30, 2017, provided there are no arrearages in the payment of the minimum quarterly distribution on the common units and subject to approval by our conflicts committee, the holder or holders of a majority of our subordinated units will have the option to convert each subordinated unit into a number of common units at a ratio that may be less than one-to-one on a basis equal to the percentage of available cash from operating surplus paid out over the previous four-quarter period in relation to the total amount of distributions required to pay the minimum quarterly distribution in full over the previous four quarters.

 

  Please read “How We Make Cash Distributions—Subordination Period.”

 

Seadrill Member’s right to reset the target distribution levels

The Seadrill Member, as the initial holder of all of our incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and the Seadrill Member has received incentive distributions at the highest level to which it is entitled (50%) for each of the prior four consecutive fiscal quarters and the amount of such distribution did not exceed adjusted operating surplus, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election, and to receive common units in connection with this reset.

 

  For a more detailed description of the Seadrill Member’s right to reset the target distribution levels upon which the incentive distribution payments are based and the concurrent right of the Seadrill Member to receive common units in connection with this reset, please read “How We Make Cash Distributions—Seadrill Member’s Right to Reset Incentive Distribution Levels.”

 

Issuance of additional units

We can issue an unlimited number of additional units, including units that are senior to the common units in rights of distribution, liquidation and voting, on the terms and conditions determined by our board of directors, without the consent of our unitholders. Please read “Units Eligible for Future Sale” and “The Operating Agreement—Issuance of Additional Interests.”

 

Board of directors

We will hold a meeting of the members every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. The Seadrill Member has the right to appoint three of the seven members of our board of directors who will serve as directors for terms determined by the Seadrill Member. At our 2013 annual meeting, the common unitholders will elect four of our directors. The four directors elected by our common unitholders at our 2013 annual meeting will be divided into three classes to be elected by our common unitholders annually on a staggered basis to serve for three-year terms. The majority of our directors are expected to be non-United States citizens or residents.

 

 

12


Table of Contents

Voting rights

Each outstanding common unit is entitled to one vote on matters subject to a vote of common unitholders. However, if at any time, any person or group owns beneficially more than 5% of any class of units then outstanding, any such units owned by that person or group in excess of 5% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes under our operating agreement, unless otherwise required by law. The voting rights of any such unitholders in excess of 5% will effectively be redistributed pro rata among the other common unitholders holding less than 5% of the voting power of all classes of units entitled to vote. The Seadrill Member, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 5% limitation except with respect to voting their common units in the election of the elected directors.

 

  You will have no right to elect the Seadrill Member on an annual or other continuing basis. The Seadrill Member may not be removed except by a vote of the holders of at least 662/3% of the outstanding units, including any units owned by the Seadrill Member and its affiliates, voting together as a single class. Upon consummation of this offering, Seadrill will own 16,065,025 of our common units and all of our subordinated units, representing a 78.8% limited liability company interest in us. If the underwriters’ over-allotment option is exercised in full, Seadrill will own 14,752,525 of our common units and all of our subordinated units, representing a 75.7% limited liability company interest in us. As a result, you will initially be unable to remove the Seadrill Member without Seadrill’s consent because Seadrill will own sufficient units upon completion of this offering to be able to prevent the Seadrill Member’s removal. Please read “The Operating Agreement—Voting Rights.”

 

Limited call right

If at any time the Seadrill Member and its affiliates own more than 80% of the outstanding common units, the Seadrill Member has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price equal to the greater of (x) the average of the daily closing prices of the common units over the 20 trading days preceding the date three days before the notice of exercise of the call right is first mailed and (y) the highest price paid by the Seadrill Member or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. The Seadrill Member is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.

 

U.S. federal income tax considerations

We are organized as a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes. Consequently, all or a portion of the distributions you receive from us

 

 

13


Table of Contents
 

will constitute dividends for such purposes. The remaining portion of such distributions will be treated first as a non-taxable return of capital to the extent of your tax basis in your common units and, thereafter, as capital gain. We estimate that if you hold the common units that you purchase in this offering through the period ending December 31, 2014, the distributions you receive, on a cumulative basis, that will constitute dividends for U.S. federal income tax purposes will be less than 20% of the total cash distributions received during that period. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions” for the basis for this estimate. Please also read “Risk Factors—Tax Risks” for a discussion relating to the taxation of dividends. For a discussion of other material U.S. federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Considerations,” and for a discussion of material income tax consequences that may be relevant to prospective unitholders under Marshall Islands law, please read “Non-United States Tax Considerations.”

 

Exchange listing

The common units have been approved for listing on the New York Stock Exchange under the symbol “SDLP,” subject to official notice of issuance.

 

 

14


Table of Contents

Summary Financial and Operating Data

 

The following table presents, in each case for the periods and as of the dates indicated, summary historical financial and operating data of Seadrill Partners LLC Predecessor, which includes the subsidiaries of Seadrill that have interests in the drilling rigs in OPCO’s initial fleet and the associated service companies. The summary historical financial data of Seadrill Partners LLC Predecessor as of December 31, 2011 and 2010 and for the years ended December 31, 2011 and 2010 are derived from the audited Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor, prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which are included elsewhere in this prospectus. The summary historical financial data of Seadrill Partners LLC Predecessor as of June 30, 2012 and for the six months ended June 30, 2012 and 2011 are derived from the unaudited Condensed Interim Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor, prepared in accordance with U.S. GAAP, which are included elsewhere in this prospectus. The balance sheet data for the six months ended June 30, 2011 has been prepared from our financial records on a basis consistent with the historical financial information of Seadrill Partners LLC Predecessor.

 

The following financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto, our unaudited Pro Forma Combined Consolidated Balance Sheet and the notes thereto and our forecasted results of operations for the twelve months ending September 30, 2013, in each case included elsewhere in this prospectus.

 

Our financial position, results of operations and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of Seadrill in the periods for which historical financial data are presented below, and such data may not be indicative of our future operating results or financial performance.

 

     Six Months Ended June 30,     Year Ended December 31,  
     2012     2011     2011     2010  
     (in millions)  

Statement of Operations Data:

        

Total operating revenues

   $ 275.2      $ 247.8      $ 497.2      $ 478.3   

Rig operating expenses(1)

     89.1        78.4        157.5        131.8   

Reimbursable expenses(2)

     4.1        5.3        11.7        8.7   

Depreciation and amortization

     30.9        29.4        57.8        56.8   

General and administrative expenses

     12.8        7.6        17.0        11.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     136.9        120.7        244.0        208.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     138.3        127.1        253.2        269.6   

Interest income

     1.2        —          —          —     

Interest expense

     (18.0     (16.0     (31.9     (35.6

Loss on interest rate swaps

     (10.5     (8.6     (52.1     (22.5

Foreign exchange (loss)/gain

     (1.3     0.5        (0.5     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     109.7        103.0        168.7        211.5   

Income taxes

     (15.8     (14.1     (27.6     (35.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 93.9      $ 88.9      $ 141.1      $ 176.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheet Data (at end of period):

        

Cash and cash equivalents

   $ 2.9      $ 3.8      $ 15.4      $ 5.2   

Drilling rigs

     2,127.3        1,384.4        1,334.6        1,409.5   

Total assets

     2,298.5        1,969.6        2,210.5        1,893.2   

Interest bearing debt (including current portion)

     1,240.1        836.2        1,330.5        777.3   

Owner’s equity

     934.4        981.9        793.0        1,034.7   

 

 

15


Table of Contents
     Six Months Ended June 30,     Year Ended December 31,  
     2012     2011     2011     2010  
     (in millions, except fleet data)  

Cash Flow Data:

        

Net cash provided by operating activities

   $ 98.1      $ 108.9      $ 293.6      $ 244.7   

Net cash used in investing activities

     (57.2     (18.6     (392.3     (140.6

Net cash provided by (used in) financing activities

     (53.4     (91.7     108.9        (114.8

Fleet Data(3):

        

Number of drilling rigs in operation at end of period

     3        3        3        3   

Average age of drilling rigs in operation at end of period (years)

     3.0        2.0        2.5        1.5   

Other Financial Data:

        

Adjusted EBITDA(4)

   $ 163.2      $ 150.5      $ 299.0      $ 315.3   

Capital expenditures

     57.2        82.6        392.3        140.6   

 

(1)   Rig operating expenses are related to the drilling rigs we have in operation and include the remuneration of offshore crews and onshore rig supervision staff, as well as expenses for repair and maintenance.
(2)   Reimbursable expenses are incurred at the request of customers, and include provision of supplies, personnel and other services.
(3)   The West Capricorn began earning a contractual pre-commencement standby rate on June 10, 2012 and is not included in the number of drilling rigs in operation or the average age of drilling rigs in operation at the end of the period.

 

 

16


Table of Contents
(4)   Non-GAAP Financial Measure

Adjusted EBITDA. Earnings before interest, other financial items, depreciation and amortization, amortization of mobilization revenue and expense and taxes is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our financial and operating performance. We believe that adjusted EBITDA assists our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization, amortization of mobilization revenue and expense and taxes, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including adjusted EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common units.

Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following table reconciles adjusted EBITDA to net income, the most directly comparable GAAP financial measure, for the periods presented.

 

     Six Months Ended
June 30,
    Year Ended
December 31,
 
     2012     2011     2011     2010  
     (in millions)  

Net income

   $ 93.8      $ 88.9      $ 141.1      $ 176.5   

Interest income

     (1.2     —          —          —     

Interest expense

     18.0        16.0        31.9        35.6   

Other financial items(a)

     11.8        8.1        52.6        22.5   

Depreciation and amortization

     29.8        28.1        55.5        54.9   

Amortization of mobilization revenue and expense(b)

     (4.8     (4.7     (9.7     (9.2

Income taxes

     15.8        14.1        27.6        35.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 163.2      $ 150.5      $ 299.0      $ 315.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)  

Other financial items consists of loss on interest rate swaps and foreign exchange (loss)/gain.

(b)  

Amortization of mobilization revenue and expense is amortization of lump sum mobilization revenue received prior to the commencement of the drilling contracts net of amortized expense incurred during the mobilization period.

 

 

17


Table of Contents

RISK FACTORS

 

Common units are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

 

If any of the following risks were actually to occur, our business, financial condition, results of operations and cash flows could be materially adversely affected. In that case, we might not be able to make distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.

 

Risks Inherent in Our Business

 

Because our ownership interest in OPCO currently represents our only cash-generating asset, our cash flow initially will depend completely on OPCO’s ability to make distributions to its owners, including us.

 

Our cash flow initially will depend completely on OPCO’s distributions to us as one of its owners. The amount of cash OPCO can distribute to its owners will principally depend upon the amount of cash it generates from its operations, which may fluctuate from quarter to quarter based on, among other things:

 

   

the dayrates it obtains under its drilling contracts;

 

   

the level of its rig operating costs, such as the cost of crews, repair, maintenance and insurance;

 

   

the levels of reimbursable revenues and expenses;

 

   

its ability to re-contract its drilling rigs upon expiration or termination of an existing drilling contract and the dayrates it can obtain under such contracts;

 

   

delays in the delivery of any new drilling rigs and the beginning of payments under drilling contracts relating to those drilling rigs;

 

   

the timeliness of payments from customers under drilling contracts;

 

   

prevailing global and regional economic and political conditions;

 

   

time spent mobilizing drilling rigs to the customer location;

 

   

changes in local income tax rates;

 

   

currency exchange rate fluctuations and currency controls; and

 

   

the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of its business.

 

The actual amount of cash OPCO will have available for distribution also will depend on other factors such as:

 

   

the level of capital and operating expenditures it makes, including for maintaining and replacing drilling rigs or modifying existing drilling rigs to meet customer requirements and complying with regulations or to upgrade technology on OPCO’s drilling rigs;

 

   

its debt service requirements, including fluctuations in interest rates, and restrictions on distributions contained in its debt instruments;

 

   

fluctuations in its working capital needs;

 

   

number of days of rig downtime or less than full utilization, which would result in a reduction of revenues under a drilling contract;

 

18


Table of Contents
   

whether we or OPCO exercise the option to purchase the T-15 or the T-16 from Seadrill;

 

   

the ability to make working capital borrowings and availability under the sponsor credit facility; and

 

   

the amount of any cash reserves, including reserves for future maintenance and replacement capital expenditures, working capital and other matters, established by our board of directors.

 

OPCO’s operating agreements provide that it will distribute its available cash to its owners on a quarterly basis. OPCO’s available cash includes cash on hand less any reserves that may be appropriate for operating its business. The amount of OPCO’s quarterly distributions, including the amount of cash reserves not distributed, will be determined by our board of directors.

 

The amount of cash OPCO generates from operations may differ materially from its profit or loss for the period, which will be affected by non-cash items. As a result of this and the other factors mentioned above, OPCO may make cash distributions during periods when it records losses and may not make cash distributions during periods when it records net income.

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units and subordinated units.

 

The source of our earnings and cash flow initially will consist exclusively of cash distributions from OPCO. Therefore, the amount of cash distributions we are able to make to our unitholders will fluctuate, initially, based on the level of distributions made by OPCO to its owners, including us, and, in the future, based on the level of cash distributions made by OPCO and any other subsidiaries through which we later conduct operations. OPCO or any such operating subsidiaries may make quarterly distributions at levels that will not permit us to make distributions to our common unitholders at the minimum quarterly distribution level or to increase our quarterly distributions in the future. In addition, while we would expect to increase or decrease distributions to our unitholders if OPCO increases or decreases distributions to us, the timing and amount of any such increased or decreased distributions will not necessarily be comparable to the timing and amount of the increase or decrease in distributions made by OPCO to us.

 

Our ability to distribute to our unitholders any cash we may receive from OPCO or any future operating subsidiaries is or may be limited by a number of factors, including, among others:

 

   

interest expense and principal payments on any indebtedness we incur;

 

   

restrictions on distributions contained in any of our current or future debt agreements;

 

   

fees and expenses of us, the Seadrill Member, its affiliates or third parties we are required to reimburse or pay, including expenses we will incur as a result of being a public company; and

 

   

reserves our board of directors believes are prudent for us to maintain for the proper conduct of our business or to provide for future distributions.

 

Many of these factors will reduce the amount of cash we may otherwise have available for distribution. We may not be able to pay distributions, and any distributions we make may not be at or above our minimum quarterly distribution. The actual amount of cash that is available for distribution to our unitholders will depend on several factors, many of which are beyond our control.

 

The assumptions underlying our forecast of cash available for distribution are inherently uncertain and are subject to risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

The forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” includes our forecast of operating results and cash flows for the twelve months ending September 30, 2013. The financial forecast has been prepared by management and we have not received an

 

19


Table of Contents

opinion or report on it from our or any independent auditor. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially.

 

The amount of available cash we need to pay the minimum quarterly distribution for four quarters on the common units and the subordinated units to be outstanding immediately after this offering is $64.1 million. During the twelve months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2012, we would have had cash available for distribution of $48.1 million, $44.3 million and $26.4 million, respectively, which would not have been sufficient to pay the minimum quarterly distribution on all of our common units and subordinated units, as the historical periods did not include results, except for pre-commencement revenue in June 2012, for the West Capricorn, which commenced operations in July 2012. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects.” For a forecast of our ability to pay the full minimum quarterly distribution on our common units and subordinated units for the twelve months ending September 30, 2013, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

Our ability to grow may be adversely affected by our cash distribution policy. OPCO’s ability to meet its financial needs and grow may be adversely affected by its cash distribution policy.

 

Our cash distribution policy, which is consistent with our operating agreement, requires us to distribute all of our available cash each quarter. Accordingly, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations.

 

In addition, OPCO’s cash distribution policy requires it to distribute all of its available cash each quarter. In determining the amount of cash available for distribution by OPCO, our board of directors will approve the amount of cash reserves to set aside for us and OPCO, including reserves for anticipated maintenance and replacement capital expenditures, working capital and other matters. OPCO will also rely upon external financing sources, including commercial borrowings, to fund its capital expenditures. Accordingly, to the extent OPCO does not have sufficient cash reserves or is unable to obtain financing, its cash distribution policy may significantly impair its ability to meet its financial needs or to grow.

 

OPCO must make substantial capital and operating expenditures to maintain the operating capacity of its fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.

 

OPCO must make substantial capital and operating expenditures to maintain and replace, over the long-term, the operating capacity, of its fleet. We estimate that maintenance and replacement capital expenditures for OPCO will average approximately $76.7 million per year, including $47.2 million for replacing current drilling rigs at the end of their useful lives. Maintenance and replacement capital expenditures include capital expenditures for maintenance (including special classification surveys) and capital expenditures associated with modifying an existing drilling rig, including to upgrade its technology, acquiring a new drilling rig or otherwise replacing current drilling rigs at the end of their useful lives to the extent these expenditures are incurred to maintain or replace the operating capacity of OPCO’s fleet. These expenditures could vary significantly from quarter to quarter and could increase as a result of changes in:

 

   

the cost of labor and materials;

 

   

customer requirements;

 

   

fleet size;

 

20


Table of Contents
   

the cost of replacement drilling rigs;

 

   

the cost of replacement parts for existing drilling rigs;

 

   

the geographic location of the drilling rigs;

 

   

length of drilling contracts;

 

   

governmental regulations and maritime self-regulatory organization and technical standards relating to safety, security or the environment; and

 

   

industry standards.

 

Our operating agreement requires our board of directors to deduct estimated maintenance and replacement capital expenditures, instead of actual maintenance and replacement capital expenditures, from operating surplus each quarter in an effort to reduce fluctuations in operating surplus as a result of variations in actual maintenance and replacement capital expenditures each quarter. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our conflicts committee at least once a year. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted from operating surplus. If our board of directors underestimates the appropriate level of estimated maintenance and replacement capital expenditures, we may have less cash available for distribution in future periods when actual capital expenditures exceed our previous estimates.

 

If capital expenditures are financed through cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished, our financial leverage could increase or our unitholders could be diluted.

 

Use of cash from operations to expand or maintain OPCO’s fleet will reduce cash available for OPCO to distribute to us and us to distribute to our unitholders. Our ability and that of OPCO to obtain bank financing or our ability to access debt and equity capital markets may be limited by our financial condition or that of OPCO, respectively, at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions, changes in the offshore drilling industry and contingencies and uncertainties that are beyond our control. Failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, results of operations and financial condition and on our ability to make cash distributions. Even if we are successful in obtaining necessary funds, the terms of any debt financings could limit OPCO’s ability to pay distributions to us and our ability to pay cash distributions to unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to pay the minimum quarterly distribution to unitholders, both of which could have a material adverse effect on our ability to make cash distributions.

 

OPCO’s debt levels may limit its or our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to unitholders.

 

Upon completion of this offering and the related transactions, we estimate that our consolidated debt (including indebtedness outstanding under OPCO’s financing agreements) will be approximately $1,192.5 million. Following this offering, we will continue to have the ability to incur additional debt. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

OPCO’s level of debt could have important consequences to it and us, including the following:

 

   

the ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be limited or such financing may not be available on favorable terms;

 

21


Table of Contents
   

we and OPCO will need a substantial portion of our cash flow to make principal (including amortization payments as required by OPCO’s financing agreements) and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

   

such debt may make us each more vulnerable to competitive pressures or a downturn in our business or the economy generally than our competitors with less debt; and

 

   

such debt may limit our and OPCO’s flexibility in responding to changing business and economic conditions.

 

Our ability to service our consolidated debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our consolidated current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our consolidated debt, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms, or at all.

 

Furthermore, OPCO’s financing agreements contain cross-default clauses which are linked to other indebtedness of Seadrill. In the event of a default by Seadrill under one of its other credit facilities, we could be adversely affected by the cross-default clauses, even if Seadrill cures any such default.

 

Financing agreements containing operating and financial restrictions and other covenants may restrict OPCO’s and our business and financing activities.

 

The operating and financial restrictions and covenants in the financing agreements of Seadrill, OPCO or us and any future financing agreements of Seadrill, OPCO or us, could adversely affect our ability and that of OPCO, respectively, to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, subject to certain exceptions, the financing agreements may restrict our ability or that of OPCO to:

 

   

enter into other financing agreements;

 

   

incur additional indebtedness;

 

   

create or permit liens on our respective assets;

 

   

sell its drilling rigs or the capital stock of our respective subsidiaries;

 

   

change the nature of our business;

 

   

make investments;

 

   

pay distributions to our unitholders or to us, respectively;

 

   

change the management and/or ownership of the drilling rigs;

 

   

make capital expenditures; and

 

   

compete effectively to the extent our competitors are subject to less onerous restrictions.

