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Songa Offshore SE - Report for the first quarter 2014

May 28, 2014



ENP Newswire - 28 May 2014

Release date- 27052014 - Songa Offshore SE reports operating revenue for the fourth quarter of USD 154.7 million and an EBITDA of USD 65.3 million.

Net profit for the quarter was USD 1.4 million including the recognition of an impairment charge for Songa Mercur and Songa Venus of USD 24.7 million in the quarter corresponding to the rigs' EBITDA in the quarter and consistent with accounting practise for Assets Held for Sale.

'We have again delivered a strong quarter operationally, with an operating efficiency of 99.7%. In combination with increased cost control and reduced operating costs, we are delivering the strongest quarterly EBITDA in three years', says Songa Offshore CEO, Bjornar Iversen.

Regarding the Cat D rigs, the yard has fallen behind on the delivery schedule for all the rigs. The delivery of the first rig, Songa Equinox, is now slipping into early first quarter 2015, with one rig being delivered each subsequent quarter. As a consequence, the average USD 660 million 'ready-to-drill' cost will increase by 2-3%.

'We are clearly unsatisfied with the delays and have taken action in order to ensure that appropriate measures are put in place. The yard has now allocated 300 to 400 more staff to complete the first unit. We are monitoring the situation closely and are confident that the revised delivery schedules will be met', says Bjornar Iversen.

Financial Results

Operating revenue for the first quarter 2014 was USD 135.8 million, compared to USD 124.8 million in first quarter 2013. The main reason for the increase is the higher earnings efficiency in the first quarter 2014 compared to corresponding prior year quarter, also reflecting the first quarter 2013 Songa Trym yard stay.

Total revenue for the first quarter 2014 was USD 154.7 million, compared to USD 133.8 million in first quarter 2013. The main reason for the increase is the higher operating and reimbursable revenue in the first quarter 2014 compared to corresponding prior year quarter.

Rig operating expenses were USD 66.7 million, slightly up from USD 65.4 million in the corresponding prior year quarter. The first quarter operating cost includes USD 3.5 million in non-recurring expenses related to the completed eniVietnam contract for the Songa Mercur.

General and Administrative expenses were USD 14.1 million as compared to USD 16.2 million in the corresponding prior year quarter. The decrease is mainly explained by absence of severance payments. EBITDA was USD 65.3 million compared to USD 50.4 million in the corresponding prior year quarter. This represents an EBITDA margin of 42%, compared to 38% in the first quarter 2013, reflecting the aforementioned changes.

Depreciation expense was USD 29.7 million, USD 1.3 million lower than in the corresponding prior year quarter expense. The decrease relates to the Songa Venus and the Songa Mercur rigs for which depreciation has ceased from 1 January 2014 as a result of the 'asset held for sale' classification, partly offset by higher depreciation for the three North Sea rigs.

During the first quarter 2014 the Group recognised an impairment charge of USD 24.7 million, relating to the Songa Venus and the Songa Mercur. In line with the 'asset held for sale' accounting rules, where the net selling price of the two rigs has to be reduced by the earned EBITDA during the period that they are recognised as assets held for sale. As such the two rigs have been written down by the EBIDTA contribution earned from the rigs during the first quarter 2014.

Earnings before Interest and Tax (EBIT) was USD 10.9 million compared to USD 19.5 million in the same period in 2013, primarily reflecting the impairment of the Songa Venus and Songa Mercur rigs in the first quarter of 2014. Net finance costs in the first quarter 2014 were USD 7.4 million compared to USD 8.9 million in first quarter 2013. The decrease is primarily explained by the effects of lower interest costs following the December 2013 refinancing process.

Profit before tax for first quarter 2014 was USD 3.5 million compared to USD 10.6 million in the corresponding prior year quarter, reflecting the above fluctuations. Tax charge in first quarter 2014 was USD 2.1 million compared to a charge of USD 1.2 in first quarter 2013. Tax charges for the quarter was related to Vietnam and Singapore with USD 1.0 million and Norway with USD 1.1 million. The tax charge in Norway was of a non-cash nature, and was positively affected by a USD 3.0 million credit, from a lower 2013 actual tax assessment compared to 2013 estimated and reported tax.

Net profit for the period was USD 1.4 million, compared to a net profit of USD 9.4 million in the same period in 2013, reflecting the above fluctuations. Net profit for the period, excluding the impairment charge, is USD 26.1 million.

Financing

Cash Position

During the first quarter 2014 the Group's cash position decreased from USD 440.1 million to USD 297.3 million, primarily reflecting the repayment of USD 110.1 million under the Statoil credit facility, as well as full repayment of the USD 50.3 millionSwedbank bank facility.

