LISTING TRANSFER PROSPECTUS SEVAN DRILLING ASA (A public limited liability company organized under the laws of Norway) Transfer of listing of the shares in Sevan Drilling ASA from Oslo Axess to Oslo Børs The information contained in this prospectus (the “Prospectus”) relates to the transfer of listing from Oslo Axess to Oslo Børs (the “Listing Transfer”) of 336,625,000 common shares (the “Shares”) in Sevan Drilling ASA (“Sevan Drilling”or the “Company”), a public limited liability company organized under the laws of Norway (taken together with its consolidated subsidiaries, the “Sevan Drilling Group” or the “Group”) with a nominal value of NOK 1.00 each, together being all the currently issued and outstanding common stock of the Company. The Company's application for the Listing Transfer was approved by the board of directors of Oslo Børs ASA in its meeting on 25 January 2012. It is expected that the last day of listing on Oslo Axess will be on or about 10 February 2012, and the first day of listing on Oslo Børs will be on or about 13 February 2012. No offering or other sale of Shares will be completed in connection with the Listing Transfer. The Shares will be listed on Oslo Børs under the Company's current ticker code “SEVDR”. All Shares are registered in the Norwegian Central Securities Depository (the “VPS”), in book-entry form, and all Shares rank in parity with one another and carry one vote each. The Prospectus has been prepared to comply with the Norwegian Securities Trading Act of 29 June 2007 no. 75 (the “Norwegian Securities Trading Act”) and related secondary legislation, including the Commission Regulation (EC) no. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 regarding information contained in prospectuses (the “Prospectus Directive”) as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements (hereafter “EC Regulation 809/2004”). The Financial Supervisory Authority of Norway (Nw. Finanstilsynet) (the “Norwegian FSA”) has reviewed and approved the Prospectus in accordance with sections 7-7 and 7-8 of the Norwegian Securities Trading Act. The Prospectus has been prepared solely in the English language. THE PROSPECTUS DOES NOT CONSTITUTE AND SHALL NOT IMPLY IN ANY JURISDICTION AN OFFER TO BUY, SUBSCRIBE OR SELL ANY OF THE SECURITIES DESCRIBED HEREIN, AND THE INFORMATION IN THE PROSPECTUS IS NOT INTENDED TO FORM THE BASIS FOR ANY INVESTMENT DECISIONS.THE PROSPECTUS SERVES AS A TRANSFER OF LISTING PROSPECTUS ONLY AS REQUIRED BY NORWEGIAN LAW AND REGULATIONS, ANDNO SECURITIES ARE BEING OFFERED OR SOLD PURSUANT TO IT. Any reproduction or redistribution of the Prospectus, in whole or in part, is prohibited. The Prospectus shall be governed by and construed in accordance with Norwegian law. The courts of Norway, with Oslo as legal venue, shall have exclusive jurisdiction to settle any dispute which may arise out of or in connection with the Prospectus. Investing in the Company and the Shares involve risks and uncertainties. See section 2 “Risk Factors” and section 4 “Cautionary Notice to Investors”. 10 February 2012
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LISTING TRANSFER PROSPECTUS
SEVAN DRILLING ASA(A public limited liability company organized under the laws of Norway)
Transfer of listing of the shares in Sevan Drilling ASA
from Oslo Axess to Oslo Børs
The information contained in this prospectus (the “Prospectus”) relates to the transfer of listing from Oslo Axess to Oslo Børs (the “Listing Transfer”) of 336,625,000 common shares (the “Shares”) in Sevan Drilling ASA (“Sevan Drilling”or the “Company”), a public limited liability company organized under the laws of Norway (taken together with its consolidated subsidiaries, the “Sevan Drilling Group” or the “Group”) with a nominal value of NOK 1.00 each, together being all the currently issued and outstanding common stock of the Company. The Company's application for the Listing Transfer was approved by the board of directors of Oslo Børs ASA in its meeting on 25 January 2012. It is expected that the last day of listing on Oslo Axess will be on or about 10 February 2012, and the first day of listing on Oslo Børs will be on or about 13 February 2012. No offering or other sale of Shares will be completed in connection with the Listing Transfer.The Shares will be listed on Oslo Børs under the Company's current ticker code “SEVDR”. All Shares are registered in the Norwegian Central Securities Depository (the “VPS”), in book-entry form, and all Shares rank in parity with one another and carry one vote each.
The Prospectus has been prepared to comply with the Norwegian Securities Trading Act of 29 June 2007 no. 75 (the “Norwegian Securities Trading Act”) and related secondary legislation, including the Commission Regulation (EC) no. 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 regarding information contained in prospectuses (the “Prospectus Directive”) as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements (hereafter “EC Regulation 809/2004”).
The Financial Supervisory Authority of Norway (Nw. Finanstilsynet) (the “Norwegian FSA”) has reviewed and approved the Prospectus in accordance with sections 7-7 and 7-8 of the Norwegian Securities Trading Act.
The Prospectus has been prepared solely in the English language.
THE PROSPECTUS DOES NOT CONSTITUTE AND SHALL NOT IMPLY IN ANY JURISDICTION AN OFFER TO BUY, SUBSCRIBE OR SELL ANY OF THE SECURITIES DESCRIBED HEREIN, AND THE INFORMATION IN THE PROSPECTUS IS NOT INTENDED TO FORM THE BASIS FOR ANY INVESTMENT DECISIONS.THE PROSPECTUS SERVES AS A TRANSFER OF LISTING PROSPECTUS ONLY AS REQUIRED BY NORWEGIAN LAW AND REGULATIONS, ANDNO SECURITIES ARE BEING OFFERED OR SOLD PURSUANT TO IT.
Any reproduction or redistribution of the Prospectus, in whole or in part, is prohibited.
The Prospectus shall be governed by and construed in accordance with Norwegian law. The courts of Norway, with Oslo as legal venue, shall have exclusive jurisdiction to settle any dispute which may arise out of or in connection with the Prospectus.
Investing in the Company and the Shares involve risks and uncertainties. See section 2 “Risk Factors” and section 4 “Cautionary Notice to Investors”.
14 Definitions and Glossary .........................................................................................................................68
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1 SUMMARYThe following summary must be read as an introduction to the full text of this Prospectus, and is qualified in its entirety by, information presented in greater detail elsewhere in this Prospectus and the appendices hereto. This summary is not complete and does not contain all the information a potential investor should consider before investing in the Shares. Any investment in the Shares should be based on the consideration of this Prospectus as a whole, including section 2 “Risk Factors” and the Financial Statements included herein. Where a claim relating to the information contained in this Prospectus is brought before a court, a plaintiff investor might, under the national legislation of a Member State of the European Economic Area, have to bear the costs of translating this Prospectus before legal proceedings are initiated. No civil liability attaches to those persons who have prepared this summary, including any translations thereof, unless it is misleading, inaccurate or inconsistent when read together with other sections of this Prospectus. For definitions of certain terms as used herein, see section 14 “Definitions and Glossary”.
1.1 Introduction to Sevan DrillingCorporate information
Sevan Drilling was incorporated on 31 May 2006 as a public limited liability company. The Company is organized and existing under the laws of Norway in accordance with and pursuant to the Norwegian Public Limited Liability Companies Act. The Company’s registration number is 989 910 272.
According to section 2 of its articles of association (the "Articles of Association"), the Company’s head-quarters and registered office shall be in Oslo. The Company's headquarter is currently located in Tordenskioldsgate 6, 0160 Oslo, Norway, telephone: +47 22 33 00 00 and e-mail [email protected]. The Company’s website is www.sevandrilling.com.
In April and May 2011, the Company completed an initial public offering of its Shares resulting in the issuance of 240,625,000 new Shares. The Company's Shares were subsequently admitted to trading on Oslo Axess on 3 May 2011, under the ticker code "SEVDR".
Business overview
Sevan Drilling is a fully integrated offshore drilling contractor with ownership of two ultra deepwater drilling units. The drilling rigs are of cylindrical design, constructed on the basis of the cylinder shaped offshore floating unit design developed by the Company's former parent company Sevan Marine ASA ("Sevan Marine") through patented design and proprietary know-how held by Sevan Marine (the “Sevan Design”).
The Company owns and operates Sevan Driller, which is one the world‘s most advanced, robust and “state-of-the-art” ultra deepwater drilling units. The Sevan Driller is of the Sevan Cylindrical Drilling Unit design and built for safe and efficient year-round operations in ultra deepwaters worldwide. The Sevan Driller has been operating under a 6-year charter contract with Petrobras S.A (“Petrobras”) since June 2010 off the coast of Brazil. The second unit, the Sevan Brasil has been under construction at the COSCO Qidong Shipyard, China (“COSCO”). The Sevan Brasil is also an ultra deepwater drilling unit of the Sevan Cylindrical Drilling Unit design for commencement of a six-year charter contract with Petrobras in Brasil in the second quarter of 2012. Sevan Brasil left the COSCO shipyard on 10 January 2012 and proceeded offshore to commence thruster installation andseatrials. These operations are expected to take approximately four to six weeks and following completion the rig will be secured for shipment and loaded on to heavy lift for transport to Brazil.
In May 2011, Sevan Drilling, through two wholly owned subsidiaries, entered into contracts with COSCO for the construction of two ultra deepwater drilling units (the "newbuilds" or "Sevan Drilling Rigs 3 and 4"), and options for two additional units of the same specifications (the "optional newbuilds"or "Sevan Drilling Rigs 5 and 6"), based on the Sevan Cylindrical Drilling Unit design. The Company estimates a price including project management, pre-delivery financing, capital spares, drilling tools and pre-operations) of approximately USD 525 million for each newbuild. The price for the two optional newbuilds will be the same, however, the price is subject to possible price adjustments for significant movements in exchange rates and prices of materials to be purchased by COSCO. Under the construction contracts for the Sevan Drilling Rigs 3 and 4, the first newbuild shall be delivered in the fourth quarter of 2013, whereas the second newbuild shall be delivered in the second quarter of 2014. The first optional newbuild, Sevan Drilling Rig 5, assuming that the option is exercised at the latest by 10 December 2012, shall be delivered in the fourth quarter of 2014, whereas the second optional newbuild, Sevan Drilling Rig 6, assuming that the option is exercised at the latest by 10 December 2012, shall be delivered in the second quarter of 2015.
Strategies
The Company has identified the following key strategic objectives in order to fulfil its ambition of being recognized as a world class and fully integrated drilling contractor, owning and operating drilling units:
Recruit, develop and train an international workforce to deliver premium quality services throughout our organisation.
Enhance our existing design to extend the operating capabilities of our rigs to meet expected market demand.
Build strong, long term, relationships with key suppliers and construction yards and continuously improve project execution to capture costs benefits of building and operating our rigs.
Deliver best in class QHSE performance by building a company culture where we take responsibility for each other’s wellbeing, the operation of our equipment and our impact on the environment.
Deliver continuous improvement in operations - focusing on providing efficient and cost effective solutions to client needs.
Deliver an excellent return to our shareholders by providing a valuable service to our customers and the communities where we operate. We will demand the same commitments from our suppliers.
1.2 Summary financial and operating informationThe Group’s first drilling unit commenced operations during 2010, and the financial results for 2008 and 2009 accordingly reflect no significantrevenues before increasing to USD 40.6 million in 2010. Operating result was negative USD (47.1) million in 2010 compared to USD (32.6) million in 2009 and USD (23.4) million in 2008. Operating result before depreciation (“EBITDA”) was negative USD (4.4) million in 2010, compared to negative USD (30.5) million in 2009 and negative USD (19.3) million in 2008.
The financial information below for the years 2010, 2009 and 2008 has been extracted from the audited Sevan Drilling Combined Accounts prepared in accordance with IFRS as adopted by EU for the years ended 31 December, 2010, 2009 and 2008. The Sevan Drilling Combined Financial Statements comprise the consolidated accounts for Sevan Drilling and the consolidated accounts for Sevan Drilling Invest AS (formerly known as Sevan Drilling AS). The Combined Financial Statements have been prepared for the period 2008 to 2010 to reflect the Sevan Drilling Group as a whole, including the legal structure of Sevan Drilling Invest AS who is the owner of the Sevan Driller. Until 21 March 2011 Sevan Drilling Invest AS was wholly owned by Sevan Marine ASA and was transferred to Sevan Drilling Group in connection with the IPO. The Combined Financial Statements are based on IFRS and prepared to reflect a Sevan Drilling Group in previous periods where it was not legally a group. The Combined Financial Statements have been prepared specifically for purposes of this Prospectus and for the purpose of providing comparable historic information. The financial accounts are further described in sections 7 and 8 below.
The interim financial information below has been extracted from the restated unaudited Sevan Drilling Interim Third Quarter Financial Statement and represent the interim consolidated financial statements of the Sevan Drilling group as of 30 September 2011 and 30 September 2010 and for the three and nine months ended on such dates.
Nine months ended30 September(unaudited)
Three months ended30 September(unaudited) For the year ended 31 December
Total assets and liabilities per year-end 2010 was USD 1,165.3 million, up from USD 964.4 million in 2009, due to progression on the construction programs and the delivery of the Company’s first drilling unit. Total equity was USD 116.8 million at year-end 2010, down from USD 203.6 million year-end 2009, due to a negative net profit during the year. Please refer to section 7 for further details. The table below sets out a summary of the Group’s combined balance sheet as at 31 December 2010, 2009 and 2008 as extracted from the Combined Financial Statements, and as at 30 September 2011 with comparable figures as of at 30 September 2010 as extracted from the restated unaudited Sevan Drilling Interim Third Quarter Financial Statement:
The table below sets out a summary of the Group’s combined cash flow data for the years ended 31 December 2010, 2009 and 2008 as extracted from the Combined Financial Statements, and the nine months period ended 30 September 2011 as extracted from the restated unaudited Sevan Drilling Interim Third Quarter Financial Statement:
Nine months ended30 September(unaudited) For the year ended 31 December
USD million 2011 2010 2009 2008
Net cash generated from operating activities ...........................
Cash flows from investment activities
17.5 -21.2 -52.3 -40.2
Purchase of property, plant and equipment................................ -340.0 -164.6 -292.9 -154.2Net cash flow from investment activities................................
Cash flow from financing activities
-340.0 -164.6 -292.9 -154.2
Net proceeds from issuance of ordinary shares............................. 247.9 0.0 109.6 0.0Loan from Sevan Marine ASA - 92.9 179.2 34.3Repayment of interest-bearing debt -248.6 -4.8 0.0 0.0Net proceeds from interest-bearing debt................................ 250.4 42.6 129.2 100.0Net cash flow from financing activities ................................ 249.7 130.8 418.0 134.3Net cash flow for the period....................................................... -72.8 -55.1 72.8 -60.2Cash balance at the beginning of the year ................................ 1.8 74.2 1.5 61.7Cash balance included in contribution in kind 207.0Cash balance at the end of the year................................ 136.0 19.1 74.2 1.5
Capitalisation and indebtedness per 30 September 2011:
Amounts in USD million 30 Sep 2011
Unaudited
Total equity (A) 694.1
Current debt (incl. provisions)Guaranteed/secured loans 79.9Unguaranteed/unsecured 61.1Total current debt 141.1
Leasing debt due within one year Current bank debt / current portion of non-current debt 53.0
Other current interest-bearing debt 26.9Bonds due within 1 yearCurrent financial debt (E) 79.9
Net current financial indebtedness (E-C-D) (F) -56.1
Long-term leasing debt 0.0Other non-current interest-bearing debt 0.0Non-current bank loans 617.9Bonds due after 1 year 0.0Non-current financial debt (G) 617.9
Non-current receivables (H) 0.0
Net financial indebtedness (F+G-H) 561.8
After 30 September 2011, the amount drawn on the Company's USD 525 bank facility has been increased from USD 282 million to USD 479 million in connection with the financing of Sevan Brasil. Other than this, there have been no significant changes in the Company's capitalisation and indebtedness since 30 September 2011 and up until the date of the Prospectus. In addition the Company has repaid a vendor credit of USD 26 million in December 2011.
The Company's bank loan facilities are secured with securities customary in this type of financing, including during the pre-delivery stage security in the hull under construction, in the various contracts, assignment of refund guarantees and insurances, pledge in shares and account pledges, to be supplemented from delivery by a first mortgage over the unit and assignment of earnings borrower. For further details see "A summary description of the financing agreements currently in place" in section 8.6 below.
Major events subsequent to 30 September 2011 and Trends
In December 2011 the Company made a drawdown of USD 200 million under the Sevan Brasil bank facility to fund the construction of Sevan Brasil.After the drawdown there is USD 46 million available to draw under the bank facility (the total bank facility is USD 525 million).
Sevan Driller had a technical uptime of 55.9% in January 2012. Most of the down-time in January is related to an incident with the wash-pipe. During routine maintenance to replace the wash pipe the threaded connection between the wash pipe and the swivel was damaged. The repair required that the swivel was removed and taken onshore where the damaged parts were replaced. There were no injuries or environmental damages related to this incident and the rig was back on contract 3 February. The rig was partly on rate during the incident, and total days off rate were about 14 days.
Following its acquisition of 28.5% of the shares in Sevan Drilling ASA in December, the company received a request from Seadrill Limited that an extraordinary general meeting (EGM) in Sevan Drilling ASA is convened for the purpose of electing a new board of directors reflecting the new shareholder base. The EGM was held 9 January. As follows from the minutes, it was duly resolved to:
i. appoint new directors as proposed, so that the new board of directors of the Company now consists of Chairman Erling Lind (new), Kitty Hall, Anne Breive, Per Wullf (new) and Kristian Johansen (new).
ii. appoint a new nomination committee as proposed, the committee now thus consisting of Harald Thorstein, Jarle Sjo and Geir Tjetland, and approve the proposed nomination committee guidelines.
iii. change the articles of association so that the registered business address of the Company shall be in Oslo.iv. approve the proposed long term incentive program (LTIP) and grant of authorisation to the Board of Directors to issue up to 10,000,000 new
shares in order to fulfil such program. Each option will give the holder the right to subscribe for one share in the Company at a strike price of NOK 5.75. The options will vest with 1/3 annually, subject to certain terms and conditions.
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As described above and as reported by the Company on 10 January 2012, the Sevan Brasil left the COSCO shipyard on 10 January 2012 and proceeded offshore to commence thruster installation and seatrials. These operations are expected to take approximately four to six weeks and following completion the rig will be secured for shipment and loaded on to heavy lift for transport to Brazil. On 6 February, the Company published the following status update with respect to its rigs:
Sevan Driller:
Sevan Driller had a technical uptime of 55.9% in January 2012. The downtime in January is primarily related to an incident with the wash pipe and swivel drive shaft described in a release dated 19 January 2012.
As of 12.00 pm local Brazilian time on 4 February 2012, Sevan Driller was fully operational.
Sevan Brasil:
The construction and mobilization of Sevan Brasil is progressing according to plan. Sea trials were successfully completed on 2 February 2012 and the rig is now undergoing final preparations for transport. The window for heavy lift transport of the rig to Brazil is between 1 March and 7 March 2012.
The Company expects Sevan Brasil to arrive in Rio de Janeiro by mid-April 2012. The rig is scheduled to commence operation under a six year charter contract with Petrobras during second quarter 2012.
Sevan rig no 3:
Construction of Sevan rig no 3 is progressing according to plan. Keel-laying took place 8 October 2011 and erection of main hull is ongoing. Fabrication of drill-floor has started.
Sevan rig no 4:
Construction of Sevan rig no 4 is also progressing according to plan. Keel-laying took place 16 December 2011 and erection of lower part of main hull is ongoing.
Other than this and as otherwise described in this Prospectus, there have been no significant changes in the financial or trading position of the Group since 30 September 2011 (the date of its latest financial information included in this Prospectus).
1.3 Board of Directors, senior management and employeesThe Company’s current Articles of Association provide that the Board of Directors shall consist of 3 to 9 Directors. The Directors are elected by the shareholders.
Board of Directors
The Company’s current board of directors (the "Board of Directors") consists of Erling Lind (chairman), Katherine Jessie Hall,Anne Breive, Kristian Johansen and Per Wullf.
Senior management
The senior management of the Company currently consists of Scott Kerr (CEO), Jon H. Wilmann (CFO), Bjørn Egil Gustavsen (VP Projects), Eileen Aspehaug (VP HR), Paul Grimen (VP Operations), Heitor Gioppo (VP Brazil) and Pascal Busch (VP QHSE).
Employees
The Sevan Drilling Group currently employs approximately 350 employees in Norway, Singapore, China and Brazil.
1.4 Major shareholder and related party transactionsMajor Shareholders
The following table sets forth information concerning the two largest registered holders of the Company’s Shares as registered in the VPS on 9 February 2012. Except as set forth below, the Company is not aware of any shareholder owning 5% or more of the Company’s outstanding Shares.
Name of Shareholder Number of Shares Percentage of Shares
Seadrill Ltd 96,000,000 28.52%
Skagen Vekst 17,599,671 5.23%
Related party transactions
The Group has in the period covered by the Financial Statements incorporated hereto by reference been subject to various related party transactions with Sevan Marine and companies in which Sevan Marine exerts considerable influence. For further information, see section 8.12 “Related Party Transactions” below in this Prospectus.
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1.5 Share capitalAs at the date of this Prospectus, the Company’s share capital is NOK 336,625,000, divided into 336,625,000 Shares with a par value of NOK 1.00 each. All Shares in the Company are of the same class and vested with equal rights in all respects. The Shares have all been validly issued and are fully paid.
1.6 Articles of Association and Documents on DisplayThe Articles of Association of the Company have been incorporated hereto by reference. See section 13.3.
Copies of the following documents will be available for inspection at the Company’s registered office during normal business hours from Monday to Friday each week (except public holidays) for a period of twelve months from the date of this Prospectus:
the Articles and Memorandum of Association of the Company;
the audited Combined Financial Statements for Sevan Drilling Group, and the audited financial statements of Sevan Drilling ASA as of and for years ended 31 December 2010, 2009 and 2008 and the unaudited interim consolidated financial information for the Sevan Drilling ASA group for the three first quarters of 2011;
the annual accounts of each of the Company's subsidiaries for the years 2010 and 2009 (to the extent such exist);
all reports included or referred to in this Prospectus; and
this Prospectus.
1.7 AdvisorsAdvokatfirmaet Schjødt AS has acted as legal advisor to the Company (as to Norwegian law) in connection with this Prospectus and the transfer of listing from Oslo Axess to Oslo Børs.
1.8 AuditorsPricewaterhouseCoopers AS (“PwC”) is the Company’s independent auditor. PwC is a member of the Norwegian Institute of Public Auditors (Nw. Den Norske Revisorforening).
1.9 Summary of risk factors Investing in the Shares involves inherent risks. A description of material risks relating to the Company and the Shares and that are currently known to the Company is described in section 2 "Risk Factors". Additional risks and uncertainties that the Company currently believes are immaterial, unlikely or that are not presently known to the Company, may however also have a material adverse effect on its business, financial condition, results of operations and cash flow. An investment in the Shares is suitable only for investors who understand the risk factors associated with this type of investment and who can afford a loss of all or part of the investment.
A summary of the risks described in section 2 is listed below. If any of these risks herein materialize, individually or together with other circumstances, they may have a material adverse effect on the Group’s business, financial condition, results of operations and cash flow, which may cause a decline in the value and trading price of the Shares that could result in a loss of all or part of any investment in the Shares. The order in which the risks are presented below is not intended to provide an indication of the likelihood of their occurrence nor of their severity or significance. These risks should also be considered in connection with the cautionary statement regarding forward-looking information set forth in section 4 below.
Risks relating to the industry in which the Group operates:
The offshore contract drilling industry, which is capital intensive, is also cyclical, with volatile demand and day rates. The business, financial condition, and results of operations for drilling rig owners and operators depend on the level of activity in the offshore oil and gas industry, which is significantly affected by, among other things, volatile oil and gas prices and may be materially and adversely affected by a decline in offshore oil and gas exploration, development and production.
Uncertainty relating to the development of the world economy may affect the oil price in general and/or reduce demand for drilling services or result in contract delays or cancellations.
An over-supply of drilling units may lead to a reduction in day rates, which are the amounts earned per day per drilling unit, which may materially impact the competition between and/or the profitability of rig owners.
The market value of drilling units may decrease, which could cause rig owners to incur losses in case of sale of drilling rigs following a decline in their market values, and may result in lower day rates on subsequent charter contracts.
Consolidation of suppliers may limit availability of supplies and services when needed, at an acceptable cost, or at all.
Governmental laws and regulations could affect the operations of rig owners, increase their operating costs, reduce demand for drilling services and/or restrict the ability of rig owners to operate the drilling units or otherwise adversely affect their operational or financial condition.
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Rig owners may be subject to liability under environmental laws and regulations or for claims relating to environmental matters, which could have a material adverse effect on their results or operations and financial condition.
The drilling business involves numerous operating hazards.
Rig owners may be subject to litigation that could have an adverse effect on their financial condition.
Technology disputes involving rig owners, their suppliers or sub-suppliers could impact their operations or increase operating costs.
Competition within the oilfield services industry is fierce and may adversely affect rig owners’ ability to market their services and/or secure profitable employment.
Uncertainty relating to the development of the world economy may reduce demand for drilling services or result in contract delays or cancellations.
The drilling units may, from time to time, operate in various jurisdictions exposing the relevant owners and operators to additional risks.
Tax rules may change or new tax rules may be introduced, or the application of existing rules may change all of which could materially and adversely affect the profitability of the drilling business.
Risk of war and/or terrorist attacks.
Risks relating to the Group:
The Group currently has only one customer (Petrobras) and operates in one country only (Brazil).
The Group currently has only one rig in operation and operational downtime on that rig can significantly impact the Group’s ability to pay down its debt as planned.
The two newbuilds, Sevan Drilling Rig 3 and 4, are currently without employment contracts and financing for 80% of the contract price. No assurance can be given that employment and financing can be obtained on acceptable terms, or at all, in time for scheduled delivery in fourth quarter 2013 and first quarter 2014, respectively. Additional equity financing may be necessary if bank financing is not secured by delivery of the newbuild rigs.
The continued availability of the financing of the Sevan Brasil is conditional upon the unit being delivered by the yard no later than by 31 November 2012 and the acceptance by Petrobras of the unit under the charter contract no later than by 30 May 2013, failing which a mandatory prepayment event occurs.
The Group’s operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues.
The Group’s future contracted revenue for its drilling units may not be ultimately realized.
The Group’s offshore drilling contracts may be terminated early due to certain events.
The Group may not be able to renew or obtain new and favourable contracts for drilling units whose contracts are expiring or are terminated, which could adversely affect the Group’s revenues and profitability.
The Group’s newbuilding projects are subject to risks which could cause delays or cost overruns.
The Company may not be able to successfully implement its strategies.
The Group’s success depends on key members of its management team.
Failure to obtain or retain highly skilled personnel could adversely affect the Group’s operations.
Labour interruptions could disrupt the Group’s business.
In order to execute the Company’s growth strategy, the Company may require additional equity and/or debt capital in the future, which may not be available at acceptable terms or at all.
The Group’s existing or future debt arrangements could limit the Group’s liquidity and flexibility in obtaining additional financing, in pursuing other business opportunities or the Company’s ability to declare dividends to its shareholders.