 

For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

OPCO’s ability to comply with the restrictions and covenants, including financial ratios and tests, contained in any financing agreements of Seadrill, OPCO or us is dependent on future performance and may be affected by events beyond its control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, OPCO’s ability to comply with these covenants may be impaired. If OPCO is

 

22


Table of Contents

unable to comply with the restrictions and covenants in the agreements governing its indebtedness or in current or future debt financing agreements, there could be a default under the terms of those agreements. Seadrill’s obligations under such facilities could exceed the indebtedness of OPCO and its subsidiaries under such agreements. If a default occurs under these agreements, lenders could terminate their commitments to lend and/or accelerate the outstanding loans and declare all amounts borrowed due and payable. OPCO pledges its drilling rigs as security for Seadrill’s obligations under such agreements. If Seadrill’s lenders were to foreclose on OPCO’s drilling rigs in the event of a default, this may adversely affect OPCO’s and our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. In addition, all of OPCO’s loan agreements contain cross-default provisions, meaning that if OPCO is in default under one of its loan agreements, amounts outstanding under its other loan agreements may also be accelerated and become due and payable. If any of these events occur, we cannot guarantee that OPCO’s assets will be sufficient to repay in full all of its outstanding indebtedness, and OPCO may be unable to find alternative financing. Even if OPCO could obtain alternative financing, that financing might not be on terms that are favorable or acceptable. Any of these events would adversely affect our ability to make distributions to our unitholders and cause a decline in the market price of our common units. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

 

Restrictions in OPCO’s debt agreements may prevent it or us from paying distributions.

 

The payment of principal and interest on OPCO’s debt will reduce cash available for distribution to us and to our unitholders. In addition, OPCO’s current financing agreements contain provisions that, upon the occurrence of certain events, permit lenders to terminate their commitments and/or accelerate the outstanding loans and declare all amounts due and payable, which may prevent us from paying distributions to our unitholders. These events include, among others:

 

   

a failure to pay any principal, interest, fees, expenses or other amounts when due;

 

   

a violation of covenants requiring us to maintain certain levels of insurance coverage, minimum liquidity levels, minimum interest coverage ratios and minimum current ratios;

 

   

a default under any other provision of the financing agreement, as well as a default under any provision of related security documents;

 

   

a material breach of any representation or warranty contained in the applicable financing agreement;

 

   

a default under other indebtedness;

 

   

a failure to comply with a final legal judgment from a court of competent jurisdiction;

 

   

a bankruptcy or insolvency event;

 

   

a suspension or cessation of our business;

 

   

the destruction or abandonment of our assets, or the seizure or appropriation thereof by any governmental, regulatory or other authority if the lenders determine such occurrence could have a material adverse effect on our business or our ability to satisfy our obligations under or otherwise comply with the applicable financing agreement;

 

   

the invalidity, unlawfulness or repudiation of any financing agreement or related security document;

 

   

an enforcement of any liens or other encumbrances covering our assets; and

 

   

the occurrence of certain other events that the lenders believe is likely to have a material adverse effect on our business or our ability to satisfy our obligations under or otherwise comply with the applicable financing agreement.

 

In connection with this offering, OPCO will enter into a $300 million revolving credit facility with Seadrill, as the lender, which we refer to as the sponsor credit facility. The sponsor credit facility will contain customary covenants and provisions relating to events of default. Furthermore, we expect that OPCO’s future financing agreements will contain similar provisions. For more information regarding these financing agreements, please read “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

 

23


Table of Contents

Seadrill’s failure to comply with covenants and other provisions in its existing or future financing agreements could result in cross-defaults under OPCO’s existing financing agreements, which would have a material adverse effect on us.

 

OPCO’s existing financing agreements contain cross-default provisions that may be triggered if Seadrill defaults under the terms of its existing or future financing agreements. In the event of a default by Seadrill under one of its financing agreements, the lenders under OPCO’s existing financing agreements could determine that OPCO is in default under its financing agreements. This could result in the acceleration of the maturity of such debt under these agreements and the lenders thereunder may foreclose upon any collateral securing that debt, including OPCO’s drilling rigs, even if Seadrill were to subsequently cure its default. In the event of such acceleration and foreclosure, OPCO might not have sufficient funds or other assets to satisfy all of its obligations, which would have a material adverse effect on our business, results of operations and financial condition and would significantly reduce our ability, or make us unable, to make distributions to our unitholders for so long as such default is continuing.

 

The failure to consummate or integrate acquisitions in a timely and cost-effective manner could have an adverse effect on our financial condition and results of operations.

 

Acquisitions that expand our drilling operations are an important component of our business strategy. For example, we intend to purchase the T-15 and the T-16 from Seadrill if we are able to reach an agreement with Seadrill regarding their purchase price. Under the omnibus agreement that we will enter into with Seadrill in connection with the closing of this offering, we and OPCO will have the right to purchase the T-15 and the T-16 from Seadrill at any time within 24 months after their respective acceptance by the customer under the applicable drilling contract. We will not be obligated to purchase either of these drilling rigs at the applicable determined price, and, accordingly, we may not complete the purchase of either of such drilling rigs.

 

We believe that other acquisition opportunities may arise from time to time, and any such acquisition could be significant. Any acquisition could involve the payment by us of a substantial amount of cash, the incurrence of a substantial amount of debt or the issuance of a substantial amount of equity. Certain acquisition and investment opportunities may not result in the consummation of a transaction. In addition, we may not be able to obtain acceptable terms for the required financing for any such acquisition or investment that arises. We cannot predict the effect, if any, that any announcement or consummation of an acquisition would have on the trading price of our common units. Our future acquisitions could present a number of risks, including the risk of incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets, the risk of failing to successfully and timely integrate the operations or management of any acquired businesses or assets and the risk of diverting management’s attention from existing operations or other priorities. We may also be subject to additional costs related to compliance with various international laws in connection with such acquisition. If we fail to consummate and integrate our acquisitions in a timely and cost-effective manner, our financial condition, results of operations and cash available for distribution could be adversely affected.

 

Our growth depends on the level of activity in the offshore oil and natural gas industry, which is significantly affected by, among other things, volatile oil and natural gas prices, and may be materially and adversely affected by a decline in the offshore oil and natural gas industry.

 

The offshore drilling industry is cyclical and volatile. Our growth strategy focuses on expansion in the offshore drilling sector, which depends on the level of activity in oil and natural gas exploration, development and production in offshore areas worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments affect customers’ drilling programs. Oil and natural gas prices and market expectations of potential changes in these prices also significantly affect this level of activity and demand for drilling rigs.

 

 

24


Table of Contents

Oil and natural gas prices are extremely volatile and are affected by numerous factors beyond our control, including the following:

 

   

worldwide production and demand for oil and natural gas;

 

   

the cost of exploring for, developing, producing and delivering oil and natural gas;

 

   

expectations regarding future energy prices;

 

   

advances in exploration, development and production technology;

 

   

the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain levels and pricing;

 

   

the level of production in non-OPEC countries;

 

   

government regulations, including restrictions on offshore transportation of oil and natural gas;

 

   

local and international political, economic and weather conditions;

 

   

domestic and foreign tax policies;

 

   

development and exploitation of alternative fuels;

 

   

the policies of various governments regarding exploration and development of their oil and natural gas reserves;

 

   

accidents, severe weather, natural disasters and other similar incidents relating to the oil and natural gas industry; and

 

   

the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East or other geographic areas or further acts of terrorism in the United States, or elsewhere.

 

Declines in oil and natural gas prices for an extended period of time, or market expectations of potential decreases in these prices, could negatively affect our future growth. Sustained periods of low oil and natural gas prices typically result in reduced exploration and drilling because oil and natural gas companies’ capital expenditure budgets are subject to cash flow from such activities and are therefore sensitive to changes in energy prices. These changes in commodity prices can have a dramatic effect on rig demand, and periods of low demand can cause excess rig supply and intensify the competition in the industry which often results in drilling rigs, particularly older and less technologically-advanced drilling rigs, being idle for long periods of time. We cannot predict the future level of demand for drilling rigs or future conditions of the oil and natural gas industry. Any decrease in exploration, development or production expenditures by oil and natural gas companies could reduce our revenues and materially harm our business, results of operations and cash available for distribution.

 

In addition to oil and natural gas prices, the offshore drilling industry is influenced by additional factors, including:

 

   

the availability of competing offshore drilling rigs;

 

   

the level of costs for associated offshore oilfield and construction services;

 

   

oil and natural gas transportation costs;

 

   

the level of rig operating costs including crew and maintenance;

 

   

the discovery of new oil and natural gas reserves; and

 

   

regulatory restrictions on offshore drilling.

 

Any of these factors could reduce demand for drilling rigs and adversely affect our business and results of operations.

 

25


Table of Contents

We depend on certain affiliates of Seadrill, including Seadrill Management, to assist us and OPCO in operating and expanding our business.

 

Our ability and that of OPCO to enter into new drilling contracts and expand our customer and supplier relationships will depend largely on our ability to leverage our relationship with Seadrill and its reputation and relationships in the offshore drilling industry. If Seadrill suffers material damage to its reputation or relationships, it may harm our ability to:

 

   

renew existing drilling contracts upon their expiration;

 

   

obtain new drilling contracts;

 

   

efficiently and productively carry out our drilling activities;

 

   

successfully interact with shipyards;

 

   

obtain financing and maintain insurance on commercially acceptable terms;

 

   

maintain access to capital under the sponsor credit facility OPCO and Seadrill will enter into prior to the closing of this offering; or

 

   

maintain satisfactory relationships with suppliers and other third parties.

 

In addition, pursuant to the management and administrative services agreements, Seadrill Management and Seadrill UK Ltd. will provide us with significant management, administrative, financial and other support services and/or personnel. In addition, affiliates of Seadrill will provide advisory, technical and administrative services to OPCO’s fleet pursuant to advisory, technical and administrative services agreements. Our and OPCO’s operational success and ability to execute our growth strategy will depend significantly upon the satisfactory performance of these services. Our business will be harmed if Seadrill and its affiliates fail to perform these services satisfactorily, if they cancel their agreements with us or if they stop providing these services to us. Please read “Certain Relationships and Related Party Transactions.”

 

OPCO’s drilling contracts may not permit OPCO to fully recoup its costs in the event of a rise in expenses.

 

OPCO’s drilling contracts have dayrates that are fixed over the contract term. In order to mitigate the effects of inflation on revenues from these term contracts, all of OPCO’s drilling contracts include escalation provisions. These provisions allow OPCO to adjust the dayrates based on certain published indices. These indices are designed to recompense OPCO for certain cost increases, including wages, insurance and maintenance costs. However, actual cost increases may result from events or conditions that do not cause correlative changes to the applicable indices. Furthermore, certain indices are updated semi-annually, and therefore may be outdated at the time of adjustment. In addition, the adjustments are normally performed on a semi-annual or annual basis. For these reasons, the timing and amount received as a result of the adjustments may differ from the timing and amount of expenditures associated with actual cost increases, which could adversely affect OPCO’s and our cash flow and ability to make cash distributions.

 

An increase in operating and maintenance costs could materially and adversely affect our financial performance.

 

Our operating expenses and maintenance costs depend on a variety of factors including crew costs, provisions, equipment, insurance, maintenance and repairs and shipyard costs, many of which are beyond our control and affect the entire offshore drilling industry. During periods after which a rig becomes idle, we may decide to “warm stack” the rig, which means the rig is kept fully operational and ready for redeployment, and maintains most of its crew. As a result, our operating expenses during a warm stacking will not be substantially different than those we would incur if the rig remained active. We may also decide to “cold stack” the rig, which the means the rig is stored in a harbor, shipyard or a designated offshore area, and the crew is assigned to an active rig or dismissed. However, reductions in costs following the decision to cold stack a rig may not be

 

26


Table of Contents

immediate, as a portion of the crew may be required to prepare the rig for such storage. Moreover, as our rigs are mobilized from one geographic location to another, the labor and other operating and maintenance costs can vary significantly. Operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues. Operating revenues may fluctuate as a function of changes in supply of offshore drilling rigs and demand for contract drilling services, which in turn, affect dayrates, and the economic utilization and performance of OPCO’s fleet of drilling rigs. However, operating costs are generally related to the number of drilling rigs in operation and the cost level in each country or region where such drilling rigs are located. In addition, equipment maintenance costs fluctuate depending upon the type of activity that the drilling rig is performing and the age and condition of the equipment. Escalation provisions contained in OPCO’s drilling contracts may not be adequate to substantially mitigate these increased operating and maintenance costs. In connection with new assignments, OPCO might incur expenses relating to preparation for operations under a new contract. The expenses may vary based on the scope and length of such required preparations and the duration of the contractual period over which such expenditures are amortized. In situations where OPCO’s drilling rigs incur idle time between assignments, the opportunity to reduce the size of its crews on those drilling rigs is limited as the crews will be engaged in preparing the drilling rig for its next contract. When a drilling rig faces longer idle periods, reductions in costs may not be immediate as some of the crew may be required to prepare drilling rigs for stacking and maintenance in the stacking period. Should drilling rigs be idle for a longer period, OPCO may not be successful in redeploying crew members, who are not required to maintain the drilling rigs, and therefore may not be successful in reducing our costs in such cases.

 

Any limitation in the availability or operation of OPCO’s four drilling rigs could have a material adverse effect on our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders.

 

OPCO’s fleet currently consists of two semi-submersible drilling rigs, one drillship and one tender rig. If any of OPCO’s drilling rigs are unable to generate revenues as a result of the expiration or termination of its drilling contracts or sustained periods of downtime, our results of operations and financial condition could be materially adversely affected.

 

Some of OPCO’s customers have the right to terminate their drilling contracts without cause upon the payment of an early termination fee. However, such payments may not fully compensate OPCO for the loss of the drilling contract. Under certain circumstances OPCO’s contracts may permit customers to terminate contracts early without the payment of any termination fees as a result of non-performance, total loss of the rigs, extended periods of downtime or impaired performance caused by equipment or operational issues, or sustained periods of downtime due to force majeure events beyond OPCO’s control. During periods of challenging market conditions, OPCO may be subject to an increased risk of its customers seeking to repudiate their contracts, including through claims of non-performance. OPCO’s customers’ ability to perform their obligations under their drilling contracts may also be negatively impacted by the prevailing uncertainty surrounding the development of the world economy and the credit markets. If a customer cancels its contract, and OPCO is unable to secure a new contract on a timely basis and on substantially similar terms, or if a contract is suspended for an extended period of time or if a contract is renegotiated on different terms, it could adversely affect our business, results of operations and financial condition and may reduce the amount of cash OPCO has available to distribute to us and that we have available for distribution to our unitholders. For more information regarding the termination provisions of OPCO’s drilling contracts, please read “Business—Drilling Contracts.”

 

OPCO currently derives all its revenue from four customers, and the loss of any of these customers could result in a significant loss of revenues and cash flow.

 

OPCO currently derives all of its revenues and cash flow from four customers. For the year ended December 31, 2011 and the six months ended June 30, 2012, ExxonMobil accounted for 42% and 43%, Total accounted for 41% and 39%, and Chevron accounted for 17% and 16% of OPCO’s total revenues, respectively. For the six months ended June 30, 2012, BP accounted for 2% of OPCO’s total revenues. All of OPCO’s drilling

 

27


Table of Contents

contracts have fixed terms, but may be terminated early due to certain events or might nevertheless be lost in the event of unanticipated developments, such as the deterioration in the general business or financial condition of a customer, resulting in its inability meet its obligations under our contracts.

 

If any of OPCO’s drilling contracts are terminated, OPCO may be unable to re-deploy the drilling rig subject to such terminated contract on terms as favorable to it as its current drilling contracts. If OPCO is unable to re-deploy a drilling rig for which the drilling contract has been terminated, OPCO will not receive any revenues from that drilling rig, but it will be required to pay expenses necessary to maintain the drilling rig in proper operating condition. This may cause OPCO to receive decreased revenues and cash flows from having fewer drilling rigs operating in its fleet. The loss of any customers, drilling contracts or drilling rigs, or a decline in payments under any of OPCO’s drilling contracts, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

 

In addition, our drilling contracts subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the offshore drilling industry, prevailing prices for oil and natural gas, the overall financial condition of the counterparty, the dayrates received for specific types of drilling rigs and the level of expenses necessary to maintain drilling activities. In addition, in depressed market conditions, our customers may no longer need a drilling rig that is currently under contract or may be able to obtain a comparable drilling rig at a lower dayrate. Should a counterparty fail to honor its obligations under an agreement with us, we could sustain losses, which could have a material adverse effect on our business, financial condition, results of operations and cash available for distribution.

 

OPCO may not be able to renew or obtain new and favorable contracts for drilling rigs whose contracts are expiring or are terminated, which could adversely affect its revenues and profitability.

 

OPCO’s ability to renew expiring contracts or obtain new contracts will depend on the prevailing market conditions at the time. If OPCO is not able to obtain new contracts in direct continuation with existing contracts, or if new contracts are entered into at dayrates substantially below the existing dayrates or on terms otherwise less favorable compared to existing contracts terms, its revenues and profitability could be adversely affected.

 

The offshore drilling markets in which we compete experience fluctuations in the demand for drilling services, as measured by the level of exploration and development expenditures and supply of capable drilling equipment. The existing drilling contracts for our drilling rigs currently employed are scheduled to expire from March 2015 through April 2019. We cannot guarantee that we will be able to obtain contracts for our drilling rigs currently employed upon the expiration or termination of their current contracts or that there will not be a gap in employment of the rigs between current contracts and subsequent contracts. In particular, if oil and natural gas prices are low, or it is expected that such prices will decrease in the future, at a time when we are seeking to arrange contracts for our drilling rigs, we may not be able to obtain drilling contracts at attractive dayrates or at all.

 

If the dayrates which we receive for the reemployment of our current drilling rigs are less favorable, we will recognize less revenue from their operations. Our ability to meet our cash flow obligations will depend on our ability to consistently secure drilling contracts for our drilling rigs at sufficiently high dayrates. We cannot predict the future level of demand for our services or future conditions in the oil and gas industry. If oil and gas companies do not continue to increase exploration, development and production expenditures, we may have difficulty securing drilling contracts, or we may be forced to enter into contracts at unattractive dayrates, which would adversely affect our ability to make distributions to our unitholders.

 

Competition within the offshore drilling industry may adversely affect us.

 

The offshore drilling industry is highly competitive and fragmented and includes several large companies that compete in the markets OPCO serves, as well as smaller companies. Offshore drilling contracts are generally

 

28


Table of Contents

awarded on a competitive bid basis or through privately negotiated transactions. In determining which qualified drilling contractor is awarded a contract, the key factors are pricing, rig availability, rig location, condition and integrity of equipment, its record of operating efficiency, including high operating uptime, technical specifications, safety performance record, crew experience, reputation, industry standing and customer relations. OPCO’s operations may be adversely affected if its current competitors or new market entrants introduce new drilling rigs with better features, performance, price or other characteristics in comparison to OPCO’s drilling rigs, or expand into service areas where OPCO operates. In addition, mergers among oil and natural gas exploration and production companies have reduced, and may from time to time further reduce, the number of available customers, which would increase the ability of potential customers to achieve pricing terms favorable to them. Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on our financial position, results of operations, cash flows and ability to make distributions to our unitholders.

 

An economic downturn could have a material adverse effect on our revenue, profitability and financial position.

 

We and OPCO depend on OPCO’s customers’ willingness and ability to fund operating and capital expenditures to explore, develop and produce oil and natural gas, and to purchase drilling and related equipment. There has historically been a strong link between the development of the world economy and demand for energy, including oil and natural gas. The world economy is currently facing a number of challenges. As a result of the credit crisis in Europe, in particular in Greece, Italy, Ireland, Portugal and Spain, the European Commission created the European Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support. In March 2011, the European Council agreed on the need for Eurozone countries to establish a permanent stability mechanism, the European Stability Mechanism, or the ESM, which will be activated by mutual agreement, to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries after June 2013. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations and the overall stability of the euro. An extended period of adverse development in the outlook for European countries could reduce the overall demand for oil and natural gas and for our services. These potential developments, or market perceptions concerning these and related issues, could affect our financial position, results of operations and cash available for distribution. This includes uncertainty surrounding the sovereign debt and credit crises in certain European countries. In addition, turmoil and hostilities in the Middle East, North Africa and other geographic areas and countries are adding to overall risk. An extended period of adverse development in the outlook for the world economy could reduce the overall demand for oil and natural gas and for our services. Such changes could adversely affect our financial condition, results of operations and ability to make distributions to our unitholders.

 

The current state of global financial markets and current economic conditions may adversely impact our ability to obtain additional financing on acceptable terms which may hinder or prevent us from expanding our business.

 

Global financial markets and economic conditions have been, and continue to be, volatile. The current state of global financial markets and current economic conditions might adversely impact our ability to issue additional equity at prices which will not be dilutive to our existing unitholders or preclude us from issuing equity at all. We cannot be certain that additional financing will be available if needed and to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to expand our existing business, complete drilling rig acquisitions or otherwise take advantage of business opportunities as they arise.

 

Our current backlog of contract drilling revenue may not be ultimately realized.

 

As of September 30, 2012, our backlog of contract drilling revenues under firm commitments was approximately $3.0 billion. We may not be able to perform under these contracts due to events beyond our

 

29


Table of Contents

control, and our customers may seek to cancel or renegotiate our contracts for various reasons, including those described under “—Certain work stoppages or maintenance or repair work may cause OPCO’s customers to suspend or reduce payment of dayrates until operation of the respective rig is resumed, which may lead to termination or renegotiation of important agreements.” In addition, some of our customers could experience liquidity issues or could otherwise be unable or unwilling to perform under the contract, which could ultimately lead a customer to go into bankruptcy or to otherwise encourage a customer to seek to repudiate, cancel or renegotiate a contract. Our inability or the inability of our customers to perform under our or their contractual obligations could adversely affect our financial position, results of operations and cash available for distribution.