Refinancing process

On 26 February 2014 the Group announced the completion of the subsequent offering of 61 million shares at NOK 2.50 per share. Following the issue of the shares on 10 March 2014, the total number of issued shares in the Group was increased from 812,912,544 to 873,912,544, each with a par value of EUR 0.11.

Cat D Financing

On 31 March 2014Songa Offshore announced that the documentation for the previously announced USD 1,014 million loan facilities for the financing of the first two Cat D drilling rigs, Songa Equinox and Songa Endurance, had been finalized and the loan agreements signed by all parties. The new facilities are split into senior loans of USD 774 million and junior loans of USD 240 million and have an average amortization profile of 10.5 years. The junior loans include a pre-delivery tranche of USD 104 million.

Drawdown of the pre-delivery tranche took on place 9 May 2014.

Songa Offshore is currently in advanced discussions with lead banks for the financing of Cat D 3 and 4, contemplated at a higher leverage than Cat D 1 and 2 and including a substantial pre-delivery tranche.

Rig operations

All five Songa Offshore rigs had excellent operational uptime during the first quarter, with an average operational efficiency of 99.7%. Average earnings efficiency of 96.7% was primarily negatively impacted by lower rates earned while waiting on weather in Norway. Songa Dee achieved an operating efficiency of 100.0% during the first quarter 2014 and an earnings efficiency of 94.0%. The earnings efficiency was negatively impacted by the rig being on waiting on weather and stand by rate. The rig has been operating for Statoil in Norway during the quarter.

Songa Delta achieved an operating efficiency of 100.0% during the first quarter 2014 and an earnings efficiency of 96.9%. The earnings efficiency was negatively impacted by the rig being on waiting on weather and stand by rate. The rig has been operating for Statoil in Norway during the quarter. Songa Trym achieved an operating efficiency of 98.6% during the first quarter 2014 and an earnings efficiency of 95.5%.

The earnings efficiency was negatively impacted from an issue with third party down-hole equipment, and the rig earning a Waiting-on-Weather rate due to inclement weather along the quarter. The rig was operating for Statoil in Norway during the quarter. Songa Mercur achieved an operating efficiency of 100.0% during the first quarter 2014 and an earnings efficiency of 99.4%. The rig has been operating for Idemitsu in Vietnam during the quarter.

Songa Venus achieved an operating efficiency of 100.0% during the first quarter 2014 and an earnings efficiency of 97.7%. The rig has been operating for Mubadala Petroleum in Malaysia during the quarter. As per 19 May 2014Songa Offshore has entered into Loss-of-Hire insurance for its three North Sea drilling rigs. The Group will arrange for same insurance also for the Cat D rigs.

Cat D New build Projects

Following January and February, where the construction progress was disappointing, it became evident to Songa Offshore project management that additional yard resources were required to regain lost time. At the same time it became apparent that the amount of work required with mechanical completion, cable pulling and commissioning had been underestimated by the yard and that a reweighting of the fabrication/commissioning part of the overall project was required.

In general, however, both Songa Encourage and Songa Enabler projects are benefitting from the learning curve from the two first rigs. As a result of the above development, there are changes to the delivery schedule communicated in the fourth quarter 2013 report. The yard has provided 31 December 2014 as new delivery date for Songa Equinox.

As a consequence, higher own project management costs in Korea and higher crew ramp-up costs, will increase the average 'ready-to-drill' cost per rig from USD 660 million with 2-3%. Construction projects of this nature often involve disputes, however in this case any potential attempt to recover shipyard costs, in the strong opinion of Songa Offshore, is groundless and any such attempts will be firmly defended.

Songa Offshore will receive USD 40 million per rig from the client in mobilisation fee at the delivery from the yard. Songa Offshore has a good cooperation with the client Statoil, as well as with the relevant Norwegian authorities in the planning phase for the Acknowledgement of Certification (AOC) process.

Songa Dee Special Periodic Survey 2014

The Songa Dee SPS is planned for the third quarter 2014 at the Invergordon yard in Scotland. Planned out of service period is unchanged from fourth quarter and budgeted at 60 days, excluding 2 to 3 days transit time to and from the Shipyard locations. Total yard stay cost is budgeted at USD 90 million plus rig operating expense in the out of service period.

The work scope consists of major drilling and well control equipment maintenance and re-certification, anchor winch upgrades, inspections, modifications and investments including customer reimbursed projects. Limited steel and piping replacement is planned. The rig has been going through an extensive inspection process over the last few months and the details of the final work scope are being finalized.

The Songa Offshore Technical and Projects (T&P) Division is responsible for the planning and execution of the SPS, in coordination with the Rig Operations Team, with a dedicated and experienced Project Team established to run the project.