If the Group is unable to comply with the restrictions and the financial covenants in the agreements governing its indebtedness, there could be a default under the terms of these agreements, which could result in an acceleration of payment obligations in respect of financial indebtedness.
Interest rate fluctuations could affect the Group’s profitability, earnings and cash flow.
Fluctuations in exchange rates could result in financial losses for the Group.
A change in tax laws or their application of any country in which the Group operates from time to time, or complex tax laws associated with international operations which the Group may undertake from time to time could result in a higher tax expense or a higher effective tax rate on the Group’s earnings.
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A loss of a major tax dispute or a successful tax challenge to the Group’s operating structure from time to time, intercompany pricing policies, the taxable presence of subsidiaries in certain countries or other disputes related to or challenges to the Group’s tax payments could result in a higher tax rate on the Group’s worldwide earnings, which could result in a significant negative impact on its earnings and cash flows from operations.
Risk of unexpected incidents and occurrences
Risks relating to the Shares:
The price of the Shares may fluctuate significantly.
Future sales of Shares by the Company’s major shareholder or any of its primary insiders may depress the price of the Shares.
Future issuances of Shares or other securities may dilute the holdings of shareholders and could materially affect the price of the Shares.
Investors may not be able to exercise their voting rights for Shares registered in a nominee account.
Investors in the United States may have difficulty enforcing any judgment obtained in the United States against the Company or its Directors or executive officers in Norway.
The transfer of Shares is subject to restrictions under the securities laws of the United States and other jurisdictions.
Shareholders outside of Norway are subject to exchange rate risk.
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2 RISK FACTORSInvesting in the Shares involves inherent risks. Before deciding whether or not to invest in the shares, an investor should consider carefully all of the information set forth in this Prospectus and otherwise available, and in particular, the specific risk factors set out below. An investment in the Shares is suitable only for investors who understand the risk factors associated with this type of investment and who can afford a loss of all or part of the investment.
If any of the risks described below materialize, individually or together with other circumstances, they may have a material adverse effect on the Group’s business, financial condition, results of operations and cash flow, which may cause a decline in the value and trading price of the Shares that could result in a loss of all or part of any investment in the Shares. The order in which the risks are presented below is not intended to provide an indication of the likelihood of their occurrence nor of their severity or significance. These risks should also be considered in connection with the cautionary notice set forth in section 4 "Cautionary Notice to Investors".
2.1 Risks relating to the industry in which the Group operatesThe general level of activity in the offshore oil and gas industry depends on the oil price, which for various reasons is likely to vary over time
The drilling business in general, including the Group’s business depends on the level of activity in oil and gas exploration, as well as the identification and development of oil and gas reserves and production in offshore areas worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development, political concerns and regulatory requirements all affect customers' levels of activity and drilling campaigns. Accordingly, oil and gas prices and market expectations of potential changes in these prices significantly affect the level of activity and demand for the Group’s drilling units.
Oil and gas prices are extremely volatile and are affected by numerous factors beyond the Group’s control, including, but not limited to, the following:
worldwide demand for oil and gas;
the cost of exploring for, developing, producing and delivering oil and gas;
expectations regarding future energy prices;
new or changed taxes on the exploration, production, sale, purchase or consumption of oil or petroleum products;
the ability of the Organisation of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and impact pricing;
the level of production in non-OPEC countries;
government laws and regulations, including environmental protection laws and regulations;
local and international political, economic and weather conditions;
political and military conflicts in oil-producing and other countries; and
the development and exploitation of alternative energy sources.
An over-supply of drilling units may lead to a reduction in day rates and/or lower utilization of drilling units
Significant increases in the prices for oil and gas have in the past resulted in a large number of construction orders being placed for newbuild rigs. Periods with very high oil prices could be followed by periods of sharp and sudden declines in oil and gas prices, which in turn result in declines in utilization and day rates, and an increase in the number of idle drilling units without long-term contracts.
The worldwide fleet of ultra deepwater and harsh environment drilling units (including the Sevan Driller and the Sevan Brasil) is currently estimated to consist of 108 units, according to data extracted from ODS Petrodata’s Rig Base. An additional 47 ultra deepwater units are reported to be under construction or on order with delivery scheduled prior to end of 2014, which would bring the expected total fleet to 155 units by expiry of 2014. The strong growth in ultra deepwater units is due to the increased focus of oil companies on existing and new ultra deepwater regions for exploration and production, and the inability to upgrade or modify the existing mid-water fleet to undertake ultra deepwater and harsh environment drilling campaigns.
Lower utilization and day rates may adversely affect the value of drilling assets.
The market value of drilling units may decrease, and rig owners are exposed to potentially significant losses if they sell assets following a decline in market values or lower earnings if new charter contracts are signed at lower day rates.
If the offshore contract drilling industry suffers adverse developments in the future, the fair market value of drilling units may decline. The fair market value of the drilling units may increase or decrease depending on a number of factors, including:
general economic and market conditions affecting the offshore contract drilling industry, including competition from other offshore contract drilling companies;
types, sizes and ages of drilling units;
supply and demand for drilling units;
cost of newbuild units;
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prevailing level of drilling services contract dayrates;
the perceived efficiency, reliability and other competitive advantages or disadvantages of specific drilling designs and technology compared to alternative drilling solutions; the time required to build or deliver new units;
government laws and regulations, including environmental protection laws and regulations and such laws becoming more stringent due to inter aliaaccidents such as the Deepwater Horizon accident; and
technological advances.
Consolidation of suppliers may limit availability of supplies and services when needed, at an acceptable cost, or at all
Owners of drilling units generally rely on a significant supply by third parties of consumables, spare parts and equipment to operate, maintain, repair and upgrade its fleet of drilling units. During the last decade the number of available suppliers has been reduced, resulting in fewer alternatives for sourcing key supplies and services. In addition, certain key equipment used by drilling rig owners and operators is protected by patents and other intellectual property of its suppliers or other third parties. All of the foregoing may limit the availability of supplies and services when needed, at an acceptable cost, or at all. Cost increases, delays or unavailability could negatively impact the drilling industry at large and/or individual owners/operators of drilling units, and result in higher rig downtime due to delays in repair and maintenance.
Governmental laws and regulations could affect operations, increase operating costs, reduce demand for services from and restrict the ability ofdrilling rig owners to operate its drilling units or otherwise.
The drilling business is affected by governmental laws and regulations. The industry is dependent on demand for services from the oil and gas companies and, accordingly, is indirectly also affected by changing laws and regulations relating to the energy business in general. The laws and regulations affecting the drilling industry include, among others, laws and regulations relating to;
protection of the environment;
quality, health and safety;
import-export quotas, wage and price controls, imposition of trade barriers and other forms of government regulation and economic conditions and
taxation.
The industry, including the Group and its customers, are required to invest financial and managerial resources to comply with these laws and regulations. The future costs of complying with these laws and regulations cannot be predicted, and any new laws or regulations could materially increase the industry’s (including the Group’s) expenditures in the future. Existing laws or regulations or adoption of new laws or regulations limiting exploration or production activities by oil and gas companies or imposing more stringent restrictions on such activities could adversely affect the Group by increasing its operating costs, reducing the demand for its services and restricting its ability to operate drilling units.
The drilling business is subject to strict environmental laws and regulations with resulting potential exposure to liability and financial consequences for the Group
The drilling business is subject to environmental rules and regulations pursuant to international conventions and national legislation in relevant jurisdictions. Breach of these rules and regulations may result in fines, penalties and/or claims by authorities, customers and other third parties. The operation of floating production and drilling units in offshore environments, entail inherent risk for pollution and resulting liability which could, potentially have a significant adverse effect on rig owners and operators, which may not be fully covered under contractual arrangements or insurances coverage.
Environmental laws and regulations have become more stringent in recent years, and may in some cases impose strict liability, rendering a person liable for environmental damage without regard to negligence. Such laws and regulations may expose rig owners and operators to liability resulting from acts or omissions by themselves or by relevant third parties. The application of legislative and/or regulatory requirements or the adoption of new requirements could have a material adverse effect on the financial position, results of operations or cash flows of affected industry players. Some degree of contractual indemnification pursuant to which clients agree to protect, hold harmless and indemnify against liability for pollution, well and environmental damage may be available to rig owners; however, there is no assurance that such indemnities are available or that, in the event of extensive pollution and environmental damage, the indemnifying party would have the financial capability to fulfill their contractual obligations. Also, these indemnities may be held to be unenforceable as a result of public policy or for other reasons. In addition, insurance cover may not be available or sufficient to cover relevant exposure.
The drilling business involves numerous operating hazards
Drilling operations are subject to hazards inherent in the drilling industry, such as blowouts, reservoir damage, loss of production, loss of well control, lost or stuck drill strings, equipment defects, fires, explosions and pollution. Contract drilling and well servicing require the use of heavy equipment and exposure to hazardous conditions, which may subject the owners and operators 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. The operation of drilling units is also subject to hazards inherent in marine operations, either while on-site or during mobilization, such as capsizing, sinking, grounding, collision, damage from severe weather and marine life infestations. Operations may also be suspended because of machinery breakdowns, abnormal drilling and/or weather conditions, and failure of subcontractors to perform or supply goods or services, or personnel shortages.
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Damage to the environment could also result from drilling operations, particularly through spillage of fuel, lubricants or other chemicals and substances used in drilling operations, or extensive uncontrolled fires. Owners and operators of drilling units may also be subject to property, environmental and other damage claims by oil and gas companies. Relevant insurance policies and contractual rights to indemnity may not adequately cover losses, and may not be customary or available at all. Pollution and environmental risks are generally not totally insurable.
The insurances coverage offered to drilling rig owners includes policy limits. As a result, they retain the risk for any losses in excess of these limits, which could be substantial. Also, industry players may decide to retain additional risk through self-insurance in the future.
If a significant accident or other event occurs and is not fully covered by insurance or any enforceable or recoverable indemnity from a client, it could significantly and adversely affect the financial position, results of operations or cash flows of the affected rig owner or operator, such as the Group.
Competition within the oilfield services industry is fierce and may adversely affect the industry players’ ability to market their services
The oilfield services industry is highly competitive and fragmented and includes several large companies that compete in the markets the Group serves, or will serve, as well as numerous small companies that compete with the Group on a local basis. The solidity and resources of the Group’s larger competitors could enable them to better withstand industry downturns, compete more effectively on the basis of technology and geographic scope, they may be favoured by clients due to better perceived reliability due to greater size and balance sheet, and they may beat the Company at recruiting and retaining skilled personnel. The Company believes the principal competitive factors in the market areas the Group serve are price, product and service quality, availability of crews and equipment and technical proficiency. The Group’s operations may be adversely affected if its current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than the Group’s products and services, or expand into service areas where the Group operates. Competitive pressures or other factors may also result in significant price competition, particularly during industry downturns, which could have a material adverse effect on the Group’s results of operations and financial condition. In addition, competition among oilfield services and equipment providers is affected by each provider’s reputation for solidity, safety, quality and technological innovation.
Uncertainty relating to the development of the world economy may reduce demand for drilling services or result in contract delays or cancellations
The drilling industry depends on its existing and prospective customers’ willingness and ability to make operating and capital expenditures to explore, develop and produce oil and gas. Demand for drilling units and services is particularly sensitive to oil price developments fluctuations in production levels, general demand and activity in the oil industry as well as exploration results. In such a volatile market, no assurance can be given as to the Company’s ability to successfully secure contracts and seize opportunities. A decrease in the oil price may have a material adverse impact on participants’ ability to secure attractive employment opportunities and, accordingly, adversely affect their financial condition. A high oil price may have a negative effect on the demand for petroleum products, which could, ultimately, have a negative impact on the demand for the industry’s products and services. Recent volatility in the world economy has caused significant changes in the prices of oil and gas prices. Continued volatility may create uncertainty that can cause oil companies to cut spending budgets. Limitations on the availability of capital or higher costs of capital for financing expenditures, or the desire to preserve liquidity, may cause potential customers to make additional reductions in future capital budgets and outlays. Such adjustments could reduce demand for drilling services generally, and the Group’s products and services specifically, which could adversely affect its results of operations and cash flows.
The industry is generally fiercely competitive and specifically subject to continual and rapid technological developments
The deepwater drilling market is characterized by continual and rapid technological developments that have resulted in, and will likely continue to result in, substantial improvements in equipment functions and performance. As a result, the future success and profitability of industry participants will be dependent in part upon its ability to:
improve existing services and related equipment;
address the increasingly sophisticated needs of its customers; and
anticipate changes in technology and industry standards and respond to technological developments on a timely basis.
If a rig owner such as the Group is not successful in acquiring new equipment or upgrading its existing equipment on a timely and cost-effective basis in response to technological developments or changes in standards in the industry, this could have a material adverse effect on such rig owner’sbusiness.
Drilling operations are often international in scope and expose owners and operators to different formal challenges which may entail additional risks
Drilling activities in various jurisdictions and international operations involve additional risks, including risks of:
terrorist acts, war, civil disturbances and piracy;
seizure, nationalization or expropriation of property or equipment;
political unrest;
labour unrest and strikes;
the inability to repatriate income or capital;
complications associated with repairing and replacing equipment in remote locations;
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impositions of embargos;
import-export quotas, wage and price controls, imposition of trade barriers and other forms of government regulation and economic conditions that are beyond the Group’s control;
regulatory or financial requirements to comply with foreign bureaucratic actions; and
changing tax policies.
In addition, international contract drilling operations are subject to the various laws and regulations in relevant countries and jurisdictions, including laws and regulations relating to:
the equipment requirements for operation of drilling units;
repatriation of foreign earnings;
oil and gas exploration and development;
taxation of offshore earnings and the earnings of expatriate personnel;
customs duties on the importation of drilling rigs and related equipment;
requirements for local registration or ownership of drilling rigs by nationals of the country of operations; and
the use and compensation of local employees and suppliers by foreign contractors.
Some foreign governments 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. These practices may adversely affect foreign third parties’, such as the Group’s, ability to compete in those regions. It is difficult to predict what governmental regulations may be enacted in the future that could adversely affect the international drilling industry. Failure to comply with applicable laws and regulations, including those relating to sanctions and export restrictions, may subject the Group to criminal sanctions or civil remedies, including fines, denial of export privileges, injunctions or seizures of assets.
Risk of war, civil attacks, piracy, and terrorist attacks
Terrorist attacks have among other things caused instability in the world’s financial and commercial markets. This has in turn contributed to high levels of volatility in prices for among other things oil and gas. Even war, civil disturbances and/or piracy occurs from time to time in areas where drilling business is undertaken. Continuing instability for one or more of these reasons may cause further disruption to financial and commercial markets and contribute to even higher level of volatility in prices. In addition, acts of war, piracy or terrorism could limit or disrupt drilling operations, including disruptions from evacuation of personnel, cancellation of contracts or the loss of personnel or assets, and may significantly affect the drilling business in general and/or affected individual drilling rig owners/operators’ business and results of operations in the future.
2.2 Risks relating to the GroupThe Group currently relies heavily on one customer
The Group’s contract drilling business is subject to the risks associated with having a limited number of customers for its services. While the Group may seek to enter into contracts with multiple clients in the years to come, as of the date of the Prospectus, Petrobras alone accounts for all of the Group’s current and future contracted revenues. While the Group enjoys a good relationship with Petrobras, it is also directly exposed to the results and financial condition of its sole customer for the time being, and, therefore, dependent on the continued success of Petrobras. The Group’s results of operations could be materially adversely affected if Petrobras were to fail to compensate the Group for it services, were to terminate the contracts (or any of them) with or without cause, fail to renew the existing contract or refuse to award new contracts to the Group and the Group is unable to enter into contracts with new customers at comparable dayrates.
The Group currently has only one rig in operation
The “Sevan Driller” is a highly complex unit which can suffer downtime due to failure in equipment or due to operational activity. Since this is the Group’s only source of revenue any excessive downtime can impact the Group’s ability to pay down debt and operate as a going concern.
The construction contracts with COSCO entail particular risk
The construction contracts with COSCO for the construction of the two newbuilds, Sevan 3 and 4, based on the Sevan Cylindrical Drilling Unit design is commenced without any employment having been secured for the units upon delivery and without financing in place for the instalments equal to 80% of the project price which is payable upon delivery, thus potentially exposing the 20% equity injected in the projects.
The financing of the Sevan Brasil is conditional
The continued availability of the financing of the Sevan Brasil is conditional upon the acceptance by Petrobras of the unit under the charter contract no later than by 30 May 2013, failing which a mandatory prepayment event occurs.
The Group has limited experience in operation of drilling rigs
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The “Sevan Driller” has been in operation for 20 months only, so only limited experience from the operations of its drilling rigs has been gained. Because investors have limited historical operating and financial information on which to base the investment decision, the Company outlook must be considered in light of the risks, uncertainties and obstacles that it may face in an evolving and competitive market.
The Group’s operating and maintenance costs will not necessarily fluctuate in proportion to changes in operating revenues
The Group’s 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 and demand for contract drilling services, which in turn affect dayrates. In addition, equipment maintenance costs fluctuate depending upon the type of activity the unit is performing and the age and condition of the equipment. In connection with new assignments, the Group 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 firm contractual period over which such expenditures are amortized. In a situation where a drilling unit faces long idle periods, reductions in costs may not be immediate as some of the crew may be required to prepare drilling units for stacking and maintenance in the stacking period. Should drilling units be idle for a longer period, the Group may seek to redeploy crew members, who are not required to maintain the units, to active units to the extent possible. However, there can be no assurance that the Group will be successful in reducing its costs.
The Group’s future contracted revenue for its drilling units may not be ultimately realized
There may be uncertainty as to the duration of offshore charters due to extension and/or early cancellation options held by charterers, late delivery or deviation from contracted performance measures. Also, there may be off-hire periods during and between charters. The cancellation or postponement of one or more charters can have a major adverse impact on the earnings of drilling companies, including the Company. The Company may also suffer losses should customers seek to renegotiate contracts during periods with depressed market conditions, or upon downtime, operational difficulties, safety related issues or if a unit becomes a total loss.
As of 30 September 2011, the future estimated contracted revenue for the Group’s drilling units, or contract drilling backlog, was approximately USD1.6 billion under firm commitments, including bonus potential. The Group may not be able to perform under these contracts due to events beyond its control or due to default of the Group, and any of the Group’s customers may seek to cancel or renegotiate contracts for various reasons, including adverse conditions, or invoke suspension periods, at their discretion, resulting in lower dayrates. The Group’s inability or the inability of its customers to perform contractual obligations under these contracts may have a material adverse effect on the Group’s financial position, results of operations and cash flows.
The operation of drilling rigs requires effective maintenance routines and functioning equipment. Certain pieces of equipment are critical regarding the rigs’ performance of the drilling services as required in customer contracts. While efforts are made to continuously identify the need for critical spare parts and equipment, there is a risk of unpaid downtime resulting from the time needed to repair or replace equipment which may have a long delivery time should there not be readily available spares. In addition, downtime and suspension periods may be prolonged due to complications with repairing or replacing equipment as the drilling units may be situated in remote locations.
Risks relating to counterparties
The Company relies on timely delivery of goods and services by numerous vendors and suppliers, and the performance in full by the charterers of the Sevan units. Failure to perform or financial difficulties encountered by any such counterpart can adversely affect the financial and/or operational condition of the Company.
The Group’s offshore drilling contracts may be terminated early due to certain events
Under certain circumstances the Group’s existing or future contracts may permit a customer to terminate their contract early without the payment of any termination fee, as a result of non-performance, longer periods of downtime or impaired performance caused by equipment or operational issues, or sustained periods of downtime due to force majeure events. Many of these events are beyond the Group’s control. During periods of challenging market conditions, the Group may be subject to an increased risk of its clients seeking to repudiate their contracts, including through claims of non-performance. The ability of the Group’s customers from time to time to perform their obligations under their drilling contracts with the Group may also be negatively impacted by the prevailing uncertainty surrounding the development of the world economy and the credit markets. If the Group’s customers from time to time cancel their contracts with the Group, and the Group is unable to secure new contracts on a timely basis and on substantially similar terms, or if contracts are suspended for an extended period of time or if the Group’s contracts are renegotiated, it could adversely affect the Group’s financial position, results of operations or cash flows.
The Group may not be able to renew or obtain new and favourable contracts for drilling units whose contracts are expiring or are terminated, which could adversely affect the Group’s revenues and profitability
Subject to certain extension options of up to six years granted to Petrobras, the Sevan Driller contract with Petrobras expires in June 2016, and the Sevan Brasil contract expires in 2018, 6 years after startup, which is estimated to second quarter 2012.The Group’s ability to have these contractsextended or renewed, or to obtain new contracts, will depend on the prevailing market conditions. In cases where the Group is not able to obtain new contracts in direct continuation, or where new contracts are entered into at dayrates substantially below the existing dayrates or on terms less favourable compared to existing contracts terms, the Group’s revenues and profitability could be adversely affected.
The Group’s newbuilding projects are subject to risks which could cause delays or cost overruns
Drilling rig construction projects are subject to risks of delay or cost overruns inherent in any large construction project from numerous factors, including, but not limited to:
shortages of equipment, materials or skilled labour;
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unscheduled delays in the delivery of ordered materials and equipment or shipyard construction;
failure of equipment to meet quality and/or performance standards;
financial or operating difficulties experienced by equipment vendors or the shipyard;
unanticipated actual or purported change orders;
inability to obtain required permits or approvals;
unanticipated cost increases between order and delivery;
design or engineering changes;
work stoppages and other labour disputes;
adverse weather conditions or any other events of force majeure.
Significant cost overruns or delays could adversely affect the Group’s financial position, results of operations and cash flows. Additionally, failure to complete a project on time may result in the delay of revenue from that drilling unit. New drilling units may experience start-up difficulties following delivery or other unexpected operational problems that could result in uncompensated downtime, which also could adversely affect the Group’s financial position, results of operations and cash flows or the cancellation or termination of drilling contracts.
The Group may not be able to successfully implement its strategies
The Group’s strategies include international operations with focus on the Brazil region. Maintaining and expanding the Group’s operations and achieving its other objectives involve inherent costs and uncertainties and there is no assurance that the Group will achieve its objectives or other anticipated benefits. There is no assurance that the Group will be able to undertake these activities within its expected time frame, that the cost of any of the Group’s objectives will be at expected levels or that the benefits of its objectives will be achieved within the expected timeframe or at all. Should there be any regulatory changes in Brazil, these could have a negative impact on the Group’s competitive or financial position. The Group’s strategy may also be affected by factors beyond its control, such as the speed of the economic recovery in each of its markets, the disposable income of customers and the availability of acquisition opportunities in a market. Any failures, material delays or unexpected costs related to implementation of the Group’s strategies could have a material adverse effect on its business, financial condition, results of operations and cash flow.
The Company is small compared to many of its competitors
Sevan Drilling is a small drilling company, which may be a competitive disadvantage when competing for certain contracts, as larger competitors may be perceived as more solid and/or experienced subcontractors than the Company.
The Group’s success depends on key employees and members of its management team
The successful development and performance of the Group’s business depends on its ability to attract and retain skilled professionals with appropriate experience and expertise. The Group’s success depends, to a significant extent, on the continued services of the individual members of its management team, who have substantial experience in the industry and in the local jurisdictions in which it operates. The Group’s ability to continue to identify and develop opportunities depends on management’s knowledge of, and expertise in, the industry and such local jurisdictions and on their external business relationships. There can be no assurance that any management team member will remain with the Group. Any loss of the services of key members of the management team could have a material adverse effect on its business and operations.
Failure to recruit or retain highly skilled personnel could adversely affect the Group’s operations
The Group requires highly skilled personnel to operate and provide technical services and support for its business. Competition for skilled and other labour required for the Group’s drilling operations has increased in recent years as the number of rigs activated or added to the worldwide fleets has increased. For deepwater operations utilization rates remain high and the number of deepwater units in operation is growing, not least in Brasil. This is expected to increase the demand for qualified personnel with deepwater experience in particular. If this expansion continues and is coupled with improved demand for drilling services in general, shortages of qualified personnel could develop, creating upward pressure on wages and making it more difficult to staff and service the Group’s rigs. Such developments could adversely affect the Group’s financial results and cashflow and ability to grow. The drilling contracts for Sevan Driller and Sevan Brasil contain mechanisms for adjusting the day rate based on the development of certain industry cost indices, but it cannot be guaranteed that such adjustments will fully compensate for increases in salaries and other operating costs the Group experiences.
Labour interruptions could disrupt the Group’s business
The Group currently has approximately 350 employees based in Brazil, Norway, Singapore and China. Certain of the Group’s employees are members of labour unions and future employees may also be members of unions. Any labour unrest could prevent or hinder the Group’s services from being carried out normally and, if not resolved in a timely and cost-effective manner, could have a material adverse effect on its business, results of operations, cash flows and financial condition. The Group’s rigs are operated with offshore crews, the majority of which are organized in labour unions. If individuals of the offshore crew are involved in a strike or other form of labour unrest, the Group may not be able to operate its vessels, which may have a material adverse impact on its business, results of operations and financial condition.
The Company’s position and intended growth within a niche market segment may add exposure
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As the Company’s main assets are limited in number and concentrated in the deepwater drilling industry, the Company may be more vulnerable to specific economic, political, regulatory, environmental or other developments than would a company holding a more diversified portfolio of assets. The Company has been and remains in a dynamic growth period with expansion in activities, organisation, newbuilding programmes and financial exposure, all of which constitute challenges which require continuous monitoring and ability to control and adapt to inherent risk.
The Group may need additional financing to complete its newbuilding program
The Group may need to raise additional equity if bank financing is not available on delivery of the newbuild rigs.
The Group’s existing or future debt arrangements could limit the Group’s liquidity and flexibility in obtaining additional financing, in pursuing other business opportunities or the Company’s ability to declare dividends to its shareholders
The Group’s bank loan agreements contain customary covenants and event of default clauses, including cross default provisions. The bank financing agreements contain, inter alia, conditions to be satisfied in order for committed funds to be made available to the relevant Group member, as well as restrictive covenants and performance requirements, which may affect operational and financial flexibility. In particular, Sevan Drilling as the parentcompany of the Group may have limited operations and income of its own, and its cash flow is to some extent dependent on distributions and contributions from its operating subsidiaries, which may be restricted by law or limitations imposed by lenders. The Group may in the future enter into loan agreements with stricter, or less strict, conditions than those currently in place.
As of 30 September 2011, the Group had USD had total liabilities of USD 786 million in principal amount of debt, representing approximately 53% of its total equity and liabilities). The current indebtedness and future indebtedness which the Group may incur could affect the Group’s future operations, as a portion of the Group’s cash flow from operations will be dedicated to the payment of interest and principal on such debt and will not be available for other purposes. Covenants contained in the Group’s debt agreements require the Company or the Group to meet certain financial measures, which may (i) affect the Company’s flexibility in planning for, and reacting to, changes in its business, and (ii) limit the Group’s ability to dispose of assets or use the proceeds from such dispositions, withstand current or future economic or industry downturns or compete with others in the industry for strategic opportunities. The Group’s ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited. In addition, such financial measures could place restrictions on the Company’s ability to declare dividends to its shareholders. The Group’s ability to meet its debt service obligations and to fund planned expenditures, including construction costs for its newbuilding projects, will be dependent upon the Group’s future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting the Group’s operations, many of which are beyond the Group’s control. The Group’s future cash flows may be insufficient to meet all of its debt obligations and contractual commitments, and any insufficiency could negatively impact the Group’s business. To the extent that the Group is unable to repay its indebtedness as it becomes due, the Group may need to refinance its debt, raise new debt, sell assets or repay the debt with the proceeds from equity offerings.