 

Failure to obtain or retain highly skilled personnel could adversely affect OPCO’s operations.

 

We believe that competition for skilled and other labor required for OPCO’s drilling operations has increased in recent years as the number of rigs activated or added to worldwide fleets has increased. Both the number of rigs in operation is continuing to grow as new units ordered during the period from 2005 to 2008 are being delivered, and additional rigs ordered from September 2010 to date are expected to increase the future demand for offshore drilling crews. In some regions such as Angola and Nigeria, limited availability of qualified personnel, in combination with local regulations focusing on crew composition, is expected to further increase demand for qualified offshore drilling crews, which may increase costs. A continued expansion of the rig fleet, increased demand for drilling services in general, coupled with shortages of qualified personnel could further create and intensify upward pressure on wages and make it more difficult or costly for OPCO to staff and service its rigs, or do so on economically viable terms. Such developments could adversely affect our financial position, results of operations, cash flows and ability to make distributions to our unitholders. Furthermore, as a result of any increased competition for people and risk for higher turnover, OPCO may experience a reduction in the experience level of its personnel, which could lead to higher downtime and more operating incidents.

 

Certain work stoppages or maintenance or repair work may cause OPCO’s customers to suspend or reduce payment of dayrates until operation of the respective drilling rig is resumed, which may lead to termination or renegotiation of the drilling contract.

 

Compensation under OPCO’s drilling contracts is based on daily performance and/or availability of each drilling rig in accordance with the requirements specified in the applicable drilling contract agreement. For instance, when our drilling rigs are idle, but available for operation, OPCO’s customers are entitled to pay a waiting rate lower than the operational rate.

 

Several factors could cause an interruption of operations, including:

 

   

breakdowns of equipment and other unforeseen engineering problems;

 

   

work stoppages, including labor strikes;

 

   

shortages of material and skilled labor;

 

   

delays in repairs by suppliers;

 

   

surveys by government and maritime authorities;

 

   

periodic classification surveys;

 

   

severe weather, strong ocean currents or harsh operating conditions; and

 

   

force majeure events.

 

In addition, if OPCO’s drilling rigs are taken out of service for maintenance and repair for a period of time exceeding the scheduled maintenance periods set forth in its drilling contracts, we will not be entitled to payment of dayrates until the relevant rig is available for deployment. If the interruption of operations were to exceed a determined period due to an event of force majeure, OPCO’s customers have the right to pay a rate (the “force majeure rate”) that is significantly lower than the waiting rate for a period of time, and, thereafter, may terminate

 

30


Table of Contents

the drilling contracts related to the subject rig. For more details on OPCO’s drilling contracts, see “Business—Drilling Contracts” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Important Financial and Operational Terms and Concepts—Contracted Revenues and Dayrates.” Suspension of drilling contract payments, prolonged payment of reduced rates or termination of any drilling contract agreements as a result of an interruption of operations as described herein could materially adversely affect our financial condition, results of operations and ability to make distributions to our unitholders.

 

Labor costs and operating restrictions that apply to OPCO could increase as a result of collective bargaining negotiations and changes in labor laws and regulations.

 

A significant portion of OPCO’s employees are represented by collective bargaining agreements. The majority of these employees work in Nigeria and Angola. In addition, some of OPCO’s contracted labor works under collective bargaining agreements. As part of the legal obligations in some of these agreements, OPCO is required to contribute certain amounts to retirement funds and pension plans and is restricted in its ability to dismiss employees. In addition, many of these represented individuals are working under agreements that are subject to salary negotiation. These negotiations could result in higher personnel costs, other increased costs or increased operating restrictions that could adversely affect our financial condition, results of operations and ability to pay distributions.

 

An inability to obtain visas and work permits for drilling rig personnel on a timely basis could hurt its operations and have an adverse effect on our business.

 

OPCO’s ability to operate worldwide depends on obtaining the necessary visas and work permits for the personnel on its drilling rigs to travel in and out of, and to work in, the jurisdictions in which it operates. Governmental actions in some of the jurisdictions in which OPCO operates may make it difficult to move personnel in and out of these jurisdictions by delaying or withholding the approval of these visa and work permits. If visas and work permits cannot be obtained for the employees needed for operating OPCO’s rigs on a timely basis or for third-party technicians needed for maintenance or repairs, OPCO might not be able to perform its obligations under its drilling contracts, which could lead to periods of prolonged downtime or allow OPCO’s customers to cancel the contracts. Any such downtime or cancellation could adversely affect our financial condition, results of operations and ability to make distributions to our unitholders.

 

OPCO’s business and operations involve numerous operating hazards, and its insurance and indemnities from its customers may not be adequate to cover potential losses from its operations.

 

OPCO’s operations are subject to hazards inherent in the offshore drilling industry, such as blowouts, reservoir damage, loss of production, loss of well control, lost or stuck drill strings, equipment defects, punch-throughs, craterings, fires, explosions and pollution. Contract drilling requires the use of heavy equipment and exposure to hazardous conditions, which may subject us to liability claims by employees, customers and third parties. These hazards can cause personal injury or loss of life, severe damage to or destruction of property and equipment, pollution or environmental damage, claims by third parties or customers and suspension of operations. OPCO’s offshore fleet is also subject to hazards inherent in marine operations, either while on-site or during mobilization, such as capsizing, sinking, grounding, collision, piracy, damage from severe weather and marine life infestations. Operations may also be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services or personnel shortages. OPCO customarily provides contract indemnity to its customers for claims that could be asserted by OPCO relating to damage to or loss of our equipment, including rigs, and claims that could be asserted by OPCO or its employees relating to personal injury or loss of life.

 

Damage to the environment could also result from OPCO’s operations, particularly through spillage of hydrocarbons, fuel, lubricants or other chemicals and substances used in drilling operations, or extensive

 

31


Table of Contents

uncontrolled fires. OPCO may also be subject to property damage, environmental indemnity and other claims by oil and natural gas companies. OPCO’s insurance policies and drilling contracts contain rights to indemnity that may not adequately cover its losses, and OPCO does not have insurance coverage or rights to indemnity for all risks. There are certain risks, including risks associated with the loss of control of a well (such as blowout, cratering, the cost to regain control of or re-drill the well and remediation of associated pollution), and OPCO’s customers may be unable or willing to indemnify OPCO against such risks. In addition, a court may decide that certain indemnities in OPCO’s current or future contracts are not enforceable. For example, in 2011, a U.S. District Court in the Southern District of Texas invalidated certain contractual indemnities for gross negligence in a drilling master services agreement governed by U.S. maritime law as a matter of public policy. OPCO maintains insurance coverage for property damage, occupational injury and illness, and general and marine third-party liabilities (except as described below with respect to drilling rigs and equipment in the U.S. Gulf of Mexico, or U.S. GOM). However, pollution and environmental risks generally are not totally insurable.

 

OPCO’s insurance provides for deductibles for damage to its offshore drilling equipment and third-party liabilities. With respect to hull and machinery OPCO’s insurance provides for a deductible per occurrence of $5 million for all of its fleet. However, in the event of a total loss or a constructive total loss of a drilling rig, such loss is fully covered by its insurance with no deductible. For general and marine third-party liabilities OPCO’s insurance provides for up to a $500,000 deductible per occurrence on personal injury liability for crew claims as well as non-crew claims and per occurrence on third-party property damage.

 

If a significant accident or other event occurs that is not fully covered by OPCO’s insurance or an enforceable or recoverable indemnity from a customer, the occurrence could adversely affect our financial position, results of operations or cash available for distribution. The amount of OPCO’s insurance may also be less than the related impact on enterprise value after a loss. OPCO’s insurance coverage will not in all situations provide sufficient funds to protect it from all liabilities that could result from its drilling operations. OPCO’s coverage includes annual aggregate policy limits. As a result, OPCO retains the risk for any losses in excess of these limits. Any such lack of reimbursement may cause OPCO to incur substantial costs. In addition, OPCO could decide to retain more risk in the future. This results in a higher risk of losses, which could be material, that are not covered by third-party insurance contracts. Specifically, OPCO has elected to not insure for physical damage to rigs and equipment caused by named windstorms in the U.S. GOM due to the substantial costs associated with such coverage. If such windstorms cause significant damage to any rig and equipment OPCO has in the U.S. GOM, it could have a material adverse effect on our financial position, results of operations or cash flows. Moreover, no assurance can be made that we will be able to maintain adequate insurance in the future at rates that we consider reasonable, or obtain insurance against certain risks.

 

An over-supply of drilling rigs may lead to a reduction in dayrates and therefore may materially impact OPCO’s profitability.

 

During the recent period of high utilization and high dayrates, industry participants have increased the supply of drilling rigs by ordering construction of new drilling rigs. Historically, this has resulted in an over-supply of drilling rigs and has caused a subsequent decline in utilization and dayrates when the drilling rigs have entered the market, sometimes for extended periods of time until the new units have been absorbed into the active fleet. According to ODS-Petrodata, the worldwide fleet of tender rigs, semi-submersible rigs and drillships consisted of 331 units, comprised of 33 tender rigs, 214 semi-submersible rigs and 84 drillships as of September 30, 2012. As of September 30, 2012, an additional 12 tender rigs, 20 semi-submersible rigs and 75 drillships were under construction or on order, which would bring the total fleet to 438 units. A relatively large number of the drilling rigs currently under construction have not been contracted for future work, which may intensify price competition as scheduled delivery dates occur and lead to a reduction in dayrates as the active fleet grows. Any further increase in construction of new units may increase the negative impact on dayrates and utilization. In addition, drilling rigs may be relocated to markets in which we operate, which could exacerbate excess drilling rig supply and lower dayrates in those markets. If a large number of drilling rigs become available around the time of expiration of our drilling contracts, it could depress the dayrate we are able to obtain under a renewed or new contract with respect to our drilling rigs.

 

32


Table of Contents

Lower utilization and dayrates could adversely affect OPCO’s revenues and profitability, which could affect OPCO’s ability to make distribution to us and us to our unitholders. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on OPCO’s drilling rigs if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these drilling rigs may not be recoverable.

 

The market value of OPCO’s current drilling rigs and those we or OPCO acquire in the future may decrease, which could cause us to incur losses if we decide to sell them following a decline in their market values.

 

If the offshore drilling industry suffers adverse developments in the future, the fair market value of OPCO’s drilling rigs may decline. The fair market value of the drilling rigs that OPCO currently owns, or that we or OPCO may acquire in the future, may increase or decrease depending on a number of factors, including:

 

   

general economic and market conditions affecting the offshore drilling industry, including competition from other offshore contract drilling companies;

 

   

types, sizes and ages of drilling rigs;

 

   

supply and demand for drilling rigs;

 

   

costs of newbuilds;

 

   

prevailing level of drilling services contract dayrates;

 

   

governmental or other regulations; and

 

   

technological advances.

 

If we or OPCO sell any drilling rig at a time when prices for drilling rigs have fallen, such a sale may result in a loss. Such a loss could materially and adversely affect our business prospects, financial condition, liquidity, results of operations and ability of OPCO to pay distributions to us and us to our unitholders.

 

Consolidation and governmental regulation of suppliers may increase the cost of obtaining supplies or restrict OPCO’s ability to obtain needed supplies, which may have a material adverse effect on our results of operations and financial condition.

 

OPCO relies on certain third parties to provide supplies and services necessary for its offshore drilling operations, including but not limited to drilling equipment suppliers, catering and machinery suppliers. Recent mergers have reduced the number of available suppliers, resulting in fewer alternatives for sourcing key supplies. With respect to certain items, such as blow-out preventers, OPCO is dependent upon the original equipment manufacturer for repair and replacement of the item or its spare parts. Such consolidation, combined with a high volume of drilling rigs under construction, may result in a shortage of supplies and services thereby increasing the cost of supplies and/or potentially inhibiting the ability of suppliers to deliver on time. These cost increases or delays could have a material adverse effect on OPCO’s results of operations and result in rig downtime, and delays in the repair and maintenance of its drilling rigs. Furthermore, most of OPCO’s suppliers are U.S. companies, which means that in the event a U.S. supplier was debarred or otherwise restricted by the U.S. government from delivering product, OPCO’s ability to supply and service its operations could be materially impacted. For example, recently, four international freight forwarding companies, including our principal freight forwarder, CEVA, were debarred for a short period of time by the U.S. government. Because CEVA’s debarment was for a short period of time, our operations were not materially impaired. In addition, through regulation and permitting, certain foreign governments effectively restrict the number of suppliers and technicians available to supply and service our operations in those jurisdictions, which could materially impact our operations. Please see “—Local content policies may impair OPCO’s ability to compete in local jurisdictions, and changes in these policies may adversely affect our financial conditions and results of operations.”

 

33


Table of Contents

OPCO’s international operations involve additional risks, which could adversely affect our business.

 

As a result of OPCO’s international operations, we may be exposed to political and other uncertainties, including risks of:

 

   

terrorist acts, armed hostilities, war and civil disturbances;

 

   

acts of piracy, which have historically affected ocean-going drilling rigs trading in regions of the world such as the South China Sea, the Gulf of Aden off the coast of Somalia, where piracy has increased significantly in frequency since 2008, and off the west coast of Africa;

 

   

significant governmental influence over many aspects of local economies;

 

   

seizure, nationalization or expropriation of property or equipment;

 

   

repudiation, nullification, modification or renegotiation of contracts;

 

   

limitations on insurance coverage, such as war risk coverage, in certain areas;

 

   

political unrest;

 

   

foreign and U.S. monetary policy and foreign currency fluctuations and devaluations;

 

   

the inability to repatriate income or capital;

 

   

complications associated with repairing and replacing equipment in remote locations;

 

   

import-export quotas, wage and price controls, imposition of trade barriers;

 

   

U.S. and foreign sanctions or trade embargoes;

 

   

regulatory or financial requirements to comply with foreign bureaucratic actions;

 

   

changing taxation policies, including confiscatory taxation;

 

   

other forms of government regulation and economic conditions that are beyond our control; and

 

   

governmental corruption.

 

In addition, international contract drilling operations are subject to various laws and regulations of the countries in which OPCO operates, including laws and regulations relating to:

 

   

the equipping and operation of drilling rigs;

 

   

exchange rates or exchange controls;

 

   

oil and natural gas exploration and development;

 

   

taxation of offshore earnings and the earnings of expatriate personnel; and

 

   

use and compensation of local employees and suppliers by foreign contractors.

 

It is difficult to predict what governmental regulations may be enacted in the future that could adversely affect the international drilling industry. The actions of foreign governments, including initiatives by OPEC, may adversely affect our ability to compete. Failure to comply with applicable laws and regulations, including those relating to sanctions and export restrictions, may subject us to criminal sanctions or civil remedies, including fines, denial of export privileges, injunctions or seizures of assets.

 

If OPCO’s business activities involve countries, entities and individuals that are subject to restrictions imposed by the U.S. or other governments, we could be subject to enforcement action and our reputation and the market for our common units could be adversely affected.

 

U.S. sanctions have been tightened in recent years to target the activities of non-U.S. companies, such as us. In particular, sanctions against Iran have been significantly expanded. In 2010, the U.S. enacted the

 

34


Table of Contents

Comprehensive Iran Sanctions Accountability and Divestment Act, or “CISADA,” which expanded the scope of the former Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions to non-U.S. companies, such as us, and introduces limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. On August 10, 2012, the U.S. signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which places further restrictions on the ability of non-U.S. companies to do business or trade with Iran and Syria. Perhaps the most significant provision in the Iran Threat Reduction Act is that prohibitions in the existing Iran sanctions applicable to U.S. persons will now apply to any foreign entity owned or controlled by a U.S. person (essentially making the U.S. sanctions against Iran as expansive as U.S. sanctions against Cuba). However, we do not believe this provision is applicable to us, as we are primarily owned and controlled by non-U.S. persons. The other major provision in the Iran Threat Reduction Act is that issuers of securities must disclose to the SEC in their annual and quarterly reports filed after February 6, 2013 if the issuer or “any affiliate” has “knowingly” engaged in certain sanctioned activities involving Iran during the timeframe covered by the report. The disclosure must describe the nature and extent of the activity in detail and the SEC will publish the disclosure on its website. The President must then initiate an investigation and determine whether sanctions on the issuer or its affiliate will be imposed. Such negative publicity and the possibility that sanctions could be imposed would present a risk for any issuer that is knowingly engaged in sanctioned conduct or that has an affiliate that is knowingly engaged in such conduct. At this time, we are not aware of any violative activity, conducted by ourselves or by any affiliate, that is likely to trigger an SEC disclosure requirement. In addition to the sanctions against Iran, U.S. law continues to restrict U.S. owned or controlled entities from doing business with Cuba and various U.S. sanctions have certain other extraterritorial effects that need to be considered by non-U.S. companies. Moreover, any U.S. persons who serve as officers, directors or employees of OPCO would be fully subject to U.S. sanctions. It should also be noted that other governments are more frequently implementing versions of U.S. sanctions. OPCO does not currently have any drilling contracts or plans to initiate any drilling contracts involving operations in countries or with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism. However, from time to time, OPCO may enter into drilling contracts involving operations in countries or with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism in cases where entering into such contracts would not violate U.S. law or may enter into drilling contracts involving operations in countries or with government-controlled entities that may become subject to sanctions and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism. However, this could negatively affect our ability to obtain investors. In some cases, U.S. investors would be prohibited from investing in an arrangement in which the proceeds could directly or indirectly be transferred to a sanctioned entity. Moreover, even in cases where the investment would not violate U.S. law, potential investors could view such drilling contracts negatively, which could adversely affect our reputation and the market for our common units. As stated above, we believe that we are in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance. However, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines or other penalties and could result in some investors deciding, or being required, to divest their interest, or not to invest, in our common units. Additionally, some investors may decide to divest their interest, or not to invest, in our common units simply because we may do business with companies that do business in sanctioned countries. Moreover, OPCO’s drilling contracts may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us, OPCO or its drilling rigs, and those violations could in turn negatively affect our reputation. Investor perception of the value of our common units may also be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.

 

35


Table of Contents

Local content policies may impair OPCO’s ability to compete in local jurisdictions, and changes in these policies may adversely affect our financial conditions and results of operations.

 

Certain foreign governments, such as those of Nigeria and Angola, favor or effectively require (i) the awarding of drilling contracts to local contractors or to drilling rigs owned by their own citizens, (ii) the use of a local agent or (iii) foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. For example, the local content policy in Angola requires our customers to develop and implement a plan to increase local Angolan content, including specific goals. In addition, Nigerian laws require one of our subsidiaries to enter into a joint venture with Nigerian investors to own the West Capella. These regulations may adversely affect OPCO’s ability to compete in these contract drilling markets. Further, local content policies may be subject to significant and unpredictable changes, which may lead to greater uncertainty in operational planning in those jurisdictions.

 

If our drilling rigs fail to maintain their class certification or fail any required survey, that drilling rig would be unable to operate, thereby reducing our revenues and profitability.

 

Every offshore drilling rig is a registered marine vessel and must be “classed” by a classification society. The classification society certifies that the drilling rig is “in-class,” signifying that such drilling rig has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the drilling rig’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned. The West Aquarius is certified as being “in class” by Det Norske Veritas. Each of the West Capella, the West Capricorn and the West Vencedor is certified as being “in class” by American Bureau of Shipping. If any drilling rig does not maintain its class and/or fails any annual survey or special survey, the drilling rig will be unable to carry on operations and will be unemployable and uninsurable, which could cause us to be in violation of certain covenants in our credit facilities. Any such inability to carry on operations or be employed, could have a material adverse impact on our financial condition, results of operations, and ability to make distributions to our unitholders.

 

Fluctuations in exchange rates or exchange controls could result in losses to us.

 

As a result of OPCO’s international operations, we are exposed to fluctuations in foreign exchange rates due to revenues being received and operating expenses paid in currencies other than U.S. dollars. Accordingly, we may experience currency exchange losses if we have not fully hedged our exposure to a foreign currency, or if revenues are received in currencies that are not readily convertible. We may also be unable to collect revenues because of a shortage of convertible currency available to the country of operation, controls over the repatriation of income or capital or controls over currency exchange.

 

OPCO and the majority of its subsidiaries use the U.S. Dollar as their functional currency because the majority of their revenues and expenses are denominated in U.S. Dollars. Accordingly, our reporting currency is also US dollars. We do, however, earn revenue and incur expenses in other currencies and there is a risk that currency fluctuations could have an adverse effect on our statements of operations and cash flows.

 

We are exposed with respect to the West Vencedor, which receives approximately 27% of its dayrate in Euros. In addition, we receive 10% of the West Capella’s revenues in Nigerian Naira. Although we are currently offsetting our Naira revenues with our operating costs denominated in Nigerian Naira, if, in the future, we are required to receive a greater portion of our revenues in Nigerian Naira, we may be unable to offset such revenue with operating expenses owed in Nigerian Naira and, as a result, may incur substantial foreign exchange losses. We do not use foreign currency forward contracts to hedge against this risk.

