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2015-08-27

Seadrill Partners LLC: SDLP - Seadrill Partners LLC Announces Second Quarter 2015 Results

Highlights

* Seadrill Partners reports net income attributable to Seadrill Partners LLC
Members for the second quarter 2015 of $101.3 million and operating income
of $205.5 million. * Generated distributable cash flow of $84.7 million
with a coverage ratio of 1.53 for the second quarter 2015. * Declared a
$0.5675 per unit distribution for the second quarter, in line with the
first quarter distribution. * Economic utilization for the second quarter
of 97%. * Seadrill Operating LP, Seadrill Partners' 58% owned subsidiary,
completed the acquisition of the West Polaris from Seadrill Limited. The
total consideration for the West Polaris acquisition was comprised of $204
million in cash, $336 million of debt, a $50 million seller's credit and an
earn-out dependent upon future day rates.

Financial Results Overview

Seadrill Partners LLC[1]reports:

Total revenues were $417.2 million for the second quarter of 2015 (the "second
quarter"), compared to $400.7 million in the first quarter of 2015 (the
"first quarter"). The increase in revenues is primarily related to improved
operational performance in the second quarter relative to the first quarter
and inclusion of the West Polaris for 12 days in the second quarter, offset
in part by the reduction in revenue from the West Sirius following its
contract termination.

Operating income for the quarter was $205.5 million compared to $190.7 million
in the preceding quarter. The increase is largely as a result of revenue
improvements described above with a marginal increase in overall operating
expense.

Net income for the quarter was $192.5 million compared to $70.9 million in the
previous quarter. This is after the recognition of a gain on derivative
instruments of $18.3 million in the second quarter, compared to a loss of
$51.9 million for the first quarter as a result of an increase in long term
interest rates in the second quarter. The unrealized non-cash element of
these amounts is a $30.3 million gain in the second quarter and a $38.9
million loss for the first quarter. Additionally, a gain on bargain purchase
on the acquisition of the West Polaris of $39.6 million and income tax of
$32.9 million were recognized.

As a result, net income attributable to Seadrill Partners LLC Members was
$101.3 million for the second quarter compared to $38.2 million for the
previous quarter.

Distributable cash flow[2]was $84.7 million for Seadrill Partners' second
quarter as compared to $82.0 million for the previous quartergiving a
coverage ratio of 1.53x for the second quarter.

Distribution for the period was $0.5675 per unit, equivalent to an annual
distribution of $2.27, representing a 46% increase from the Company's minimum
quarterly distribution set at its IPO.
Operations

Overall economic utilization[3]for the fleet was 97% for the second quarter.

The semi-tender rig West Vencedor completed its current contract during the
third week of June and its demobilization and relocation to Southeast Asia at
the end of July.

The semi-submersible rig West Sirius completed its de-manning and thruster
removal in preparation for cold stacking during the third quarter. Operating
expenses began to decline during the second quarter, however the full impact
is expected to be realized during the fourth quarter. Once fully de-manned
and idle, the Company expects the annual cost to cold stack the unit to be
approximately $3.5 million.

Total operating expenses for the second quarter were $211.7 million, compared
to $210.0 million in the previous quarter. Part of the increase is as a
result of operating expenses related to the West Polaris, which was acquired
during the quarter. Significant progress has been made to drive efficiencies
in operating expenditures across the fleet and in corporate overhead.

Acquisitions

During the second quarter, Seadrill Operating LP, Seadrill Partners' 58% owned
subsidiary, completed the acquisition of the West Polaris from Seadrill
Limited. The West Polaris is a 6th generation, dynamically positioned
drillship delivered from the Samsung shipyard in 2008. The West Polaris is
expected to carry out operations in Angola until the end of its contract with
ExxonMobil in March 2018.

The consideration for the West Polaris acquisition was comprised of $204
million in cash and $336 million of debt outstanding under the existing
facility financing the West Polaris. Seadrill Partners funded the balance of
the purchase price with a seller's credit of $50 million due in 2021 that
carries an interest rate of 6.5% per annum.

The West Polaris is currently contracted with ExxonMobil on a daily rate of
$653,000. Under the terms of the acquisition agreement, Seadrill Partners has
agreed to pay Seadrill Limited any dayrate it receives in excess of $450,000
per day, adjusted for daily utilization, for the remainder of the ExxonMobil
contract. By effectively lowering the dayrate Seadrill Partners receives to
$450,000 per day, the Company has reduced the acquisition cost and its
re-contracting risk.