Additional indebtedness or equity financing may not be available to the Group in the future for the refinancing or repayment of existing indebtedness, and the Group may not be able to complete asset sales in a timely manner sufficient to make such repayments.
If the Group is unable to comply with the restrictions and the financial covenants in the agreements governing its indebtedness, there could be a default under the terms of these agreements, which could result in an acceleration of repayment of funds that have been borrowed
If the Group is 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. The Group’s ability to comply with these restrictions and covenants, including meeting financial ratios and measures, is dependent on its future performance and may be affected by events beyond its control. If a default occurs under these agreements, lenders could terminate their commitments to lend or accelerate the outstanding loans and declare all amounts borrowed due and payable. Borrowings under debt arrangements that contain cross-acceleration or cross-default provisions may also be accelerated and become due and payable. If any of these events occur, the value of Group’s assets may or may not be sufficient to repay in full all of its outstanding indebtedness, and the Group may be unable to find alternative financing. Even if the Group could obtain alternative financing, that financing might not be on terms that are favourable or acceptable.
Continued bank financing depends on timely delivery and acceptance of Sevan Brasil under construction contract and charter
The USD 525 million bank facility relating to Sevan Brasil requires the unit to have been delivered by the yard and accepted by the borrower no later than by 31 November 2012, and that the unit shall have been accepted by Petrobras under the charter no later than by 30 May 2013, failing which it shall constitute a mandatory prepayment event.
Interest rate fluctuations could affect the Group’s profitability, earnings and cash flow
The Group has incurred, and may in the future incur, significant amounts of debt. Approximately 75% of the Group’s existing debt arrangements as of the date of this Prospectus have been hedged towards fluctuations in floating interest rates. However, movements in interest rates may adversely affect the Group’s profitability, earnings and cash flow. The principal amount covered by interest rate swaps is evaluated continuously and determined based on the Group’s debt level, the Company’s expectations regarding future interest rates and the Group’s overall financial risk exposure.
Fluctuations in exchange rates could result in financial losses for the Group
The daily contract operating rates under the Group’s existing offshore rig contracts with Petrobras consist of USD and a portion in Reais (16%). The Group has operating costs mainly in USD and Reais. The revenues nominated in Reais are more or less equal to operating cost in Reais and constitutes thus a natural hedge. All interest bearing debt is nominated in USD.
Although the Group will attempt to achieve a match of incoming and outgoing cashflows in each currency it will never achieve a 100% hedge and some exchange rate fluctuation risk will be present. The Group is continuously considering alternatives in order to minimise exchange rate fluctuation effects.
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A change in tax laws of any country in which the Group operates from time to time, or complex tax laws associated with international operations which the Group may undertake from time to time, could result in a higher tax expense or a higher effective tax rate on the Group’s earnings
The Group will from time to time conduct operations through various subsidiaries in countries throughout the world. Tax laws and regulations are highly complex and subject to interpretation and change. In addition to potential exposure to corporate taxation in relevant jurisdictions of incorporation for the relevant Group member, and controlled-foreign-company (CFC) tax treatment (Nw. NOKUS) under Norwegian tax laws of one or more of the Group’s non-Norwegian subsidiaries, the Group’s drilling units may inter alia become subject to taxation at their place of operation under local laws. Further, the Group will be subject to changing tax laws, treaties and regulations in and between countries in which it operates from time to time. New tax treatment could expose the Group to new or additional taxes which could adversely affect its profitability.
A loss of a major tax dispute or a successful tax challenge to the Group’s operating structure from time to time, intercompany pricing policies, the taxable presence of subsidiaries in certain countries or other disputes related to or challenges to the Group’s tax payments could result in a higher tax rate on the Group’s earnings, which could result in a significant negative impact on its earnings and cash flows from operations
From time to time the Group’s tax structure and/or payments may be subject to review or investigation by tax authorities of the jurisdictions in which the Group operates. If any tax authority successfully challenges the Group’s operational structure, intercompany pricing policies, the taxable presence of its subsidiaries in certain countries; or if the Group losses a material tax dispute in any country, or any tax challenge of the Group’s tax payments is successful its effective tax rate on its earnings could increase substantially and the Group’s earnings and cash flows from operations could be materially adversely affected.
The Group may be subject to litigation that could have an adverse effect on the Group
The operating hazards inherent in the Group’s business expose the Group to litigation, including personal injury litigation, environmental litigation, contractual litigation with clients, intellectual property litigation, tax or securities litigation, and maritime lawsuits including the possible arrest of the Group’s drilling units. The Group is currently not involved in any litigation that, in the Company’s view, may have a significant effect on the Group’s financial position or profitability. However, the Company anticipates that the Group may in the future, be involved in litigation matters from time to time in the ordinary course of business. The Company cannot predict with certainty the outcome or effect of any claim or other litigation matter. Any future litigation may have an adverse effect on the Group’s business, financial position, results of operations and the Company’s ability to pay dividends, because of potential negative outcomes, the costs associated with instigating or defending such lawsuits, and the diversion of management's attention to these matters.
Technological risks
The rig design used by the Company has not yet been tested under all environmental and operational conditions. The former parent company and technology developer and patent holder, Sevan Marine, has used a closely related design on its FPSO units, which may be deemed proven in the North Sea and in Brazil, but the Group has limited operating experience for the Sevan drilling rigs.
Technology disputes involving the Group, the Group’s suppliers or sub-suppliers could impact the Group’s operations or increase its costs
The Group utilizes the patented Sevan platform concept, and along with other patented or proprietary technology, this is an essential part of Sevan Drilling’s business concept. The proprietary design will be utilised in drilling rig operations and on drilling units, and involve a potential risk of infringement of third party rights. The Company’s drilling units are based on the Sevan Design, in respect of which the Company has secured a licenseright. While the Sevan Design is patented, there is an inherent risk that a third-party company may question, challenge or infringe on these patents, which may lead the Company in a legal dispute. In the event that a member of the Company or one of the Company’s suppliers or sub-suppliers becomes involved in a dispute over infringement of intellectual property rights relating to equipment owned or used by the Company, the Company may lose access to repair services, replacement parts, or could be required to cease use of some equipment. The Company could also be required to pay royalties for the use of equipment. Technology disputes involving the Company’s suppliers, sub-suppliers or the Company could adversely affect the Company’s financial results and operations. Certain of the Company’s contracts with its suppliers provide contractual rights to indemnity from the supplier against intellectual property lawsuits on a limited basis. Such contractual rights to indemnity may not adequately cover all relevant risks or actual loss incurred, and no assurances can be given that the Company’s suppliers will be willing or financially able to indemnify the Company against these risks, or that such contractual indemnities will protect the Company from adverse consequences of such technology disputes.
Risk of unexpected incidents and occurrences
Although the Company tries to keep an overview of all known risks related to its operations, there is a risk that the Company will be subject to unexpected incidents and occurrences resulting from additional risks and uncertainties that the Company currently believes are immaterial, unlikely or that are not presently known to the Company. Such incidents and occurences may also have a material adverse effect on its business, financial condition, results of operations and cash flow.
2.3 Risks relating to the SharesThe price of the Shares may fluctuate significantly
The trading price of the Shares could fluctuate significantly in response to a number of factors beyond the Company’s control, including, but not limited to, quarterly variations in operating results, adverse business developments, changes in financial estimates and investment recommendations or ratings by securities analysts, or any other risk discussed herein materialising or the anticipation of such risk materialising.
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In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in the offshore drilling industry. Those changes may occur without regard to the operating performance of these companies. The price of the Company’s Shares may therefore fluctuate based upon factors that have little or nothing to do with the Company, and these fluctuations may materially affect the price of its Shares.
Future sales of Shares by the Company’s majors shareholder or any of its primary insiders may depress the price of the Shares
The market price of the Shares could decline as a result of sales of a large number of Shares in the market or the perception that these sales could occur, or any sale of Shares by any of the Company’s primary insiders from time to time. These sales, or the possibility that these sales may occur, might also make it more difficult for the Company to sell equity securities in the future at a time and at a price that it deems appropriate.
Future issuances of Shares or other securities may dilute the holdings of shareholders and could materially affect the price of the Shares
It is possible that the Company may in the future decide to offer additional Shares or other securities in order to finance new capital-intensive projects, in connection with unanticipated liabilities or expenses or for any other purposes, see section 2.2 “Risks relating to the Group”. If the Company raises additional funds by issuing additional equity securities, that may result in dilution to the holdings of existing shareholders.
Investors may not be able to exercise their voting rights for Shares registered in a nominee account
Beneficial owners of the Shares that are registered in a nominee account (such as through brokers, dealers or other third parties) may not be able to vote for such Shares unless their ownership is re-registered in their names with the VPS prior to the Company’s general meetings. The Company cannot guarantee that beneficial owners of the Shares will receive the notice of a general meeting in time to instruct their nominees to either effect a re-registration of their Shares or otherwise vote their Shares in the manner desired by such beneficial owners.
Investors in the United States may have difficulty enforcing any judgment obtained in the United States against the Company or its directors or executive officers in Norway
The Company is incorporated under the laws of Norway, and all of its current directors and executive officers reside outside the United States. Furthermore, and as of the date of this Prospectus, the Company’s assets and the assets of the Company’s directors and executive officers are located outside the United States. As a result, investors in the United States may be unable to effect service of process on the Company or its directors and executive officers or enforce judgments obtained in the United States courts against the Company or such persons in the United States, including judgments predicated upon the civil liability provisions of the federal securities laws of the United States. The United States and Norway do not currently have a treaty providing for reciprocal recognition and enforcement of judgments (other than arbitral awards) in civil and commercial matters.
The transfer of Shares is subject to restrictions under the securities laws of the United States and other jurisdictions
The Shares have not been registered under the US Securities Act or any US state securities laws or any other jurisdiction outside of Norway and are not expected to be registered in the future. As such, the Shares may not be offered or sold except pursuant to an exemption from the registration requirements of the US Securities Act and applicable securities laws. In addition, there can be no assurances that shareholders residing or domiciled in the United States will be able to participate in future capital increases or rights offerings.
Shareholders outside of Norway are subject to exchange rate risk
The Shares are priced in NOK, and any future payments of dividends on the Shares will be denominated in NOK. Accordingly, each investor outside Norway is subject to adverse movements in the NOK against its local currency, as the foreign currency equivalent of any dividends paid on the Shares or price received in connection with any sale of the Shares could be materially adversely affected.
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3 RESPONSIBILITY STATEMENTThis Prospectus has been prepared by the Company pursuant to statutory requirements in connection with the transfer of listing of the Shares from Oslo Axess to Oslo Børs.
The board of directors of Sevan Drilling (the “Board of Directors”) accepts responsibility for the information contained in this Prospectus. The members of the Board of Directors confirm that, after having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import.
10 February 2012
The Board of Directors of Sevan Drilling ASA
Erling Lind(chairman)
Katherine Jessie Hall(director)
Anne Breive(director)
Kristian Johansen(director)
Per Wullf(director)
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4 CAUTIONARY NOTICE TO INVESTORS4.1 Cautionary note regarding forward-looking statements and risks
This Prospectus includes forward-looking statements that reflect the Company’s current views with respect to future events and financial and operational performance, including, but not limited to, statements relating to the risks specific to the Group’s business, the strengths of the Group, and the implementation of strategic initiatives, as well as other statements relating to the Group’s future business development and financial performance. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “assumes”, “projects”, “forecasts”, “estimates”, “expects”, “anticipates”, “believes”, “plans”, “intends”, “may”, “might”, “will”, “would”, “can”, “could”, “should” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements are not historic facts. They appear in a number of places throughout this Prospectus and include statements regarding the Company’s intentions, beliefs or current expectations concerning, among other things, financial position, operating results, liquidity, prospects, growth, strategies and the industry in which the Group operates, such as, but not limited to, with respect to number of wells to be drilled and demand for ultra deepwater drilling units in the future, exploration and production companies ultradeepwater drilling unit backlog in the future and yard capacity for building of new ultra deepwater units in the future.
Prospective investors in the Shares are cautioned that forward-looking statements are not guarantees of future performance and that the Group’s actual financial position, operating results and liquidity, and the development of the industry in which the Group operates, may differ materially from those made in or suggested by the forward-looking statements contained in this Prospectus. The Company cannot guarantee that the intentions, beliefs or current expectations upon which its forward-looking statements are based will occur.
By their nature, forward-looking statements involve and are subject to uncertainties and assumptions as they relate to events and depend on circumstances that may or may not occur in the future. Because of these known and unknown uncertainties and assumptions, the outcome may differ materially from those set out in the forward-looking statements. Important factors that could cause those differences include, but are not limited to:
the effect of changes in demand, pricing and competition for the Group’s existing and future drilling units;
wells to be drilled and demand for ultra deepwater drilling units in the future;
exploration and production companies ultra deepwater drilling unit backlog in the future;
yard capacity for building of new ultra deepwater units in the future;
the competitive nature of the business the Group operates in and the competitive pressure and changes to the competitive environment in general;
earnings, cash flow, dividends and other expected financial results and conditions;
the price volatility of oil and gas products;
the ability to secure sufficient employment opportunities for the Group’s existing drilling units as the term of the drilling contracts for these units expire, and the new, planned drilling units when these are being delivered;
the utilization level for the Group’s existing drilling units and the new, planned drilling units;
delay or cost overruns in the construction projects for the new, planned drilling units;
level of required repair, maintenance expenditures and replacement costs on the existing and new drilling units of the Group;
technological changes and new products and services introduced into the Group’s market and industry;
fluctuations of exchange rates;
changes in general economic and industry conditions;
political, governmental, social, legal and regulatory changes;
dependence on and changes in management and failure to retain and attract a sufficient number of skilled personnel;
access to funding; and
legal proceedings.
Some of the risks that could affect the Group’s future results and could cause results to differ materially from those expressed in the forward-looking statements are discussed in section 2 “Risk Factors”.
The information contained in this Prospectus, including the information set out under section 2 “Risk Factors”, identifies additional factors that could affect the Group’s financial position, operating results, liquidity and performance. Prospective investors in the Shares are urged to read all sections of this Prospectus and, in particular, section 2 “Risk Factors” for a more complete discussion of the factors that could affect the Group’s future performance and the industry in which the Group operates when considering an investment in the Company.
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4.2 Enforcement of civil liabilitiesThe Company is a Norwegian public limited liability company and its assets are located outside the United States. In addition, the members of the Company’s Board of Directors and its officers are non-residents of the United States whose assets are located primarily or entirely outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon the Company or such persons or to enforce against them or the Company judgments of courts of the United States, whether predicated upon the civil liability provisions of the federal securities laws of the United States or other laws of the United States or any state thereof. There is doubt as to the enforceability in Norway of original actions or of actions for enforcement of judgments of US courts of civil liabilities predicated solely upon the federal securities laws of the United States or other laws of the United States or any state thereof. In addition, awards of punitive damages in actions brought in the United States or elsewhere may not be enforceable in Norway.
4.3 Amendments of the ProspectusSave as required according to section 7-15 of the Norwegian Securities Trading Act, the Company undertakes no obligation to publicly update or publicly revise any of the information included in this Prospectus, including without limitation and forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements referred to above and contained elsewhere in this Prospectus.
4.4 Available informationFor as long as any of the Shares are “restricted securities” within the meaning of Rule 144(a)(3) under the US Securities Act, and the Company is notsubject to sections 13 or 15(d) of the Securities Act of 1934, as amended (the “ USExchange Act”) and is exempt from reporting pursuant to Rule 12g3-2(b) under the US Exchange Act, it will, upon the request of any such person, furnish to any holder or beneficial owners of Shares, or to any prospective purchaser designated by any such registered holder, the information required to be delivered pursuant to Rule 144A(d)(4) of the US Securities Act.
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5 COMPANY DESCRIPTION5.1 Corporate information
Sevan Drilling was incorporated on 31 May 2006. The Company is organized and existing under the laws of Norway in accordance with and pursuant to the Norwegian Public Limited Liability Companies Act and is a Public Limited Liability Company (so called “ASA”). The Company’s registration number is 989 910 272.
According to section 2 of its articles of association, the Company’s head-quarters and registered office is in Oslo. The Company's headquarter is at Tordenskioldsgate 6, 0160 Oslo, Norway, telephone: +47 22 33 00 00. The Company’s web site is www.sevandrilling.com. The Company's Shares are registered on Oslo Axess under the ticker code "SEVDR" and ISIN NO 0010455793.
The Company is an international offshore drilling contractor specializing in the ultra deepwater segment. Sevan Drilling owns, operates and builds ultra deepwater rigs, and as of the date of the Prospectus, the Company comprises the operation activities related to Sevan Driller and construction activities related to Sevan Brasil and two additional newbuilds, Sevan Drilling Rigs 3 and 4.
5.2 The offshore drilling rig marketOffshore oil and gas exploration and production is more challenging and expensive than onshore due to the remote and often harsh environment in which the resources are located. During drilling the offshore well needs to be extended from the seabed to the rig floor. Due to the higher complexity of offshore drilling versus onshore operations, required rig time is significantly higher.
Within offshore rigs there are two main categories; Jack-up rigs and floaters (Semi-submersibles, the Sevan units and Drill ships).
Jack-up rigs – A self-contained combination drilling rig and floating barge, fitted with long support legs that can be raised or lowered independently of each other. Upon arrival at the drilling location, the legs are jacked down onto the seafloor, preloaded to securely drive them into the sea bottom, and then all three legs are jacked further down. Since the legs have been preloaded and will not penetrate the seafloor further, this jacking down of the legs has the effect of raising the jacking mechanism, which is attached to the barge and drilling package. In this manner, the entire barge and drilling structure are slowly raised above the water to a predetermined height above the water, so that wave, tidal and current loading acts only on the relatively small legs and not the bulky barge and drilling package. A Jack-up rig can naturally only work in water depths that are less than the length of its legs, and typically this limits operations to less than 400 feet of water depth.
Semi-submersibles – A particular type of floating vessel that is supported primarily on large pontoon-like structures submerged below the sea surface. The operating decks are elevated perhaps 100 or more feet above the pontoons on large steel columns. This design has the advantage of submerging most of the area of components in contact with the sea and minimizing loading from waves and wind. Semisubmersibles can operate in a wide range of water depths, including deepwater. They are either anchored with six to twelve anchors tethered by strong chains and wire cables, which are computer controlled to maintain station keeping or using a thrusters based dynamic positioning (DP) system for station keeping. Semi-submersibles can be used in different operations, such as drilling, workover operations and production, depending on the equipment with which they are equipped.
Drill ships – A maritime vessel modified to include a drilling rig and using station-keeping equipment similar to semi-submersibles. The vessel is typically capable of operating in deepwater. A drillship must stay relatively stationary on location in the water for extended periods of time. Drill ships typically carry larger payloads than semisubmersible drilling vessels, but their motion characteristics are usually inferior.
Sevan drilling unit – A cylindrical shaped floating vessel combining the favourable motion characteristics of a semi-submersible rig with the high variable deck load capacity of a drillship. The vessel shape enables larger internal storage capacity for bulk materials, like drilling fluids and chemicals. The station keeping positioning may be accomplished with multiple anchors, dynamic propulsion (thrusters) or a combination of these. The vessel is capable of operating in deep and ultra deepwater and has the same uses as a semi-submersible rig and a drillship.
5.3 Business overviewSevan Drilling is a fully integrated offshore drilling contractor, owning two of the world’s most advanced ultra deepwater drilling units. These semi-submersible drilling rigs of Sevan650 design, Sevan Driller and Sevan Brasil, are built for safe and efficient operations in ultra deepwaters worldwide –including Brazil, West Africa and the US Gulf of Mexico. Sevan Driller has been in operation since June 2010 whereas Sevan Brasil is estimated to start operations in the second quarter of 2012. Both rigs are contracted to Petrobras on six-year drilling contracts for operations off the coast of Brazil. Sevan Driller has been operating at approximately 2,200 meters water depth in the Campos Basin and approximately 1,800 meters water debt in the Santos Basin. Since start-up, and following some start-up issues and downtime primarily as a result of defects in equipment provided by third parties, the Sevan Driller has demonstrated a rapidly increasing performance, with a utilization of 90%, 94%, 88% and 98% for the respective four quarters of 2011. The rig has received good client feedback, and has attracted great interest from the market, which confirms that Sevan Drilling has succeeded in meeting oil company requirements with new and modern drilling units for complex and demanding ultra deepwater drilling operations.
For the year ended 31 December 2010, the Sevan Drilling Group generated a turnover of USD 40.6 million with a corresponding EBITDA of USD(4.4) million.
The Company has established a competent and experienced organisation. Long experience and strong focus on operating excellence and health, safety and environment (“HSE”) characterize both the management and the operating organisation of the whole Group, which comprises approximately 350employees based in Brazil, Norway, Singapore and China. Sevan Drilling seek to offer the highest standards of safety for people and the environment.
In May 2011, Sevan Drilling, through two wholly owned subsidiaries, entered into contracts with COSCO for the engineering, production andconstruction of two ultra deepwater drilling units, Sevan Drilling Rigs 3 and 4, and options for two additional units with the same specifications, all
based on the Sevan Cylindrical Drilling Unit design. The Company estimates a price including project management, pre-delivery financing, capital spares, drilling tools and pre-operations of approximately USD 526 million for each newbuild. The price for the two optional newbuilds will bethe same, however, the price is subject to possible price adjustments for significant movements in exchange rates, changes to a Chinese inflationary index for the industry segment, and prices of major equipment packages. Under the construction contracts, the Sevan Drilling Rig 3 shall be delivered in the fourth quarter of 2013, whereas the Sevan Drilling Rig 4 shall be delivered in the second quarter of 2014. The first optional newbuild, assuming that the option is exercised at the latest by 10 December 2012, shall be delivered in the fourth quarter of 2014, whereas the second optional newbuild, assuming that the option is exercised at the latest by 10 December 2012 shall be delivered in the second quarter of 2015.
5.4 HistorySevan Drilling was established in 2006 for the purpose of building state-of-the-art drilling rigs based on the Sevan Cylindrical Drilling Unit design. Later the same year the Company's former parent company, Sevan Marine, successfully completed a private placement for the purpose of financing, in part, its drilling business, and an order for Sevan Driller was placed with COSCO in 2007.
In 2007, Sevan Drilling’s management team was in place, and key positions for both the offshore and onshore organisations of the Group were filled. A six-year drilling contract with Petrobras was secured.
In 2008, the Company secured its second six-year contract with Petrobras for a deepwater drilling unit and Sevan Brasil was ordered from COSCO. During 2008 and 2009, the Company continued to build up the operating organisation of the Group with senior rig personnel. Sevan Driller went through commissioning work with Sevan Drilling resources working closely with the yard.
In 2009, the Company was fully manned and all training programs were completed and the Company took delivery of the Sevan Driller. In June 2010, Sevan Driller commenced drilling operations off the coast of Brazil for Petrobras. The rig has since then been drilling in the Campos basin, currently at water depths of 1,900 meters.
In April and May 2011, the ownership of Sevan Drilling Invest AS was transferred from Sevan Marine ASA to Sevan Drilling, and the Company completed an initial public offering of its Shares resulting in the issuance of 240,625,000 new Shares, raising gross proceeds for the Company of NOK 1,925 million. The Company's Shares were subsequently admitted to trading on Oslo Axess on 3 May 2011, under the ticker code "SEVDR".
In May 2011, the Company entered into contracts with COSCO for the construction of two newbuilds, the Sevan Drilling Rigs 3 and 4. As part of this, the Company also secured options for two additional newbuilds of the same design, the Sevan Drilling Rigs 5 and 6.
In December 2011, the shares previously held by Sevan Marine was acquired by Seadrill Ltd ("Seadrill"), a leading offshore deepwater drilling company operating a fleet of 60 drilling units, following which Seadrill became the owner of 28.5% of the Company's Shares thus becoming the Company's largest shareholder.
In 2011, the construction of the Sevan Brasil has been ongoing at COSCO, on schedule and budget. The rig left the COSCO yard on 10 January 2012 to begin seatrials, and is expected to start its six-year contract with Petrobras in the second quarter of 2012.
5.5 Competitive strengthsStrong foundation from deepwater operations in Brazil
The Sevan Drilling Group has a well-established position in Brazil through existing operations with the two 6-year contracts with Petrobras for Sevan Driller and Sevan Brasil.
Following some start-up problems and downtime primarily as a result of defects in equipment provided by third parties, Sevan Driller has since start-up of operations in June 2010 demonstrated a rapidly increasing performance in the ultra deepwaters of the Campos Basin in Brazil. Sevan Brasil is scheduled to commence operations in second quarter 2012. The Company has successfully proven its drilling concept and operations setup to Petrobras. The Brazilian continental shelf is one of the fastest growing ultra deepwater markets in the world, and the market requires high standards with respect to personnel, equipment, HSE and operational procedures. With a good foothold in this market, and with Petrobras, the Company is in a good position for further growth in this market. The Company believes this represents a robust platform for a continued positive development of its business.
Premium rigs for ultradeepwater
The design of the Sevan Rig ensures a high variable deck load capacity and favourable motion characteristics. The variable deck load capacity is in line with ultra deepwater drillships and about 2.5 to 3 times the capacity of a sixth generation semi-submersible rig.
The Sevan Rig offers a particular advantage for drilling operations in ultra deepwater far away from existing infrastructure, due to its variable deck load capacity and internal storage capacity for bulk materials, including drilling fluids and chemicals.
Sevan Driller and Sevan Brasil have an oil storage capacity of 150,000 barrels, enabling the rigs to carry out extended well testing operations.
Following an initial period during the first months of operations, with downtime relating to issues with the BOP and other third party equipment, the uptime and performance of the Sevan Driller have since been in accordance with expectations. The performance so far suggests motion characteristics in line with model testing, with insignificant downtime caused by waiting on weather.
The key operating advantages of the Sevan Rig may be summarized as follows:
high variable deck load capacity;
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ultra deepwater capabilities;
good motion characteristics;
long structural life time; and
storage capacity for crude oil.
Well positioned for growth in the attractive deepwater segments
Operation of ultra deepwater drilling units in Brazil requires high specification units due to the environment and with regards to technology and equipment, HSE and operational procedures in order to comply with Petrobras requirements and the regulatory regime. The Company believes its existing and scalable organisation, combined with the management- and operating systems in place, creates a strong platform for growth also in other deepwater regions, in particular West Africa and the US Gulf. With the more accessible oil reservoirs having been explored, offshore activities have moved towards deeper waters. A focus on operation of drilling units for deepwaters will position the Company to meet, and take advantage of, oil and gas companies’ increasing need to drill in more demanding and complex regions in order to replace their current reserves and ensure future production.