 

The Nigerian Naira exchange rate is set by the Nigerian Central Bank, and such rate may not reflect the rates we are able to achieve in the market. Exchanges at market rates may result in substantial foreign exchange losses. In addition, the government of Angola has discussed requiring a certain portion of payments for our

 

36


Table of Contents

drilling contract for the West Vencedor to be made into a local Angolan bank account. If this requirement is enforced, we may be unable to remove such cash from Angola, and if we are able to remove such cash, we may incur substantial foreign exchange losses.

 

A change in tax laws in any country in which we operate could result in higher tax expense.

 

We conduct our operations through various subsidiaries. Tax laws and regulations are highly complex and subject to interpretation. Consequently, we are subject to changing tax laws, treaties and regulations in and between countries in which we operate. Our income tax expense is based on our interpretation of the tax laws in effect at the time the expense was incurred. A change in tax laws, treaties or regulations, or in the interpretation thereof, could result in a materially higher tax expense or a higher effective tax rate on our earnings.

 

We file periodic tax returns that are subject to review and audit by various revenue agencies in the jurisdictions in which we operate. Taxing authorities may challenge any of our tax positions, at which time we will contest such assessments where we believe the assessments are in error. Determinations by such authorities that differ materially from our recorded estimates, favorably or unfavorably, may have a material impact on our results of operations, financial position or cash available for distribution.

 

We may be unable to obtain, maintain, and/or renew permits necessary for our operations or experience delays in obtaining such permits, which could have a material effect on our operations.

 

The operation of OPCO’s drilling rigs are subject to certain governmental approvals and permits. The permitting rules in most jurisdictions, and the interpretations of those rules, are complex, subject to change, including their interpretations by regulators, all of which may make compliance more difficult or impractical, and may increase the length of time it takes to receive regulatory approval for offshore drilling operations. In many jurisdictions, substantive requirements under environmental laws are implemented through permits and permit renewals. If we fail to timely secure the necessary approvals or permits, OPCO’s customers may have the right to terminate or seek to renegotiate their drilling contracts to OPCO’s detriment. In the future, the amendment or modification of existing laws and regulations or the adoption of new laws and regulations curtailing or further regulating exploratory or development drilling and production of oil and gas or increasing the time needed to obtain necessary environmental permits, could have a material adverse effect on our business, operating results or financial condition.

 

We are subject to complex laws and regulations, including environmental laws and regulations that can adversely affect the cost, manner or feasibility of doing business.

 

OPCO’s operations are subject to numerous environmental laws and regulations in the form of international conventions and treaties, and national, state and local laws and regulations (including those of the United States, Canada, Nigeria, and Angola) in force in the jurisdictions in which its drilling rigs operate or are registered, which can significantly affect the operation of its drilling rigs. The offshore drilling industry is dependent on demand for services from the oil and natural gas exploration and production industry, and, accordingly, we are directly affected by the adoption of laws and regulations that, for economic, environmental or other policy reasons, may curtail exploration and development drilling for oil and gas. Compliance with such laws, regulations and standards, where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful lifetime of OPCO’s drilling rigs. OPCO may also incur additional costs in order to comply with other existing and future regulatory obligations, including, but not limited to, costs relating to air emissions, including greenhouse gases, the management of ballast waters, maintenance and inspection, development and implementation of emergency procedures and insurance coverage or other financial assurance of its ability to address pollution incidents. These costs could have a material adverse effect on our business, results of operations, cash flows and financial condition. A failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of OPCO’s operations. Environmental laws often impose strict liability for remediation of spills and releases of oil

 

37


Table of Contents

and hazardous substances, which could subject OPCO to liability without regard to whether it was negligent or at fault. An oil spill could result in significant liability, including fines, penalties and criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages.

 

OPCO’s drilling rigs could cause the release of oil or hazardous substances, especially as its drilling rigs age. Any releases may be large in quantity, above our permitted limits or occur in protected or sensitive areas where public interest groups or governmental authorities have special interests. Any releases of oil or hazardous substances could result in fines and other costs to OPCO, such as costs to upgrade its drilling rigs, clean up the releases, and comply with more stringent requirements in its discharge permits. Moreover, these releases may result in OPCO’s customers or governmental authorities suspending or terminating its operations in the affected area, which could have a material adverse effect on our business, results of operation and financial condition.

 

If we are able to obtain from our customers some degree of contractual indemnification against pollution and environmental damages, the indemnification may not be applicable in all instances or the customer may not be financially able to comply with its indemnity obligations. In the future, OPCO may not be able to obtain contractual indemnification against pollution and environmental damages.

 

In addition, we are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Our insurance coverage may not be available in the future, or we may not obtain certain insurance coverage. Even if insurance is available and we have obtained the coverage, the insurance coverage may not be adequate to satisfy our liabilities or its insurance underwriters may be unable to pay compensation if a significant claim should occur. Any of these scenarios could have a material adverse effect on our business, operating results and financial condition.

 

To the extent new laws are enacted or other governmental actions are taken that prohibit or restrict offshore drilling or impose additional environmental protection requirements that result in increased costs to the oil and gas industry, in general, or the offshore drilling industry, in particular, our business or prospects could be materially adversely affected. Future earnings and cash available for distribution may be negatively affected by compliance with any such new legislation or regulations.

 

Climate change and regulation of greenhouse gases may have an adverse impact on our business.

 

Due to concern over the risk of climate change, a number of countries and the International Maritime Organization, or IMO, have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from vessel emissions. These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy. Also, a treaty may be adopted in the future that includes restrictions on shipping emissions. Compliance with changes in laws and regulations relating to climate change could increase our costs of operating and maintaining our drilling rigs and could require us to make significant financial expenditures that we cannot predict with certainty at this time.

 

Additionally, adverse effects upon the oil and natural gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also adversely affect demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and natural gas in the future or create greater incentives for use of alternative energy sources. Any long-term material adverse effect on the oil and natural gas industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.

 

Please read “Business—Environmental and Other Regulations in the Offshore Drilling Industry—Regulation of Greenhouse Gas Emissions” below for a more detailed discussion.

 

38


Table of Contents

The aftermath of the moratorium on offshore drilling in the U.S. Gulf of Mexico, and new regulations adopted as a result of the investigation into the Macondo well blowout, could negatively impact us.

 

In the near-term aftermath of the Macondo well blow out incident, the U.S. government on May 30, 2010 imposed a six-month moratorium on certain drilling activities in water deeper than 500 feet in the U.S. GOM and subsequently implemented Notices to Lessees 2010-N05 and 2010 N-06, providing enhanced safety requirements applicable to all drilling activity in the U.S. GOM, including drilling activities in water shallower than 500 feet. On October 12, 2010, the U.S. government lifted the moratorium subject to compliance with the requirements set forth in Notices to Lessees 2010-N05 and 2010-N06. Additionally, all drilling in the U.S. GOM must comply with the Increased Safety Measures for Energy Development on the Outer Continental Shelf (Drilling Safety Rule), which takes effect October 22, 2012, and the Workplace Safety Rule on Safety and Environmental Management Systems (SEMS), which was issued on October 15, 2010 and required SEMS programs to be in place on or before November 15, 2011. We continue to evaluate these new measures and others to ensure that OPCO’s rigs and equipment are in full compliance, where applicable. As new standards and procedures are being integrated into the existing framework of offshore regulatory programs, we anticipate that there may be increased costs associated with regulatory compliance and delays in obtaining permits for other operations such as recompletions, workovers and abandonment activities.

 

Additional requirements could be forthcoming based on further recommendations by regulatory agencies investigating the Macondo incident. We are not able to predict the likelihood, nature or extent of additional rulemaking or when the interim rules, or any future rules, could become final. The current and future regulatory environment in the U.S. GOM could impact the demand for drilling rigs in the U.S. GOM in terms of overall number of rigs in operations and the technical specification required for offshore rigs to operate in the U.S. GOM. It is possible that short-term potential migration of rigs from the U.S. GOM could adversely impact dayrates levels and fleet utilization in other regions. Additional governmental regulations concerning licensing, taxation, equipment specifications, training requirements or other matters could increase the costs of OPCO’s operations, and escalating costs borne by its customers, along with permitting delays, could reduce exploration and development activity in the U.S. GOM and, therefore, reduce demand for OPCO’s services. In addition, insurance costs across the industry are expected to increase as a result of the Macondo incident and, in the future, certain insurance coverage is likely to become more costly, and may become less available or not available at all. We cannot predict if the U.S. government will issue new drilling permits in a timely manner, nor can we predict the potential impact of new regulations that may be forthcoming as the investigation into the Macondo well incident continues. Nor can we predict if implementation of additional regulations might subject OPCO to increased costs of operating and/or a reduction in the area of operation in the U.S. GOM. As such, our cash available for distribution and financial position could be adversely affected if our drilling rig operating in the U.S. GOM became subject to the risks mentioned above.

 

Hurricanes Ivan, Katrina, Rita, Gustav and Ike caused damage to a number of unaffiliated drilling rigs in the U.S. GOM. The Bureau of Ocean Energy Management, Regulation and Enforcement, or BOEMRE, formerly the Minerals Management Service of the U.S. Department of the Interior, effective October 1, 2011, reorganized into two new organizations, the Bureau of Ocean Energy Management, or BOEM, and the Bureau of Safety and Environmental Enforcement, or BSEE, and issued guidelines for tie-downs on drilling rigs and permanent equipment and facilities attached to outer continental shelf production platforms, and moored drilling rig fitness that apply through the 2013 hurricane season. These guidelines effectively impose new requirements on the offshore oil and natural gas industry in an attempt to increase the likelihood of survival of offshore drilling rigs during a hurricane. The guidelines also provide for enhanced information and data requirements from oil and natural gas companies that operate properties in the U.S. GOM region of the Outer Continental Shelf. BOEM and BSEE may issue similar guidelines for future hurricane seasons and may take other steps that could increase the cost of operations or reduce the area of operations for OPCO’s ultra-deepwater drilling rigs, thereby reducing their marketability. Implementation of new guidelines or regulations that may apply to ultra-deepwater drilling rigs may subject OPCO to increased costs and limit the operational capabilities of its drilling rigs, although such risks to the extent possible should rest with OPCO’s customers.

 

39


Table of Contents

We cannot guarantee that the use of OPCO’s drilling rigs will not infringe the intellectual property rights of others.

 

The majority of the intellectual property rights relating to OPCO’s drilling rigs and related equipment are owned by its suppliers. In the event that one of OPCO’s suppliers becomes involved in a dispute over infringement of intellectual property rights relating to equipment owned by OPCO, it may lose access to repair services, replacement parts, or could be required to cease use of some equipment. In addition, OPCO’s competitors may assert claims for infringement of intellectual property rights related to certain equipment on its drilling rigs and OPCO may be required to stop using such equipment and/or pay damages and royalties for the use of such equipment. The consequences of technology disputes involving OPCO’s suppliers or competitors could adversely affect its financial results, operations and cash available for distribution. OPCO has provisions in some of its supply contracts to provide indemnity from the supplier against intellectual property lawsuits. However, we cannot be assured that these suppliers will be willing or financially able to honor their indemnity obligations, or guarantee that the indemnities will fully protect OPCO from the adverse consequences of such technology disputes. OPCO also has provisions in some of its customer contracts to require the customer to share some of these risks on a limited basis, but we cannot provide assurance that these provisions will fully protect OPCO from the adverse consequences of such technology disputes.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act or the UK Bribery Act could result in fines, criminal penalties, drilling contract terminations and an adverse effect on our business.

 

OPCO currently operates its drilling rigs in a number of countries throughout the world, including some with developing economies. Also, the existence of state or government-owned shipbuilding enterprises puts OPCO in contact with persons who may be considered “foreign officials” or “foreign public officials” under the U.S. Foreign Corrupt Practices Act of 1977 (or the FCPA) and the Bribery Act 2010 of the Parliament of the United Kingdom (or the UK Bribery Act), respectively. We are committed to doing business in accordance with all applicable anti-corruption laws and have adopted a code of business conduct and ethics, as well as recordkeeping and internal accounting controls, which are consistent and in full compliance with the FCPA and the UK Bribery Act. We are subject, however, to the risk that we, OPCO, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption laws, including the FCPA and the UK Bribery Act. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of OPCO’s operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business. Furthermore, detecting, investigating and resolving actual or alleged violations would be expensive and consume significant time and attention of our senior management.

 

In order to effectively compete in some foreign jurisdictions, we utilize local agents and/or establish joint ventures with local operators or strategic partners. For example, in Nigeria, we expect that Nigerian investors will be permitted to invest in a subsidiary of Seadrill Operating LP that will be fully controlled and approximately 56% owned by Seadrill Operating LP, and will result in a Nigerian joint venture partner owning an effective 1% interest in the West Capella. Seadrill will own the remaining ownership interest in the joint venture. All of these activities involve interaction by our agents with non-U.S. government officials. Even though some of our agents and partners may not themselves be subject to the FCPA, the UK Bribery Act or other anti-bribery laws to which we may be subject, if our agents or partners make improper payments to non-U.S. government officials in connection with engagements or partnerships with us, we could be investigated and potentially found liable for violation of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which could have a material adverse effect on our business, financial position, results of operations and cash flows.

 

Acts of terrorism, piracy and political and social unrest could affect us specifically or, more generally, the markets for drilling services, which may have a material adverse effect on our results of operations.

 

Acts of terrorism, piracy, and political and social unrest, brought about by world political events or otherwise, have caused instability in the world’s financial and insurance markets in the past and may occur in the

 

40


Table of Contents

future. Such acts could be directed against companies such as ours. OPCO’s drilling operations may be targeted by acts of terrorism, piracy, or acts of vandalism or sabotage carried out by environmental activist groups. In addition, acts of terrorism and political and social unrest could lead to increased volatility in prices for crude oil and natural gas and could affect the markets for drilling services and result in lower dayrates. OPCO’s insurance premiums could increase as a result of these events, and coverage may be unavailable in the future.

 

Any failure to comply with the complex laws and regulations governing international trade could adversely affect our operations.

 

The shipment of goods, services and technology across international borders subjects our business to extensive trade laws and regulations. Import activities are governed by unique customs laws and regulations in each of the countries of operation. Moreover, many countries, including the United States, control the export and re-export of certain goods, services and technology and impose related export recordkeeping and reporting obligations. Governments also may impose economic sanctions against certain countries, persons and other entities that may restrict or prohibit transactions involving such countries, persons and entities. U.S. sanctions, in particular, are targeted against countries (such as Cuba, Iran, Sudan and Syria, among others) that are heavily involved in the petroleum and petrochemical industries, which includes drilling activities.

 

The laws and regulations concerning import activity, export recordkeeping and reporting, export control and economic sanctions are complex and constantly changing. These laws and regulations may be enacted, amended, enforced or interpreted in a manner materially impacting our operations. Shipments can be delayed and denied export or entry for a variety of reasons, some of which are outside our control and some of which may result from failure to comply with existing legal and regulatory regimes. Shipping delays or denials could cause unscheduled operational downtime. Any failure to comply with applicable legal and regulatory trading obligations could also result in criminal and civil penalties and sanctions, such as fines, imprisonment, debarment from government contracts, seizure of shipments and loss of import and export privileges.

 

Risks Inherent in an Investment in Us

 

Seadrill and its affiliates may compete with us.

 

Pursuant to the omnibus agreement that we and Seadrill will enter into in connection with the closing of this offering, Seadrill and its controlled affiliates (other than us, the Seadrill Member and our subsidiaries) generally will agree not to acquire, own, operate or contract for certain drilling rigs operating under drilling contracts of five or more years. The omnibus agreement, however, contains significant exceptions that may allow Seadrill or any of its controlled affiliates to compete with us, which could harm our business. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Noncompetition.”

 

Unitholders have limited voting rights, and our operating agreement restricts the voting rights of the unitholders owning more than 5% of our common units.

 

Unlike the holders of common stock in a corporation, holders of common units have only limited voting rights on matters affecting our business. We will hold a meeting of the members every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting. Common unitholders will be entitled to elect only four of the seven members of our board of directors. The elected directors will be elected on a staggered basis and will serve for three year terms. The Seadrill Member in its sole discretion will appoint the remaining three directors and set the terms for which those directors will serve. The operating agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management. Unitholders will have no right to elect the Seadrill Member, and the Seadrill Member may not be removed except by a vote of the holders of at least 66 2/3% of the outstanding common and subordinated units, including any units owned by the Seadrill Member and its affiliates, voting together as a single class.

 

41


Table of Contents

Our operating agreement further restricts unitholders’ voting rights by providing that if any person or group owns beneficially more than 5% of any class of units then outstanding, any such units owned by that person or group in excess of 5% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 5% will effectively be redistributed pro rata among the other common unitholders holding less than 5% of the voting power of all classes of units entitled to vote. The Seadrill Member, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 5% limitation except with respect to voting their common units in the election of the elected directors.

 

The Seadrill Member and its other affiliates own a controlling interest in us and have conflicts of interest and limited duties to us and our common unitholders, which may permit them to favor their own interests to your detriment.

 

Following this offering, Seadrill will own the Seadrill Member interest and a 78.8% limited liability company interest in us, assuming no exercise of the underwriters’ over-allotment option, and will own and control the Seadrill Member. We expect that certain of our officers and certain of our directors will be directors and/or officers of Seadrill and its affiliates and, as such, they will have fiduciary duties to Seadrill that may cause them to pursue business strategies that disproportionately benefit Seadrill or which otherwise are not in the best interests of us or our unitholders. Conflicts of interest may arise between Seadrill and its affiliates on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, Seadrill and its affiliates may favor their own interests over the interests of our unitholders. Please read “—Our operating agreement limits the duties the Seadrill Member and our directors and officers may have to our unitholders and restricts the remedies available to unitholders for actions taken by the Seadrill Member or our directors and officers.” These conflicts include, among others, the following situations:

 

   

neither our operating agreement nor any other agreement requires the Seadrill Member or Seadrill or its affiliates to pursue a business strategy that favors us or utilizes our assets, and Seadrill’s officers and directors have a fiduciary duty to make decisions in the best interests of the shareholders of Seadrill, which may be contrary to our interests;

 

   

our operating agreement provides that the Seadrill Member may make determinations or take or decline to take actions without regard to our or our unitholders’ interests. Specifically, the Seadrill Member may exercise its call right, pre-emptive rights, registration rights or right to make a determination to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, consent or withhold consent to any merger or consolidation of the company, appoint any directors or vote for the election of any director, vote or refrain from voting on amendments to our operating agreement that require a vote of the outstanding units, voluntarily withdraw from the company, transfer (to the extent permitted under our operating agreement) or refrain from transferring its units, the Seadrill Member interest or incentive distribution rights or vote upon the dissolution of the company;

 

   

the Seadrill Member and our directors and officers have limited their liabilities and any fiduciary duties they may have under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by the Seadrill Member and our directors and officers, all as set forth in the operating agreement;

 

   

the Seadrill Member is entitled to reimbursement of all costs incurred by it and its affiliates for our benefit;

 

   

our operating agreement does not restrict us from paying the Seadrill Member or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf;

 

42


Table of Contents
   

the Seadrill Member may exercise its right to call and purchase our common units if it and its affiliates own more than 80% of our common units; and

 

   

the Seadrill Member is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of its limited call right.

 

Although a majority of our directors will over time be elected by common unitholders, the Seadrill Member will likely have substantial influence on decisions made by our board of directors. Please read “Certain Relationships and Related Party Transactions,” “Conflicts of Interest and Fiduciary Duties” and “The Operating Agreement.”

 

Although we control OPCO, we owe duties to OPCO and its other owner, Seadrill, which may conflict with the interests of us and our unitholders.

 

Conflicts of interest may arise as a result of the relationships between us and our unitholders, on the one hand, and OPCO, and its other owner, Seadrill, on the other hand. Seadrill owns a 70% limited partner interest in Seadrill Operating LP, a 49% limited liability company interest in Seadrill Capricorn Holdings LLC and a 100% limited liability company interest in the Seadrill Member. Our directors have duties to manage OPCO in a manner beneficial to us. At the same time, our directors have a duty to manage OPCO in a manner beneficial to OPCO’s owners, including Seadrill. Our board of directors may resolve any such conflict and has broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in the best interest of us or our unitholders.

 

For example, conflicts of interest may arise in the following situations:

 

   

the allocation of shared overhead expenses to OPCO and us;

 

   

the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and OPCO or its subsidiaries, on the other hand;

 

   

the determination and timing of the amount of cash to be distributed to OPCO’s owners and the amount of cash to be reserved for the future conduct of OPCO’s business;

 

   

the decision as to whether OPCO should make asset or business acquisitions or dispositions, and on what terms;

 

   

the determination of the amount and timing of OPCO’s capital expenditures;

 

   

the determination of whether OPCO should use cash on hand, borrow or issue equity to raise cash to finance maintenance or expansion capital projects, repay indebtedness, meet working capital needs or otherwise; and

 

   

any decision we make to engage in business activities independent of, or in competition with, OPCO.