As part of the acquisition agreement, the Company's obligation to repay the
$50 million seller's credit due to Seadrill Limited will be reduced if the
average contracted dayrate under any replacement contract is below $450,000
until the seller's credit's maturity in 2021. The amount of seller's credit
due will be reduced until Seadrill Partners' effective dayrate is $450,000 or
until the seller's credit is reduced to zero. Should the average dayrate of
the replacement contract be above $450,000, the entire $50 million seller's
credit must be paid to Seadrill Limited upon maturity of the seller's credit
in 2021.

Additionally as part of the acquisition agreement, Seadrill Partners has
agreed to pay Seadrill 50% of any dayrate above $450,000 per day, adjusted
for daily utilization, after the conclusion of the existing contract until
2025.
Financing and Liquidity

As of June 30, 2015, the Company had cash and cash equivalents, on a
consolidated basis, of $197.7 million and two revolving credit facilities
with $150 million in undrawn capacity. One $100 million facility is provided
by Seadrill as the lender and the second $100 million facility is provided by
a syndicate of banks and secured in connection with the $2.9 billion term
loan B facility. Total debt was $3,904.9 million as of June 30, 2015.

Net debt as at June 30, 2015 was therefore $3,707.2 million giving a ratio of
net debt to annualized adjusted EBITDA[4] of 3.2:1.

As of June 30, 2015, in addition to the Term Loan B, the Company had three
secured credit facilities totaling $884.4 million relating to the T-15, T-16,
West Vela and West Polaris. Additionally the Company has a $109.5 million
vendor loan from Seadrill maturing in 2016 relating to the acquisition of the
T-15 and a $65.8 million intercompany loan from Seadrill relating to the West
Vencedor maturing in June 2018.

Seadrill Partners will continue to explore refinancing alternatives for the
remaining related party debt on the West Vencedor, T-15, T-16, West Vela and
West Polaris.

As of June 30, 2015, Seadrill Partners had interest rate swaps outstanding on
principal debt of $3,538.3 million, representing approximately 91% of debt
obligations as of June 30, 2015. The average swapped rate, excluding bank
margins, is approximately 2.25%. The Company has a policy of hedging the
significant majority of its long-term interest rate exposure in order to
reduce the risk of a rising interest rate environment.
Market

Following the recovery in oil prices during the first quarter, commodity
prices have again moved lower and are now approaching the lows witnessed at
the beginning of 2015. The low commodity price environment, reductions in oil
company spending plans and an increasing supply / demand imbalance for
drilling units all continue to have a negative impact on utilization and
pricing in all market segments. As expected, dayrates for new fixture
activity remains at, or below, cash flow breakeven levels.

Seadrill Partners continues to believe that this challenging market will
continue through 2016 and that visibility for 2017 and beyond is dependent
upon commodity price stability, oil companies realizing the benefits of their
capital spending rationalization programs and continued fleet attrition.

Pricing for the remainder of 2015 and 2016 is expected to continue to be
driven by a high degree of excess capacity with 91 floaters already idle and
92 additional floaters ending their current contracts by the end of 2016.

Oil companies continue to prefer newer and more capable equipment,
demonstrated by the utilization rates of different asset classes.
Ultra-deepwater units are currently experiencing 81% marketed capacity
utilization versus 71% for deep and mid water floaters. During the downcycle
older units are more challenged to remain utilized due to the availability of
better and more efficient equipment.

Based on the level of current activity seen in the floater market, we expect
stacking and scrapping activity to continue through the second half of 2015
and well into 2016. Scrapping activity has continued in the second quarter
with an incremental 14 floaters designated for retirement. A total of 40
floaters have been now been scrapped since the end of 2013, equivalent to 12%
of the total fleet, and currently there are 28 cold stacked units. Lower than
expected stacking costs and a commodity price recovery may delay scrapping
decisions as rig owners retain some option value on older units. However, we
continue to believe that the significant cost to perform periodic classing
activity on these older assets will ultimately drive decisions to cold stack
and scrap these less capable units.

Currently the orderbook stands at approximately 78 units, of which 29 are Sete
new builds. Approximately 145 units, or 51% of the total marketed floater
fleet are rolling off contracts between now and the end of 2017, many of
which must undergo a 15 or 20 year classing. Current indications are that a
significant number of newbuild orders will be delayed until an improved
market justifies taking delivery of the unit. In light of the likely cold
stacking, scrapping activity and newbuild delays there remains a high
likelihood that there will be limited, or no, growth in the marketed fleet
between now and 2018.
Outlook

Third quarter adjusted EBITDA is expected to be similar to or slightly lower
than the second quarter. The West Vencedor is expected to incur a full
quarter of idle time in the third quarter and West Sirius operating earnings
will be negatively impacted by upfront costs related to its cold stacking.
This will be offset however by a full quarters contribution from the West
Polaris. During the third quarter to date, operating performance continues to
be ...

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