The total ultra deepwater fleet of drilling units is today 110 units increasing up to 155 in 2014. There is a utilisation of 100% today and the demand for ultra deepwater drilling units is strong.
Established organisation with experienced management and drilling team
The Company has a highly-qualified and experienced management team. The operational management has more than 25 years of experience on average from operational and leadership positions in well-regarded and relevant offshore companies. Through its employees, the Company has a broad and deep knowledge base, with significant experience and competence from deepwater operations internationally. The Group’s drilling crews have on average 10to 15 years of experience each, and offshore leading positions have on average 25 years of experience.
5.6 StrategyBased on the key strengths outlined in section 5.5 “Competitive strengths”, the Company believes that it has a strong basis for fulfilling its overall goal of being recognized as a leading and fully integrated drilling contractor owning and operating drilling units. The Company has identified the following key strategic objectives in order to fulfil this ambition:
Utilize the market position in Brazil to further increase the activities there, as well as internationally, with focus on deepwater and technically demanding areas
The Company has developed a strong market position in the ultra deepwater market in Brazil, which one of the world’s most attractive offshore markets. The Company already holds two 6-year drilling contracts with Petrobras. The existing fleet of deepwater units in Brazil is not sufficient to cover the expected demand and Petrobras has announced that it will require more new deepwater drilling units to cover its program for exploration and development drilling in the coming years. The Company is well positioned to take advantage of opportunities in this market.
The position in Brazil, and the experience gained from the operation of rigs for demanding clients like Petrobras, will be used as a basis for pursuing opportunities in other ultra deepwater markets, especially in West Africa and the US Gulf.
Develop a fleet of high specification, ultra deepwater drilling rigs based on the Sevan design, with state-of-the-art drilling equipment
The Company today owns two ultra deepwater drilling units (one of which is under construction for delivery in the first quarter of 2012), and the rig fleet is expected to be complemented by the two additional newbuilds of same design. All rigs are equipped with the best available and proven drilling equipment from well recognized suppliers. The rationale for the newbuild orders is to take advantage of an expected increase in the demand for ultra deepwater drilling units in the years to come. This increase in demand is, amongst other things, due to a shift (which has been ongoing for several years) from shallow/mid water to deeper water with respect to exploration and development drilling, and higher technical requirements following amongst other things the Deepwater Horizon (owned by Transocean) accident, which in general contribute to making older rigs obsolete.
Utilize the Sevan rig’s competitive advantages to offer efficient and cost-effective drilling solutions to its clients
The design of the Sevan drilling units ensures a high variable deck load capacity and favourable motion characteristics. The variable deck load capacity is in line with ultra deepwater drillships and about 2.5 to 3 times the capacity of a sixth generation semi-submersible rig. The Sevan drilling units offer a particular advantage for drilling operations in ultra deepwater far away from existing infrastructure, due to its variable deck load capacity and internal storage capacity for bulk materials, like drilling fluids and chemicals. This reduces the need for re-supply and the use of supply boats, thereby reducing the spread cost for the customer.
The motion characteristics of the Sevan design ensure stable working conditions even in areas with demanding weather conditions in terms of wind, waves and current. Due to the hull design of the Sevan drilling units, there is less heave and pitch motions for most wave conditions, compared to a conventional drillship, thus increasing the rig uptime.
Prioritize long term drilling contracts with professional and reputable clients
The Company currently has firm 6-year drilling contracts for Sevan Driller and Sevan Brasil. The strategy is to prioritize long-term contracts also with respect to the two newbuilds, with solid and professional customers that are financially robust and well recognized in the industry. Long term contracts ensuring stable long term cash flow visibility is important for the Company in order to secure financial flexibility and reduce the cost of capital.
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Develop relationships with key clients and suppliers
The Company will seek to develop relationships with key clients and suppliers in order to establish Sevan Drilling as the preferred partner. The Company will seek to minimise execution risk for newbuilds through selecting well-recognized yards for building rigs of proven design and technology, and aims to sign lump-sum contracts for construction and commissioning of the units.
Leverage off and enhance the organisation’s experience and competence The Company’s organisation has long experience from ultra deepwater operations. The organisation is international, and the offshore crews comprise both local and foreign personnel. The onshore and offshore organisation’s experience and competence is the Company’s most valuable asset. The Company aims to further develop this competence to strengthen the Company’s position in Brazil and to potentially expand the business to other geographical areas.
5.7 Management and organisationSince inception in 2006, the Group’s senior management team, and the organisation at large, has gradually been scaled up through a careful selection and recruitment process. The onshore and offshore drilling management and crews comprise senior and highly experienced people with extensive experience from deepwater operations internationally. Previous employers include well-known companies like BP,Pride International, Ocean Rig and Diamond Offshore. The Sevan Drilling Group currently has approximately 350 employees (of which approximately 261 are offshore and approximately89 onshore).
The Company has the project organisation in place to manage the construction of the newbuilds, due to the ongoing construction of Sevan Brasil. Continuity within the project organisation has been preserved during the construction of these two units and the Company will benefit from this when the construction of the two newbuilds starts. COSCO has also built up experience from the construction of the first two rigs which will benefit the execution of the newbuild construction. The Company and COSCO emphasize joint lessons learnt processes, whereby experience from one project is collected and discussed, and utilized in the next project.
5.8 Competitive positionThe drilling industry consists of a very large number of participants. However, the industry has experienced consolidation and some large market participants have significant market shares. Sevan Drilling has competitors that are significantly larger in size, both in respect to fleet and market capitalization. The Company’s focus is to establish a fleet of modern ultra deepwater drilling units. Although, there are only a few companies in the drilling industry which focus exclusively on the ultra deepwater segment, the drilling industry consists of several companies with different types of drilling assets and operations, including deepwater. Such companies include Transocean, Noble, Ensco, Seadrill, Ocean Rig, Diamond, Saipem, Maersk, Stena, Pacific Drilling, North Atlantic Drilling and Pride.
Drilling contracts are traditionally awarded on a competitive bid basis. Governing factors for successful bids are in most cases based on price, availability, technical compliance, experience and performance record.
The drilling market is global. However, the competition may vary significantly from region to region at any particular time. Competing contractors may be able to relocate units from areas with low utilisation and dayrates to areas with higher activity and dayrates. New orders of drilling units, upgrades of existing units and new technology may also increase competition.
5.9 Sevan Driller and Sevan Brasil
Specification
The specification of Sevan Driller and Sevan Brasil are substantially identical. Both rigs are state-of-the-art drilling units equipped for drilling in 10,000 ft of water depth.
The newbuilds, Sevan Drilling Rigs 3 and 4, will have substantially identical specifications.
Main particulars: Sevan Driller, Sevan Brasil and newbuildsDesign Sevan Cylindrical Drilling UnitRegistration SingaporeClassification DNVWater depth 3,000 m (10,000 ft, upgradable to 12,000 ft)Drilling depth 10,000 m (35,000 ft)LOA (Length) 85 mBreadth 75 m (at waterline)
Displacement About 56,000 mT at 12.5m draftVariable deck load 20,000 mTDiesel generators 8 x 5,535 kWThrusters 8 x 3,800 kWStation keeping DP3
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Living quarters 150 personsHelicopter deck Sikorsky S92 and S-61N, Superpuma AS332L2, EC225 and EH-101Deck cranes 2 ea, max capacity: 100 mt at 15 mOil storage 150,000 bbl (Sevan Driller)Mud storage 2,800 m3Transit speed 7-9 knotsDeck area 5,700 m2Riser tensioning system DAT - 3,200 kipsDrilling lifting capacity 1,000 tonSet back load 1,000 mT
Drilling particulars:Type Parallel operations. Independent handling of BOP and X-mas treesHook load, main/aux 908 mTBOP 18 3/4", 15,000 psi, 5-6 rams (upgradeable to 7)Mud pumps 4 x 2,200 hp, 7,500 psi
Construction contracts
“Sevan Brasil”
On 29 April 2009 Sevan Drilling Rig II Pte Ltd entered into a contract with COSCO for the engineering, procurement and construction of the drilling unit Sevan Brasil
The contract covers all work and services required for delivery of a complete Sevan Rig. The Sevan Brasil is of the Sevan Cylindrical Drilling Unitdesign, and the rig will in all material respects be a sister unit of Sevan Driller.
The contract with COSCO comprises:
a) a lump sum portion, which covers, inter alia, engineering, procurement, construction, installation and commissioning of hull, marine systems, engine rooms, mud module, living quarter, outfitting, insurance and drill floor. It may be adjusted based on (i) fluctuation in the conversion rate for USD/RMB, and (ii) increases or decreases in quantities/ re-measurements of material used. The risk related to fluctuation in the conversion rate for the USD/RMB has been fully hedged.
b) a provisional sum covering payment in respect of the vendor contracts and transportation thereof, which have been transferred and novated from Sevan to COSCO (see below) as per relevant payment terms under such vendor contracts (which are, generally, based on milestone progress schedules).
Payment of the contract price is made according to a payment milestone schedule set out in the contract.
All pre-delivery milestone payments by Sevan and certain claims towards COSCO are secured by refund guarantees.
The delivery date is estimated to be in the first quarter of 2012.
In case of delays for which COSCO is responsible, Sevan shall be entitled to liquidated damages.
Delivery of the Sevan Brasil will occur when the parties jointly conclude a delivery protocol certifying that the unit has been completed, passed the tests specified in the contract and is ready for delivery together with all necessary certificates and documents.
COSCO has warranted the quality of the work relating to Sevan Brasil for a period from signing of the delivery protocol and until the earlier of (i) the date occurring two years after delivery, and (ii) 12 months from the date Sevan Brasil taken into commercial use. In order to secure delivery of certain long lead time equipment items, Sevan concluded relevant equipment contracts with certain key vendors prior to entering into the COSCO contract. These equipment contracts have been transferred and novated by Sevan to COSCO. COSCO’s liability for such key equipment as set out in the contract is subject to certain limitation.
Sevan and COSCO, respectively, have provided parent company commitments in favour of each other, whereby the respective parent companies are committed to ensure the due performance of the relevant respective subsidiaries’ obligations under the contract.
In case of material breach by COSCO of its obligations thereunder, Sevan is entitled to terminate the contract, under certain conditions.
In case of breach by Sevan of its obligations under the contract, COSCO may claim default interest if the breach relates to late payment, or claim adjustment of the contract price and contract schedule for other breaches, or, if such breach has not been cured within applicable remedy periods terminate the contract and claim limited direct damages
The contract is governed by English law. Any dispute arising under the contract shall be settled by arbitration in London.
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Drilling contracts for Sevan Driller and Sevan Brasil
Petrobras
As further described below, members of the Sevan Drilling Group are parties to contracts with Petrobras for the chartering of the Sevan Driller and the Sevan Brasil and the provision of certain operational services related thereto. While the Group may seek to enter into contracts with multiple clients in the years to come, Petrobras alone accounts for all of the Group’s current and future contracted revenues as of the date of the Prospectus. While the Group enjoys a good relationship with Petrobras, it is also directly exposed to the results and financial condition of its sole customer for the time being, and, therefore, dependent on the continued success of Petrobras. The Group’s results of operations could be materially adversely affected if Petrobras were to fail to compensate the Group for it services, were to terminate the contracts (or any of them) with or without cause, fail to renew the existing contract or refuse to award new contracts to the Group and the Group is unable to enter into contracts with new customers at comparable dayrates.
Petrobras is a publicly traded Brazilian corporation, with the Government of Brazil as the major shareholder. Petrobras is a leading international energy company, with a presence in most relevant sectors and segments, including exploration and production, refining, oil and natural gas trade and transportation, petrochemicals, and derivatives, electric energy, biofuel and other renewable energy source distribution. A front-runner in the Brazilian oil industry, Petrobras has significantly expanded its operations in recent years, aiming to be among the top five integrated energy companies in the world by 2020. Petrobras currently enjoys a presence in 28 countries. The 2010-2014 business plan foresees investments in the region of USD 174.4 billion.
General regarding contract structure
The rig-owning entities are members of the Group incorporated in Singapore. Brazilian authorities will, on a general basis, not permit offshore drilling contracts to be entered into with counterparts based in tax havens. Thus, the rig-owning companies have bareboat-chartered the relevant units to other members in the group, who satisfy and comply with Brazilian requirements. As per Petrobras’ general practice, the contractual arrangement with Petrobras is divided into two agreements: A charter contract regarding the provision of the drilling unit, and a service contract regarding the provision of drilling services. The two contracts are based on a similar basic structure and of identical duration, but the day rate payable under the charter is denominated in USD, and the service contract remuneration is denominated in Reais.
The remuneration payable by Petrobras under the Sevan Driller contracts equals (based on current exchange rates and indexation levels) a base dayrate of USD 434,000 as per today. An additional USD 36,000 per day is payable in the second year of operation only. This increased dayrate is amortized over the remaining duration of the contract. The remuneration payable by Petrobras under the Sevan Brasil contracts will upon commencement which is expected to take place in the second quarter of 2012 (based on current exchange rates and indexation levels) equal a base dayrate of USD 400,000. Both charter contracts contain a bonus potential of up to 10% of the base dayrate which is linked to the operational performance on a monthly basis.
The contracts are based on Petrobras’ standard. No explicit governing law provision is included, but any disputes are to be resolved before the regularcourts of Rio de Janeiro, Brazil.
Contract overview
The upper graph relates to Sevan Driller, while the lower relates to Sevan Brasil.
In some more detail, the contractual arrangements can be described as follows:
Sevan Driller
Bareboat Charter Agreement
The Sevan Driller is owned by Sevan Drilling Pte. Ltd. (Singapore), who, as registered owner, has entered into a bareboat charter contract with its wholly-owned subsidiary Sevan Drilling Limited (a company incorporated in Scotland) as charterer. The agreement has equal duration as the agreement with Petrobras and has a dayrate of USD 272,000.
Petrobras Charter Contract
Sevan Drilling Limited has chartered out the Sevan Driller to Petrobras under a bareboat charter contract entered into in September 2009. The bareboat charter contract is for a firm period of 6 years. Operations commenced in June 2010, and, accordingly, the contract expires in June 2016.
A part of the day rate is subject to annual escalation based on certain price indexes, as from the date of contract signature. Daily rate reduction mechanisms apply in respect of inter alia stand-by periods, force majeure events, periods during which repair works are carried out, and periods during which the rig is moved. As of the date of the Prospectus, Sevan Drilling has estimated the remaining value of the charter contracts with Petrobras for the Sevan Driller for the fixed term until June 2016 to approximately USD 634 million including the bonus potential. Petrobras is entitled to assign their rights and obligations under the bareboat charter contract subject to the consent of Sevan Drilling Ltd.
Project phase Fixed Period
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Service Contract
In September 2009, Sevan Marine Serviços De Perfuração Ltda. (Brazil), 99.9% owned subsidiary of Sevan Drilling, entered into a service contract with Petrobras for the provision of drilling services in connection with the bareboat charter contract for Sevan Driller. The duration of the service contract is linked to the duration of the bareboat charter contract, and, accordingly, expires in June 2016.
Daily rate reduction mechanisms apply in respect of inter alia stand-by periods, force majeure events, periods during which repair works are carried out and periods during which the rig is moved. The daily rate is subject to annual escalation based on certain price indexes which reduces risks relating to inflation and escalation in operating expenses.
Sevan Brasil
Bareboat Charter Agreement
The Sevan Brasil is owned by Sevan Drilling Rig II Pte Ltd (Singapore), who, as registered owner, has entered into a bareboat charter contract with its sole shareholder, Sevan Drilling Rig II AS (Norway), as charterer.
Petrobras Charter Contract
Sevan Brasil has been chartered out to Petrobras by Sevan Drilling Rig II AS under a bareboat charter contract entered into in July 2008. The contract is for a firm period of 6 years. Sevan Drilling expect that Sevan Brasil will be delivered to Petrobras during the second quarter of 2012.
Daily rate reduction mechanisms apply in respect of inter alia stand-by periods, force majeure events, periods during which repair works are carried out and periods during which the rig is moved. The daily rate is subject to annual escalation based on certain price indexes.
The Company has, as of the date of the Prospectus, estimated the value of the contracts with Petrobras for Sevan Brasil for the fixed term of 6 years to approximately USD 973 million including the bonus potential and a mobilization fee of USD 29.3 million.
Petrobras is entitled to assign its rights and obligations under the bareboat charter contract subject to the consent of Sevan Drilling Rig II AS, except where the assignee is controlled or owned by Petrobras, in which case no consent is required.
The bareboat charter contract (and the service contract) stipulates that Sevan Marine is a “joint intervening party” to the contract, and as such liable for the relevant Group member’s performance thereunder.
Service Contract
In July 2008, Sevan Marine Serviços De Perfuração Ltda, 99.99% owned subsidiary of Sevan Drilling, entered into a service contract with Petrobras for the provision of drilling services in connection with the bareboat charter contract for Sevan Brasil. The duration of the service contract is linked to the duration of the bareboat charter contract: The firm period of the service contract is 6 years.
Daily rate reduction mechanisms apply in respect of inter alia stand-by periods, force majeure events, periods during which repair works are carried out and periods during which the rig is moved. The daily rate is subject to annual escalation based on certain price indexes which reduces risks relating to inflation and escalation in operating expense.
5.10 The newbuilds under construction at COSCO and the optional newbuildsIn March 2011, subsidiaries of the Company entered into a letters of intent (the “LOIs”) with COSCO with respect to contracts for the construction of two UDW newbuild drilling units based on the same design as the Sevan Driller and Sevan Brasil. The LOI's were in May 2011 transformed into binding turnkey engineering, production and construction contracts. Pursuant to the construction contracts, the two newbuilds, Sevan Drilling Rigs 3 and 4, are to be delivered in fourth quarter of 2013 and second quarter of 2014, respectively. The total all-in turnkey price (including projectmanagement, pre-delivery financing, spare parts, drilling tools, design fee and pre-operations cost) under the construction contracts is USD 526 millionper newbuild. The reduced price compared to the two first units reflect, inter alia, efficiencies gained from construction experience and replication at the yard, increased competition and good relationship with key equipment vendors, and attractive payment terms during the construction period.
Following execution of the construction contracts, the Company has made payment of 20% of the contract price for Sevan Drilling Rig 3 and 10% for Sevan Drilling Rig 4. The remaining 80% (90% for Sevan Drilling Rig 4) of the contract price is payable upon delivery of the rigs. The construction contracts are based on a non-recourse structure which will not expose the Sevan Drilling Group to liability. The construction contracts further provide for a full refund guarantee from the Chinese bank Bank of Communication for amounts paid by the Company during construction. The Company will finance the 80% (90%) instalments due upon delivery with a combination of debt and equity dependent on terms of potential charter contracts.
Steel cutting for Sevan Drilling Rig 3 took place in June 2011 and for Sevan Drilling Rig 4 in October 2011 and both rigs are on schedule for delivery in fourth quarter of 2013 and second quarter of 2014, respectively.
The commitments under the construction contracts has been assumed by the relevant contracting subsidiaries of the Company without future employment or post-delivery financing having been secured at this point in time, thus, potentially, exposing the contracting parties to significant risk. However, without being able to give any assurance as to final outcome, it remains the Company’s view, that the two newbuilds, position the Company to secure valuable contract opportunities.
The construction contracts provide for options to build two additional drilling units, Sevan Drilling Rig 5 and 6, based on similar design and specifications. The price is the same as for the two optional newbuilds, subject to a price adjustment reflecting currency fluctuations between USD and RMB, and the development in a Chinese industrial index relating to equipment and materials to be purchased by COSCO (other than the major
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drilling equipment, in respect of which fixed and unadjusted prices have been secured). The optional newbuilds must be exercised within 10 December 2012. In case of exercise, the agreed delivery dates are fourth quarter of 2014 and second quarter of 2015 for the first and the second unit, respectively. In case the Company exercise the option to build Sevan Drilling Rig 5 and/or 6 the Company need to raise minimum MUSD 210 to cover the instalments of 20% due upon contract execution.
5.11 Quality, health, safety and environment policySevan Drilling promotes and supports the "HSE Zero mindset". Sevan Drilling believes that all accidents causing harm to people and environment can be prevented by being proactive in its approach to QHSE. The corporate QHSE policy applies to all areas of business and is endorsed by the CEO and the Board of Directors. It is a policy of Sevan Drilling that all employees shall have the possibility to influence on their working situation in matters concerning health and safety. This basic principle gives the Company valuable feedback on how the QHSE performance is and makes it more efficient to identify improvement areas for the QHSE MS (Management System).
The corporate QHSE policy, states that “Ensuring the safety and health of our employees, taking care of the environment and delivering quality in everything we do”. These are core business principles to Sevan Drilling.
The QHSE management system is established with participation from the employees, ensuring acknowledgement and commitment. The following key QHSE principles apply:
Health
We shall evaluate and mitigate the risks to reduce the hazards at work places to an acceptable level. We shall monitor occupational health for our employees.
Safety
We shall manage our activities based on our own, the regulators and the clients’ standards. We shall focus on the communication and implementation of these standards.
Environment
We shall protect the environment and minimize the amount and effect of discharges, emissions and waste disposals from our operating facilities. The operation of the Company’s drilling rigs is conducted in accordance with the above principles.
Quality Management
We shall fulfil our customers' needs and expectations and make commitments we fully understand.
Continuous improvement
We shall verify that our operations meet agreed requirements; monitor and continuously improve these operations and the organisation’s performance.
Risk Management
Risk assessments are carried out using competent personnel, recognized tools and methodology. Focus is given to a correct approach to the different assessments performed (e.g. HAZID, HAZOP, Qualitative Risk Assessment, Emergency Preparedness Analysis, SJA, PtW system, etc.).
Compliance
Sevan Drilling shall comply with HSE legal requirements and other requirements applicable to our operations.
5.12 Legal structure The following chart illustrates the legal and organisational structure of the drilling business of the Sevan Drilling Group. Sevan Drilling (the parent company) is a pure holding company with certain management employees, and the ownership of the rigs and operations of the Sevan Drilling Group are carried out by the operating subsidiaries. As illustrated, rig ownership is held by the Singaporean subsidiaries Sevan Drilling Pte. Ltd. (owner of the Sevan Driller) and Sevan Drilling Rig II Pte.Ltd (owner of the Sevan Brasil) through Sevan Drilling Invest AS and Sevan Drilling Rig II AS, respectively. Contractual parties to Petrobras S.A. are Sevan Drilling Limited (charter contract) and Sevan Marine Servicos de Perfuracao Ltda (service contract) for the Sevan Driller and Sevan Drilling Rig II AS (charter contract) and Sevan Marine Servicos de Perfuracao Ltda (service contract) for the Sevan Brasil. The executive management of the Group, see section 9 “Board of Directors, Management and Employees”, are employed with Sevan Drilling ASA and Sevan Drilling Management AS.
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Subsidiaries Registered office Interest held
Sevan Drilling Rig Pte Ltd Singapore 100 %
Sevan Marine Servicos de Perfuracao Ltda Brazil 99.99 %
Sevan Drilling AS Norway 100 %
Sevan Drilling Rig AS Norway 100 %
Sevan Drilling Rig II AS Norway 100 %
Sevan Drilling Rig V AS Norway 100 %
Sevan Drilling Rig VI AS Norway 100 %
Sevan Drilling Rig VII AS Norway 100 %
Sevan Drilling Rig VIII AS Norway 100 %
Sevan Drilling Rig IX AS Norway 100 %
Sevan Drilling Rig II Pte Ltd Singapore 100 %
Sevan Drilling Rig IV Pte Ltd Singapore 100 %
Sevan Drilling Rig V Pte Ltd Singapore 100 %
Sevan Drilling Rig VI Pte Ltd Singapore 100 %
Sevan Drilling Rig VII Pte Ltd Singapore 100 %
Sevan Drilling Rig VIII Pte Ltd Singapore 100 %
Sevan Drilling Rig IX Pte Ltd Singapore 100 %
Sevan Drilling Holding Pte Ltd Singapore 100 %
Sevan Drilling Invest AS Norway 100%
Sevan Drilling Management AS Norway 100%
Sevan Drilling Pte Ltd Singapore 100 %
Sevan Drilling Limited UK 100 %
All subsidiaries are wholly owned (directly or indirectly) by Sevan Drilling. Each of the subsidiaries Sevan Drilling Invest AS, Sevan Drilling Rig II AS, Sevan Drilling Pte. Ltd., Sevan Drilling Rig II Pte. Ltd., Sevan Drilling Limited and Sevan Marine Servicos de Perfuracao Ltda. is considered by Sevan Drilling to be likely to have a significant effect on the assessment of the assets, liabilities, the financial position and/or the profits and losses of the Group:
Sevan Drilling Invest AS (up until a name change in March 2011 named Sevan Drilling AS) is a limited liability company organised and existing under the laws of Norway with registration number 989 417 541 and its registered office at Kittelsbuktveien 5, 4836 Arendal. The principal purpose of this entity is to be the holding company of Sevan Drilling Pte. Ltd.
Sevan Drilling Rig II AS is a limited liability company organised and existing under the laws of Norway with registration number 992 643 382 and its registered office at Kittelsbuktveien 5, 4836 Arendal. The principal purpose of this entity is to be the holding company of Sevan Drilling Rig II Pte.Ltd. and to be party to the charter contract with Petrobras S.A. for the Sevan Brasil.
Sevan Drilling Pte. Ltd. is a limited liability company organised and existing under the laws of Singapore with registration number 200602642M and its registered office at 350 Orchard Road, Shaw House #15‐08, Singapore 238868. The principal purpose of this entity is to be the owner of the Sevan Driller.
Sevan Drilling Rig II Pte. Ltd. is a limited liability company organised and existing under the laws of Singapore with registration number 200811526E and its registered office at 350 Orchard Road, #15-08 Shaw House, Singapore 238868. The principal purpose of this entity is to be the owner of the Sevan Brasil.
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Sevan Drilling Limited is a limited liability company organised and existing under the laws of the United Kingdom with registration number 993472980 and its registered office at 191 West George Street, Glasgow G2 2LD, UK. The principal purpose of this entity is to be party to the charter contract with Petrobras S.A. for the Sevan Driller.
Sevan Marine Servicos de Perfuracao Ltda. is a limited liability company organised and existing under the laws of Brazil with registration number 09.655.055/0001-4 and its registered office at Palacio Austregèsilo de Athayde building, Av. Presidente Wilson no.231 suite 1003/1004, Centro, CEP 20030‐905, RJ, Brasil. The principal purpose of this entity is to be party to the service contract with Petrobras S.A. for the Sevan Driller and the Sevan Brasil.
Sevan Drilling Management AS is a limited liability company organised and existing under the laws of Norway with registration number 996 460 185 and its registered office at Kittelsbuktveien 5, 4836 Arendal. The principal purpose of this entity is to be the employer of the Norwegian employees of the Sevan Drilling Group.
Sevan Drilling AS (up until a name change in March 2011 named Sevan Drilling Rig IV AS) is a limited liability company organised and existing under the laws of Norway with registration number 992 692 081and its registered office at Kittelsbuktveien 5, 4836 Arendal. Sevan Drilling AS is intended to be the holding company for the shares in Sevan Drilling V Pte Ltd og Sevan Drilling Rig VI Pte Ltd, see below.