 

Certain of our officers face conflicts in the allocation of their time to our business.

 

Certain of our officers are not required to work full-time on our affairs and also perform services for other companies, including Seadrill. For example, Rune Magnus Lundetræ, who is our Chief Financial Officer, also provides services in a similar capacity for Seadrill. In addition, Graham Robjohns, who is our Chief Executive Officer, also acts as the Chief Executive Officer of Golar LNG Partners LP. These other companies conduct substantial businesses and activities of their own in which we have no economic interest. As a result, there could be material competition for the time and effort of our officers who also provide services to other companies, which could have a material adverse effect on our business, results of operations and financial condition. Please read “Management.”

 

Our operating agreement limits the duties the Seadrill Member and our directors and officers may have to our unitholders and restricts the remedies available to unitholders for actions taken by the Seadrill Member or our directors and officers.

 

Our operating agreement provides that our board of directors will have the authority to oversee and direct our operations, management and policies on an exclusive basis. The Marshall Islands Limited Liability Company

 

43


Table of Contents

Act of 1996, or the Marshall Islands Act, states that a member or manager’s “duties and liabilities may be expanded or restricted by provisions in a limited liability company agreement.” As permitted by the Marshall Islands Act, our operating agreement contains provisions that reduce the standards to which the Seadrill Member and our directors and our officers may otherwise be held by Marshall Islands law. For example, our operating agreement:

 

   

provides that the Seadrill Member may make determinations or take or decline to take actions without regard to our or our unitholders’ interests. The Seadrill Member may consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting us, our affiliates or our unitholders. Decisions made by the Seadrill Member will be made by its sole owner, Seadrill. Specifically, the Seadrill Member may decide to exercise its right to make a determination to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, call right, pre-emptive rights or registration rights, consent or withhold consent to any merger or consolidation of the company, appoint any directors or vote for the election of any director, vote or refrain from voting on amendments to our operating agreement that require a vote of the outstanding units, voluntarily withdraw from the company, transfer (to the extent permitted under our operating agreement) or refrain from transferring its units, the Seadrill Member interest or incentive distribution rights or vote upon the dissolution of the company;

 

   

provides that our directors and officers are entitled to make other decisions in “good faith,” meaning they believe that the decision is in our best interests;

 

   

generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of our board of directors and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our board of directors may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and

 

   

provides that neither the Seadrill Member nor our officers or our directors will be liable for monetary damages to us, our members or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the Seadrill Member, our directors or officers or those other persons engaged in actual fraud or willful misconduct.

 

The standard of care applicable to an officer or director of Seadrill when that individual is acting in such capacity will, in a number of circumstances, be stricter than the standard of care the same individual may have when acting as an officer or director of us. The fact that an officer or director of us may have a fiduciary duty to Seadrill does not, however, diminish the duty that such individual owes to us. Compliance by such officer or director of us with such individual’s duty to us should not result in a violation of such individual’s duties to Seadrill.

 

In order to become a member of our company, a common unitholder is required to agree to be bound by the provisions in the operating agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties.”

 

Fees and cost reimbursements, which Seadrill Management and certain other affiliates of Seadrill will determine for services provided to us, OPCO and its subsidiaries, will be substantial, will be payable regardless of our profitability and will reduce our cash available for distribution to you.

 

Pursuant to the advisory, technical and administrative service agreements, OPCO will pay fees for services provided to OPCO and its subsidiaries by certain affiliates of Seadrill, and OPCO and its subsidiaries will reimburse these entities for all expenses they incur on their behalf. These fees and expenses will include all costs and expenses incurred in providing certain advisory, technical and administrative services to OPCO’s subsidiaries. We expect the amount of these fees and expenses to be approximately $11.2 million for the twelve months ending September 30, 2013.

 

 

44


Table of Contents

In addition, pursuant to the management and administrative services agreements, Seadrill Management and Seadrill UK Ltd. will provide us with significant management, administrative, financial and other support services and/or personnel. We will reimburse Seadrill Management and Seadrill UK Ltd. for the reasonable costs and expenses incurred in connection with the provision of these services. In addition, we will pay Seadrill Management and Seadrill UK Ltd. a management fee equal to 5% of the costs and expenses incurred in connection with providing services to us. We expect that we will pay approximately $8.2 million in total under the management and administrative services agreements for the twelve months ending September 30, 2013.

 

There is no cap on the amount of fees and cost reimbursements that OPCO and its subsidiaries may be required to pay such affiliates of Seadrill pursuant to the advisory, technical and administrative service agreements, or that we may be required to pay under the management and administrative services agreements. For a description of the advisory, technical and administrative service agreements and the management and administrative services agreements, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.” The fees and expenses payable pursuant to the advisory, technical and administrative service agreements and the management and administrative services agreements will be payable without regard to our financial condition or results of operations. The payment of fees to and the reimbursement of expenses of Seadrill Management, Seadrill UK Ltd. and certain other affiliates of Seadrill could adversely affect our ability to pay cash distributions to you.

 

Our operating agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or the Seadrill Member, and even if public unitholders are dissatisfied, they will be unable to remove the Seadrill Member without Seadrill’s consent, unless Seadrill’s ownership interest in us is decreased; all of which could diminish the trading price of our common units.

 

Our operating agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or the Seadrill Member.

 

   

The unitholders will be unable initially to remove the Seadrill Member without its consent because the Seadrill Member and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 66 2/3% of all outstanding common and subordinated units voting together as a single class is required to remove the Seadrill Member. Following the closing of this offering, Seadrill will own 78.8% of the outstanding common and subordinated units, assuming no exercise of the underwriters’ over-allotment option.

 

   

If the Seadrill Member is removed without “cause” during the subordination period and units held by the Seadrill Member and Seadrill are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units, any existing arrearages on the common units will be extinguished, and the Seadrill Member will have the right to convert its incentive distribution rights into common units or to receive cash in exchange for those interests based on the fair market value of those interests at the time. A removal of the Seadrill Member under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests. Any conversion of the Seadrill Member interest or incentive distribution rights would be dilutive to existing unitholders. Furthermore, any cash payment in lieu of such conversion could be prohibitively expensive. “Cause” is narrowly defined to mean that with respect to a director or officer, a court of competent jurisdiction has entered a final, non-appealable judgment finding such director or officer liable for actual fraud or willful misconduct, and with respect to the Seadrill Member, the Seadrill Member is in breach of the operating agreement or a court of competent jurisdiction has entered a final, non-appealable judgment finding the Seadrill Member liable for actual fraud or willful misconduct against the Company or its members, in their capacity as such. Cause does not include most cases of charges of poor business decisions, such as charges of poor management of our business by the directors appointed by the Seadrill Member, so the removal of the Seadrill Member because of the unitholders’ dissatisfaction

 

45


Table of Contents
 

with the Seadrill Member’s decisions in this regard would most likely result in the termination of the subordination period.

 

   

Common unitholders will be entitled to elect only four of the seven members of our board of directors. The Seadrill Member in its sole discretion will appoint the remaining three directors.

 

   

Election of the four directors elected by unitholders is staggered, meaning that the members of only one of three classes of our elected directors will be selected each year. In addition, the directors appointed by the Seadrill Member will serve for terms determined by the Seadrill Member.

 

   

Our operating agreement contains provisions limiting the ability of unitholders to call meetings of unitholders, to nominate directors and to acquire information about our operations as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

   

Unitholders’ voting rights are further restricted by the operating agreement provision providing that if any person or group owns beneficially more than 5% of any class of units then outstanding, any such units owned by that person or group in excess of 5% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law. The voting rights of any such unitholders in excess of 5% will effectively be redistributed pro rata among the other common unitholders holding less than 5% of the voting power of all classes of units entitled to vote. The Seadrill Member, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 5% limitation except with respect to voting their common units in the election of the elected directors.

 

   

There are no restrictions in our operating agreement on our ability to issue additional equity securities.

 

The effect of these provisions may be to diminish the price at which the common units will trade.

 

The control of the Seadrill Member may be transferred to a third party without unitholder consent.

 

The Seadrill Member may transfer its Seadrill Member interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. In addition, our operating agreement does not restrict the ability of the members of the Seadrill Member from transferring their respective limited liability company interests in the Seadrill Member to a third party.

 

If we cease to control OPCO, we may be deemed to be an investment company under the Investment Company Act of 1940.

 

If we cease to manage and control OPCO and are deemed to be an investment company under the Investment Company Act of 1940 because of our ownership of OPCO interests, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage, and require us to add additional directors who are independent of us or our affiliates.

 

Substantial future sales of our common units in the public market could cause the price of our common units to fall.

 

We have granted registration rights to Seadrill and certain of its affiliates. These unitholders have the right, subject to some conditions, to require us to file registration statements covering any of our common, subordinated or other equity securities owned by them or to include those securities in registration statements that we may file for ourselves or other unitholders. Upon the closing of this offering and assuming no exercise of the

 

46


Table of Contents

underwriters’ over-allotment option, Seadrill will own 16,065,025 common units and 16,543,350 subordinated units and all of the incentive distribution rights (through its ownership of the Seadrill Member). Following their registration and sale under the applicable registration statement, those securities will become freely tradable. By exercising their registration rights and selling a large number of common units or other securities, these unitholders could cause the price of our common units to decline.

 

You will experience immediate and substantial dilution of $13.36 per common unit.

 

The assumed initial public offering price of $21.00 per common unit (the midpoint of the range set forth on the cover of this prospectus) exceeds pro forma net tangible book value of $7.64 per common unit. Based on the assumed initial public offering price, you will incur immediate and substantial dilution of $13.36 per common unit. This dilution results primarily because the assets contributed by the Seadrill Member and its affiliates are recorded at their historical cost, and not their fair value, in accordance with U.S. GAAP. Please read “Dilution.”

 

The Seadrill Member, as the initial holder of all of the incentive distribution rights, may elect to cause us to issue additional common units to it in connection with a resetting of the target distribution levels related to the Seadrill Member’s incentive distribution rights without the approval of the conflicts committee of our board of directors or holders of our common units and subordinated units. This may result in lower distributions to holders of our common units in certain situations.

 

The Seadrill Member, as the initial holder of all of the incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and the Seadrill Member has received incentive distributions at the highest level to which it is entitled (50%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Following a reset election by the Seadrill Member, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount.

 

In connection with resetting these target distribution levels, the Seadrill Member will be entitled to receive a number of common units equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to the Seadrill Member on the incentive distribution rights in the prior two quarters. We anticipate that the Seadrill Member would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that the Seadrill Member could exercise this reset election at a time when it is experiencing, or may be expected to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued our common units, rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued additional common units to the Seadrill Member in connection with resetting the target distribution levels related to the Seadrill Member’s incentive distribution rights. Please read “How We Make Cash Distributions—Incentive Distribution Rights” and “How We Make Cash Distributions—Seadrill Member’s Right to Reset Incentive Distribution Levels.”

 

We may issue additional equity securities, including securities senior to the common units, without your approval, which would dilute your ownership interests.

 

We may, without the approval of our unitholders, issue an unlimited number of additional units or other equity securities. In addition, we may issue an unlimited number of units that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

47


Table of Contents
   

the amount of cash available for distribution on each unit may decrease;

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of the common units may decline.

 

Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.

 

During the subordination period, which we define elsewhere in this prospectus, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.3875 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units. Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash. See “How We Make Cash Distributions—Subordination Period,” “—Distributions of Available Cash From Operating Surplus During the Subordination Period” and “—Distributions of Available Cash From Operating Surplus After the Subordination Period.”

 

In establishing cash reserves, our board of directors may reduce the amount of cash available for distribution to you.

 

OPCO’s operating agreements provide that our board of directors will approve the amount of reserves from OPCO’s cash flow that will be retained by OPCO to fund its future operating and capital expenditures. Our operating agreement requires our board of directors to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating and capital expenditures. These reserves also will affect the amount of cash available for distribution by OPCO to us and by us to our unitholders. In addition, our board of directors may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters. As described above in “—Risks Inherent in Our Business—OPCO must make substantial capital and operating expenditures to maintain the operating capacity of its fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted,” our operating agreement requires our board of directors each quarter to deduct from operating surplus estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, which could reduce the amount of available cash for distribution. The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our board of directors at least once a year, provided that any change must be approved by the conflicts committee of our board of directors.

 

The Seadrill Member has a limited call right that may require you to sell your common units at an undesirable time or price.

 

If at any time the Seadrill Member and its affiliates own more than 80% of the common units, the Seadrill Member will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than the then-current market price of our common units. The Seadrill Member is not obligated to obtain a fairness opinion regarding

 

48


Table of Contents

the value of the common units to be repurchased by it upon the exercise of this limited call right. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. For additional information about the limited call right, please read “The Operating Agreement—Limited Call Right.”

 

At the completion of this offering and assuming no exercise of the underwriters’ over-allotment option, Seadrill, which owns and controls the Seadrill Member, will own 64.7% of our common units. At the end of the subordination period, assuming no additional issuances of common units, no exercise of the underwriters’ over-allotment option and the conversion of our subordinated units into common units, Seadrill will own 78.8% of our common units.

 

We can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.

 

Our operating agreement allows us to make working capital borrowings to pay distributions. Accordingly, if we have available borrowing capacity, we can make distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions. Any working capital borrowings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business. For more information, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

Increases in interest rates may cause the market price of our common units to decline.

 

An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units. Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities may cause the trading price of our common units to decline.

 

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

 

Prior to this offering, there has been no public market for the common units. After this offering, there will be only 8,750,000 publicly traded common units, assuming no exercise of the underwriters’ over-allotment option. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

Unitholders may have liability to repay distributions.

 

Under some circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. The Marshall Islands Act provides that for a period of three years from the date of the impermissible distribution, members who received the distribution and who knew at the time of the distribution that it violated the Marshall Islands Act will be liable to the limited liability company for the distribution amount. Assignees who become substituted members are liable for the obligations of the assignor to make contributions to the company that are known to the assignee at the time it became members and for unknown obligations if the liabilities could be determined from the operating agreement. Liabilities to members on account of their limited liability company interest and liabilities that are non-recourse to the company are not counted for purposes of determining whether a distribution is permitted.

 

49


Table of Contents

We have no history operating as a separate publicly traded entity and will incur increased costs as a result of being a publicly traded limited liability company.

 

We have no history operating as a separate publicly traded entity. As a publicly traded limited liability company, we will be required to comply with the SEC’s reporting requirements and with corporate governance and related requirements of the Sarbanes-Oxley Act, the SEC and the securities exchange on which our common units will be listed. We will incur significant legal, accounting and other expenses in complying with these and other applicable regulations. We anticipate that our incremental general and administrative expenses as a publicly traded limited liability company will be approximately $2.0 million annually, and will include costs associated with annual reports to unitholders, tax return preparation, investor relations, registrar and transfer agent fees, audit fees, legal fees, incremental director and officer liability insurance costs and officer and director compensation.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common units less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” as described under “Summary—Implications of Being an Emerging Growth Company.” We cannot predict if investors will find our common units less attractive because we may rely on these exemptions. If some investors find our common units less attractive as a result, there may be a less active trading market for our common units and our unit price may be more volatile.

 

In addition, under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of the our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. For as long as we take advantage of the reduced reporting obligations, the information that we provide unitholders may be different than information provided by other public companies.

 

We have been organized as a limited liability company under the laws of the Republic of the Marshall Islands, which does not have a well-developed body of limited liability company law.

 

Our limited liability company affairs are governed by our operating agreement and by the Marshall Islands Act. The provisions of the Marshall Islands Act resemble provisions of the limited liability company laws of a number of states in the United States, most notably Delaware. The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Limited Liability Company Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands courts, interpreted according to the non-statutory law (or case law) of the State of Delaware. There have been, however, few, if any, court cases in the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited liability company statute. Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as the courts in Delaware. For example, the rights of our unitholders and the duties of the Seadrill Member and our directors and officers under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware. As a result, unitholders may have more difficulty in protecting their interests in the face of actions by the Seadrill Member and our officers and directors than would unitholders of a similarly organized limited liability company in the United States.

 

Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

 

We are organized under the laws of the Marshall Islands, and substantially all of our assets are located outside of the United States. In addition, the Seadrill Member is a Marshall Islands limited liability company, and our directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of

 

50


Table of Contents

the assets of these non-residents are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States if you believe that your rights have been infringed under securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict you from enforcing a judgment against our assets or the assets of the Seadrill Member or our directors or officers. For more information regarding the relevant laws of the Marshall Islands, please read “Service of Process and Enforcement of Civil Liabilities.”

 

Tax Risks

 

In addition to the following risk factors, you should read “Business—Taxation of the Company,” “Material U.S. Federal Income Tax Considerations” and “Non-United States Tax Considerations” for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our common units.

 

We will be subject to taxes, which will reduce our cash available for distribution to you.

 

Some of our subsidiaries will be subject to tax in the jurisdictions in which they are organized or operate, reducing the amount of cash available for distribution. In computing our tax obligation in these jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing authorities. We cannot assure you that upon review of these positions the applicable authorities will agree with our positions. A successful challenge by a tax authority could result in additional tax imposed on our subsidiaries, further reducing the cash available for distribution. In addition, changes in our operations could result in additional tax being imposed on us, OPCO or our or its subsidiaries in jurisdictions in which operations are conducted. Please read “Business—Taxation of the Company.”

 

U.S. tax authorities could treat us as a “passive foreign investment company,” which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes if at least 75% of its gross income for any taxable year consists of “passive income” or at least 50% of the average value of its assets produce, or are held for the production of, “passive income.” For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.

 

Based on our current and projected method of operation, and an opinion of our U.S. counsel, Vinson & Elkins L.L.P., we believe that we will not be a PFIC for our 2012 taxable year, and we expect that we will not be treated as a PFIC for any future taxable year. We have received an opinion of our U.S. counsel in support of this position that concludes that the income our subsidiaries earn from our present drilling contracts should not constitute passive income for purposes of determining whether we are a PFIC. In addition, we have represented to our U.S. counsel that we expect that more than 25% of our gross income for our 2012 taxable year and each future year will arise from such drilling contracts or other income our U.S. counsel has opined does not constitute passive income, and more than 50% of the average value of our assets for each such year will be held for the production of such nonpassive income. Assuming the composition of our income and assets is consistent with these expectations, and assuming the accuracy of other representations we have made to our U.S. counsel for purposes of their opinion, our U.S. counsel is of the opinion that we should not be a PFIC for our 2012 taxable year or any future year.

 

While we have received an opinion of our U.S. counsel in support of our position, our counsel has advised us that the conclusions in this area are not free from doubt and the U.S. Internal Revenue Service, or IRS, or a

 

51


Table of Contents

court could disagree with this opinion and our position. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to each taxable year, we cannot assure you that the nature of our operations will not change in the future and that we will not become a PFIC in any taxable year. If the IRS were to find that we are or have been a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), our U.S. unitholders would face adverse U.S. federal income tax consequences. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. federal income tax consequences to U.S. unitholders if we are treated as a PFIC.

 

The current preferential tax rates applicable to qualified dividend income are scheduled to expire before our first planned distribution.

 

Under current law, distributions received from an entity treated as a corporation for U.S. federal income tax purposes, such as us, may be treated as qualified dividend income eligible for preferential rates of U.S. federal income tax to U.S. individual unitholders (and certain other U.S. unitholders). In the absence of legislation extending the preferential treatment of such distributions, however, this preferential treatment will expire for dividends received in taxable years beginning on or after January 1, 2013, and those dividends will instead be taxed at rates applicable to ordinary income. As described herein, our first planned distribution is not expected to be made until after January 1, 2013. Accordingly, absent the enactment of legislation extending the term of the preferential rates of taxation applicable to qualified dividend income, distributions received from us by U.S. individual holders (and certain other U.S. unitholders) that are treated as dividends for federal income tax purposes will be taxed at graduated tax rates applicable to ordinary income. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Distributions.”

 

The ratio of dividend income to distributions on our common units is subject to business, economic and other uncertainties as well as tax reporting positions with which the IRS may disagree, which could result in a higher ratio of dividend income to distributions and adversely affect the value of our common units.

 

We estimate that less than 20% of the total cash distributions made to a purchaser of common units in this offering who owns those units from the date of this offering through December 31, 2014 will constitute dividend income. The remaining portion of the distributions will be treated first as a nontaxable return of capital to the extent of the purchaser’s tax basis in its common units and thereafter as capital gain. These estimates are based on certain assumptions that are subject to business, economic, regulatory, competitive and political uncertainties beyond our control. In addition, these estimates are based on current U.S. federal income tax law and tax reporting positions that we will adopt and with which the IRS could disagree. As a result of these uncertainties, these estimates may be incorrect and the actual percentage of total cash distributions that will constitute dividend income could be higher, and any difference could adversely affect the value of the common units. Please read “Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Ratio of Dividend Income to Distributions.”

 

52


Table of Contents

FORWARD-LOOKING STATEMENTS

 

Some of the information included in this prospectus (including our financial forecast and any other statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto, including statements and assumptions concerning OPCO) contains forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements which are also forward-looking statements. Such statements include, in particular, statements about our plans, strategies, business prospects, changes and trends in our business, and the markets in which we and OPCO operate as described in this prospectus. In some cases, you can identify the forward-looking statements by the use of words such as “may,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “forecast,” “believe,” “estimate,” “predict,” “propose,” “potential,” “continue” or the negative of these terms or other comparable terminology.