Organisation

On 24 January 2014 Mr Frederik Mohn was appointed new Chairman of the Board. Mrs Christina Ioannidou and Mr Jon Bjorstad were appointed new members of the Board of Directors. On the same date Mr Steven James McTiernan and Mrs Nancy Erotocritou resigned from the Board of Directors.

Sale of Songa Mercur and Songa Venus

On 25 April 2014Songa Offshore announced an agreement with Opus Offshore Group for the sale of the Songa Mercur and Songa Venus and the establishment of a strategic joint venture drilling management company. Opus Offshore will acquire 100% of the rigs, which will be operated by the Songa-Opus joint venture company. Total proceeds for Songa Offshore from the transaction will amount to up to USD 168.4 million, including:

USD 102.5 million in cash settlement at transaction closing, which is expected to take place in June 2014. USD 10.0 million consideration for Songa Offshore's upfront cash contribution of operational resources into the JV also paid at closing.

Earn out mechanism of up to USD 21.7 million, to be paid proportionally to Songa Offshore based on Songa Mercur employment between 1 January 2014 and the earlier of the commencement of the SPS in 2015 and 1 July 2015, to be paid in 2015.

Deferred consideration of USD 34.2 million payable to Songa Offshore on (or before) 31 December 2017 and structured as seller's credit secured with a 2nd priority mortgage over Songa Venus and a Parent Company Guarantee from the Opus Offshore Group. Songa Offshore will retain the cash flow generated by these two rigs between 1 January 2014 and closing date, estimated at USD 41.6 million.

In addition, an EBITDA upside sharing mechanism in relation to the Songa Mercur where Opus Offshore will pay Songa Offshore 20% of the cumulative EBITDA exceeding USD 105 million for the Songa Mercur between 1 January 2014 and 31 May 2017 will be paid in 2017. Furthermore, Songa Offshore will enter into a bareboat charter for the Songa Venus with Opus Offshore between transaction closing and commencement of the SPS end of first quarter 2015, where Songa Offshore will pay a fixed daily rate of USD 120,000.

In addition to the upfront consideration, Opus Offshore has a call option to acquire Songa Offshore's 50% stake in the JV for USD 20 million, exercisable 30 months from 25 April 2014. After the expiry of the thirty months period, (call option commencement date), Opus is entitled to exercise the call option at any time within a period of 12 months (call option validity period) at a price of USD 20 million. If Opus exercises the call option after the call option validity period, the price Opus shall pay for all Songa Offshore's shares shall be at fair market value.

The expected total transaction value to Songa Offshore, based on economical date 1 January 2014, is estimated to be between USD 180 million and USD 235 million, depending on the earn-out, contract coverage on Songa Venus and whether Opus Offshore will call the option for the JV. As a result of the transaction, Songa Offshore will make a mandatory loan pre-payments of approximately USD 24.3 million on its 'Fleet Loan Facility'.

The inclusion of the Songa Offshore Malaysia, Singapore and Vietnam staff in the JV will reduce the Songa Offshore G&A costs in South East Asia. These G&A costs amounted to about USD 2.1 million in the first quarter 2014. There will also be an overall positive working capital effect from reduction in Trade Receivables and Accounts Payables. The JV will buy certain services from Songa Offshore. Contract revenue backlog as of 31 March 2014 is USD 6.6 billion firm, with another USD 8.4 billion worth of options.

Market conditions and outlook

A slowdown has been seen in the Norwegian Continental Shelf (NCS) market in 2014, as well as in the global drilling market. This is indicated by oil companies letting options for drilling contracts extensions lapse. Since late 2013 operators on the NCS have declined options for four semis in Norway. As a result of the dampened activity, there are several rigs expected to exit the NCS in the near future.

Songa Offshore expects an improved NCS market as from the second half of 2015 and into 2016 as a result of low net fleet growth with already several known new rig requirements in the market. All Songa Offshore units are on long term contracts with Statoil on the Norwegian Continental Shelf. The mid-water market in South East Asia remains challenging. The Company is, however, working on several opportunities for employment of the Songa Venus.

Contact:

Bjornar Iversen

Tel: + 357 99649152

Jan Rune Steinsland

Tel: +47 97052533

FINANCIAL STATEMENTS

General information

In furtherance of a shareholder-approved plan to re-domicile to Cyprus, on 12 December 2008, Songa Offshore ASA was converted into a European public company limited by shares ('Societas Europaea' or 'SE') in accordance with Article 2 no. 1 of the European Council Regulation no. 2157/2001 (the 'SE Regulation') and Section 5 of the Norwegian Act on European Companies of 1 April 2005 (the 'SE Act').

The conversion into an SE was effected through a merger between Songa Offshore ASA and Songa Offshore Cyprus Plc. Effective 11 May 2009, the survivor of the merger, Songa Offshore SE, transferred its registered office to Cyprus in accordance with Article 8 of the SE Regulation and Section 7 of the SE Act.