Sevan Drilling Rig V AS, is a limited liability company organised and existing under the laws of Norway with registration number 992 297 794 and its registered office at Kittelsbuktveien 5, 4836 Arendal. The principal purpose of this entity is to be the holding company of Sevan Drilling Rig V Pte. Ltd.
Sevan Drilling Rig V Pte Ltd is a limited liability company organised and existing under the laws of Singapore with registration number 2008811702E and its registered office at 350 Orchard Road, #15-08 Shaw House, Singapore 238868. The company is party to the construction contracts with COSCO and is intended to be the purchaser and owner of the first newbuild, Sevan Drilling Rig 3.
Sevan Drilling Rig VI AS, is a limited liability company organised and existing under the laws of Norway with registration number 992 297 883 and its registered office at Kittelsbuktveien 5, 4836 Arendal. The principal purpose of this entity is to be the holding company of Sevan Drilling Rig VI Pte. Ltd.
Sevan Drilling Rig VI Pte Ltd is a limited liability company organised and existing under the laws of Singapore with registration number 2008812328N and its registered office at 350 Orchard Road, #15-08 Shaw House, Singapore 238868. The company is party to the construction contracts with COSCO and is intended to be the purchaser and owner of the second newbuild, Sevan Drilling Rig 4.
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Corporate structure for Sevan Drilling
Sevan Drilling ASA
(Org No. 989 910 272)
Sevan Drilling Management
AS(Org No. 996
460 185)
Sevan Drilling Invest AS
(Org No. 989 417 541)(Formerly
Sevan Drilling AS)
Sevan Drilling Pte Ltd(Org No.
200602642M)(Owner of
Sevan Driller)
Sevan Drilling Ltd
(Org No. 350264)
Sevan Drilling Rig II AS
(Org No. 992 643 382)
Sevan Drilling Rig II Pte Ltd
(Org No. 200811526E)
(Owner of Sevan Brasil)
Sevan Drilling AS
(Org No. 992 692 081)(Formerly
Sevan Drilling Rig IV AS)
Sevan Drilling Rig IV Pte Ltd
(Org No. 200811702E)
Sevan Drilling Rig V AS
(Org No. 992 297 794)
Sevan Drilling Rig V Pte Ltd
(Org No. 200812324K)
(Owner of Sevan Driller
No. 3)
Sevan Drilling Rig VI AS
(Org No. 992 297 883)
Sevan Drilling Rig VI Pte Ltd
(Org No. 200812328N)
(Owner of Sevan Driller
No. 4)
Sevan Drilling Rig VII AS
(Org No. 992 297 840)
Sevan Drilling Rig VII Pte Ltd
(Org No.200812330Z
)
Sevan Drilling Rig VIII AS
(Org No. 992762 586)
Sevan Drilling Rig VIII Pte Ltd
(Org No.200812334D
)
Sevan Drilling Rig IX AS
(Org No. 892 765 162)
Sevan Drilling Rig IX Pte Ltd
(Org No.200812339W)
Sevan Marine Servicos de Perfuracoes
Ltda (99.99%) (Org No.
09.655.055/0001-04)
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6 BOARD OF DIRECTORS, MANAGEMENT AND EMPLOYEES6.1 Overview
Sevan Drilling’s management is vested in the Company’s Board of Directors and the senior management. In accordance with Norwegian law, the Company’s Board of Directors is responsible for, among other things, supervising the general and day-to-day management of the Company’s business ensuring proper organisation; preparing plans and budgets for its activities ensuring that the Company’s activities, accounts and assets management are subject to adequate controls and undertaking investigations necessary to perform its duties.
Sevan Drilling’s senior management is responsible for the day-to-day management of the Company’s operations within the business objective of the Company and in accordance with instructions set out by the Board of Directors. Among other responsibilities, the Company’s Chief Executive Officer (the “CEO”), is responsible for keeping the Company’s accounts in accordance with existing Norwegian legislation and regulations and for managing the Company’s assets in a responsible manner. At least once a month the Company’s CEO must report to the Board of Directors about the Company’s activities, financial position and operating results.
6.2 Board of DirectorsSevan Drilling’s Articles of Association provide that the Company’s Board of Directors shall consist of a minimum of three and a maximum of ninemembers. The directors are elected by the shareholders.
The table below sets out the names of the current members of the Board of Directors of Sevan Drilling and their positions.
Board of Directors in the Company
Name Position Served since Term expiresErling Lind Chairman 2012 2014KatherineJessie ("Kitty") Hall Board Member 2011 2013AnneBreive Board Member 2011 2013Kristian Johansen Board Member 2012 2014Per Wullf Board Member 2012 2014
Erling Lind, Chairman: Erling Lind is a partner at Wiersholm, an Oslo based leading law firm. Mr. Lind practices primarily finance law, company law and mergers and acquisitions, and i.a. act as external legal counsel to Seadrill. Mr. Lind is ranked amongst Norway's most prominent lawyers in his fields of expertise. He is ranked as highly recommended in the category Shipping - Finance and as leading in the category Shipping - Corporate inChambers Europe. Mr Lind received his law degree in 1982 from University of Oslo. Mr. Lind is a Norwegian citizen. His contact address for the purpose of his role in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway. Mr. Lind does not hold any Shares in the Company.
Katherine (“Kitty”) Hall, Deputy Chairman: Miss Hall has over 30 years’ experience in the exploration industry. She is a member of the Board and founding shareholder of specialist geophysical contractor ARKeX where she was CEO from 2004 to 2010. Prior to this she was CEO and founder of ARK Geophysics Ltd from 1986 to 2004, and before that various technical and sales positions in geophysics (1978-1985). She is a Board Member of Polarcus since 2008 and was previously on the Board of Eastern Echo. She was elected as 1st Vice-President of the Petroleum Exploration Society of Great Britain for 2011-12. She is a British citizen and has a Bachelors degree in Geology from University of Leeds and a Masters Degree in Stratigraphy from the University of London. Ms Hall is a British citizen. Her contact address for the purpose of her role in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway. Ms Hall holds 30,000 Shares of the Company.
Anne Breive: Ms Breive holds an MBA from Glasgow University and has previous experience as CFO of Løvenskjold-Vækerø AS and as CFO of Statnett SF from 2005 to 2008; Vice President Finance at Norske Skog from 2000 to 2005; various management positions within finance at Norske Skog from 1994 to 2000 and various positions within Kreditkassen from 1989 to 1994. Ms Breive is a Board Member and member of Audit Committee of TTS Group ASA since 2005, Board Member of NEMKO AS since 2009 and Board Member of Selvaag Bolig ASA. Ms Breive is a Norwegian citizen. Her contact address for the purpose of her role in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway. Ms Breive holds 25,000 Shares of the Company.
Kristian Johansen: Mr. Johansen is the CFO of TGS NOPEC Geophysical ASA ("TGS"), a geophysical company listed on Oslo Børs. Mr. Johansen joined TGS in 2010 as Chief Financial Officer. Prior to joining TGS, Mr. Johansen was the Executive Vice President and CFO of EDB Business Partner in Oslo, which is one of the largest IT groups in the Nordic region. Mr. Johansen also has experience in the construction, banking and oil industries. Mr. Johansen is a Norwegian citizen. His contact address for the purpose of his role in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway. Mr. Johansen does not hold any Shares in the Company.
Per Wullf: Mr. Wullf is COO of Seadrill Ltd. Mr Wullf started working for Seadrill in February 2009. He has some 30 years of experience from the drilling industry and has held several senior positions in Maersk, most recently as Managing Director of Maersk Contractors in Norway. Mr Wullf's extensive experience includes 11 years of international offshore operations and 17 years onshore. Mr Wullf is a Danish citizen and resides in Stavanger,
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Norway. His contact address for the purpose of his role in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway. Mr. Wullf does not hold any Shares in the Company.
The composition of the Company’s Board of Directors is in compliance with the independence requirements of the Norwegian Code of Practice for of 21 October 2010 (the “Corporate Governance Code”).The Company’s senior management is not represented on the Board of Directors.
6.3 Senior management
The Company’s senior management team currently consists of:Management
Name Position
Scott Kerr................................................................Jon H Wilmann ................................
Paul Grimen…………………...... VP OperationsHeitor Gioppo................................ VP BrazilEileen Aspehaug.............................VP HR
Scott I. Kerr, CEO: Mr. Kerr was CEO of Noreco from 2005 to 2011. Mr. Kerr holds a BSc in Petroleum Engineering from University of Wyoming and has previous experience as Managing Director of BP Norway from 2003– 2005; Business Unit leader Russia and Kazakhstan of BP UK from 2000 to 2003; President CIS Region and North Africa Region of ARCO from 1998 to 2000; First Vice President of LUKARCO, Moscow, Russia from 1997 to 1998.From 1979 to 1997, Mr. Kerr held various management positions within ARCO Alaska, ARCO International and ARCO Indonesia. Mr. Kerr isa US citizen. Mr. Kerr currently holds 543,100 Shares in the Company and, subject to certain terms and conditions (including vesting periods), options to subscribe for additional 1,600,000 new Shares.
Jon H. Wilmann, CFO: Mr. Wilmann holds an MBA from Norwegian school of Economics and Administration (NHH) in Bergen from 1985. Mr. Wilmann has previous experience as VP Drilling in Sevan Marine ASA from 2009 to 2011; Managing Director and Head of Offshore Oil & Gas Financing in GE Transportation Finance (GE Capital) from 2002 to 2009; Senior Vice President Offshore Oil & Gas Financing in ABB Financial Services from 1998 to 2002; and Deputy General Manager Corporate Division in DnB NOR in Oslo to 1998. Mr. Wilmann is a Norwegian citizen. Mr. Wilmann currently holds 126,388 Shares in the Company and, subject to certain terms and conditions (including vesting periods), options to subscribe for additional 1,100,000 new Shares.
Bjørn Egil Gustavsen, VP Projects: Mr. Gustavsen is a BSc Electronics from Agder University. Mr. Gustavsen has been employed with Sevan Marine since 2004 and was Project Manager for the construction of Sevan Driller and has previous experience as EI Manager in Remora Technology from 2002 to 2004, where he also was one of the co-founders; EI Manager in Hitec Marine AS, for HiLoad Development Project from 2001 to 2002; Various Positions, first as Project Engineer, later Project and Service Manager, from 1991 to 2001 in Scana Marine Electronics. Mr. Gustavsen is a Norwegian citizen. Mr. Gustavsen currently holds 26,388 Shares of the Company and, subject to certain terms and conditions (including vesting periods), options to subscribe for 500,000 new Shares.
Pascal Busch, VP QHSE: Mr. Busch holds a Nautical Science License from the Nautical College in Antwerpen. He has 29 years of experience from the shipping and offshore industry in various operational and management positions, including Offshore Installation Manager (OIM), from various companies, including Pride and Foramer. Mr. Busch is a Belgian citizen. Mr. Busch currently holds 26,388 Shares of the Company and, subject to certain terms and conditions (including vesting periods), options to subscribe for 500,000 new Shares.
Paul Grimen, VP Operations: Mr. Grimen has more than 30 years of experience from the offshore industry in various operational and management positions worldwide with Odfjell Drilling, Pride International, Songa Offshore and other drilling operators. He is electrically certified from the BergenTechnical School and is also certified from the Arendal Maritime School for work on all electrical equipment for offshore and maritime shipping. Mr. Grimen is a Norwegian citizen. Mr. Grimen currently holds 51,388Shares of the Company and, subject to certain terms and conditions (including vesting periods), options to subscribe for 500,000 new Shares.
Heitor Gioppo, VP Brazil: Mr. Gioppo holds a B.Sc. in Mechanical Engineering from Paraná Federal University in Brazil from 1981 and an MBA from Fundação Getulio Vargas FGV from 2001. From 2006 to 2008, Mr. Gioppo was General Manager for Sevan Piranema and from 2008 to 2010 he was Operations Director for Sevan Marine’s operations in Brazil. Mr. Gioppo also has previous experience as Project Manager for Schlumberger, from 1998 to 2005; and from various roles at Odebrecht, including Rig Superintendent, from 1982 to 1998. Mr. Gioppo is a Brazilian citizen with residence in Rio de Janeiro, Brazil. Mr. Gioppo currently holds no Shares in the Company,and subject to certain terms and conditions (including vesting periods),options to subscribe for 500,000 new Shares.
Eileen Aspehaug, VP HR: Ms Aspehaug holds a BA in Economics from University College Cork, Ireland and in 2005 completed a Master of Management program in Human Recourse Management from BI, Oslo. She has previous experience as Compensation and Benefits Manager in REC
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and has many years of HR experience from both Norske Skog and REC. Ms Aspehaug is a Norwegian citizen. Ms. Aspehaug currently holds no Shares in the Company, and subject to certain terms and conditions (including vesting periods), options to subscribe for 500,000 new Shares.
The contact address for the senior management for the purposes of their roles in the Company is at Tordenskioldsgate 6, 0160 Oslo, Norway.
6.4 Directorships and management positions held by the Board members and the senior managementThe following tables sets forth all companies and partnerships in which the members of the Board of Directors and senior management have been members of the administrative, management and supervisory bodies in the previous five years (not including subsidiaries within the Group).
Board Members
Name Position in Sevan DrillingCurrent other directorships and
management positions
Previous directorships and management positions
(last 5 years)
Erling Lind ChairmanWiersholm (Partner) Asia Offshore Drilling Ltd., Bermuda public Limited (Board member)
Kristian Johansen Director TGS-Nopec Geophysical Company ASA (CFO)
AF Gruppen ASA (Executive VP, CFO), EDB Business Partner ASA (Executive VP, CFO), Skeie Energy AS, TGS Subsidiaries (Board member)
Per Wullf Director Seadrill Ltd. (COO) Maersk Norway (MD)
Senior management
Name Position in Sevan DrillingCurrent other directorships and
management positions
Previous directorships and management positions
(last 5 years)Scott I. Kerr CEO Dolphin Group ASA (Board
member)Kerr Energy AS (CEO and Chairman), Explora Petrolium (Board member)
Norwegian Energy Company ASA (CEO), BP Norway(MD), BP Oil Norge AS (Board member), Arco (President CISRegion), Altinext International AS (Board member)
Sevan Marine ASA (Area Operation Manager and Director Drilling Operation), Songa Offshore (Operation Manager)
Sevan Marine ASA (President Sevan Brazil)
REC (HR Manager and Compensation and benefits manager)
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6.5 Remuneration and benefits
Remuneration of the members of the Board of Directors
The former directors of Sevan Drilling did for the financial year 2010 and previous years not receive any remuneration from Sevan Drilling. Approval of director remuneration for 2011 will be subject to approval on the 2012 annual general meeting of the Company. No members of the Board of Directors are entitled to severance pay or other benefits upon termination of their terms.
Remuneration of the members of the senior management
At 31 December 2010, there were no employees in Sevan Drilling.
The current CEO and senior management of the Company currently receive a fixed base salary, and a variable salary of up to 65% of the base salary. The variable salary (bonus) is based on the achievement of financial, operational and personal goals and the provision of leadership in line with the Company’s values. The employment contract of the CEO and the other members of senior management can be mutually terminated with six months’notice and entitles on certain conditions the CEO to 24 months’ severance pay.
The Company has established a long-term incentive scheme to allow for grants of share options to certain management members and other employees, based on a share authorisation granted to the Board of Directors in the extraordinary general meeting on 9 January 2012. The key terms of the scheme include: (i) a one-off grant of share options will be made to eligible employees; (ii) the options will have a 3 year vesting period; (iii) the plan will be reviewed after 3 years; (iv) vesting will not be subject to any further performance conditions however options contain an inherent requirement to increase the share price (vesting will, however, be subject to continued employment with the Company), (v) The option price is the market value at the date of grant based on the average closing price of the 3 preceding dealing days, and (vi) in the event of a change of control of the Company unvested options will vest.
As of the date of this Prospectus, an option program comprising a total of 9,800,000 options has been issued. Each of the options entitles the holder to subscribe for one new ordinary share of the Company, at an exercise price per share of NOK 5.75 (market price at the time of grant).
The grant levels for 2011 are shown below:
Number of incumbents Role in the Company Number of options Total number of options
1 Chief Executive Officer 1,600,000 1,600,000
1 Chief Financial Officer 1,100,000 1,100,000
1 Management Group 500,000 2,500,000
1 Line Management 200,000 4,600,000
Total 30 9,800,000
As of 31 December 2010, the last balance sheet date, the Company or its subsidiaries had not set aside or accrued any amounts for pensions, retirement or similar benefits.
6.6 Loans and guaranteesThe Company has not granted any loans, guarantees or other commitments to any of its Directors or to any member of the senior management team of the Sevan Drilling Group.
6.7 Board CommitteesAudit Committee
The Audit Committee consists of two members of the Board and acts as a preparatory body to the Board with respect to the fulfillment of its responsibility related to assessment and control of financial risk, financial reporting, auditing and control. The Audit Committee sees that the external auditor has satisfactory auditing procedures and competence and makes recommendations to the Board and the annual general meeting concerning appointment of external auditor. The Committee also makes recommendations with regard to the external auditor’s fees. The tasks and procedure of the Audit Committee are further regulated in the Company’s Audit Committee Charter. The current members of the Audit Committee are Anne Breive and Kristian Johansen.
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Remuneration Committee
The Compensation Committee consists of two members of the Board, each of whom is independent of the executive management. The Committee acts as a preparatory body to the Board with respect to terms and conditions of employment for the Chief Executive Officer and with respect to general principles and strategies for the compensation of leading executives of the Group. The tasks and procedures of the Compensations Committee are further laid down in the Company’s Compensation Committee Charter. The current members of the Compensation Committee are Kitty Hall and Per Wullf.
6.8 Nomination CommitteeThe articles of association of the Company provides for a Nomination Committee to be elected in accordance with the requirement of the Corporate Governance guidelines. In the Company’s General Meeting on 9 January 2012, Harald Thorstein, Jarle Sjo and Geir Tjetland was elected members of the Nomination Committee.
6.9 Corporate governanceThe Company’s corporate governance principles are based on, and comply with, the Norwegian Code of Practice for Corporate Governance Code as amended on 21 October 2010.
6.10 Conflicts of interests etc.During the last five years preceding the date of this Prospectus, no member of the Board of Directors or the senior management has (i) any convictions in relation to indictable offences or convictions in relation to fraudulent offences; (ii) received any official public incrimination and/or sanctions by any statutory or regulatory authorities (including designated professional bodies) or ever been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of a company or from acting in the management or conduct of the affairs of any company; or (iii) been declared bankrupt or been associated with any bankruptcy, receivership or liquidation in his capacity as a founder, director or senior manager of a company.
To the Company’s knowledge, there are currently no other actual or potential conflicts of interest between the Company and the private interests or other duties of any of the members of the Company’s senior management or the Board of Directors. It is noted, however, that director and chairman Erling Lind regularly act as external counsel to, and director Per Wullf is an employee of, Seadrill Ltd, one of the world's largest rig operators and one of the Company's competitors, in addition to its largest shareholder. It can therefore not be ruled out that these two will from time to time, due to their connection with Seadrill Ltd, have conflicting interests with the Company.
6.11 EmployeesAs of the date of this Prospectus, the Sevan Drilling Group employs approximately 350 employees. The table below shows the development in number of employees over the last three years, as per 31 December each calendar year from 2009 to 2011.
As of 31 DecemberEmployees 2009 2010 2011Total Sevan Drilling Group ..................... 81 185 350Onshore employees ..................................... 5 11 89Offshore employees..................................... 76 174 261
Geographically, 289 employees are currently based in Brazil, 43 are based in Norway and 16 are based in Singapore and 2 are based in China. Prior to commencement of operations for Sevan Driller, the offshore crew assisted the project team on the commissioning and preparation of the rig for operations in China.
As of 31 DecemberEmployees 2009 2010 2011Total Sevan Drilling Group ..................... 81 185 350
Offshore employees ................................... 76 174Offshore employees, Norway 0 0Offshore employees, China 76 0Offshore employees, Brazil 0 174 261Offshore employees, Singapore
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7 SELECTED FINANCIAL INFORMATIONThe following tables represent the Group’s selected financial and other information.
The selected consolidated and combined financial information for the years ended 31 December 2010, 2009 and 2008 has been extracted from the audited Sevan Drilling Group Combined Financial Statements prepared in accordance with IFRS as adopted by EU (except as stated therein) for the years ended 31 December 2010, 2009 and 2008 as incorporated into this Prospectus by reference.
The Combined Financial Statements have been prepared for the period 2008 to 2010 to reflect the Sevan Drilling Group as a whole, including the legal structure of Sevan Drilling Invest AS who is the owner of the Sevan Driller. Until 21 March 2011 Sevan Drilling Invest AS was wholly owned by Sevan Marine ASA and was transferred to Sevan Drilling Group in connection with the IPO. The Combined Financial Statements are based on IFRS and prepared to reflect a Sevan Drilling Group in previous periods where it was not legally a group. Consequently, the Sevan Drilling Combined Financial Statements comprise the consolidated accounts for Sevan Drilling and the consolidated accounts for Sevan Drilling Invest AS (formerly known as Sevan Drilling AS). The Combined Financial Statements have been prepared specifically for purposes of this Prospectus and for the purpose of providing comparable historic information. Accounting principles, notes to the financial accounts and the audit opinions are included in the Combined Financial Statements incorporated hereto by reference.
The selected consolidated financial information for the nine months and the three months ended 30 September 2011 and 30 September 2010 has been extracted from the restated unaudited Sevan Drilling Interim Third Quarter Financial Statement prepared in accordance with IFRS as adopted by EU (except as stated therein) for the nine months and the three months ended 30 September 2011 as incorporated into this Prospectus by reference.
The selected financial information should be read in connection with, and is qualified in its entirety by reference to the Combined Financial Statements for the Sevan Drilling Group and the restated Sevan Drilling Interim Third Quarter Financial Statement, and should be read together with section 8“Operating and Financial Review”.
For information regarding the basis of preparation of the Combined Financial Statements and the restated Sevan Drilling Interim Third Quarter Financial Statement refer to section 8.2 “Operating and Financial Review—Presentation of financial information”.
7.1 Selected Statement of IncomeThe table below sets out a summary of the Group’s combined income statement information for the years ended 31 December 2010, 2009 and 2008extracted from the Combined Financial Statements, and the three and nine month periods ended 30 September 2011and 2010 extracted from the Interim Third Quarter Financial Statement:
Nine months ended30 September(unaudited)
Three months ended30 September(unaudited) For the year ended 31 December
7.2 Selected Balance SheetThe table below sets out a summary of the Group’s combined balance sheet as at 31 December 2010, 2009 and 2008 extracted from the Combined Financial Statements, and as at 30 September 2011 with comparable figures as at 30 September 2010 extracted from the Interim Third Quarter Financial Statement:
7.3 Selected Statement of Cash FlowThe table below sets out a summary of the Group’s combined cash flow data for the years ended 31 December 2010, 2009 and 2008 extracted from the Combined Financial Statements, and the nine months periods ended 30 September 2011 extracted from the Interim Third Quarter Financial Statement:
Nine months ended30 September(unaudited) For the year ended 31 December
USD million 2011 2010 2009 2008
Net cash generated from operating activities ...........................
Cash flows from investment activities
17.5 -21.2 -52.3 -40.2
Purchase of property, plant and equipment................................ -340.0 -164.6 -292.9 -154.2Net cash flow from investment activities................................
Cash flow from financing activities
-340.0 -164.6 -292.9 -154.2
Net proceeds from issuance of ordinary shares............................. 247.9 0.0 109.6 0.0Loan from Sevan Marine ASA - 92.9 179.2 34.3Repayment of interest-bearing debt -248.6 -4.8 0.0 0.0Net proceeds from interest-bearing debt................................ 250.4 42.6 129.2 100.0Net cash flow from financing activities ................................ 249.7 130.8 418.0 134.3Net cash flow for the period....................................................... -72.8 -55.1 72.8 -60.2Cash balance at the beginning of the year ................................ 1.8 74.2 1.5 61.7Cash balance included in contribution in kind 207.0Cash balance at the end of the year................................ 136.0 19.1 74.2 1.5
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7.4 Changes in equityThe table below sets out a summary of the Group’s combined changes in equity for the years ended 31 December 2010, 2009 and 2008 extracted from the Combined Financial Statements, and the nine months period ended 30 September 2011 extracted from the Interim Third Quarter Financial Statement:
USD million Share capital
Share premium
Retained earnings
Total equity
1 January 2011 0.5 0.0 -20.4 -19.9Conversion of debtContribution in kindCapital increaseTax effect of fees capital increaseTotal comprehensive income for the period
6.09.8
45.5
183.0324.8302.3
4.4
-133.3
-28.6
189.0201.3347.8
4.4-28.6
30 September 2011 61.9 814.5 -182.3 694.1
1 January 2010 0.5 0.0 203.1 203.6Comprehensive income for the year -86.8 -86.831 December 2010 0.5 0.0 116.3 116.8
1 January 2009 0.5 0.0 144.7 145.2Capital increase 109.6 109.6Reduction of share premium -109.6 109.6 0.0Comprehensive income for the year -51.3 -51.331 December 2009 0.5 0.0 203.1 203.6
1 January 2008 0.5 0.0 132.7 133.2Comprehensive income for the year 12.0 12.031 December 2008 0.5 0.0 144.7 145.2
7.5 AuditorPricewaterhouseCoopers AS (“PwC”) is the Company’s independent auditor. PwC is a member of the Norwegian Institute of Public Auditors (Nw. Den Norske Revisorforening). PwC's registered address is Dronning Eufemiasgate 8 N-0106 Oslo, Norway.
PwC has audited the Combined Financial Statements for Sevan Drilling ASA for the financial years ended 31 December 2010, 2009 and 2008incorporated hereto by reference (see section 13.3) and the financial statement of Sevan Drilling ASA for the years ended 31 December 2010, 2009 and 2008.
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8 OPERATING AND FINANCIAL REVIEW
This operating and financial review should be read together with section 7 “Selected Financial Information”, the Sevan Drilling Group Combined Financial Statements for the years ended 31 December 2010, 2009 and 2008 and the restated Sevan Drilling Group Interim Financial Report for Third Quarter 2011, all incorporated hereto by reference.
References to “Sevan Drilling” or to the “Company” are to Sevan Drilling and all references to the “Group” are to the combined Sevan Drilling Group accounts and its consolidated subsidiaries, including, for periods prior to April 2011, Sevan Drilling Invest AS that was transferred from Sevan Marine ASA to Sevan Drilling during April 2011, the “Drilling Business”.
8.1 OverviewThe following section contains what the Company considers to be key information regarding the Company’s financial and operational position.
8.2 Presentation of Financial InformationIntroduction
Sevan Drilling Combined Financial Statements have been prepared in accordance with IFRS as adopted by EU except as stated therein and further described below.
Sevan Drilling was incorporated as a public limited liability company on 31 May 2006 to ultimately serve as the holding company for the Group. In April 2011, Sevan Drilling acquired all the shares in Sevan Drilling Invest AS by way of a contribution in kind made by Sevan Marine. The history of the Group is described in section 8.3 “History”, and the separation from Sevan Marine is described in section 8.12 “Related Party Transactions”.