 

Forward-looking statements appear in a number of places and include statements with respect to, among other things:

 

   

forecasts of our ability to make cash distributions on the units and the amount of any borrowings that may be necessary to make such distributions;

 

   

the ability to borrow under the sponsor credit facility;

 

   

future financial condition or results of operations and future revenues and expenses;

 

   

the repayment of debt;

 

   

expected compliance with financing agreements and the expected effect of restrictive covenants in such agreements;

 

   

the failure of OPCO’s drilling rigs to perform satisfactorily or to our expectations;

 

   

fluctuations in the international price of oil;

 

   

discoveries of new sources of oil that do not require deepwater drilling rigs;

 

   

the development of alternative sources of fuel and energy;

 

   

technological advances, including in production, refining and energy efficiency;

 

   

severe weather events and natural disasters;

 

   

our ability to meet any future capital expenditure requirements;

 

   

our ability to maintain operating expenses at adequate and profitable levels;

 

   

incurrence of cost overruns in the maintenance or other work performed on OPCO’s drilling rigs;

 

   

our ability to conduct and obtain investment for business activities involving U.S. sanctioned countries, entities and individuals;

 

   

our ability to leverage Seadrill’s relationship and reputation in the offshore drilling industry;

 

   

our ability to purchase drilling rigs from Seadrill in the future, including the T-15 and T-16;

 

   

increasing our ownership interest in OPCO;

 

   

delay in, payments by, or disputes with OPCO’s customers under its drilling contracts;

 

   

OPCO’s ability to comply with, maintain, renew or extend its existing drilling contracts;

 

   

OPCO’s ability to re-deploy its drilling rigs upon termination of its existing drilling contracts at profitable dayrates;

 

   

our ability to respond to new technological requirements in the areas in which we operate;

 

53


Table of Contents
   

the occurrence of any accident involving OPCO’s drilling rigs or other drilling rigs in the industry;

 

   

changes in governmental regulations that affect us or OPCO and the interpretations of those regulations, particularly those that relate to environmental matters, export or import and economic sanctions or trade embargo matters, regulations applicable to the oil industry and tax and royalty legislation;

 

   

increased competition in the offshore drilling industry and other actions of competitors, including decisions to deploy drilling rigs in the areas in which OPCO currently operates;

 

   

the increased availability on a timely basis of drilling rigs, supplies, personnel and oil field services in the areas in which OPCO operates;

 

   

general economic, political and business conditions globally;

 

   

military operations, terrorist acts, wars or embargoes;

 

   

potential disruption of operations due to accidents, political events, piracy or acts by terrorists;

 

   

our or OPCO’s ability to obtain financing in sufficient amounts and on adequate terms;

 

   

workplace safety regulation and employee claims;

 

   

the cost and availability of adequate insurance coverage;

 

   

our anticipated incremental general and administrative expenses as a publicly traded limited liability company and our fees and expenses payable under the advisory, technical and administrative services agreements and the management and administrative services agreements;

 

   

the anticipated taxation of our company and distributions to our unitholders;

 

   

future sales of our common units in the public market; and

 

   

our business strategy and other plans and objectives for future operations.

 

These and other forward-looking statements are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties, including those risks discussed in “Risk Factors.” The risks, uncertainties and assumptions involve known and unknown risks and are inherently subject to significant uncertainties and contingencies, many of which are beyond our control. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

 

We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement.

 

54


Table of Contents

USE OF PROCEEDS

 

We expect to receive net proceeds of approximately $167.3 million from the sale of 8,750,000 common units offered by this prospectus, assuming an initial public offering price of $21.00 per unit (the midpoint of the range set forth on the cover of this prospectus) and after deducting estimated underwriting discounts and commissions and structuring fees and paying estimated offering expenses. We intend to use the net proceeds from this offering as consideration for the acquisition of our interest in OPCO. In addition to the net proceeds from this offering, Seadrill will also receive the following:

 

   

16,065,025 common units and 16,543,350 subordinated units;

 

   

the incentive distribution rights; and

 

   

the Seadrill Member interest.

 

We have granted the underwriters a 30-day option to purchase up to 1,312,500 additional common units to cover over-allotments, if any. If the underwriters exercise their over-allotment option, we will use the net proceeds to redeem common units from Seadrill.

 

A $1.00 increase or decrease in the assumed initial public offering price of $21.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount and commissions and offering expenses payable by us, to increase or decrease, respectively, by approximately $8.2 million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $22.00 per common unit, would increase net proceeds to us from this offering by approximately $28.8 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial offering price to $20.00 per common unit, would decrease the net proceeds to us from this offering by approximately $26.9 million.

 

55


Table of Contents

CAPITALIZATION

 

The following table sets forth:

 

   

our historical cash and capitalization as of June 30, 2012; and

 

   

our pro forma cash and capitalization as of June 30, 2012, which reflects this offering and the other transactions described in the unaudited Pro Forma Combined Consolidated Balance Sheet included elsewhere in this prospectus.

 

The following table is derived from and should be read together with the historical unaudited Condensed Interim Combined Consolidated Carve-out Financial Statements and the unaudited Pro Forma Combined Consolidated Balance Sheet and the accompanying notes contained elsewhere in this prospectus. You should also read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2012  
     Historical      Pro Forma  
     (in millions)  

Cash and cash equivalents

   $ 2.9       $ 2.9   
  

 

 

    

 

 

 

Debt:(1)

     

Sponsor credit facility(2)

     —           —     

Current portion of long-term debt

     180.9         180.9   

Non-current portion of long-term debt

     1,059.2         1,056.8   
  

 

 

    

 

 

 

Total debt(3)

     1,240.1         1,237.7   
  

 

 

    

 

 

 

Equity:

     

Owner’s/members’ equity

     934.4         —     

Held by public:

     

Common units(4)

     —           167.3   

Held by Seadrill:

     

Common units(4)

     —           73.2   

Subordinated units(4)

     —           75.3   
  

 

 

    

 

 

 

Equity attributable to Seadrill Partners LLC

     934.4         315.8   

Non-controlling interest(5)

     —           621.0   
  

 

 

    

 

 

 

Total capitalization(6)

   $ 2,174.5       $ 2,174.5   
  

 

 

    

 

 

 

 

(1)   All of our outstanding debt is secured by OPCO’s drilling rigs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”
(2)   At or prior to the closing of this offering, OPCO will enter into the sponsor credit facility with Seadrill. We do not expect OPCO to draw under this credit facility at the closing of this offering. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities—Sponsor Credit Facility.”
(3)   As of September 30, 2012, total consolidated debt (including indebtedness outstanding under OPCO’s financing agreements) was $1,192.5 million.
(4)   Equity attributable to common units held by the public represents the net proceeds from the offering. Equity attributable to common and subordinated units held by Seadrill represents the net assets contributed to Seadrill Partners LLC from Seadrill before allocation of the net proceeds, allocated pro rata to the common and subordinated units, based on the assumption that the common and subordinated units are substantially equal in value. No equity has been attributed to the incentive distribution rights owned by the Seadrill Member, based on an assumption that these rights have nominal value at the time of this offering.

 

56


Table of Contents
(5)   Prior to the closing of this offering, we will acquire (i) a 30% limited partner interest in Seadrill Operating LP, as well as the non-economic general partner interest in Seadrill Operating LP through our 100% ownership of its general partner, Seadrill Operating GP LLC, and (ii) a 51% limited liability company interest in Seadrill Capricorn Holdings LLC. The non-controlling interest comprises (i) the 70% Seadrill limited partner interest in Seadrill Operating LP, which will own an approximate 56% interest in the entity that owns and operates the West Capella and a 100% interest in the entities that own and operate the West Aquarius and the West Vencedor and (ii) the 49% Seadrill limited liability company interest in Seadrill Capricorn Holdings LLC, which owns 100% of the entities that own and operate the West Capricorn.
(6)   A $1.00 increase or decrease in the assumed initial public offering price of $21.00 per common unit would cause the net proceeds from this offering, after deducting the estimated underwriting discount and commissions and offering expenses payable by us, to increase or decrease, respectively, by approximately $8.2 million. In addition, we may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed public offering price to $22.00 per common unit, would increase net proceeds to us from this offering by approximately $28.8 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed initial offering price to $20.00 per common unit, would decrease the net proceeds to us from this offering by approximately $26.9 million.

 

57


Table of Contents

DILUTION

 

Dilution is the amount by which the offering price will exceed the net tangible book value per common unit after this offering. Based on the initial public offering price of $21.00 per common unit (the midpoint of the range set forth on the cover of this prospectus), on a pro forma basis as of June 30, 2012, after giving effect to this offering of common units, the application of the net proceeds in the manner described under “Use of Proceeds” and the formation and contribution transactions related to this offering, our pro forma net tangible book value would have been $148.5 million, or $7.64 per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit

      $ 21.00   

Pro forma net tangible book value per common unit before this offering(1)

   $ 4.55      

Increase in net tangible book value per common unit attributable to purchasers in this offering

     3.08      
  

 

 

    

Less: Pro forma net tangible book value per common unit after this offering(2)

        7.64   
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in this offering

      $ 13.36   
     

 

 

 

 

(1)   Determined by dividing the total number of units (16,065,025 common units and 16,543,350 subordinated units, assuming no exercise of the underwriters’ over-allotment option) to be issued to the Seadrill Member and its affiliates for their contribution of assets and liabilities to us into the net tangible book value of the contributed assets and liabilities.
(2)   Determined by dividing the total number of units (24,815,025 common units and 16,543,350 subordinated units, assuming no exercise of the underwriters’ over-allotment option) to be outstanding after this offering into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering.
(3)   Each $1.00 increase or decrease in the assumed public offering price of $21.00 per common unit would increase or decrease, respectively, our pro forma net tangible book value by approximately $8.2 million, or approximately $0.94 per common unit, and dilution per common unit to investors in this offering by approximately $1.00 per common unit, after deducting the estimated underwriting discount and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. An increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $22.00 per common unit, would result in a pro forma net tangible book value of approximately $119.7 million, or $7.45 per common unit, and dilution per common unit to investors in this offering would be $14.55 per common unit. Similarly, a decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed public offering price to $20.00 per common unit, would result in an pro forma net tangible book value of approximately $175.3 million, or $7.82 per common unit, and dilution per common unit to investors in this offering would be $12.18 per common unit. The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

 

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the Seadrill Member and its affiliates and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total Consideration  
     Number      Percent     Amount      Percent  

Seadrill Member and its affiliates(1)(2)

     32,608,375         78.8   $ 148,467,265         47.0

New investors

     8,750,000         21.2        167,306,250         53.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     41,358,375         100   $ 315,773,515         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

58


Table of Contents

 

(1)   Upon consummation of the transactions contemplated by this prospectus, the Seadrill Member and its affiliates will own an aggregate of 16,065,025 common units and 16,543,350 subordinated units, assuming no exercise of the underwriters’ over-allotment option.
(2)   The assets contributed by the Seadrill Member and its affiliates were recorded at historical book value, rather than fair value, in accordance with U.S. GAAP. Book value of the consideration provided by the Seadrill Member and its affiliates, as of June 30, 2012, was $148.5 million.

 

59


Table of Contents

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with specific assumptions included in this section. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

 

Our wholly owned subsidiary, Seadrill Operating GP LLC, the general partner of Seadrill Operating LP, will manage Seadrill Operating LP’s operations and activities. Our board of directors has the authority to appoint and elect the directors of Seadrill Operating GP LLC, who in turn will appoint the officers of Seadrill Operating GP LLC. Certain of our directors and officers will also serve as directors or executive officers of Seadrill Operating GP LLC. The partnership agreement of Seadrill Operating LP will provide that certain actions relating to Seadrill Operating LP must be approved by our board of directors. These actions will include, among other things, establishing maintenance and replacement capital and other cash reserves and the determination of the amount of quarterly distributions by Seadrill Operating LP to its partners, including us. In addition, we own 51% of the limited liability company interests in Seadrill Capricorn Holdings LLC and control its operations and activities. Please read “Certain Relationships and Related Party Transactions—OPCO Operating Agreements.”

 

General

 

Rationale for Our Cash Distribution Policy

 

Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributing our available cash (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. We will generally finance any expansion capital expenditures from external financing sources, including borrowings from commercial banks and the issuance of equity and debt securities. Our cash distribution policy is consistent with the terms of our operating agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves).

 

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

 

There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

   

Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our operating agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our board of directors to establish reserves and other limitations.

 

   

The board of directors of Seadrill Operating LP’s general partner, Seadrill Operating GP LLC (subject to approval by our board of directors), has authority to establish reserves for the prudent conduct of its business. In addition our board of directors controls Seadrill Capricorn Holdings LLC and has the authority to establish reserves for the prudent conduct of its business. The establishment of these reserves could result in a reduction in cash distributions to you from levels we currently anticipate pursuant to our stated cash distribution policy.

 

   

Our ability to make cash distributions will be limited by restrictions on distributions under OPCO’s financing agreements. OPCO’s financing agreements contain material financial tests and covenants that must be satisfied in order to pay distributions. If OPCO is unable to satisfy the restrictions included in any of its financing agreements or is otherwise in default under any of those agreements, it could have a material adverse effect on OPCO’s ability to make cash distributions to us and our ability to make cash distributions to you, notwithstanding our stated cash distribution policy. These financial tests and covenants are described in this prospectus in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

 

60


Table of Contents
   

OPCO will be required to make substantial capital expenditures to maintain and replace its fleet. These expenditures may fluctuate significantly over time, particularly as drilling rigs near the end of their useful lives. In order to minimize these fluctuations, we are required to deduct estimated, as opposed to actual, maintenance and replacement capital expenditures from the amount of cash that we would otherwise have available for distribution to our unitholders. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted.

 

   

Although our operating agreement requires us to distribute all of our available cash, our operating agreement, including provisions requiring us to make cash distributions, may be amended. During the subordination period, with certain exceptions, our operating agreement may not be amended without the approval of a majority of the units held by non-affiliated common unitholders. After the subordination period has ended, our operating agreement can be amended with the approval of a majority of the outstanding common units, including those held by Seadrill. At the closing of this offering, Seadrill will own approximately 78.8% of our common units and all of our subordinated units. Please read “The Operating Agreement—Amendment of the Operating Agreement.”

 

   

Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our operating agreement.

 

   

Under Section 40 of the Marshall Islands Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to, among other things, changes in our business, including decreases in total operating revenues, decreases in dayrates, the loss of a drilling rig, increases in operating or general and administrative expenses, principal and interest payments on outstanding debt, taxes, working capital requirements, maintenance and replacement capital expenditures or anticipated cash needs. Please read “Risk Factors” for a discussion of these factors.

 

Our ability to make distributions to our unitholders depends on the performance of our controlled affiliates, including OPCO, and their ability to distribute cash to us. Upon the closing of this offering, our interest in OPCO will be our only cash-generating asset. The ability of our controlled affiliates, including OPCO, to make distributions to us may be restricted by, among other things, the provisions of existing and future indebtedness, applicable limited partnership and limited liability company laws and other laws and regulations.

 

Our Ability to Grow Depends on Our and OPCO’s Ability to Access External Capital

 

Because we and OPCO distribute all of our respective available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. We expect that we and OPCO will rely upon external financing sources, including commercial borrowings and the issuance of debt and equity securities, to fund acquisitions and capital expenditures. As a result, to the extent we or OPCO are unable to finance growth externally, the cash distribution policy will significantly impair our and OPCO’s ability to grow. To the extent we issue additional units in connection with any acquisitions or capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may affect the available cash that we have to distribute on each unit. There are no limitations in our operating agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional borrowings or other debt by OPCO or us to finance growth would result in increased interest expense, which in turn may affect the available cash that OPCO has to distribute to us and that we have to distribute to our unitholders.

 

61


Table of Contents

Initial Distribution Rate

 

Upon completion of this offering, our board of directors will adopt a policy pursuant to which we will declare an initial quarterly distribution of $0.3875 per unit for each complete quarter, or $1.55 per unit on an annualized basis, to be paid no later than 45 days after the end of each fiscal quarter (beginning with the quarter ending December 31, 2012). This equates to an aggregate cash distribution of $16.0 million per quarter, or $64.1 million per year, in each case based on the number of common units and subordinated units outstanding immediately after completion of this offering. Our ability to make cash distributions at the initial distribution rate pursuant to this policy will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.”

 

The table below sets forth the number of common units and subordinated units that will be outstanding upon the closing of this offering and the aggregate distribution amounts payable on such units during the year following the closing of this offering at our initial distribution rate of $0.3875 per unit per quarter ($1.55 per unit on an annualized basis).

 

          Distributions
      Number of
Units
   One
Quarter(1)
   Four
Quarters

Common units

   24,815,025      $9,615,822    $38,463,289

Subordinated units

   16,543,350        6,410,548      25,642,193
  

 

  

 

  

 

Total

   41,358,375    $16,026,370    $64,105,482
  

 

  

 

  

 

 

(1)   Actual payments of distributions on the common units and subordinated units are expected to be approximately $11.5 million for the period between the estimated closing date of this offering (October 26, 2012) and December 31, 2012.

 

During the subordination period, before we make any quarterly distributions to subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution plus any arrearages in distributions from prior quarters. Please read “How We Make Cash Distributions—Subordination Period.” We cannot guarantee, however, that we will pay the minimum quarterly distribution or any amount on the common units in any quarter.

 

Forecasted Results of Operations for the Twelve Months Ending September 30, 2013

 

In this section, we present in detail the basis for our belief that we will be able to pay our minimum quarterly distribution on all of our outstanding units for the twelve months ending September 30, 2013. We present two tables, consisting of:

 

   

Forecasted Results of Operations for the twelve months ending September 30, 2013; and

 

   

Forecasted Cash Available for Distribution for the twelve months ending September 30, 2013,

 

as well as the significant assumptions upon which the forecast is based.

 

We present below a forecast of the expected results of operations for Seadrill Partners LLC for the twelve months ending September 30, 2013. Our forecast presents, to the best of our knowledge and belief, the expected results of operations for Seadrill Partners LLC for the forecast period. Although we or OPCO will seek to purchase the T-15 and the T-16 from Seadrill, the timing of such purchase is uncertain and is subject to reaching an agreement with Seadrill regarding the purchase price of the drilling rigs. As a result, our forecast does not reflect the expected results of operations or related financing of such drilling rigs.

 

Our forecast reflects our judgment, as of the date of this prospectus, of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2013. Our forecast is based on

 

62


Table of Contents

assumptions that we believe to be reasonable with respect to the forecast period as a whole. The assumptions and estimates used in the forecast are inherently uncertain and represent those that we believe are significant to our financial forecast. We believe that we have a reasonable objective basis for those assumptions. To the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make working capital borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and the actual results and those differences could be material. Our operations and those of OPCO are subject to numerous risks that are beyond our control. If the forecast is not achieved, we may not be able to pay cash distributions on our units at the initial distribution rate stated in our cash distribution policy or at all.

 

Our forecasted results of operations is a forward-looking statement and should be read together with the historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and our Pro Forma Combined Consolidated Balance Sheet and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The amount of cash needed to pay the minimum quarterly distribution on all of our units to be outstanding immediately after completion of this offering is $16.0 million per quarter or $64.1 million per year. During the twelve months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2012, we would have had cash available for distribution of $48.1 million, $44.3 million and $26.4 million, respectively, which would not have been sufficient to pay the minimum quarterly distribution on all of our common units and subordinated units, as the historical periods did not include results, except for pre-commencement revenue in June 2012, for the West Capricorn, which commenced operations in July 2012. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Items You Should Consider When Evaluating Our Historical Financial Performance and Assessing Our Future Prospects.”

 

We do not, as a matter of course, make public projections as to future revenues, earnings or other results. The forecast has been prepared by and is the responsibility of our management. However, our management has prepared the financial forecast set forth below in support of our belief that we will have sufficient cash available to allow us to pay the minimum quarterly distribution on all of our outstanding units during the forecast period. The financial forecast has been prepared in accordance with the guidelines established by the American Institute of Certified Public Accountants. In addition, in the view of our management, the accompanying financial forecast was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our knowledge and belief, the expected course of action and the expected future financial performance of Seadrill Partners LLC.

 

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements included under the heading “Risk Factors” elsewhere in this prospectus. Any of the risks discussed in this prospectus or unanticipated events could cause our actual results of operations, cash flows and financial condition to vary from the financial forecast and these variations may be material. The information in this forecast is not fact and should not be relied upon as being necessarily indicative of future results, and prospective investors are cautioned to not place undue reliance on the financial forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition.

 

We are providing the financial forecast to supplement the historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor in support of our belief that we will have sufficient cash available to allow us to pay cash distributions on all of our units for each quarter in the twelve-month period ending September 30, 2013 at our stated initial distribution rate. Please read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast.

