On August 22, 2014, North Atlantic Drilling (NADL) announced that the company has signed an agreement with Rosneft whereby NADL will purchase a significant portion of Rosneft’s land drilling fleet in Russia. This article discusses this deal and the implications for North Atlantic Drilling from this deal in the long-term.
North Atlantic Drilling will be acquiring approximately 150 land drilling fleet from Rosneft along with an award of new 5-year contracts with Rosneft for these units. Rosneft will receive as consideration an approximate 30% stake in North Atlantic Drilling by receiving primary shares at the price agreed upon in May 2014 of US $9.25 per share, with the balance being paid to North Atlantic Drilling in cash. Following the transaction, Seadrill (SDRL) will continue to own more than 50% in North Atlantic Drilling.
I believe that this acquisition and deal is a big step forward for North Atlantic Drilling as it gives the company an exposure to Russia. The country is the second-largest producer of dry natural gas and third-largest liquid fuels producer in the world. More importantly, Russia has vast oil and gas reserves below Russia’s Arctic seas, and it would be impossible for Russia or Russian companies to exploit these reserves without the help of Western technology.
The deal with Rosneft is certainly mutually beneficial in that sense. North Atlantic Drilling gets exposure to one of the biggest oil & gas potentials in the world, and Rosneft gets the desired technology it needs to tap the vast oil & gas reserves under the Arctic.
The deal is also secure for North Atlantic Drilling as Rosneft will provide a five-year contract for all the land drilling rigs to be acquired by the company. This means that North Atlantic Drilling will have a five-year revenue visibility with these rigs in operation. The deal can be therefore considered as a win-win situation for both the parties.
The only risk that I see in this deal is the escalating tensions between the United States and Russia. However, I believe that it should not impact the deal as both parties have not spoken about the sanctions in their initial press release. Anything of big concern would have been talked about in the press release. Further, North Atlantic Drilling will be acquiring rigs that are built in Russia, making it immune from sanctions.
From a long-term perspective, I believe that this deal will be a landmark deal for North Atlantic Drilling. The company is a $2.5 billion market capitalization entity and entry in the Russian market with partnership with Rosneft will provide more long-term growth opportunities. The big opportunity for North Atlantic Drilling will come when it (along with Rosneft) prepare to exploit oil in the Arctic. The company’s harsh environment fleet and capability will be put to use at a high day rate and can certainly provide long-term shareholder value creation.
The deal is also important in the long-term as it ensures that North Atlantic Drilling has no funding concerns. North Atlantic Drilling is now backed by Seadrill, Rosneft and the company also have a five-year revenue visibility for 150 land rigs. The growth financing position for North Atlantic Drilling is therefore secure. At an EV/EBITDA of 9.7 and a low forward PE of 11.0, North Atlantic Drilling looks attractive for investors who have a 3-5 year investment horizon.
In conclusion, the deal is a big opportunity for North Atlantic Drilling to tap one of the biggest oil & gas markets in the world. There is still a lot that needs to be disclosed about the deal, and its long-term impact on the company’s financials. However, going by the initial data, the deal will result in stock upside for North Atlantic Drilling and the company is a good buy at these levels.
I must add here that North Atlantic Drilling also offers a generous dividend yield of 9.5% and the dividend is likely to sustain and grow as well. Investors will get the double benefit of high dividends and capital appreciation with North Atlantic Drilling.