Prior to 2010, Sevan Marine did not prepare separate consolidated financial statements for the Drilling Group, which has now been combined as described in this Prospectus. Consequently, historical consolidated financial information for the Drilling Group other than included in this prospectus is not available.
The Sevan Drilling Combined Financial Statements comprise the consolidated accounts for Sevan Drilling and the consolidated accounts for Sevan Drilling Invest AS (formerly known as Sevan Drilling AS). The Combined Financial Statements have been prepared specifically for purposes of this Prospectus and for the purpose of providing comparable historic information.
In April 2011, the ownership of Sevan Drilling Invest AS was transferred from Sevan Marine ASA to Sevan Drilling. This transaction was considered to be a common control transaction, and was recognized on a carry-over basis (referred to as “predecessor accounting”). In general, all amounts presented are therefore recorded at predecessor values as formerly included in Sevan Marine ASA’s consolidated financial statements.
Under predecessor accounting, Sevan Drilling will account for the transaction ‘as if’ the combination had taken place prior to the comparative periods presented. The Combined Financial Statements therefore present historical information for the two sub groups for the year 2010 as if they were part of the same group for all periods presented.
The Combined Financial Statements are prepared on a basis consistent with IFRS as adopted by EU, using polices consistent with those of the Sevan Marine ASA group, with the following exception: The accounts does not conform with the control notion in IAS 27 Consolidated and Separate financial Statements because Sevan Drilling was not the parent company of Sevan Drilling Invest AS for the years covered by the Combined Financial Statements.
The Combined Financial Statements are otherwise prepared using the principles of IAS 27 such as the elimination of intra-group transactions. However, transactions with other entities within the Sevan Marine ASA group have not been eliminated, as these are regarded as third party transactions to the combined entity.
Sevan Drilling’s management believes the assumptions underlying the Combined Financial Statements are reasonable.
Key Principles and Adjustments made in the Preparations of the Combined Financial Statements
The Combined Financial Statements are prepared based on the consolidated financial statements of Sevan Drilling Invest AS and the consolidated financial statements of Sevan Drilling for the periods specified. In general, when separate financial statements are required to combine from a smaller operating group, a number of adjustments are required because the relevant extracted entity or group did not actually operate as a separate entity or group for the periods presented.
The following describes the key principles used in preparing the Combined Financial Statements as well as key adjustments made in the preparation of the Combined Financial Statements:
All intercompany transactions and balances between the consolidated Sevan Drilling Invest AS and consolidated Sevan Drilling were eliminated in the Combined Financial Statements.
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8.3 Principal Factors Affecting the Group’s Results and BusinessAs of the date of this prospectus both of the Group’s UDW rigs are fully funded by equity, bank facilities of USD 480 million (Sevan Driller) and USD 525 million (Sevan Brasil). As the construction of Sevan Brasil is currently ongoing, only USD 479 million of the USD 525 bank facility has been drawn. In addition to the bank facility, there is an additional long term vendor credit facility of USD 80 million available in relation to Sevan Brasil.
Up until the first drawdown of the USD 525 million bank facility in February 2011, the Sevan Brasil construction project was funded by equity and loans from the ultimate parent company; Sevan Marine. The majority of such loans were converted to equity during March 2011.
The USD 480 million bank facility was executed in March 2011 and refinanced the existing 1st and 2nd lien financing of USD 250 million facility (bank) and NOK 1,000 million (bond) respectively.
In May 2011, Sevan Drilling raised approximately USD 364 million in new equity capital and was listed on Oslo Axess. The proceeds of USD 364 million has been allocated to equity instalments under the construction contracts with Cosco and to working capital.
With minor adjustments as to timing, the payment schedule for the newbuilds as described in sections 8.2 and 8.9 reflects 20% down-payment upon effectiveness of contracts (10% for Sevan Drilling Rig 4), and 80% (90% for Sevan Drilling Rig 4) payment upon delivery from the yard. Thus, with equity covering the initial 20% (10%) of the total construction cost of USD 526 million for each rig, 80% (90%), or USD 420 million (USD 473 million) (90% of Sevan Drilling Rig 4, is intended to be financed by a combination of equity and long-term bank debt.
8.4 Critical Accounting Policies and EstimatesThe Company’s significant accounting policies are summarized in Note 2 to the Sevan Drilling Combined Financial Statements for the years ended 31 December 2010, 2009 and 2008 and Note 1 to the restated Sevan Drilling Group Interim Financial Report for Third Quarter 2011. Summarized below are those accounting policies that require management to apply judgments which management believes to have the most significant effect on the amounts recognized in the Combined Financial Statements:
Critical Accounting Estimates and AssumptionsThe Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below.
Estimated impairment of Drilling rigsThe Group has tested whether the Drilling rigs have suffered any impairment, in accordance with the accounting policy stated in Note 2.5. The recoverable amounts of the assets have been determined based on value-in-use calculations. These calculations require the use of estimates.
Income taxes The Group is subject to income taxes in various jurisdictions. Judgment is required in determining the provision for income taxes. During the ordinary course of business, transactions and calculations occur for which the ultimate tax effect is uncertain. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
The accounting for deferred income taxes relies upon management’s judgment of the Group’s ability to generate future positive taxable income in each respective jurisdiction.
CommitmentsThe Group uses estimates regarding assessment of remaining commitments.
Depreciation of units in operationThe Group uses estimates when assessing on a continuous/annual basis each Drilling Rig asset’s useful life and residual value to determine the depreciation plan for each unit in operation.
Critical Judgments in Applying the Group’s Policies Assumptions applied for the purpose of impairment testing of Drilling rigs include estimated WACC and expected future cash flows. Due to the inverse relationship between discount rate and net present value, a decrease in WACC will increase the net present value and an increase in WACC will decrease the net present value. An increase in estimated future cash flows will increase the net present value and a decrease in estimate expected future cash flows will decrease the net present value.
Estimation of WACC is based on determination of an average WACC for the Group of 10.5%. Estimation of future cash flows is based on several assumptions, including forecasted operational expense, utilization and day rates which are based on actual contracts as well as forecasts beyond the contracted periods.
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8.5 Results of OperationsThe activities in the Sevan Drilling Group relate to the design, engineering, construction and operation of the Sevan UDW rigs. This includes Sevan Driller, which commenced operation off the coast of Brazil under a 6-year charter contract with Petrobras S.A in June 2010. The second rig, the Sevan Brasil, is under construction at COSCO with scheduled for delivery from the yard in the first quarter of 2012 and commencement of a six-year charter contract with Petrobras in Brasil in the second quarter of 2012. For further details of the charter contracts for Sevan Driller and Sevan Brasil, reference is made to section 8.8 above.
The below discussions regarding the full years 2010, 2009 and 2008 are based on the Combined Financial Statements, while the discussions regarding the three and nine months ended 30 September 2011 and 2010 are based on the unaudited restated Third Quarter Accounts.
The three months ended 30 September 2011 (compared to the three months ended 30 September 2010)
Operating revenue for the quarter amounted to USD 36.5 million (USD 1.4 million in Q3 2010). EBITDA was USD 13.2 million (USD -1.3 million in Q3 2010).
Operating revenue consists of the charter contract for Sevan Driller with Petrobras S.A. which commenced operations in June 2010. Sevan Driller had an average technical uptime of 88.2% in Q3 2011 and commercial uptime of 88.3%.
The majority of downtime in Q3 2011 was related to two separate incidents in August and September.
The day rate for the Sevan Driller has increased from July 2011 to July 2012 from USD 434,000 per day to USD 470,000 per day in accordance with the contract. The increased day rate has a cash effect in the above mentioned period but from an accounting perspective the increased revenue is amortized over the contract period.
Operating profit was USD 3.8 million (a loss of USD 17.2 million in Q3 2010). Financial expense was USD 16.2 (USD 0.5 million in Q3 2010) of which USD 1.8 million is guarantee fee paid to Sevan Marine ASA, USD 1.6 million is amortization of upfront fees paid in connection with the drawdown of the USD 480 million Credit Facility, and the remainder is interest expense.
Sevan Drilling (the Group) had a net loss of USD 17.1 million in the quarter (a net loss of USD 2.2 million in Q3 2010). An unrealized loss on an interest hedge in Q3 2011 and the guarantee fee of USD 1.8 million paid to Sevan Marine, which were not present in the previous quarter, mainly explain the difference.
Out of the USD 23.2 million in operating expense (USD 2.7 million in Q3 2010), USD 1.8 million stems from pre-operational expenses related to Sevan Brasil and USD 0.7 million is non-cash operational expenses. The cash operational expense per day on the Sevan Driller was USD 169,800 (USD 205,500 in Q3 2010) and the remaining operating expense is overhead. The overhead expense includes a one off severance payment of USD 1.6 million to the previous CEO.
As of 30 September 2011 total assets amounted to USD 1,479.6 million (USD 291.7 million in Q3 2010). USD 1,265.3 million was capitalized as among the Company’s drilling rigs as follows: Sevan Driller of USD 661.7 million, Sevan Brasil of USD 459.7 million, Sevan Drilling Rig 3 of USD 111.6 million and Sevan Drilling Rig 4 of USD 32.4 million. Cash and cash equivalents amounted to USD 136.0 million.
The Group has a bank facility of USD 243.0 million (of which 200.0 million has been drawn in December 2011) which is available to fund the construction of Sevan Brasil, and is not reflected in the balance sheet as of 30 September 2011. As of 30 September 2011 the Group also has an undrawn long term vendor credit facility relating to Sevan Brasil of approximately USD 80.0 million.
The nine months ended 30 September 2011 (compared to the nine months ended 30 September 2010)
Operating revenue for the nine months amounted to USD 77.9 million (USD 4.2 million for the nine months ended 30 September 2010). EBITDA was USD 26 million (USD -4.1 million for the nine months ended 30 September 2010).
31
32
33
34
35
36
37
Q1 2011 Q2 2011 Q3 2011
Operating Revenue ($m)
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Operating revenue consists of the charter contract for Sevan Driller with Petrobras S.A. which commenced operations in June 2010. Sevan Driller had an average technical uptime of 88.2% in Q3 2011 and commercial uptime of 88.3%.
The majority of downtime in the nine months ended 30 September 2011 was related to incidents in January, August and September.
The day rate for the Sevan Driller has increased from July 2011 to July 2012 from USD 434,000 per day to USD 470,000 per day in accordance with the contract. The increased day rate has a cash effect in the above mentioned period but from an accounting perspective the increased revenue is amortized over the contract period.
Operating profit was USD 7.2 million (loss of USD 4.2 million for the nine months ended 30 September 2010. Financial expense was USD 26.1 million (USD 1.4 million for the nine months ended 30 September 2010) of which USD 4.0 million is unrealized hedging cost; USD 0.7 million is currency loss, USD 1.8 million is guarantee fee paid to Sevan Marine ASA, USD 1.6 million is amortization of upfront fees paid in connection with the drawdown of the USD 480 million Credit Facility, and the remainder is interest expense.
Sevan Drilling (the Group) had a net loss of USD 27.5 million for the nine months (a net loss of USD 7.6 million for the nine months ended 30 September 2010).
Out of the USD 51.8 million in operating expense (USD 8.2 million for the nine months ended 30 September 2010), USD 1.8 million stems from pre-operational expenses related to Sevan Brasil and USD 0.7 million is non-cash operational expenses. The cash operational expense per day on the Sevan Driller was USD 170,000 and the remaining operating expense is overhead. The overhead expense includes a one off severance payment of USD 1.6 million to the previous CEO.
The financial year 2010 (2009)
Operating revenues for the financial year 2010 (2009) amounted to USD 40.6 million (USD 0.6 million). Operating loss was USD 47.1 million (USD 32.6 million), and net loss was USD 86.8 million (USD 51.3 million).
The increase in revenue from the previous year was due to the commencement of operation of Sevan Driller mid-year. During the initial period of operation, defects on third party equipment caused higher than anticipated downtime on the rig. The downtime was mainly due to defects in the riser tensioning system and the BOP and reduced the Technical Uptime to 50.3% and the Commercial Uptime to 49.5% for 2010. The increase in operating expense compared to previous year was mainly due to an increase in activities in relation to the commencement of operation of the Sevan Driller as also reflected in the revenues.
The increase in net financial loss of USD 19.0 million was mainly due to changes in amortization schedules for financing fees (USD 5.5 million) as the refinancing of debt effectuated in March 2011 was anticipated already upon securing the underwriting agreement with the syndicate of banks in December 2010. In addition, an increase in interest expense relating to Sevan Driller (USD 28 million) was due to interest being expensed through profit and loss rather than capitalized as part of the construction cost following completion of the rig at the inception of 2010. These effects were partly offset by a reduction (USD 24.8 million) in unrealized financial currency losses mainly relating to the NOK nominated bond.
As of December 31, 2010 (2009), total assets amounted to USD 1,165.3 million (USD 964.4 million), of which USD 1,009.6 million (USD 767.3 million) was capitalized as “Drilling rigs”. Cash and cash equivalents amounted to USD 19.1 million (USD 74.2 million).
Interest bearing debt as of December 31, 2010 (2009), consisted of a bond loan with a nominal value of NOK 1,000 million (NOK 1,000 million), a bank facility of USD 245.2 million (USD 207.4 million) and a vendor credit facility of USD 77.8 million (USD 77.8 million).
Cash flow from operations was negative USD 21.2 million in 2010 (negative USD 52.3 million in 2009), due to only one rig being operational, and only from mid-year, combined with lower efficiency and higher operating expense in the start-up phase. Cash flow from operations also include interest payments.
Cash flow from investments was negative USD 164.6 million, compared to negative USD 292.9 million in 2009. The cash flows from investments relate to the construction of Sevan Driller and Sevan Brasil.
Cash flow from financing was positive USD 130.8 million (USD 418.0 million), mainly due to drawdowns on debt facilities during 2010. In addition to drawdowns on debt facilities, a USD 109.6 million share issue was carried out during 2009.
160
165
170
175
180
Q1 2011 Q2 2011 Q3 2011
Sevan Driller cash opex per day ($k)
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The ending cash balance was USD 19.1 million at 31 December 2010, compared to USD 74.2 million at year-end 2009.
The financial year 2009 (compared to 2008)
Operating revenues for the financial year 2009 (2008) amounted to USD 0.6 million (USD 0.0 million). The operating loss was USD 32.6 million (USD 23.4 million loss in 2008), and net profit was USD 51.3 million negative (USD 12.0 million positive).
The figures reflect that the Company was in a startup phase during both years, with no material revenues as the Company’s assets were still under construction.
The change in net financial items of USD 57.1 million was mainly due to unrealized currency losses on the NOK nominated bond. Net foreign exchange loss in 2009 was USD 23.1 million compared to a gain of USD 31.1 million in 2008.
As of December 31, 2009 (2008), total assets amounted to USD 964.4 million (USD 594.5 million), of which USD 767.3 million (USD 528.7 million) was capitalized as “Drilling rigs”. Cash and cash equivalents amounted to USD 74.2 million (USD 1.5 million).
Interest bearing debt as of December 31, 2009 (2008), consisted of a bond loan with a nominal value of NOK 1,000 million (NOK 1,000 million), a bank facility of USD 207.4 million (USD 156.0 million) and a vendor credit facility of USD 77.8 million (USD 0 million).
Cash flow from operations was negative USD 52.3 million in 2009 (negative USD 40.2 million in 2008), mainly due to interest payments, cost of establishing an operational organisation as well as general pre-operational expense relating to Sevan Driller.
Cash flow from investments was negative USD 292.9 million in 2009, compared to USD 154.2 million in 2008. The cash flows from investments relate to the construction of Sevan Driller and Sevan Brasil.
Cash flow from financing was positive USD 418.0 million (USD 134.3 million), consisting of drawdown on debt facilities and a USD 109.6 million share issue during 2009 and drawdown on debt facilities during 2008.
The ending cash balance was USD 74.2 million at year-end in 2009, compared to USD 1.5 million in 2008.
8.6 Liquidity and Capital Resources
Sources of Liquidity
Historically, the Group’s primary sources of liquidity have been equity, interest-bearing debt including loans from companies in the Sevan Marine Group. The sources of liquidity are a combination of equity and interest-bearing debt.
Total cash per 30 September, 2011 was USD 136 million. The equity ratio as per 30 September 2011 was 47 %.
Capitalisation and indebtedness per 30 September 2011:
Amounts in USD million 30 Sep 2011
Unaudited
Total equity (A) 694.1
Current debt (incl. provisions)Guaranteed/secured loans 79.9Unguaranteed/unsecured 61.1Total current debt 141.1
Leasing debt due within one year Current bank debt / current portion of non-current debt 53.0
Other current interest-bearing debt 26.9Bonds due within 1 year 0.0Current financial debt (E) 79.9
Net current financial indebtedness (E-C-D) (F) -56.1
Long-term leasing debt 0.0Other non-current interest-bearing debt 0.0Non-current bank loans 617.9Bonds due after 1 year 0.0Non-current financial debt (G) 617.9
Non-current receivables (H)
Net financial indebtedness (F+G-H) 561.8
After 30 September 2011, the amount drawn on the Company's USD 525 bank facility has been increased from USD 282 million to USD 479 million in connection with the financing of Sevan Brasil. Other than this, there have been no significant changes in the Company's capitalisation and indebtedness since 30 September 2011 and up until the date of the Prospectus. In addition the Company has repaid a vendor credit of USD 26 million in December 2011.
The Company's bank loan facilities are secured with securities customary in this type of financing, including during the pre-delivery stage security in the hull under construction, in the various contracts, assignment of refund guarantees and insurances, pledge in shares and account pledges, to be supplemented from delivery by a first mortgage over the unit and assignment of earnings borrower. For further details see "A summary description of the financing agreements currently in place" below.
Borrowings
The following table summarizes the Group’s principal borrowing arrangements and their repayment schedule as at 30 September 2011.
Payments due by period, as at 30 September 2011(USD million)
Lenders/Agent Original facility
currency and amount
Total outstanding 2011 2012 2013
2014 and later
Bank debt USD 480 m 440.0 -53.9 -56.6 -59.4 -310.1Bank debt ................................ USD 525 m 282.0 0.0 -23.5 -54.4 -447.0
Total ................................................................................................ 922 53.9 -90.1 113.8 -757.1
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Under the credit facilities as set out in the tables above, the Group is subject to certain covenants:
The bank loans have conceptually been structured on a project finance basis, however, guaranteed by Sevan Drilling in whole or in part. The agreements reflect that the respective borrowers are single purpose companies, with extensive security arrangements and customary limitations, restrictions and obligations as regards actions and operations. Accordingly, the borrowing entities may not cease to carry on its business, make disposals or restructurings or otherwise enter into arrangements which may adversely affect its ability to fulfil its obligations towards the lenders or the security granted in their favour. The finance documents include financial covenants at borrower or group level (as the case may be), such as a minimum debt service coverage ratio of no less than 1.1, an equity ratio of minimum 30%, liquidity requirements of minimum 50 million and a operationalleverage ratio from 6 to 4 (stepwise reduced over the term of the facilities). The finance documents include restrictions on ownership changes and dividend distributions, affecting the ability of subsidiary borrowers to upstream funds, as well as cross default and material adverse change provisions. As a result of the cross default provisions, a default in one company in the Group will be considered a breach of the loans held by all companies in the Group.
Approximately 75% of the Group’s existing debt arrangements as of the date of this Prospectus have been hedged towards fluctuations in floating interest rates.
A summary description of the financing agreements currently in place:
Sevan Drilling Pte Ltd. USD 480 million Bank Facility:
In March 2011, Sevan Drilling Pte Ltd (an indirectly owned subsidiary of Sevan Drilling) entered into a credit facility with a syndicate of lenders with NIBC, ING Bank, DvB and China Development Bank as Mandated Lead Arrangers (“MLA’s”). NIBC is the Facility Agent and DvB is the Security Trustee. The syndicate includes in addition to the MLA’s, GIEK/Eksportfinans, Banco Itau, Natexis and DEKA Bank. Interests accrue at LIBOR plus a margin of 350 bp.
The final maturity date in respect of the commercial tranche is 9 June 2016, and in respect of the GIEK/Eksportfinans tranche 9 June 2018, provided however that GIEK/Eksportfinans may demand repayment in 2016 together with the commercial tranche if the commercial tranche is not refinanced at that time on terms acceptable to GIEK/Eksportfinans.
The loan shall be repaid in quarterly instalments, in the initial amount of USD 13,235,000, increasing gradually over the term of the loan to USD 17,068,814 with a balloon payment to the commercial lenders in June 2016 of USD 95,312,500. If GIEK/Eksportfinans require prepayment in June 2016, the amount due to them will be USD 53,046,913, which is otherwise repayable over the two remaining years until June 2018. The loan may be prepaid subject to a prepayment fee.
The loan facility is structured as a project finance facility on a single purpose basis, with securities customary in this type of financing, including, inter alia, a mortgage over the Sevan Driller, assignment of earnings and insurances, pledge of accounts, security in various contracts, and share pledges. The loan agreement contains customary provisions for agreements of this nature, such as (i) mandatory prepayment provisions relating to loss events, termination of charter and other project contracts, (ii) restrictive covenants regarding, inter alia, dividend distribution (which may affect availability of upstream funds to the Company), the operation and sale of the unit, change of ownership, and amendments to material contracts, and (iii) detailed reporting and compliance requirements. There are financial covenants related to:
-Debt service cover ratio of not less than 1.1:1.0.
-Liquidity of minimum USD 50 million on a consolidated basis
-Equity ratio of minimum 30%
-Operational leverage on a forward looking basis starting in 2012 at minimum 6 times, 5.5 times in 2013 and 5 times in 2014 and onwards.
The covenants relate to Sevan Drilling, and breach of the covenants by Sevan Drilling is considered a default of the facility.
The GIEK/Eksportfinans tranche remains within Eksportfinans also after the decision by the Norwegian government to discontinue its support of Eksportfinans as a lender. As the loan is fully drawn this should have no effect for the group.
The loan is guaranteed by Sevan Drilling.
Sevan Drilling Rig II Pte Ltd USD 525 million Bank Facility:
In December 2010, Sevan Drilling Rig II Pte Ltd (an indirectly owned subsidiary of Sevan Drilling) entered into a credit facility with a syndicate of lenders lead by ING as agent. The facility includes three tranches: A commercial facility tranche, a GIEK/Eksportfinans tranche, and a Sinosure/China Construction Bank tranche. The facility is partially guaranteed by Garantiinstituttet for Eksportkreditt (GIEK). Eksportfinans has funded GIEK’s portion of the facility. The facility consists of a USD 525 million loan used to finance, in part, the Sevan Brasil. Drawing is subject to certain milestone criteria and conditions precedent being fulfilled. As at the date of the Prospectus, USD 479 million has been drawn. The remaining payments related to the Sevan Brasil project will be financed by the undrawn amount of USD million 46 and proceeds from previous drawdowns.
Interest accrues at LIBOR plus an average margin of 340 bps prior to acceptance of the Sevan Brasil by the client and 310 bps from the time of acceptance.
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The final maturity date in respect of the commercial tranche and the Sinosure/China Construction Bank tranche is May 2018, and in respect of the GIEK/Eksportfinans tranche May 2020, provided however that GIEK/Eksportfinans may demand repayment in 2018 together with the other tranches if such tranches have not been refinanced at that time on terms acceptable to GIEK/Eksportfinans.
The loan shall be repaid in quarterly instalments during the tenor of the loan. Subject to timely delivery of the unit from the yard, the repayment schedule contemplates an initial instalment in November 2012 in the amount of USD 23,529,412, and thereafter quarterly instalments of starting at USD 13,014,706 increasing gradually over the period to May 2018 to USD 18,764,706 with a balloon payment to the commercial lenders in May 2018 of USD 36,750,000 and to Sinosure of USD 58,823,528. If GIEK/Eksportfinans require prepayment in May 2018, the amount due to them will be USD 58,823,528, which is otherwise repayable over the two and half remaining years until November 2020. From May 2018 to November 2020, the quarterly instalments due to GIEK/Eksportfinans each equal USD 5,882,353. The loan may be prepaid subject to a prepayment fee.
The loan facility is structured as a project finance facility on a single purpose basis, with securities customary in this type of financing, including during the pre-delivery stage security in the hull under construction, in the various contracts, assignment of refund guarantees and insurances, pledge in shares and account pledges, to be supplemented from delivery by a first mortgage over the unit and assignment of earnings borrower.
The loan agreement contains customary provisions for this type of financings, such as (i) mandatory prepayment provisions relating to loss events, termination of charter and other project contracts,(ii) mandatory prepayment provisions if the unit has not been delivered by COSCO on or prior to 31 November 2012 or the unit has not been accepted under the Petrobras charter by 30 May 2013, (iii) restrictive covenants regarding, inter alia, dividend distribution (which may affect availability of upstream funds to the Company), the operation and sale of the unit, change of ownership, and amendments to material contracts, and (iv) detailed reporting and compliance requirements both during construction and after completion. There is a debt service cover ratio covenant of not less than 1.1:1.0.
There are financial covenants equal to the financial covenants listed for the Sevan Drilling Pte Ltd. USD 480 million Bank Facility described above.The covenants relate to Sevan Drilling, and breach of the covenants by Sevan Drilling is considered a default of the facility.
The GIEK/Eksportfinans tranche has been agreed assigned from Eksportfinans to the Norwegian Ministry of Trade and Industry, following the decision by the Norwegian government referred to in the above section. The company awaits a request from the Ministry on further assignment upon implementation of the new government backed financing vehicle that will in the end replace Eksportfinans.
The loan is guaranteed by Sevan Drilling. A previous guarantee provided by Sevan Marine will for a limited time period continue to apply pending final release. All cross default provisions related to Sevan Marine in general and specifically this guarantee are fully removed. The Company will continue to pay a guarantee fee until the guarantee is released.
Sevan Drilling Pte Ltd USD 78 million vendor credit arrangement with COSCO
The USD 78 million vendor credit facility with COSCO was drawn in November 2009 and had a repayment schedule over three years which recently has resulted in it being fully repaid.
Sevan Drilling Rig II Pte Ltd USD 80 million vendor credit arrangement with COSCO
The USD 80 million vendor credit facility with COSCO may be drawn at the time of delivery of Sevan Brasil from COSCO and has a repayment structure divided in three equal instalments of USD 27 million whereby the first instalment is payable 24 months after delivery, the second instalment is due 36 months after delivery and the third instalment is due 48 months after delivery. The interest rate under the credit facility is fixed at 4.5 per cent p.a. and interest is payable together with the instalments.
Cash Flows
The Company generates revenues under the Sevan Driller Contract with Petrobras which commenced in June 2010. The revenues cover operation expenses and thereafter debt service. The Company is restricted from making dividends payments from the rig owning company (Sevan Drilling Pte Ltd)unless certain conditions are met. These conditions are not expected to be met during the 2-3 first years of operations.
Working Capital Statement
The Company is of the opinion that the Group’s working capital is sufficient for its present requirements. For purposes of this statement, “workingcapital” means the ability to access cash and other available liquid resources in order to meet liabilities as they fall due, and “present requirements” means 12 months from the date of this Prospectus.