 

63


Table of Contents

We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update the financial forecast to reflect events or circumstances after the date of this prospectus, even in the event that any or all of the underlying assumptions are shown to be in error. Therefore, we caution you not to place undue reliance on this information.

 

Neither our independent registered public accounting firm, nor any other independent registered public accounting firm, have compiled, examined or performed any procedures with respect to the forecasted results of operations contained herein, nor have they expressed any opinion or given any other form of assurance on such information or its achievability, and they assume no responsibility for such forecasted results of operations. Our independent registered accounting firm’s report included in this prospectus relates to the Combined Consolidated Carve-out Financial Information of Seadrill Partners LLC Predecessor. That report does not extend to the tables and the related forecasted results of operations contained in this section and should not be read to do so.

 

64


Table of Contents

SEADRILL PARTNERS LLC

FORECASTED RESULTS OF OPERATIONS

 

The following table presents (1) forecasted results of operations for Seadrill Partners LLC for the twelve months ending September 30, 2013 and (2) historical results of operations for Seadrill Partners LLC Predecessor for the twelve months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2012. Net income attributable to non-controlling interest, net income attributable to Seadrill Partners LLC members and net income per unit are not extracted from the audited historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the year ended December 31, 2011 or the unaudited Condensed Interim Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the six months ended June 30, 2012 that are included elsewhere in this prospectus.

 

     Forecast     Historical  
     Seadrill
Partners LLC
    Seadrill Partners LLC Predecessor  
     Twelve
Months
Ending
September 30,
2013
    Twelve
Months
Ended
June 30,
2012
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2012
 
(in millions, except per unit data)    (unaudited)     (unaudited)     (audited)     (unaudited)  

Operating revenues:

        

Contract revenues

   $ 632.7      $ 505.1      $ 485.0      $ 262.2   

Reimbursable and other revenues

     25.7        19.5        12.2        13.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

   $ 658.4      $ 524.6      $ 497.2      $ 275.2   

Operating expenses:

        

Rig operating expenses

     (216.4     (168.2     (157.5     (89.1

Reimbursable expenses

     (25.1     (10.5     (11.7     (4.1

Depreciation and amortization

     (87.4     (59.3     (57.8     (30.9

General and administrative expenses(1)

     (21.4     (22.2     (17.0     (12.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ (350.3   $ (260.2   $ (244.0   $ (136.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     308.1        264.4        253.2        138.3   

Financial items:

        

Interest income

     2.3        1.2        —          1.2   

Interest expense

     (67.6     (33.9     (31.9     (18.0

Loss on interest rate swaps

     —          (54.0     (52.1     (10.5

Foreign exchange loss

     —          (2.3     (0.5     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total financial items

   $ (65.3   $ (89.0   $ (84.5   $ (28.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and non-controlling interest

     242.8        175.4        168.7        109.7   

Income taxes

     (29.5     (29.3     (27.6     (15.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     213.3        146.1        141.1        93.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 
     (forecasted)     (estimated)     (estimated)     (estimated)  

Net income attributable to non-controlling interest(2)(3)

     146.8        113.9        107.2        73.1   

Net income attributable to Seadrill Partners LLC members(3)

   $ 66.5      $ 32.1      $ 33.9      $ 20.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per:

        

Common unit—basic(3)(4)

   $ 1.62      $ 1.55      $ 1.55      $ 0.78   

Subordinated unit—basic(3)(4)

   $ 1.60      $ 0.44      $ 0.55      $ 0.50   

Unit—diluted(3)(4)

   $ 1.61      $ 0.98      $ 1.04      $ 0.63   

 

65


Table of Contents

 

(1)   Forecasted amount includes estimated incremental public company expenses of $2.0 million.
(2)   Non-controlling interest for the historical periods presented in the table above have been calculated as if the intended capital structure was in place at January 1, 2011. Please also see the audited historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the year ended December 31, 2011 and the unaudited Condensed Interim Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the six months ended June 30, 2012 included elsewhere in this prospectus. Net income attributable to non-controlling interest has been estimated based on a number of assumptions. The main assumption is related to the allocation of loss on derivatives, where the allocation has been based on average outstanding debt in the periods presented. Net income attributable to non-controlling interest includes:

 

     Forecast      Estimated  
     Seadrill
Partners LLC
     Seadrill Partners LLC Predecessor  
     Twelve
Months
Ending
September 30,
2013
     Twelve
Months
Ended
June 30,
2012
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2012
 
(in millions)   

(forecasted)

    

(estimated)

   

(estimated)

    (estimated)  

Net income attributable to non-controlling interest in the West Capella

   $ 33.8       $ 27.7      $ 24.4      $ 18.2   

Net income attributable to non-controlling interest in Seadrill Capricorn Holdings LLC

     29.7         (6.6     (2.5     (4.7

Net income attributable to non-controlling interest in Seadrill Operating LP

     83.3         93.4        85.3        59.6   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total net income attributable to non-controlling interest

   $ 146.8       $ 113.9      $ 107.2      $ 73.1   
  

 

 

    

 

 

   

 

 

   

 

 

 
(3)   Net income attributable to non-controlling interest, net income attributable to Seadrill Partners LLC members and net income per unit are not extracted from the audited historical Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the year ended December 31, 2011 or the unaudited Condensed Interim Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor and the notes thereto for the six months ended June 30, 2012 that are included elsewhere in this prospectus.

 

(4)   Forecasted net income per common unit-basic and net income per subordinated unit-basic have been calculated based on 24,815,025 common units and 16,543,350 subordinated units, respectively, outstanding following the completion of this offering. Forecasted net income per unit-diluted is calculated assuming the conversion of all the subordinated units into common units. Estimated net income per common unit-basic and net income per subordinated unit-basic have been calculated based on 16,065,025 common units and 16,543,350 subordinated units, respectively, outstanding, and do not include any common units to be offered to the public in this offering. Estimated net income per unit-diluted is calculated assuming the conversion of all the subordinated units into common units. All net income per unit amounts have been calculated following the two-class method as if all earnings for the period had been distributed.

 

Please read the accompanying summary of significant accounting policies and forecast assumptions.

 

The financial information presented in the table above contains forecasted and estimated financial information. Our estimated financial position, results of operations and cash flows could differ from those that would have resulted if we had operated autonomously or as an entity independent of Seadrill in the periods for which historical financial data is presented above, and such data may not be indicative of our future operating results, cash flows or financial performance.

 

66


Table of Contents

Forecast Assumptions and Considerations

 

Basis of Presentation

 

The accompanying financial forecast and related notes of Seadrill Partners LLC present the forecasted results of operations of Seadrill Partners LLC for the twelve months ending September 30, 2013, based on the assumption that:

 

   

we will acquire a 30% limited partner interest in Seadrill Operating LP and a 100% interest in Seadrill Operating GP LLC, which holds the non-economic general partner interest in Seadrill Operating LP;

 

   

we will acquire a 51% limited liability company interest in Seadrill Capricorn Holdings LLC;

 

   

we will issue to Seadrill 16,065,025 common units and 16,543,350 subordinated units, representing a 78.8% limited liability company interest in us;

 

   

we will issue to Seadrill Member LLC, a wholly owned subsidiary of Seadrill, the Seadrill Member interest, which is a non-economic limited liability company interest in us, and all of our incentive distribution rights, which will entitle the Seadrill Member to increasing percentages of the cash we distribute in excess of $0.4456 per unit per quarter; and

 

   

we will issue 8,750,000 common units to the public in this offering, representing a 21.2% limited liability company interest in us.

 

Summary of Significant Accounting Policies

 

Organization.    We are a Marshall Islands limited liability company formed in June 2012 to acquire our interest in OPCO.

 

Principles of Combination.    This financial forecast includes our accounts and those of the wholly and partially owned subsidiaries we control, including OPCO. All intercompany transactions have been eliminated in consolidation.

 

Use of Estimates.    The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reporting Currency.    The U.S. Dollar is our functional and reporting currency because the majority of our revenues and expenses are denominated in U.S. Dollars. Transactions involving other currencies during a period are converted into U.S. Dollars using the exchange rates in effect on the date of the transactions. Foreign currency assets and liabilities are translated using rates of exchange at the balance sheet date. Resulting gains or losses are reflected in our consolidated statements of income.

 

Contract Revenues.    A substantial majority of OPCO’s revenues are derived from dayrate-based drilling contracts (which may include lump sum fees for mobilization and demobilization) and other service contracts. Both dayrate based revenues and lump sum fee revenues are recognized ratably over the original contract term when services are rendered, excluding any extension option periods. Under some contracts, OPCO is entitled to additional payments for meeting or exceeding certain performance targets. Such additional payments are recognized when any uncertainties regarding such performance targets are resolved or upon completion of the drilling program, as applicable.

 

In connection with its drilling contracts, OPCO may receive lump sum fees for the mobilization of equipment and personnel or for capital additions and upgrades prior to commencement of drilling services. These up-front fees are recognized as revenue over the original contract term, excluding any extension option periods.

 

67


Table of Contents

In some cases, OPCO may receive lump sum non-contingent fees or dayrate-based fees from customers for demobilization upon completion of a drilling contract. Non-contingent demobilization fees are recognized as revenue over the original contract term, excluding any extension option periods. Contingent demobilization fees are recognized as earned upon completion of the drilling contract.

 

Fees received from customers under drilling contracts for capital upgrades are deferred and recognized over the original contract term, excluding any extension option periods.

 

Reimbursable Revenues and Expenses.    Reimbursements received for the purchases of supplies, personnel and other services provided on behalf of and at the request of our customers in accordance with a drilling contract are recorded as revenue. The related costs are recorded as reimbursable expenses in the same period.

 

Mobilization and Demobilization Expenses.    Mobilization costs incurred as part of a contract are capitalized and recognized as expense over the original contract term, excluding any extension option periods. The costs of relocating drilling rigs that are not under contract are expensed as incurred. Demobilization costs are costs related to the transfer of a drilling rig to a safe harbor or different geographic area and are expensed as incurred.

 

Rig Operating Expenses.    Rig operating expenses are costs associated with operating a drilling rig that is either in operation or stacked, and include the remuneration of offshore crews and related costs, rig supplies, insurance costs, expenses for repairs and maintenance as well as costs related to onshore personnel in various locations where we operate the rigs and are expensed as incurred.

 

Depreciation and Amortization.    Depreciation and amortization costs are based on the historical cost of the drilling rigs and other equipment. Costs related to periodic overhauls of drilling rigs are capitalized under drilling rigs and amortized over the anticipated period between overhauls, which is generally five years. Related costs are primarily shipyard costs and the cost of employees directly involved in the work. Amortization costs for periodic overhauls are included in depreciation and amortization expense.

 

Cash and Cash Equivalents.    Cash and cash equivalents consist of cash, bank deposits and highly liquid financial instruments with original maturities of three months or less.

 

Newbuilds.    The carrying value of rigs under construction, which are referred to as newbuilds, represents the accumulated costs at the balance sheet date. Cost components include payments for yard installments and variation orders, construction supervision, equipment, spare parts, capitalized interest, costs related to first time mobilization and commissioning costs. No charge for depreciation is made until commissioning of the newbuild has been completed and it is ready for its intended use.

 

Drilling Rigs.    Drilling rigs are recorded at historical cost less accumulated depreciation. The cost of these assets less estimated residual value is depreciated on a straight-line basis over their estimated remaining economic useful lives. The estimated economic useful life of each of OPCO’s drilling rigs, when new, is 30 years.

 

Significant investments are capitalized and depreciated in accordance with the nature of the investment. Significant investments that are deemed to increase a rig’s value for its remaining economic useful life are capitalized and depreciated over the remaining economic useful life of the rig.

 

Deferred Charges.    Deferred charges, including debt arrangement fees and legal expenses, are capitalized and amortized over the term of the related loan and are included in interest expense.

 

Income Taxes.    OPCO’s subsidiaries operate in jurisdictions where taxes are imposed on income and thus, income taxes have been recorded in these jurisdictions when appropriate. As tax law is based on interpretations and applications of the law, which are only ultimately decided by the courts of the particular jurisdictions,

 

68


Table of Contents

significant judgment is involved in determining our provision for income taxes in the ordinary course of our business. We recognize tax liabilities based on our assessment of whether our tax positions are more likely than not sustainable, based on the technical merits of each position and having regard to the relevant taxing authority’s widely understood administrative practices and precedence.

 

Net Income Per Unit.    The calculation of the forecasted basic and diluted earnings for the twelve months ending September 30, 2013 is set forth below:

 

($ in thousands)    Common
Unitholders
   Subordinated
Unitholders

Members’ interests in forecasted net income

   $40,120    $26,472

Forecasted weighted average number of units outstanding

   24,815,025    16,543,350

Forecasted net income per unit

   $1.62    $1.60

 

Summary of Significant Forecast Assumptions

 

Contract Revenues.    Our forecast of contract revenues is based on estimated dayrates multiplied by the estimated economic utilization rate and the total number of days on the contract during the twelve months ending September 30, 2013. Forecasted contract revenues assume that all of OPCO’s drilling rigs are operational throughout the twelve months ending September 30, 2013.

 

In arriving at economic utilization, we have taken into account certain contractual elements that generally exist in our drilling contracts. For example, drilling contracts generally provide for a general repair allowance for preventive maintenance or repair of equipment, which could range from 18 to 48 hours per month. Such allowance varies from contract to contract, and OPCO may be compensated at the full operating dayrate or at a reduced operating dayrate for such general repair allowance. In addition, drilling contracts typically provide for situations where the drilling rig would operate at reduced operating dayrates, such as, among other things: a standby rate, where the drilling rig is prevented from commencing operations for reasons such as bad weather, waiting for customer orders, waiting on other contractors; a moving rate, where the drilling rig is in transit between locations; a reduced performance rate in the event of major equipment failure; or a force majeure rate in the event of a force majeure that causes the suspension of operations. In addition, in limited circumstances, the drilling rig could operate at a zero rate due to a shutdown of operations for repairs where the general repair allowance has been exhausted or for any period of force majeure in excess of a specific number of days allowed under a drilling contract.

 

The assumed economic utilization rate for each drilling rig is based on Seadrill’s past experience with similar drilling rigs.

 

In all of OPCO’s drilling contracts we are entitled to cost escalation in dayrates to compensate us for specific cost increases as reflected in publicly available cost indices. We have estimated the escalation of the dayrate for OPCO’s drilling rigs based on current cost indices and incorporated all of the known or estimated 2012 escalations in our forecast.

 

In addition to recurring contracted dayrates, we may also receive mobilization and demobilization fees for drilling rigs before and after their drilling assignments, and may also receive reimbursement of costs incurred by us at the customer’s request for additional supplies, personnel and other services not covered by the contracted dayrate. The drilling contract related to the West Capricorn provides for the mobilization fee, revenue and reimbursable costs incurred prior to the commencement of the contract to be amortized at a certain rate of return and paid daily over the contract period. For the purpose of this forecast, we have included mobilization fees for drilling rigs that commence operations during the twelve-month period ending September 30, 2013, but have not included any demobilization fees in the forecast as no drilling rigs are expected to be demobilizing during this period.

 

69


Table of Contents

The following table summarizes our assumed dayrates and economic utilization for the twelve months ending September 30, 2013:

 

Drilling rigs

   Year  Built(1)      Ownership(2)     Customer    Country of
Operations
   Dayrates(3)      Expiration
Date
   Economic
Utilization
 

West Aquarius(4)

     2009         100   Exxon
Mobil
   Canada    $ 530,000       June 2015      95.2

West Capricorn(5)

     2011         100   BP    USA    $ 487,000       July 2017      95.5

West Capella(6)

     2008         56   Total    Nigeria    $ 544,000       April 2014      96.5

West Vencedor(7)

     2010         100   Chevron    Angola    $ 206,500       March 2015      97.0

 

(1)   The West Aquarius, the West Capricorn, the West Capella and the West Vencedor commenced operations in 2009, 2012, 2009 and 2010, respectively.
(2)   The ownership percentage represents the ownership of each drilling rig by OPCO.
(3)   Forecasted revenues assumes that the estimated amortized rig rate and the escalations discussed in the footnotes below were included in the dayrate for the twelve months ending September 30, 2013. In addition, forecasted revenues include a mobilization fee of $10.4 million during the twelve-month period ending September 30, 2013 relating to the West Aquarius, the West Capella and the West Vencedor.
(4)   The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.
(5)   Excludes estimated amortized rig rate charge payable by the customer of approximately $29,000 per day relating to lump sum mobilization fee, contract revenues and reimbursables prior to the commencement of contract, and a $5,000 per day catering and accommodation rate.
(6)   OPCO will own an approximate 56% interest in the entity that owns and operates the West Capella. The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.
(7)   This drilling contract is denominated in U.S. Dollars, but approximately 27% of the dayrate is received in Euros. The forecast assumes an exchange rate of one Euro to 1.27 U.S. Dollars. The dayrate excludes any annual contract revenue adjustment, which is based on U.S. indices derived from the U.S. Bureau of Labor Statistics. The adjustment usually results in an escalation in the dayrates.

 

Reimbursable Revenues and Expenses.    Our forecast assumes estimated reimbursable revenues of $25.7 million and expenses of $25.1 million during the twelve months ending September 30, 2013. The assumed reimbursable revenues consist primarily of estimated fuel costs relating to one of the drilling rigs in transit between locations, plus the estimated handling fees.

 

Rig Operating Expenses.    Forecasted rig operating expenses assumes that all of OPCO’s drilling rigs are operational throughout the twelve months ending September 30, 2013.

 

Our forecast also assumes the cost level of operating in each of Canada, Angola, Nigeria and the United States, where OPCO’s drilling rigs are expected to be located during the twelve months ending September 30, 2013.

 

The forecast takes into account increases in crewing and other labor related costs driven predominantly by an increase in demand for qualified and experienced officers and crew.

 

General and Administrative Expenses.    Forecasted general and administrative expenses for the twelve months ending September 30, 2013 are based on the following assumptions:

 

   

we will incur approximately $8.2 million of costs and fees pursuant to the management and administrative services agreements that we will enter into with Seadrill Management and Seadrill UK Ltd. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Management and Administrative Services Agreements;”

 

   

OPCO will incur approximately $11.2 million of costs and fees pursuant to the advisory, technical and administrative services agreement that OPCO’s subsidiaries will enter into with certain affiliates of

 

70


Table of Contents
 

Seadrill. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Advisory, Technical and Administrative Services Agreement;” and

 

   

we will incur approximately $2.0 million in incremental expenses as a result of being a publicly traded limited liability company. These expenses will include costs associated with annual reports to unitholders, tax return preparation, investor relations, registrar and transfer agent fees, audit fees, legal fees, incremental director and officer liability insurance costs and director compensation.

 

Depreciation and Amortization.    Forecasted depreciation and amortization expense assumes that no drilling rigs are purchased or sold during the twelve months ending September 30, 2013. We have accounted for depreciation and amortization expense in a manner consistent with the historical presentation in the Combined Consolidated Carve-out Financial Statement of Seadrill Partners LLC Predecessor. Drilling rigs and equipment are recorded at historical cost less accumulated depreciation. The cost of drilling rigs and equipment less the estimated residual value is depreciated on a straight-line basis over the assets’ remaining economic useful lives, which we estimate at the start of 2012 to be approximately 27 years, 30 years, 27 years and 28 years for the West Aquarius, the West Capricorn, the West Capella and the West Vencedor, respectively.

 

Interest Income.    Our forecast includes interest income of $2.2 million associated with the unpaid lump sum mobilization fee, pre-commencement contract revenues and reimbursables of the West Capricorn, which are amortized over the contract period. In addition, we have assumed that any cash surplus balances will be invested throughout the forecast period and will earn an assumed interest rate of 0.2% per annum.

 

Interest Expense.    Our forecast for the twelve months ending September 30, 2013 assumes we will have an average outstanding loan balance of approximately $1,116.2 million, with an estimated weighted average interest rate of approximately 6.1% per annum. We have assumed that interest rates are constant during the forecast period. The rates we have assumed are based on an estimated LIBOR rate of 1.85% plus the applicable margins under OPCO’s financing agreements, which consist of (1) a $550 million secured credit facility that was used to partly fund the delivery of and is secured by the West Capricorn; (2) a $1.2 billion term loan under which the West Vencedor is one of the three rigs pledged; and (3) a $1.5 billion secured credit facility under which the West Aquarius and the West Capella are two of the four rigs pledged. Each of the three loan facilities must be repaid in quarterly installments over a term of five years, each with a balloon payment upon maturity.

 

In addition, we have assumed OPCO will enter into a $300 million revolving credit facility with Seadrill that will bear interest at a rate of LIBOR plus 5%, with an annual 2% commitment fee on the undrawn balance, which we refer to as the sponsor credit facility. We have assumed the sponsor credit facility will have an outstanding balance of approximately $35 million at the end of the forecast period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities.”

 

Derivative Financial Instruments and Hedging Activities.    We have assumed OPCO will enter into 10-year interest rate swap agreements to hedge its exposure to floating interest rates during the twelve months ending September 30, 2013. We assumed OPCO does not use hedge accounting for these interest-rate swap agreements and will record them at fair value. Changes in the fair value of interest-rate swap agreements will be recorded as a gain or loss as a separate line item within Financial Items. For the purpose of the forecast, we assumed there will be no change in the long-term interest rates that would result in a variation in the mark-to-market valuation of interest rate swaps. The market valuation adjustments for the interest swap instrument may have a significant impact on OPCO’s results of operations and financial position.