8.7 Financial and Other LiabilitiesThe table below provides an overview of the Group’s combined financial and other liabilities to third parties and related parties as at 31 December 2010, 2009 and 2008 and as at 30 September 2011:
30 September 31 December USD million 2011 2010 2009 2008 Interest-bearing debt ................................................................. 697.8 496.0 452.9 286.6Interest-bearing debt to related parties ...................................... 275.2 229.5 34.4Other liabilities (external trade payables, accruals etc) ............. 87.6 277.3 78.4 128.3
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8.8 Capital ExpendituresThe table below shows the Group’s capital expenditures on fixed assets the periods ended 31 December 2010, 2009 and 2008 and for the nine months ended 30 September 2011:
For the nine months ended 30 September For the year ended 31 December
USD million 2011 2010 2009 2008 Capital expenditures Sevan Driller ........................................... 661.7 52.7 199.2 194.0Capital expenditures Sevan Brasil ............................................ 459.7 216.9 40.1 70.2Capital expenditures Sevan Drilling Rig 3 and 4 143.9
8.9 Contractual CommitmentsThe table below provides a maturity analysis of the Group’s contractual obligations, commercial commitments and principal payments scheduled as at 30 September 2011:
Payments due by period (USD million)Contractual obligations (1) Total Less than 1 year 1-5 years More than 5
yearsConstruction obligations Sevan Brasil ................................ 225.3 225.3Total ................................................................................................225.3 225.3
(1) The table above does not show the Group’s contractual commitments towards personnel (salary and benefit obligations), pension obligations or deferred tax obligations. Purchase obligations set forth in the table represent estimated minimum purchase commitments, not likely purchases.
8.10 Off Balance Sheet ArrangementsThe Group has undertaken contractual obligations which are not treated as liabilities on its balance sheet because the Group is not required to do so by IFRS. The Group is not party to any off-balance sheet arrangements that have or are reasonably likely to have, a current or future material effect on its financial condition, changes in financial condition, revenues, or expenses, operating results, liquidity, capital expenditures or capital resources. When the Group treats contractual obligations as liabilities in the Group’s balance sheet, it involves the application of assumptions and estimates to determine the amount of the liability. Because of the inherent uncertainty in the application of assumptions and estimates, the Group’s actual liabilities could turn out to be different from the amounts counted as liabilities on its balance sheet.
8.11 Significant Changes and TrendsIn December 2011 the Company made a drawdown of USD 200 million under the Sevan Brasil bank facility to fund the construction of Sevan Brasil.After the drawdown there is USD 46 million available to draw under the bank facility (the total bank facility is USD 525 million).
Sevan Driller had a technical uptime of 55.9% in January 2012. Most of the down-time in January is related to an incident with the wash-pipe. During routine maintenance to replace the wash pipe the threaded connection between the wash pipe and the swivel was damaged. The repair required that the swivel was removed and taken onshore where the damaged parts were replaced. There were no injuries or environmental damages related to this incident and the rig was back on contract 3 February. The rig was partly on rate during the incident, and total days off rate were about 14 days.
Following its acquisition of 28.5% of the shares in Sevan Drilling ASA in December, the company received a request from Seadrill Limited that an extraordinary general meeting (EGM) in Sevan Drilling ASA is convened for the purpose of electing a new board of directors reflecting the new shareholder base. The EGM was held 9 January. As follows from the minutes, it was duly resolved to:
i. appoint new directors as proposed, so that the new board of directors of the Company now consists of Chairman Erling Lind (new), Kitty Hall, Anne Breive, Per Wullf (new) and Kristian Johansen (new).
ii. appoint a new nomination committee as proposed, the committee now thus consisting of Harald Thorstein, Jarle Sjo and Geir Tjetland, and approve the proposed nomination committee guidelines.
iii. change the articles of association so that the registered business address of the Company shall be in Oslo.iv. approve the proposed long term incentive program (LTIP) and grant of authorisation to the Board of Directors to issue up to 10,000,000 new
shares in order to fulfil such program. Each option will give the holder the right to subscribe for one share in the Company at a strike price of NOK 5.75. The options will vest with 1/3 annually, subject to certain terms and conditions.
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As described above and as reported by the Company on 10 January 2012, the Sevan Brasil left the COSCO shipyard on 10 January 2012 and proceeded offshore to commence thruster installation and seatrials. These operations are expected to take approximately four to six weeks and following completion the rig will be secured for shipment and loaded on to heavy lift for transport to Brasil.
On 6 February, the Company published the following status update with respect to its rigs:
Sevan Driller:
Sevan Driller had a technical uptime of 55.9% in January 2012. The downtime in January is primarily related to an incident with the wash pipe and swivel drive shaft described in a release dated 19 January 2012.
As of 12.00 pm local Brazilian time on 4 February 2012, Sevan Driller was fully operational.
Sevan Brasil:
The construction and mobilization of Sevan Brasil is progressing according to plan. Sea trials were successfully completed on 2 February 2012 and the rig is now undergoing final preparations for transport. The window for heavy lift transport of the rig to Brazil is between 1 March and 7 March 2012.
The Company expects Sevan Brasil to arrive in Rio de Janeiro by mid-April 2012. The rig is scheduled to commence operation under a six year charter contract with Petrobras during second quarter 2012.
Sevan rig no 3:
Construction of Sevan rig no 3 is progressing according to plan. Keel-laying took place 8 October 2011 and erection of main hull is ongoing. Fabrication of drill-floor has started.
Sevan rig no 4:
Construction of Sevan rig no 4 is also progressing according to plan. Keel-laying took place 16 December 2011 and erection of lower part of main hull is ongoing.
Except as set out above or otherwise disclosed in this Prospectus, there have been no significant changes in the financial or trading position of theGroup since the date of its latest financial information included in this Prospectus.
8.12 Related Party TransactionsFollowing the disposal of its shares in the Company in December 2011, Sevan Marine is no longer considered to be a related party to Sevan Drilling and the Company’s subsidiaries. Sevan Marine was, however, prior to such sale a related party pursuant in accordance with IAS 24 and descriptions of certain related party transactions with Sevan Marine for the periods covered by the Financial Statements incorporated by reference in the Prospectuscan be found in the notes therein.
For a description of related party transactions within the Sevan Drilling Group, we refer to the 2011 quarterly reports incorporated hereto by reference.
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9 DIVIDENDS AND DIVIDEND POLICY9.1 Dividend policy
Sevan Drilling has not distributed any dividends since the Company’s inception.
The Company aims at obtaining a sound financial structure, reflecting the capital intensive nature of its business, the offshore market fluctuations and the duration of the contract portfolio for its units. The Company’s goal will be to provide its shareholders with a competitive return on their investmentover time, in terms of dividend and development in share price. The Company aims to distribute dividends to its shareholders on a regular basis.
When determining whether to declare a dividend or the size of a dividend, account will be taken of the Company’s financial targets, large investments or commitments made, possible future acquisitions, expected future results of operations, financial condition, cash flows and other factors. There can be no assurance that in any given year a dividend will be proposed or declared.
The Group’s existing debt arrangements contain, and the Group’s future debt arrangement may contain, restrictions on distribution of dividends. Under the new senior secured debt discussed in section 11.9., the Company will be subject to dividend restrictions such that a maximum of 50% of the net income in the relevant financial year, adjusted for tax and write downs on the Sevan Driller and the Sevan Brasil, may be distributed as dividends. Any amount permitted to be distributed, but not distributed in one year, may be carried forward and distributed in subsequent years.
9.2 Legal constraints on the distribution of dividendsDividends may be paid in cash or in some instances in kind. The Norwegian Public Limited Liability Companies Act sets forth several constraints on the distribution of dividends:
Unless the procedures stipulated in sections 12-4 and 12-6 of the Norwegian Public Limited Liability Companies Act in respect of reduction of share capital, dividends are payable only out of distributable reserves of the Company (Sevan Drilling). section 8-1 of the Norwegian Public Limited Liability Companies Act provides that distributable reserves consist of the profit for the prior fiscal year (as reflected in the income statement approved by the annual general meeting) and the retained profit from previous years (adjusted for any reclassification of equity), less (i) uncovered losses, (ii) the book value of research and development, goodwill and net deferred tax assets (as recorded in the balance sheet, as of the most recent fiscal year end, approved by the annual general meeting), (iii) the total nominal value of treasury shares acquired for ownership or as security in previous fiscal years, and credit and security that, pursuant to sections 8-7 to 8-9 of the Norwegian Public Limited Liability Companies Act, fall within the limits of distributable equity, and (iv) that part of the profit for the prior fiscal year which, by law or pursuant to the Company’s Articles of Association, must be allocated to the un-distributable reserves or cannot be distributed as a dividend.
Dividends cannot be distributed if the Company’s (Sevan Drilling’s) equity amounts to less than 10% of its total assets unless the procedures stipulated in sections 12-4 and 12-6 of the Norwegian Public Limited Liability Companies Act for the reduction of share capital are complied with.
Dividends can only be distributed to the extent compatible with good and careful business practice, with due regard to any losses that may have been incurred since the balance sheet date (i.e. the prior fiscal year end) or that may be expected to be incurred.
The amount of distributable dividends is calculated on the basis of the Company’s (Sevan Drilling’s) separate financial statements and not on the basis of the consolidated financial statements of the Company and its subsidiaries.
Distribution of dividends is resolved by a majority vote at the general meeting of the shareholders of the Company, and on the basis of a proposal from the Board of Directors. The general meeting cannot distribute a larger amount than what is proposed or accepted by the Board of Directors.
The Norwegian Public Limited Liability Companies Act does not provide for any time limit after which entitlement to dividends lapses. Subject to various exceptions, Norwegian law provides a limitation period of three years from the date on which an obligation is due. There are no dividend restrictions or specific procedures for non-Norwegian resident shareholders to claim dividends. For a description of withholding tax on dividends applicable to non-Norwegian residents, see section 16 “Taxation”.
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10 DESCRIPTION OF THE SHARES AND SHARE CAPITALThe following is a summary of certain material information relating to the Shares and share capital of Sevan Drilling and certain other shareholder matters, including summaries of certain provisions of the Company’s Articles of Association and applicable Norwegian law in effect as of the date of this Prospectus, including the Norwegian Public Limited Liability Companies Act. The summary does not purport to be complete and is qualified in its entirety by the Company’s Articles of Association and Norwegian law.
10.1 Share capital and share capital historyThe Company’s issued and registered share capital is as of the date of this Prospectus NOK 336,625,000 divided into 336,625,000 Shares, each fully paid up and with a par value of NOK 1.00.
The table below shows the development in the Company’s share capital development for the period from inception to the date hereof:
Date Type of change Capital increase (NOK)
Price per share (NOK) New share capital (NOK) Shares outstanding
31 May 2006 Incorporation 3,000,000 1 3,000,000 3,000,000
21 March 2011 Debt to equity conversion 33,570,000 N/A (no new shares) 36,570,000 3,000,000
21 March 2011 Contribution in kind 59,430,000 N/A (no new shares) 96,000,000 3,000,000
21 March 2011 Share split (1:32) 0 N/A 96,000,000 96,000,000
29 April 2011 Share issue (IPO) 240,625,000 8 336,625,000 336,625,000
As follows from the table above, more than 10% of the share capital has been contributed as contribution in kind.
10.2 Major shareholdersThe following table sets forth information concerning the two largest registered holders of the Company’s Shares as registered in the VPS on 9February 2012. Except as set forth below, the Company is not aware of any shareholder owning 5% or more of the Company’s outstanding Shares.
Name of Shareholder Number of Shares Percentage of Shares
Seadrill Ltd 96,000,000 28.52%
Skagen Vekst 17,599,671 5.23%
Other than as described above, the Company is not aware of any shareholder directly or indirectly controlling the Company. The Company’s major shareholders do not have voting rights different from those of other holders of the Company’s Shares.
Shareholders owning 5% or more of the Shares in the Company have an interest in the Company’s share capital which is notifiable pursuant to the Norwegian Securities Trading Act.
10.3 Authorisations to issue new sharesIn an extraordinary general meeting of the Company on 9 December 2012, the Board of Directors was granted an authorisation to increase the Company's share capital by issuing of up to 10,000,000 new Shares, each with a par value of NOK 1. The authorisation may only be used for fulfilment of the Company's long term incentive program.
10.4 Other financial instrumentsAs described in section 6.5 above, the Company has granted a total of 9,800,000 options to senior management members and other employees as part of the Company's long term incentive plans. Other than this, neither Sevan Drilling nor any of its subsidiaries has issued any options, warrants, convertible loans or other instruments that would entitle a holder of any such instrument to subscribe for any shares in Sevan Drilling or its subsidiaries.
10.5 Shareholder rightsSevan Drilling has one class of shares in issue, and in accordance with the Norwegian Public Limited Liability Companies Act, all shares in that class provide equal rights in Sevan Drilling.
10.6 The Articles of AssociationSevan Drilling’s Articles of Association are incorporated hereto by reference (see section 13.3). Below is a summary of provisions of the Articles of Association. The Articles of Association of the Company do not place more stringent conditions for the change of rights of holders than those required by the Norwegian Public Limited Liability Companies Act, see section 14.7 “Voting rights– Amendments to the Articles of Association and other resolutions”.
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Objective of Sevan Drilling
The objective of Sevan Drilling is, on its own, or through participation in or together with other companies, to own and operate drilling units as well as to undertake thereto associated activities. Sevan Drilling’s objective can be found in Article 3 of its Articles of Association, or in Article 3 of the articles included in the Memorandum of Association.
Registered office
Sevan Drilling’s registered office is in the municipality of Oslo, Norway.
Share capital and par value
Sevan Drilling’s share capital is NOK 336,625,000 divided into NOK 336,625,000 Shares, each Share with a par value of NOK1.00.
Board of Directors and nomination committee
According to article 5 of the Articles of Association of Sevan Drilling, the Company’s Board of Directors shall consist of a minimum of three and a maximum of nine members. According to article 6 of the Articles of Association of Sevan Drilling, the Company shall have a nomination committee consisting of minimum three members.
Restrictions on transfer of Shares
The Articles of Association do not provide for any restrictions, or a right of first refusal, on transfer of Shares. Share transfers are not subject to approval by the Board of Directors.
General meetings
Documents which deal with matters that are to be handled at the general meeting of Sevan Drilling’s shareholders are not required to be sent to the shareholders, provided that such documents have been made available on the internet site of the Company. A shareholder may in any case require the submission of documents which deal with matters that are to be handled at the general meeting of Sevan Drilling’s shareholders.
10.7 Certain aspects of Norwegian corporate law
General meetings
In accordance with Norwegian law, the annual general meeting of Sevan Drilling’s shareholders is required to be held each year on or prior to 30 June. Norwegian law requires that written notice of general meetings setting forth inter alia the time, date and agenda of the meeting be sent to all shareholders whose addresses are known at least three weeks prior to the date of the meeting. A shareholder may vote at the general meeting either in person or by proxy. Although Norwegian law does not require Sevan Drilling to send proxy forms to its shareholders for general meetings, SevanDrilling plans to include a proxy form with notices of general meetings. All of Sevan Drilling’s shareholders who are registered in the register of shareholders maintained with the VPS as of the date of the general meeting, or who have otherwise reported and documented ownership to Shares, are entitled to participate at general meetings, without any requirement of pre-registration. Sevan Drilling’s Articles of Association do not currently include any provisions requiring shareholders to pre-register in order to participate at general meetings, however the Company may include such requirements in notices for general meetings. The deadline for pre-registration may not be more than five days prior to the relevant general meeting.
Apart from the annual general meeting, extraordinary general meetings of shareholders may be held if the Board of Directors considers it necessary. An extraordinary general meeting of shareholders must also be convened for the consideration of specific matters at the written request of the Company’s auditor or of shareholders representing a total of at least five % of Sevan Drilling’s share capital. The requirements for notice and admission to the annual general meeting of Sevan Drilling’s shareholders also apply for extraordinary general meetings of shareholders.
Voting rights – Amendments to the Articles of Association and other resolutions
Each of Sevan Drilling’s Shares carries one vote. In general, decisions that shareholders are entitled to make under Norwegian law or Sevan Drilling’s Articles of Association may be made by a simple majority of the votes cast. In the case of elections, the persons who obtain the greatest number of votes cast are elected. However, as required under Norwegian law, certain decisions, including resolutions to waive preferential rights to subscribe in connection with any share issue in Sevan Drilling, to approve a merger or demerger of Sevan Drilling, to amend the Articles of Association, to authorizean increase or reduction in the share capital, to authorize an issuance of convertible loans or warrants by Sevan Drilling or to authorize the Board of Directors to purchase Shares and hold them as treasury shares or to dissolve Sevan Drilling, must receive the approval of at least two-thirds of the aggregate number of votes cast as well as at least two-thirds of the share capital represented at a general meeting of Sevan Drilling’s shareholders. Norwegian law further requires that certain decisions, which have the effect of substantially altering the rights and preferences of any shares or class of shares, receive the approval by the holders of such shares or class of shares as well as the majority required for amending the Articles of Association.
Decisions that (i) would reduce the rights of some or all of Sevan Drilling’s shareholders in respect of dividend payments or other rights to assets or (ii) restrict the transferability of the Shares, require that at least 90 % of the share capital represented at the general meeting of Sevan Drilling’s shareholders in question vote in favour of the resolution, as well as the majority required for amending the Articles of Association. Certain types of
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changes in the rights of shareholders require the consent of all shareholders affected thereby as well as the majority required for amending the Articles of Association.
In general, only a shareholder registered in the VPS is entitled to vote for such Shares. Beneficial owners of Sevan Drilling’s Shares that are registered in the name of a nominee are generally not entitled to vote under Norwegian law, nor is any person who is designated in the VPS register as the holder of such Shares as nominees. Investors should note that there are varying opinions as to the interpretation of the right to vote on nominee registered shares.
There are no quorum requirements that apply to the general meetings of the shareholders of Sevan Drilling.
Additional issuances and preferential rights
If Sevan Drilling issues any new Shares, including bonus share issues, Sevan Drilling’s Articles of Association must be amended, which requires the same vote as other amendments to its Articles of Association. In addition, under Norwegian law, Sevan Drilling’s shareholders have a preferential right to subscribe for new Shares issued by Sevan Drilling. Preferential rights may be derogated from by resolution in a general meeting of Sevan Drilling’s shareholders passed by the same vote required to approve an amendment of the Articles of Association. A derogation from the shareholders’ preferential rights in respect of bonus issues requires the approval of all outstanding Shares.
At a general meeting Sevan Drilling’s shareholders may, by the same vote as is required for amending the Articles of Association, authorize the Board of Directors to issue new Shares, and to derogate from the preferential rights of shareholders in connection with such issuances. Such authorisation may be effective for a maximum of two years, and the par value of the Shares to be issued may not exceed 50 % of the registered nominal share capital when the authorisation is registered with the Norwegian Register of Business Enterprises.
Under Norwegian law, Sevan Drilling may increase its share capital by a bonus share issue, subject to approval by Sevan Drilling’s shareholders, by transfer from Sevan Drilling’s distributable equity or from Sevan Drilling’s share premium reserve and thus the share capital increase does not require any payment of a subscription price by the shareholders. Any bonus issues may be effected either by issuing new shares to Sevan Drilling’s existing shareholders or by increasing the par value of Sevan Drilling’s outstanding Shares.
Issuance of new Shares to shareholders who are citizens or residents of the United States upon the exercise of preferential rights, may require SevanDrilling to file a registration statement in the United States under United States securities laws. Should Sevan Drilling in such a situation decide not to file a registration statement, Sevan Drilling’s US shareholders may not be able to exercise their preferential rights. If a US shareholder is ineligible to participate in a rights offering, such shareholder would not receive the rights at all and the rights would be sold on the shareholder’s behalf by SevanDrilling.
Minority rights
Norwegian law sets forth a number of protections for minority shareholders of Sevan Drilling, including but not limited to those described in this paragraph and the description of general meetings as set out above. Any of Sevan Drilling’s shareholders may petition Norwegian courts to have a decision of the Board of Directors or Sevan Drilling’s shareholders made at the general meeting declared invalid on the grounds that it unreasonably favours certain shareholders or third parties to the detriment of other shareholders or Sevan Drilling itself. Sevan Drilling’s shareholders may require the courts to dissolve Sevan Drilling as a result of such decisions. Minority shareholders holding five % or more of Sevan Drilling’s share capital have a right to demand in writing that Sevan Drilling’s Board of Directors convene an extraordinary general meeting of Sevan Drilling’s shareholders to discuss or resolve specific matters. In addition, any of Sevan Drilling’s shareholders may in writing demand that Sevan Drilling place an item on the agenda for any general meeting as long as Sevan Drilling is notified in time for such item to be included in the notice of the meeting. If the notice has been issued when such a written demand is presented, a renewed notice must be issued if at least two weeks remain before the general meeting is to be held.
Rights of redemption and repurchase of Shares
The share capital of Sevan Drilling may be reduced by reducing the par value of the Shares or by cancelling Shares. Such a decision requires the approval of at least two-thirds of the aggregate number of votes cast and at least two-thirds of the share capital represented at a general meeting of Sevan Drilling’s shareholders. Redemption of individual Shares requires the consent of the holders of the Shares to be redeemed.
Sevan Drilling may purchase its own Shares provided that the Board of Directors has been granted an authorisation to do so by a general meeting of Sevan Drilling’s shareholders with the approval of at least two-thirds of the aggregate number of votes cast and at least two-thirds of the share capital represented at the meeting. The aggregate par value of treasury shares so acquired, and held by the Company must not exceed 10 % of Sevan Drilling’s share capital, and treasury shares may only be acquired if Sevan Drilling’s distributable equity, according to the latest adopted balance sheet, exceeds the consideration to be paid for the shares. The authorisation by the general meeting of Sevan Drilling’s shareholders cannot be granted for a period exceeding 18 months.
Shareholder vote on certain reorganisations
A decision of Sevan Drilling’s shareholders to merge with another company or to demerge requires a resolution by the general meeting of the shareholders passed by at least two-thirds of the aggregate votes cast and at least two-thirds of the share capital represented at the general meeting. A merger plan, or demerger plan signed by the Board of Directors along with certain other required documentation, would have to be sent to all SevanDrilling’s shareholders at least one month prior to the general meeting of Sevan Drilling’s shareholders to pass upon the matter.
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Liability of directors
Members of the Board of Directors owe a fiduciary duty to Sevan Drilling and its shareholders. Such fiduciary duty requires that the Board members act in the best interests of the Company when exercising their functions and exercise a general duty of loyalty and care towards the Company. Their principal task is to safeguard the interests of the Company.
Members of the Board of Directors may each be held liable for any damage they negligently or wilfully cause the Company. Norwegian law permits the general meeting of Sevan Drilling’s shareholders to discharge any such person from liability, but such discharge is not binding on the Company if substantially correct and complete information was not provided at the general meeting of Sevan Drilling’s shareholders passing upon the matter. If a resolution to discharge Sevan Drilling’s directors from liability or not to pursue claims against such a person has been passed by a general meeting of Sevan Drilling’s shareholders with a smaller majority than that required to amend Sevan Drilling’s Articles of Association, shareholders representing more than 10 % of the share capital or, if there are more than 100 shareholders, more than 10 % of the shareholders may pursue the claim on SevanDrilling’s behalf and in its name. The cost of any such action is not the Company’s responsibility but can be recovered from any proceeds the Company receives as a result of the action. If the decision to discharge any of Sevan Drilling’s directors from liability or not to pursue claims against SevanDrilling’s directors is made by such a majority as is necessary to amend the Articles of Association, the minority shareholders of Sevan Drilling cannot pursue such claim in Sevan Drilling’s name.
Indemnification of directors
Neither Norwegian law nor the Articles of Association contains any provision concerning indemnification by Sevan Drilling of the Board of Directors. Sevan Drilling is permitted to purchase, and have purchased, insurance to cover Sevan Drilling’s directors against certain liabilities that they may incur in their capacity as such.
Distribution of assets on liquidation
Under Norwegian law, Sevan Drilling may be wound-up by a resolution of Sevan Drilling’s shareholders at the general meeting passed by at least two-thirds of the aggregate votes cast and at least two-thirds of the share capital represented at the meeting. In the event of liquidation, the Shares rank equally in the event of a return on capital by Sevan Drilling.
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11 SECURITIES TRADING IN NORWAY11.1 Trading and settlement
Trading of equities on Oslo Børs is carried out in the electronic trading system TradElect. This trading system is in use by all markets operated by the London Stock Exchange as well as by the Borsa Italiana and the Johannesburg Stock Exchange.
Official trading on Oslo Børs takes place between 09:00 hours (CET) and 17:30 hours (CET) each trading day, with pre-trade period between 08:15 hours (CET) and 09:00 hours (CET), a closing auction from 17:20 hours (CET) to 17:25 hours (CET) and a post-trade period from 17:25 hours (CET) to 18:15 hours (CET).
The settlement period for trading on Oslo Børs is three trading days (T+3).
Investment services in Norway may only be provided by Norwegian investment firms holding a license under the Securities Trading Act, branches of investment firms from an EEA member state or investment firms from outside the EEA that have been licensed to operate in Norway. Investment firms in an EEA member state may also provide cross-border investment services into Norway.
It is possible for investment firms to undertake market-making activities in shares listed in Norway if they have a license to this effect under the Norwegian Securities Trading Act, or in the case of investment firms in an EEA member state, a license to carry out market-making activities in their home jurisdiction. Such market-making activities will be governed by the regulations of the Norwegian Securities Trading Act relating to brokers’ trading for their own account. Such market-making activities do not as such require notification to the Norwegian FSA or Oslo Børs except for the general obligation of investment firms that are members of Oslo Børs to report all trades in stock exchange listed securities.
11.2 Information, control and surveillanceUnder Norwegian law, Oslo Børs is required to perform a number of surveillance and control functions. The Surveillance and Corporate Control unit of Oslo Børs monitors all market activity on a continuous basis. Market surveillance systems are largely automated, promptly warning department personnel of abnormal market developments.
Under Norwegian law, a company that is listed on a Norwegian regulated market, or is subject to the application for listing on such market, must promptly release any inside information directly concerning the company (that is, precise information about financial instruments, the issuer thereof or other matters that are likely to have a significant effect on the price of the relevant financial instruments or related financial instruments, and that are not publicly available or commonly known in the market). A company may, however, delay the release of such information in order not to prejudice its legitimate interests, provided that it is able to ensure the confidentiality of the information and that the delayed release would not be likely to mislead the public. Oslo Børs may levy fines on companies violating these requirements.
11.3 The VPS and transfer of sharesThe Company’s shareholder register is operated through the VPS. The VPS is the Norwegian paperless centralised securities register. It is a computerised bookkeeping system in which the ownership of, and all transactions relating to, Norwegian listed shares must be recorded. The VPS and Oslo Børs are both wholly owned by Oslo Børs VPS Holding ASA.