 

Foreign Exchange Gain and Loss.    Foreign exchange gains or losses arise primarily due to the translation of cash balances that are denominated in Euros and Nigerian Naira and accounts receivables denominated in Euros. For the purpose of our forecast, we have assumed that the exchange rate between the U.S. Dollar and the Euros and Nigerian Naira will not fluctuate and, as a result, we have assumed that there is no foreign exchange rate gain or loss at translation.

 

71


Table of Contents

Our and OPCO’s functional currency is the U.S. Dollar as the vast majority of our and OPCO’s revenues are received in U.S. Dollars and a majority of our expenditures are made in U.S. Dollars. Our reporting currency is also in U.S. Dollars.

 

As a result of our international operations, OPCO and we are exposed to fluctuations in foreign exchange rates due to revenues being received and operating expenses paid in currencies other than U.S. Dollars. Accordingly, OPCO and we may experience currency exchange losses if we have not fully hedged our exposure to a foreign currency, or if revenues are received in currencies that are not readily convertible. OPCO and we may also be unable to collect revenues because of a shortage of convertible currency available to the country of operation, controls over currency exchange or controls over the repatriation of income or capital. See “Risk Factors—Risks Inherent in Our Business—Fluctuations in exchange rates or exchange controls could result in losses to us.”

 

OPCO is exposed to some extent in respect of the West Vencedor’s revenues, which has approximately 27% of its dayrate denominated in Euros. In addition OPCO receives 10% of the West Capella’s revenues in Nigerian Naira. Because we incur operating costs related to the West Capella in Nigerian Naira, we are able to offset a portion of our foreign currency exposure with respect to revenues earned in Nigerian Naira. In addition, OPCO’s operating costs are also denominated in Angolan Kwanza, Canadian Dollars and U.S. Dollars. For the purpose of the forecast, we have assumed a constant exchange rate of 1.0 U.S. Dollar to 0.79 Euros, 1.0 U.S. Dollar to 95.1 Angolan Kwanza, 1.0 U.S. Dollar to 158.0 Nigerian Naira and 1.0 U.S. Dollar to 1.0 Canadian Dollar.

 

Taxes.    Forecasted income tax expense is based on the tax laws and applicable rates in the countries where operations are conducted and income is earned. The forecasted tax expense for the twelve months ending September 30, 2013 is primarily comprised of expected Canadian tax on the Canadian operations of the West Aquarius, expected Angolan tax on the Angola operations of the West Vencedor, expected Nigerian tax on the Nigeria operations of the West Capella and the expected U.S. tax on the U.S. operations of the West Capricorn. Rig movement between taxing jurisdictions and their respective operating structures could affect the provision for income tax expense. We have assumed that during the forecast period the drilling rigs will remain in the same country of operations throughout the twelve months ending September 30, 2013.

 

Non-Controlling Interest.    The non-controlling interest in the West Capella consists of the 44% interest in the West Capella that is not owned by Seadrill Operating LP. The non-controlling interest in OPCO reflects the 70% limited partner interest in Seadrill Operating LP and 49% limited liability company interest in Seadrill Capricorn Holdings LLC that are owned by Seadrill, as those entities will be controlled and consolidated by us.

 

Maintenance and Replacement Capital Expenditures.    Our operating agreement requires our board of directors to deduct from operating surplus each quarter estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, in order to reduce disparities in operating surplus caused by fluctuating maintenance and replacement capital expenditures, such as long term maintenance (including special classification surveys) and drilling rig replacement. The actual cost of replacing the drilling rigs in OPCO’s fleet will depend on a number of factors, including prevailing market conditions and the availability and cost of financing at the time of replacement. Our board of directors, with the approval of the conflicts committee, may determine that one or more of our assumptions should be revised, which could cause our board of directors to increase the amount of estimated maintenance and replacement capital expenditures. We may elect to finance some or all of maintenance and replacement capital expenditures through the issuance of additional common units which could be dilutive to our existing unitholders. Please read “Risk Factors—Risks Inherent in Our Business—OPCO must make substantial capital and operating expenditures to maintain the operating capacity of its fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.”

 

Maintenance Capital Expenditures.    Because of the substantial capital expenditures OPCO is required to make to maintain its fleet, our initial annual estimated maintenance costs (including special classification surveys) for OPCO’s drilling rigs will be $29.5 million per year.

 

72


Table of Contents

Replacement Capital Expenditures.    Our initial annual estimated replacement capital expenditures will be $47.2 million per year, including financing costs, for replacing drilling rigs at the end of their useful lives. The annual estimated $47.2 million for future drilling rig replacement is based on assumptions regarding the remaining useful lives of the drilling rigs, a net investment rate, drilling rig replacement values based on current market conditions and residual value of the drilling rigs.

 

Regulatory, Industry and Economic Factors.    Our forecast for the twelve months ending September 30, 2013 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

no material nonperformance or credit-related defaults by suppliers, customers or vendors;

 

   

no new regulation or any interpretation of existing regulations or governmental action that, in either case, would be materially adverse to our business;

 

   

no material accidents, environmental incidents, releases, weather-related incidents, unscheduled downtime or similar unanticipated events;

 

   

no major adverse change in the markets in which we operate resulting from oil production disruptions, reduced demand for oil or significant changes in the market prices of oil; and

 

   

no material changes to market, regulatory and overall economic conditions or in prevailing interest rates.

 

Cash Available for Distribution

 

The table below sets forth our calculation of (1) forecasted cash available for distribution to our unitholders for the twelve months ending September 30, 2013 based on the Forecasted Results of Operations set forth above and (2) Seadrill Partners LLC Predecessor cash available for distribution for the twelve months ended June 30, 2012, the year ended December 31, 2011 and the six months ended June 30, 2012. Based on the financial forecast and related assumptions, we forecast that our cash available for distribution generated during the twelve months ending September 30, 2013 will be approximately $70.5 million. This amount would be sufficient to pay the minimum quarterly distribution of $0.3875 per unit on all of our common units and subordinated units for the four quarters ending September 30, 2013 in accordance with our cash distribution policy. Please see “—General” above and “How We Make Cash Distributions.”

 

Actual payments of distributions on the common units and subordinated units are expected to be $11.5 million for the period between the estimated closing date of this offering (October 26, 2012) and December 31, 2012.

 

You should read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecast of adjusted EBITDA that is included in the table below. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted adjusted EBITDA. If our estimate is not achieved, we may not be able to pay distributions on the common units at the initial distribution rate of $0.3875 per unit per quarter ($1.55 per unit on an annualized basis). Our financial forecast and the forecast of cash available for distribution set forth below have been prepared by our management. This calculation represents available cash from operating surplus generated during the period and excludes any cash from working capital borrowings, capital expenditures and cash on hand on the closing date.

 

Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow from operating activities or any other measure of financial performance calculated in accordance with U.S. GAAP.

 

When considering our forecast of cash available for distribution for the twelve months ending September 30, 2013, you should keep in mind the risk factors and other cautionary statements under the heading

 

73


Table of Contents

“Forward-Looking Statements” and “Risk Factors” included elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our financial results of operations to vary significantly from those set forth in the financial forecast and the forecast of cash available for distribution set forth below.

 

Neither our independent registered public accounting firm, nor any other independent registered public accounting firm have compiled, examined or performed any procedures with respect to the forecasted financial information contained herein, nor have they expressed any opinion or given any other form of assurance on such information or its achievability, and they assume no responsibility for such forecasted financial information. Our independent registered accounting firm’s report included in this prospectus relates to the Combined Consolidated Carve-out Financial Statements of Seadrill Partners LLC Predecessor. That report does not extend to the tables and the related financial forecast information contained in this section and should not be read to do so.

 

The non-controlling interest in the table below is comprised of (i) the 70% Seadrill limited partner interest in Seadrill Operating LP, which will own an approximate 56% interest in the entity that owns and operates the West Capella and a 100% interest in the entities that own and operate the West Aquarius and the West Vencedor and (ii) the 49% Seadrill limited liability company interest in Seadrill Capricorn Holdings LLC, which owns 100% of the entities that own and operate the West Capricorn. We expect that Nigerian investors will be permitted to invest in a subsidiary of Seadrill Operating LP. The resulting Nigerian joint venture will be fully controlled and approximately 56% owned by Seadrill Operating LP, and will result in a Nigerian joint venture partner owning an effective 1% interest in the West Capella. Seadrill will own the remaining ownership interest in the joint venture. We expect that the joint venture agreement will provide such joint venture partner with the right to purchase up to an approximate effective 25% interest in the West Capella at a fair market value price over the course of five years, and subject to additional mutually agreed upon terms. Any such purchase is expected to be from Seadrill’s ownership interest and not from Seadrill Operating LP, which will not occur during the forecast period. Therefore, the forecast assumes that Seadrill Operating LP has an approximate 56% ownership interest in the West Capella for the entire twelve-month period ending September 30, 2013. Non-controlling interest for the historical periods presented in the table below have been calculated as if the non-controlling interests described herein were in place at January 1, 2011.

 

74


Table of Contents

The financial information presented in the table below contains forecasted and estimated financial information. Our estimated financial position, results of operations and cash flows could differ from those that would have resulted if we had operated autonomously or as an entity independent of Seadrill in the periods for which historical financial data is presented below, and such data may not be indicative of our future operating results, cash flows or financial performance.

 

SEADRILL PARTNERS LLC

FORECASTED CASH AVAILABLE FOR DISTRIBUTION(1)

 

     Forecast     Estimated  
     Seadrill
Partners LLC
    Seadrill Partners LLC Predecessor  
     Twelve
Months
Ending
September 30,
2013
    Twelve
Months
Ended
June 30,
2012
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2012
 
(in millions, except per unit amounts)    (unaudited)  

Adjusted EBITDA(2)

   $ 389.9      $ 311.7      $ 299.0      $ 163.2   

Adjustments for cash items and estimated maintenance and replacement capital expenditures:

        

Cash interest expense

     (61.2     (33.1     (30.9     (17.9

Cash interest income

     2.3        1.2        —          1.2   

Cash income tax expense

     (30.1     (23.9     (29.5     (4.5

Maintenance capital expenditure reserves(3)

     (29.5     (22.1     (22.1     (11.1

Replacement capital expenditure reserves(3)

     (47.2     (34.0     (34.0     (17.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution before non-controlling interest

     224.2        199.8        182.5        113.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     (forecasted)     (estimated)     (estimated)     (estimated)  

Less: Cash flow attributable to non-controlling interest(4)

     (153.7     (151.7     (138.2     (87.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution

   $ 70.5      $ 48.1      $ 44.3      $ 26.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expected distributions:

        

Distributions per unit

   $   1.55      $   1.55      $   1.55      $   1.55   

Distributions to our public common unitholders(5)

     13.6        13.6        13.6        6.8   

Distributions to Seadrill—common units(5)

     24.9        24.9        24.9        12.4   

Distributions to Seadrill—subordinated units(5)

     25.6        25.6        25.6        12.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions(6)

   $ 64.1      $ 64.1      $ 64.1      $ 32.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Excess (shortfall)

   $ 6.4      $ (16.0   $ (19.8   $ (5.6

Annualized minimum quarterly distribution per unit

   $ 1.55      $ 1.55      $ 1.55      $ 1.55   

Aggregate distributions based on annualized minimum quarterly distribution

     64.1        64.1        64.1        64.1   

Percent of minimum quarterly distributions payable to common unitholders

     100.0     100.0     100.0     100.0

Percent of minimum quarterly distributions payable to subordinated unitholder

     100.0     37.5     22.7     56.3

 

(1)   The forecast is based on the assumptions set forth in “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions.”
(2)  

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA means earnings before interest, other financial items, depreciation and amortization, amortization of mobilization revenue and expense, taxes and non-controlling interest and is used as a supplemental financial measure by management and external users of financial statements, such as investors, to assess our financial and operating performance. Adjusted EBITDA assists our management and investors by increasing the comparability of our

 

75


Table of Contents
 

performance from period to period and against the performance of other companies in our industry that provide adjusted EBITDA information. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, other financial items, depreciation and amortization, amortization of mobilization revenue and expense, taxes and non-controlling interest, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect net income between periods. We believe that including adjusted EBITDA as a financial and operating measure benefits investors in (a) selecting between investing in us and other investment alternatives and (b) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common units.

       Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with U.S. GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income, and these measures may vary among other companies. Therefore, adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies. The following table reconciles our forecasted net income to forecasted adjusted EBITDA.

 

     Forecast     Estimated  
     Seadrill
Partners

LLC
    Seadrill Partners LLC Predecessor  
     Twelve
Months
Ending
September 30,
2013
    Twelve
Months
Ended June  30,
2012
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2012
 
(in millions)   

(forecasted)

    (estimated)     (estimated)     (estimated)  

Net income attributable to Seadrill Partners LLC members

   $ 66.5      $ 32.1      $ 33.9      $ 20.7   

Interest income

     (2.3     (1.2     —          (1.2

Interest expense and other financial items(a)

     67.6        90.2        84.5        29.8   

Depreciation and amortization

     87.4        57.2        55.5        29.8   

Amortization of mobilization revenue and expense(b)

     (5.6     (9.8     (9.7     (4.8

Income taxes

     29.5        29.3        27.6        15.8   

Non-controlling interest

     146.8        113.9        107.2        73.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 389.9      $ 311.7      $ 299.0      $ 163.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)   Other financial items consists of loss on interest rate swaps and foreign exchange loss.
  (b)   Amortization of mobilization revenue and expense is amortization of lump sum mobilization revenue received prior to the commencement of the drilling contracts net of amortized expense incurred during the mobilization period.
(3)   Our operating agreement requires that an estimate of the maintenance and replacement capital expenditures necessary to maintain our asset base be subtracted from operating surplus each quarter, as opposed to amounts actually spent. Please read “Risk Factors—Risks Inherent in Our Business—OPCO must make substantial capital and operating expenditures to maintain the operating capacity of its fleet, which will reduce cash available for distribution. In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.”
(4)  

The non-controlling interest comprises (i) the 70% Seadrill limited partner interest in Seadrill Operating LP, which will own an approximate 56% interest in the entity that owns and operates the West Capella and a 100% interest in the entities that own and operate the West Aquarius and the West Vencedor and (ii) the 49% Seadrill limited liability company interest in Seadrill Capricorn Holdings LLC, which owns 100% of the entities that own and operate the West Capricorn. We expect that Nigerian investors will be permitted to

 

76


Table of Contents
 

invest in a subsidiary of Seadrill Operating LP. The resulting Nigerian joint venture will be fully controlled and approximately 56% owned by Seadrill Operating LP, and will result in a Nigerian joint venture partner owning an effective 1% interest in the West Capella. Seadrill will own the remaining ownership interest in the joint venture. We expect that the joint venture agreement will provide such joint venture partner with the right to purchase up to an approximate effective 25% interest in the West Capella at a fair market value price over the course of five years, and subject to additional mutually agreed upon terms. Any such purchase is expected to be from Seadrill’s ownership interest and not from Seadrill Operating LP, which will not occur during the forecast period. Therefore, the forecast assumes that Seadrill Operating LP has an approximate 56% ownership interest in the West Capella for the entire twelve-month period ending September 30, 2013. Non-controlling interest for the historical periods presented in the table above have been calculated as if the non-controlling interests described above were in place at January 1, 2011. Net income attributable to non-controlling interest has been estimated based on a number of assumptions. The main assumption is related to the allocation of loss on derivatives, where the allocation has been based on average outstanding debt in the periods presented.

(5)   Assumes the underwriters’ option to purchase additional common units is not exercised.
(6)   Represents the amount required to fund distributions to our unitholders for four quarters based upon our minimum quarterly distribution rate of $0.3875 per unit.

 

Forecast of Compliance with Debt Covenants.    Our ability to make distributions could be affected if OPCO and Seadrill do not remain in compliance with the covenants of their financing agreements. We have assumed that OPCO and Seadrill will be in compliance with all of the covenants in such financing agreements during the forecast period. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Borrowing Activities” for a further description of OPCO’s financing agreements, including these financial covenants.

 

Quarterly Forecast Information

 

The following table presents our forecasted results of operations and cash available for distribution on a quarterly basis for the forecast period. You should read “—Forecast Assumptions and Considerations—Summary of Significant Forecast Assumptions” included as part of the financial forecast for a discussion of the material assumptions underlying our forecast of adjusted EBITDA that is included in the table below. Our forecast is based on those material assumptions and reflects our judgment of conditions we expect to exist and the course of action we expect to take. The assumptions disclosed in our financial forecast are those that we believe are significant to generate the forecasted adjusted EBITDA. Accordingly, there can be no assurance that actual quarterly results will not differ materially from the quarterly forecast information presented below. Although we do not currently expect to have a shortfall during any of quarter during the forecast, to the extent that there is a shortfall during any quarter in the forecast period, we believe we would be able to make working capital borrowings to pay distributions in such quarter and would be able to repay such borrowings in a subsequent quarter, because we believe the total cash available for distribution for the forecast period will be more than sufficient to pay the aggregate minimum quarterly distribution to all unitholders. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved.

 

77


Table of Contents

SEADRILL PARTNERS LLC

QUARTERLY FORECASTED RESULTS OF OPERATIONS

 

     Three Months Ending     Twelve
Months
Ending
 
     December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    September 30,
2013
 
(in millions, except per unit data)    (unaudited)  

Operating revenues:

          

Contract revenues

   $ 155.5      $ 158.3      $ 158.6      $ 160.3      $ 632.7   

Reimbursable and other revenues

     25.7        —          —          —          25.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

   $ 181.2      $ 158.3      $ 158.6      $ 160.3      $ 658.4   

Operating expenses:

          

Rig operating expenses

     (52.1     (54.2     (54.8     (55.3     (216.4

Reimbursable expenses

     (25.1     —          —          —          (25.1

Depreciation and amortization

     (21.8     (21.9     (21.8     (21.9     (87.4

General and administrative expenses(1)

     (5.6     (5.2     (5.3     (5.3     (21.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ (104.6   $ (81.3   $ (81.9   $ (82.5   $ (350.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     76.6        77.0        76.7        77.8        308.1   

Financial items:

          

Interest income

     0.6        0.6        0.6        0.5        2.3   

Interest expense

     (17.8     (16.8     (16.7     (16.3     (67.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial items

   $ (17.2   $ (16.2   $ (16.1   $ (15.8   $ (65.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and non-controlling interest

     59.3        60.8        60.6        62.1        242.8   

Income taxes

     (7.5     (7.6     (7.6     (6.8     (29.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     51.8        53.2        53.0        55.3        213.3   

Net income attributable to non-controlling interest(2)

     (36.0     (36.6     (36.4     (37.8     (146.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Seadrill Partners LLC members

   $ 15.8      $ 16.6      $ 16.6      $ 17.5      $ 66.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per:

          

Common unit—basic

   $ 0.39      $ 0.40      $ 0.40      $ 0.42      $ 1.62   

Subordinated unit—basic

   $ 0.37      $ 0.40      $ 0.40      $ 0.42      $ 1.60   

Unit—diluted

   $ 0.38      $ 0.40      $ 0.40      $ 0.42      $ 1.61   

 

(1)   Includes estimated annual incremental public company expenses of $2.0 million.
(2)   Net income attributable non-controlling interest includes:

 

     Three Months Ending      Twelve
Months
Ending
 
     December 31,
2012
     March 31,
2013
     June 30,
2013
     September 30,
2013
     September 30,
2013
 
(in millions)    (unaudited)  

Net income attributable to non-controlling interest in the West Capella

   $ 9.1       $ 8.1       $ 8.2       $ 8.4       $ 33.8   

Net income attributable to non-controlling interest in Seadrill Capricorn Holdings LLC

     6.9         7.3         7.4         8.1         29.7   

Net income attributable to non-controlling interest in Seadrill Operating LP

     20.0         21.3         20.7         21.3         83.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net income attributable to non-controlling interest

   $ 36.0       $ 36.7       $ 36.3       $ 37.8       $ 146.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

78


Table of Contents

SEADRILL PARTNERS LLC

QUARTERLY FORECASTED CASH AVAILABLE FOR DISTRIBUTION(1)

 

     Three Months Ending     Twelve
Months
Ending
 
     December 31,
2012
    March 31,
2013
    June 30,
2013
    September 30,
2013
    September 30,
2013
 
(in millions, except per unit amounts)    (unaudited)  

Adjusted EBITDA(2)

   $ 96.4      $ 97.4      $ 97.5      $ 98.6      $ 389.9   

Adjustments for cash items and estimated maintenance and replacement capital expenditures:

          

Cash interest expense

     (16.2     (15.2     (15.1     (14.7     (61.2

Cash interest income

     0.6        0.6        0.6        0.5        2.3   

Cash income tax expense

     (6.7     (9.1     (7.6     (6.7     (30.1

Maintenance capital expenditure reserves(3)

     (7.3     (7.4     (7.4