All transactions relating to securities registered with the VPS are made through computerised book entries. No physical share certificates are, or may be, issued. The VPS confirms each entry by sending a transcript to the registered shareholder irrespective of any beneficial ownership. To give effect to such entries, the individual shareholder must establish a share account with a Norwegian account agent. Norwegian banks, Norges Bank (that is, Norway’s central bank), authorized securities brokers in Norway and Norwegian branches of credit institutions established within the EEA are allowed to act as account agents.
The entry of a transaction in the VPS is prima facie evidence in determining the legal rights of parties as against the issuing company or any third party claiming an interest in the given security. A transferee or assignee of shares may not exercise the rights of a shareholder with respect to such shares unless such transferee or assignee has registered such shareholding or has reported and shown evidence of such share acquisition, and the acquisition is not prevented by law, the relevant company’s articles of association or otherwise.
The VPS is liable for any loss suffered as a result of faulty registration or an amendment to, or deletion of, rights in respect of registered securities unless the error is caused by matters outside the VPS’ control which the VPS could not reasonably be expected to avoid or overcome the consequences of. Damages payable by the VPS may, however, be reduced in the event of contributory negligence by the aggrieved party.
The VPS must provide information to the Norwegian FSA on an ongoing basis, as well as any information that the Norwegian FSA requests. Further, Norwegian tax authorities may require certain information from the VPS regarding any individual’s holdings of securities, including information about dividends and interest payments.
11.4 Shareholder registerUnder Norwegian law, shares are registered in the name of the beneficial owner of the shares. As a general rule, there are no arrangements for nominee registration and Norwegian shareholders are not allowed to register their shares in VPS through a nominee. However, foreign shareholders may register their shares in the VPS in the name of a nominee (bank or other nominee) approved by the Norwegian FSA. An approved and registered nominee has a duty to provide information on demand about beneficial shareholders to the company and to the Norwegian authorities. In case of registration by
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nominees, the registration in the VPS must show that the registered owner is a nominee. A registered nominee has the right to receive dividends and other distributions, but cannot vote in general meetings on behalf of the beneficial owners.
11.5 Foreign investment in Norwegian sharesForeign investors may trade shares listed on Oslo Børs through any broker that is a member of Oslo Børs, whether Norwegian or foreign.
11.6 Disclosure obligationsIf a person’s, entity’s or consolidated group’s proportion of the total issued shares and/or rights to shares in a company listed on a regulated market in Norway (with Norway as its home state, which will be the case for the Company) reaches, exceeds or falls below the respective thresholds of 5%, 10%, 15%, 20%, 25%, 1/3, 50%, 2/3 or 90% of the share capital or the voting rights of that company, the person, entity or group in question has an obligation under the Norwegian Securities Trading Act to notify Oslo Børs and the issuer immediately. The same applies if the disclosure thresholds are passed due to other circumstances, such as a change in the company’s share capital.
11.7 Insider tradingAccording to Norwegian law, subscription for, purchase, sale or exchange of financial instruments that are listed, or subject to the application for listing, on a Norwegian regulated market, or incitement to such dispositions, must not be undertaken by anyone who has inside information, as defined in section 3-2 of the Norwegian Securities Trading Act. The same applies to the entry into, purchase, sale or exchange of options or futures/forward contracts or equivalent rights whose value is connected to such financial instruments or incitement to such dispositions.
11.8 Mandatory offer requirementThe Norwegian Securities Trading Act requires any person, entity or consolidated group that becomes the owner of shares representing more than one-third of the voting rights of a Norwegian company listed on a Norwegian regulated market to, within four weeks, make an unconditional general offer for the purchase of the remaining shares in that company. A mandatory offer obligation may also be triggered where a party acquires the right to become the owner of shares that, together with the party’s own shareholding, represent more than one-third of the voting rights in the company and Oslo Børs decides that this is regarded as an effective acquisition of the shares in question.
The mandatory offer obligation ceases to apply if the person, entity or consolidated group sells the portion of the shares that exceeds the relevant threshold within four weeks of the date on which the mandatory offer obligation was triggered.
When a mandatory offer obligation is triggered, the person subject to the obligation is required to immediately notify Oslo Børs and the company in question accordingly. The notification is required to state whether an offer will be made to acquire the remaining shares in the company or whether a sale will take place. As a rule, a notification to the effect that an offer will be made cannot be retracted. The offer and the offer document required are subject to approval by Oslo Børs before the offer is submitted to the shareholders or made public.
The offer price per share must be at least as high as the highest price paid or agreed by the offeror for the shares in the six-month period prior to the date the threshold was exceeded. However, if it is clear that that the market price was higher when the mandatory offer obligation was triggered, the Norwegian Securities Trading Act states that the offer price shall be at least as high as the market price. If the acquirer acquires or agrees to acquire additional shares at a higher price prior to the expiration of the mandatory offer period, the acquirer is obliged to restate its offer at such higher price. A mandatory offer must be in cash or contain a cash alternative at least equivalent to any other consideration offered.
In case of failure to make a mandatory offer or to sell the portion of the shares that exceeds the relevant threshold within four weeks, Oslo Børs may force the acquirer to sell the shares exceeding the threshold by public auction. Moreover, a shareholder who fails to make an offer may not, as long as the mandatory offer obligation remains in force, exercise rights in the company, such as voting in a general meeting of the Company’s shareholders, without the consent of a majority of the remaining shareholders. The shareholder may, however, exercise his/her/its rights to dividends and pre-emption rights in the event of a share capital increase. If the shareholder neglects his/her/its duty to make a mandatory offer, Oslo Børs may impose a cumulative daily fine that runs until the circumstance has been rectified.
Any person, entity or consolidated group that owns shares representing more than one-third of the votes in a Norwegian company listed on a Norwegian regulated market is obliged to make an offer to purchase the remaining shares of the company (repeated offer obligation) if the person entity or consolidated group through acquisition becomes the owner of shares representing 40%, or more of the votes in the company. The same applies correspondingly if the person entity or consolidated group through acquisition becomes the owner of shares representing 50% or more of the votes in the company. The mandatory offer obligation ceases to apply if the person, entity or consolidated group sells the portion of the shares which exceeds the relevant threshold within four weeks of the date on which the mandatory offer obligation was triggered.
Any person, entity or consolidated group that has passed any the above mentioned threshold in such a way as not to trigger the mandatory bid obligation, and has therefore not previously made an offer for the remaining shares in the company in accordance with the mandatory offer rules is, as a main rule, obliged to make a mandatory offer in the event of a subsequent acquisition of shares in the company.
11.9 Compulsory acquisitionPursuant to the Norwegian Public Limited Liability Companies Act and the Norwegian Securities Trading Act, a shareholder who, directly or through subsidiaries, acquires shares representing more than 90% of the total number of issued shares in a Norwegian public limited liability company, as well as more than 90% of the total voting rights, has a right, and each remaining minority shareholder of the company has a right to require such majority
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shareholder, to effect a compulsory acquisition for cash of the shares not already owned by such majority shareholder. Through such compulsory acquisition the majority shareholder becomes the owner of the remaining shares with immediate effect.
If a shareholder acquires shares representing more than 90% of the total number of issued shares, corresponding the total voting rights, through a voluntary offer in accordance with the Norwegian Securities Trading Act, a compulsory acquisition can, subject to the following conditions, be carried out without such shareholder being obliged to make a mandatory offer: (i) the compulsory acquisition is commenced no later than four weeks after the acquisition of shares through the voluntary offer, (ii) the price offered per share is equal to or higher than what the offer price would have been in a mandatory offer, and (iii) the settlement is guaranteed by a financial institution authorized to provide such guarantees in Norway.
A majority shareholder who effects a compulsory acquisition is required to offer the minority shareholders a specific price per share, the determination of which is at the discretion of the majority shareholder. However, where the offeror, after making a mandatory or voluntary offer, has acquired more than 90% of the voting shares of a company and a corresponding proportion of the votes that can be cast at the general meeting, and the offeror pursuant to section 4-25 of the Public Limited Liability Companies Act completes a compulsory acquisition of the remaining shares within three months after the expiry of the offer period, it follows from the Norwegian Securities Trading Act that the redemption price shall be determined on the basis of the offer price for the mandatory /voluntary offer unless specific reasons indicating another price.
Should any minority shareholder not accept the offered price, such minority shareholder may, within a specified deadline of not less than two months, request that the price be set by a Norwegian court. The cost of such court procedure will, as a general rule, be the responsibility of the majority shareholder, and the relevant court will have full discretion in determining the consideration to be paid to the minority shareholder as a result of the compulsory acquisition.
Absent a request for a Norwegian court to set the price or any other objection to the price being offered, the minority shareholders would be deemed to have accepted the offered price after the expiry of the specified deadline.
11.10 Foreign exchange controlsThere are currently no foreign exchange control restrictions in Norway that would potentially restrict the payment of dividends to a shareholder outside Norway, and there are currently no restrictions that would affect the right of shareholders of a Norwegian company who are not residents in Norway to dispose of their shares and receive the proceeds from a disposal outside Norway. There is no maximum transferable amount either to or from Norway, although transferring banks are required to submit reports on foreign currency exchange transactions into and out of Norway into a central data register maintained by the Norwegian customs and excise authorities. The Norwegian police, tax authorities, customs and excise authorities, the National Insurance Administration and the Norwegian FSA have electronic access to the data in this register.
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12 TAXATIONBelow is a summary of certain Norwegian tax matters related to the purchase, holding and disposal of shares. The summary is based on Norwegian laws, rules and regulations applicable as of the date of this Prospectus, and is subject to any changes in law occurring after such date. Such changes could possibly be made on a retroactive basis. The summary does not address foreign tax laws. The summary is of a general nature and does not purport to be a comprehensive description of all the Norwegian tax considerations that may be relevant for a decision to acquire, own or dispose of the shares. Shareholders who wish to clarify their own tax situation should consult with and rely upon their own tax advisers. Shareholders resident in jurisdictions other than Norway should consult with and rely upon local tax advisers with respect to the tax position in their country of residence. The statements only apply to shareholders who are beneficial owners of the shares.
12.1 Tax consequences related to the ownership and realization of shares - Norwegian ShareholdersThis section summarizes certain Norwegian tax rules relevant to shareholders that are residents of Norway for Norwegian tax purposes (“Norwegian Shareholders”).
Taxation of repayments of paid-in capital
Repayments of paid-in capital for tax purposes that are equally distributed on all shares are not considered taxable income in Norway. Paid-in capital for tax purposes is determined on a share-by-share basis, and may differ between the shares. Repayments of paid-in capital on a share exceeding the paid-in capital for tax purposes on the same share should be taxed as dividends, see section 16.1.below.
Repayments of paid-in capital for tax purposes on a share should reduce Norwegian Shareholders’ cost price on the same share.
Taxation of dividends
Norwegian Personal Shareholders
Dividends received by shareholders who are individuals tax-resident in Norway (“Norwegian Personal Shareholders”) from a limited liability company tax-resident in Norway are subject to tax in Norway as general income at a flat rate of 28%.
Norwegian Personal Shareholders may be entitled to deduct a calculated allowance when calculating their taxable dividend income. The allowance is calculated on a share-by-share basis, and the allowance for each share is equal to the cost price of the share, multiplied by a risk-free interest rate. The allowance is calculated for each calendar year, and is allocated solely to Norwegian Personal Shareholders holding shares at the expiration of the relevant calendar year. Norwegian Personal Shareholders who transfer shares will thus not be entitled to deduct any calculated allowance related to the year of transfer. Any part of the calculated allowance one year exceeding the dividend distributed on the share can be forwarded and deducted when calculating taxable dividend income on the same share a later year. Furthermore, unused allowance can be added to the cost price of the share and included in the basis for calculating the allowance on the same share the following years.
Norwegian Corporate Shareholders
Dividends received by shareholders that are limited liability companies or similar entities tax-resident in Norway (“Norwegian Corporate Shareholders”) from a limited liability company tax-resident in Norway are comprised by the participation exemption method.
Three % of the net annual income comprised by the participation exemption method is to be entered as general income and taxed at the flat rate of 28%. Losses on shares may reduce the net annual income comprised by the participation exemption method to zero, but cannot be forwarded nor reduce taxable income from other sources.
Norwegian Shareholders holding shares through partnerships
Partnerships are as a general rule transparent for Norwegian tax purposes. Taxation occurs at partner level, and each partner is taxed on a current basis for its proportional share of the net income generated by the partnership at a rate of 28%, regardless of whether such income is distributed to the partners or not.
For partnerships, dividends received on shares from a limited liability company tax-resident in Norway are comprised by the participation exemption method. Three per cent of the net annual income comprised by the participation exemption method is to be entered as general income and taxed at the flat rate of 28%,see the description of tax issues related to Norwegian Corporate Shareholders above.
For partners who are Norwegian Personal Shareholders, further taxation occurs when the dividends received are distributed from the partnership to such partners. Such distributions will be taxed as general income at a rate of 28%. The Norwegian Personal Shareholders will be entitled to deduct a calculated allowance when calculating their taxable income from the partnership. Norwegian Corporate Shareholders holding shares through a partnership are exempt from further taxation when the dividends received are distributed by the partnership.
Taxation of capital gains on realization of shares
Norwegian Personal Shareholders
Sale, redemption or other disposal of shares is considered a realization for Norwegian tax purposes. A capital gain or loss generated by a Norwegian personal shareholder through a disposal of shares is taxable or tax deductible in Norway. Such capital gain or loss is included in or deducted from the
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basis for computation of general income in the year of realization. General income is taxable at a rate of 28%. Gain is subject to tax and loss is tax deductible irrespective of the duration of the ownership and the number of shares disposed of.
The capital gain is calculated as the consideration received less the cost price of the share, including costs incurred in relation to the acquisition or realization of the share. From this capital gain, Norwegian Personal Shareholders may be entitled to deduct a calculated allowance when calculating their taxable income, provided that the allowance has not already been used to reduce taxable dividend income, see above. The allowance for each share will be equal to the cost price of the share multiplied by a determined risk-free interest rate. The allowance is calculated per each calendar year, and is allocated solely to Norwegian Personal Shareholders holding shares at the expiration of the relevant calendar year. Norwegian Personal Shareholders who transfer shares will thus not be entitled to deduct any calculated allowance related to the year of transfer. The unused allowance may only be deducted in order to reduce a taxable gain on the same share, and may not be deducted in order to increase or produce a deductible loss. Further, unused allowance may not be set off against gains from realization of other shares.
If the shareholder owns shares acquired at different points in time, the shares that were acquired first will be regarded as the first to be disposed of, on a first-in first-out basis.
Special rules apply for Norwegian Personal Shareholders who cease to be tax-resident in Norway.
Norwegian Corporate Shareholders
For Norwegian Corporate Shareholders a capital gain or loss on realization of shares in a limited liability company tax-resident in Norway are comprised by the participation exemption method.
Three per cent of the net annual income comprised by the participation exemption method shall be entered as general income and taxed at a rate of 28%. Losses on shares may reduce the net annual income comprised by the participation exemption method to zero, but cannot be forwarded nor reduce taxable income from other sources.
If the shareholder owns shares acquired at different points in time, the shares that were acquired first will be regarded as the first to be disposed of, on a first-in first-out basis.
Special rules apply for Norwegian Corporate Shareholders that cease to be tax-resident in Norway.
Norwegian Shareholders holding shares through partnerships
Partnerships are as a general rule transparent for Norwegian tax purposes. Taxation occurs at partner level, and each partner is taxed on a current basis for its proportional share of the net income generated by the partnership at a rate of 28%, regardless of whether such income is distributed to the partners or not.
For partnerships, realization of shares in a limited liability company tax-resident in Norway is comprised by the participation exemption method. Three per cent of the net annual income comprised by the participation exemption method is to be entered as general income, see the description of tax issues related to Norwegian Corporate Shareholders above.
If the shares are acquired at different points in time, the shares that were acquired first will be regarded as the first to be disposed of, on a first-in first-out basis.
For partners who are Norwegian Personal Shareholders, further taxation occurs when the capital gains received are distributed from the partnership to such partners. Such distributions will be taxed as general income at a rate of 28%. The Norwegian Personal Shareholders will be entitled to deduct a calculated allowance when calculating their taxable income from the partnership. Norwegian Corporate Shareholders holding shares through a partnership are exempt from further taxation when the capital gains received are distributed by the partnership
Net wealth tax
For Norwegian Personal Shareholders, shares will form part of their basis for calculation of Norwegian net wealth tax. Listed shares are valued at 100% of their quoted value as of 1 January in the assessment year (the year following the income year). The current marginal net wealth tax rate is 1.1%.
Norwegian Corporate Shareholders are exempt from Norwegian net wealth tax.
12.2 Tax consequences related to the ownership and realization of shares Foreign ShareholdersThis section summarizes certain Norwegian tax rules relevant to shareholders that are not resident in Norway for Norwegian tax purposes (“Foreign Shareholders”). The potential tax liabilities for foreign shareholders in the jurisdiction where they are resident for tax purposes or other jurisdictions will depend on tax rules applicable in the relevant jurisdiction.
Taxation of repayments of paid-in capital
Repayments of paid-in capital for tax purposes are not considered as dividends in Norway. Paid-in capital for tax purposes is determined on a share-by-share basis, and may differ between the shares. Repayment of paid-in capital on a share exceeding the paid-in capital for tax purposes on the same share should be taxed as dividends, see section16.2 below.
Repayments of paid-in capital for tax purposes on a share to Foreign Shareholders should not be subject to withholding tax in Norway.
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Taxation of dividends
Dividends paid by Norwegian limited liability companies and similar entities to Foreign Shareholders, both corporate and individuals, are as a general rule subject to withholding tax in Norway at the regular rate of 25%, unless otherwise provided for in an applicable income tax treaty or the recipient is covered by the specific regulations for corporate shareholders tax-resident within the European Economic Area (EEA). The withholding obligation lies with the company distributing the dividends.
Foreign Shareholders who are individuals (“Foreign Personal Shareholders”) tax-resident within the EEA for tax purposes are subject to Norwegian withholding tax on dividends received from Norwegian companies at the regular rate or at a reduced rate according to an applicable tax treaty. However, if withholding tax at the regular rate is deducted, such shareholders may apply individually to the tax authorities for a refund of an amount corresponding to the calculated tax-free allowance on each individual share (see above). Foreign Personal Shareholders tax-resident within the EEA may carry forward any unused allowance, if the allowance exceeds the dividends.
Foreign Shareholders that are corporate entities tax-resident within the EEA for tax purposes are exempt from Norwegian withholding tax on dividends distributed from Norwegian limited liability companies, provided that the Foreign Shareholder in fact is genuinely established within the EEA and manages a genuine business within the EEA.
In accordance with the present administrative system in Norway, the Norwegian distributing company will normally deduct withholding tax at the regular rate or reduced rate according to an applicable tax treaty, based on the information registered with the VPS with regard to the tax- residence of the Foreign Shareholder. Dividends paid to Foreign Shareholders in respect of nominee- registered shares will be subject to withholding tax at the general rate of 25% unless the nominee, by agreeing to provide certain information regarding beneficial owners, has obtained approval for a reduced rate from the Central Office for Foreign Tax Affairs (Nw. Sentralskattekontoret for utenlandssaker).
Foreign Shareholders that are exempt from withholding tax and Foreign Shareholders who have suffered a higher withholding tax than set out by an applicable tax treaty can apply for a refund of any excess withholding tax deducted.
If a Foreign Shareholder is engaged in business activities in Norway, and the shares are effectively connected with such business activities, dividends distributed to such shareholder will generally be subject to the same taxation as that of Norwegian Shareholders, as described above.
Foreign Shareholders should consult their own advisers regarding the availability of treaty benefits in respect of dividend payments, including the ability to effectively claim refunds of withholding tax.
Taxation of capital gains on realization of shares
As a general rule, capital gains generated by Foreign Shareholders are not taxable in Norway.
If a Foreign Shareholder is engaged in business activities in Norway, and the shares are effectively connected with such business activities, capital gains realized by such shareholder will generally be subject to the same taxation as that of Norwegian Shareholders, cf the description of tax issues related to Norwegian Shareholders above.
Net wealth tax
Foreign Shareholders are not subject to net wealth tax in Norway on shares unless the shareholder is an individual who is engaged in business activities in Norway, and the shares are effectively connected with such business activities.
Inheritance tax
When shares are transferred either through inheritance or as a gift, such transfer may give rise to inheritance tax in Norway if the decedent, at the time of death, or the donor, at the time of the gift, is a resident or citizen of Norway, or if the shares are effectively connected with a business carried out through a permanent establishment in Norway. However, in the case of inheritance, if the decedent was a citizen but not a resident of Norway, Norwegian inheritance tax will not be levied if inheritance tax or a similar tax is levied by the decedent’s country of residence.
VAT and transfer taxes
Norway does not impose VAT, stamp duty or similar taxes on the transfer of shares.
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13 ADDITIONAL INFORMATION13.1 Litigation and disputes
From time to time, the Company and other companies in the Group may be involved in litigation, disputes and other legal proceedings arising in the normal course of its business. No Group member is at the date of this Prospectus, nor has any Group member during the course of the preceding twelve months been, involved in any legal, governmental or arbitration proceedings which may have, or have had in the recent past, any -, significant effect on the Group’s financial position or profitability. The Company is not aware of any such proceedings which are pending or threatened.
13.2 Documents on display Copies of the following documents will be available for inspection at the Company’s registered office during normal business hours from Monday to Friday each week (except public holidays) for a period of twelve months from the date of this Prospectus:
the Articles and Memorandum of Association of the Company;
the audited Combined Financial Statements for Sevan Drilling Group, and the audited financial statements of Sevan Drilling ASA as of and for years ended 31 December 2010, 2009 and 2008 and the unaudited interim financial statements for the Sevan Drilling ASA group for the three first quarters of 2011;
the annual accounts of each of the Company's subsidiaries for the years 2010 and 2009 (to the extent such exist);
all reports included or referred to in this Prospectus; and
this Prospectus.
13.3 Incorporation by referenceThe following documents have been incorporated hereto by reference:
Reference Section in Prospectus
Incorporated by reference Website
The Company’s restated third quarter 2011 interim financial statements.
7 and 8 The consolidated condensed financial information in the Company’s restated thirdquarter report for 2011, including condensed consolidated statement of income (page 3), statement of comprehensive income (page 3), condensed consolidated balance sheet (page 4), changes in equity (page 5) and statement of cash flow (page 5).
www.sevandrilling.com
The Company’s second quarter 2011 interim financial statements.
7 and 8 The consolidated condensed financial information in the Company’s second quarter report for 2011, including statement of income (page 6), statement of comprehensive income (page 6), condensed consolidated balance sheet (page 7), changes in equity (page 8) and statement of cash flow (page 8).
www.sevandrilling.com
The Company’s first quarter 2011 interim financial statements.
7 and 8 The consolidated condensed financial information in the Company’s first quarter report for 2011, including statement of income (page 4), statement of comprehensive income (page 4), condensed consolidated balance sheet (page 5), changes in equity (page 6) and statement of cash flow (page 6).
www.sevandrilling.com
The Sevan Drilling Group Combined Financial Statement for 2010 as included in the Company's listing prospectus, including an overview of the Company’s accounting policy, explanatory notes and auditor’s report.
11, 13 and 17 The consolidated financial information in the Sevan Drilling Group Combined Financial Statement for 2010, including combined balance sheet (page 4), combined income statement (page 5), combined statement of comprehensive income (page 6), combined statement of changes in equity (page 6), combined cash flow statement
(page 7), an overview of accounting principles (pages 9-14), explanatory notes (pages 8-30) and the auditor’s report (page 31).
The Sevan Drilling Group Combined Financial Statement for 2009 (with 2008 comparables) as included in the Company's listing prospectus, including an overview of the Company’s accounting policy and auditor’s report.
11, 13 and 17 The consolidated financial information in the Sevan Drilling Group Combined Financial Statement for 2009, including combined balance sheet (page 4), combined income statement (page 5), combined statement of comprehensive income (page 6), combined statement of changes in equity (page 6), combined cash flow statement(page 7), an overview of accounting principles (pages 9-14), explanatory notes (pages 8-30) and the auditor’s report (page 31).
www.sevandrilling.com
Articles of Association 1.6 Articles of Association. www.sevandrilling.com
13.4 Expert statementsNo expert statements have been incorporated in this Prospectus.
Capex........................................... Capital expenditures.
Combined Financial Statements .. The Company’s audited consolidated and combined financial statements as of and for the years ended 31 December 2010, 2009 and 2008 consisting of Sevan Drilling ASA Group and Sevan Drilling Invest AS Group.
Company ..................................... Sevan Drilling.
Corporate Governance Code ....... The Norwegian Code of Practice for Corporate Governance, recommended by Norsk Utvalg for Eierstyring og Selskapsledelse (NUES) of 21 October 2010.
Deepwater.................................... Water depths greater than 3,000 feet.
EIA .............................................. The US Energy Information Administration.
E&P ............................................. Exploration and production.
EBITDA ...................................... Earnings before interest, tax, depreciation and amortization.
FSMA.......................................... Financial Services and Markets Act 2000.
GAAP .......................................... Generally Accepted Accounting Practices. Specifically, US GAAP is the generally accepted accounting practices used by US companies.
Group........................................... The Company and its subsidiaries.
HSE ............................................. Health, safety and environment.
IEA .............................................. The International Energy Agency.
IAS .............................................. International Accounting Standard.
IFRS ............................................ International Financial Reporting Standards as adopted by the European Union.
Interim Third Quarter Financial Statements ...................................
The Company's unaudited consolidated financial information for the nine months and the three months ended 30 September 2011 and 30 September 2010
Member States............................. The participating member states of the European Union.
NCS ............................................. The Norwegian Continental Shelf.
NGL............................................. Natural gas liquids.
NOK ............................................ Norwegian Kroner, the lawful currency of Norway.
Norwegian FSA........................... The Norwegian Financial Supervisory Authority (Nw. Finanstilsynet).
Norwegian Public Limited Liability Companies Act..............
The Norwegian Public Limited Companies Act of 13 June 1997, no. 45 (Nw. allmennaksjeloven).
The Norwegian Securities Trading Act of 28 June 2007, no. 75 (Nw. verdipapirhandelloven).
OPEC........................................... The Organisation of Petroleum Exporting Countries.
Oslo Børs..................................... Oslo Børs ASA, or, as the context may require, Oslo Børs, a Norwegian regulated
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stock exchange operated by Oslo Børs ASA. (Eng. The Oslo Stock Exchange).
Prospectus.................................... This Prospectus, dated 10 February 2012.
Prospectus Directive.................... Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003.
Registrar Nordea Bank Norge, Issuer Services.
Relevant Member State ............... Each Member State of the European Economic Area which has implemented the Prospectus Directive.
Semi ............................................ A semi-submersible drilling rig.
Share(s) ....................................... Means the ordinary shares in the capital of the Company, each with a par value of NOK 1.00, or any one of them.
UDW ........................................... Ultra deepwater, specifying water depths greater than 7,500 feet.
US Securities Act ........................ The United States Securities Act of 1933, as amended.
USD............................................. United States Dollars.
USGS........................................... US Geological Survey.
VPS ............................................. The Norwegian Central Securities Depository (Nw. Verdipapirsentralen or VPS).
VPS account ................................ An account with VPS for the registration of holdings of securities.