Songa Offshore SE is a public limited liability company, subject to the laws and regulations of the Cyprus Companies Law, Cap. 113. The address of its registered office is: 4, Profiti Elia, Kanika International Business Centre, 6th Floor, Germasogeia. The Company's shares have been listed on the Oslo Stock Exchange since 26 January 2006 with the ticker SONG.

Songa Offshore SE ('the Company') and its subsidiaries (together, 'Songa Offshore' of 'the Group') are engaged in the business of constructing, owning and operating drilling rigs to be used in exploration and production. Songa Offshore operates in the international oil service industry within the offshore drilling sector, and owns a fleet of five semi-submersible rigs, all operating in the mid-water segment.

Drilling rigs, related equipment and crews are generally contracted on a day rate basis to exploration and production companies. Currently, Songa Offshore operates in the Norwegian part of the North Sea and offshore Malaysia and Vietnam.

Songa Dee, Songa Delta and Songa Trym are operating in the North Sea on long term contracts with Statoil Songa Mercur is currently operating in Malaysia on contract with Idemitsu, while Songa Venus is located offshore Malaysia, pursuing new contract opportunities. In addition to the five semisubmersible drilling rigs, Songa Offshore has four semisubmersible Cat D drilling rigs under construction at the DSME yard in Korea.

Songa Dee, Songa Delta and Songa Trym, and all four rigs under construction, are contracted for long term employment in Norwegian waters, with Statoil as charterer. These rigs have as per 31 March 2014 an aggregate contract backlog of approximately USD 6.6 billion, with options corresponding to approximately USD 8.4 billion.

The Company is headquartered in Limassol, Cyprus, and the rig operations are managed from Singapore, Limassol - Cyprus, Stavanger - Norway, Kuala Lumpur - Malaysia and Ho Chi Minh City- Vietnam.

Basis for preparation

The condensed unaudited consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim financial statements should be read in conjunction with the annual consolidated financial statements for the year ended 31 December 2013, which have been prepared in accordance with IFRS as adopted by the European Union. The Group does not consider that its drilling operations are affected by seasonality factors.

Accounting policies

The condensed unaudited consolidated interim financial statements have been prepared under the historical cost convention except from the revaluation of certain financial instruments. In the current period, the Group has adopted all new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on 1 January 2014.

The accounting policies, presentation and methods of computation applied in these condensed consolidated financial statements are consistent with those applied in the preparation of the Group's consolidated annual financial statements for the year ended 31 December 2013.

Financial risk management and financial instruments

Financial Risk

Through its activities the Group is exposed to a variety of financial risks: market risk, foreign currency risk, interest rate risk, credit risk and liquidity risk arising from its operations and the financial instruments that it holds. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group's financial performance. The Group makes use of derivative financial instruments such as foreign exchange forward contracts and interest rate swaps to moderate certain risk exposures.

The interim consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's consolidated financial statements as at 31 December 2013.

Level 1

Fair value is measured using list prices from active markets for identical financial instruments. No adjustment is made with a view to these prices.

Level 2

The fair value of financial instruments not traded on an active market is determined using valuation methods, which maximize the use of observable data, where available, and rest as little as possible on the Group's own estimates. Classification at level 2 presupposes that all the significant data required to determine fair value are observable data.

Fair value of financial assets and liabilities measured at amortized cost

The fair value of borrowings, trade and other receivables, other current financial assets, cash and cash equivalents (excluding bank overdrafts), and trade and other payables approximate their carrying amount.

Borrowings

As of 31 March 2014, total outstanding debt for the Group amounted to USD 905.9 million from which USD 24.3 million has been classified as bank loan related to 'asset held for sale' in relation to the Songa Venus and Songa Mercur. Outstanding debt consisted of the following:

USD 344.8 million outstanding of the bank facility that the Company entered into in October 2010, with a LIBOR + 2.94% margin. The loan is repaid with quarterly installments until final maturity in October 2016, on which date a balloon payment of USD 177.8 million is due.

USD 230.7 million outstanding under the amended senior unsecured NOK 1,400 million bond issued in November 2011. The amended NOK bond carries an 8.40% fixed interest. In December 2013 and following the restructuring the full NOK 1.400 million bond was swapped to USD 250.0 million at a fixed coupon of 7.73%. The swap matures with the maturity of the NOK bond in May 2018. Upon maturity the bond will be repaid at 103.5% of par value.

USD 114.6 million outstanding under the amended senior unsecured NOK 750.0 million bond issued in June 2012. The amended NOK bond carries a 7.50% fixed interest. In December 2013 and following the restructuring the full amount NOK 750 million bond was swapped to USD 124.7 million at a fixed coupon of 7.37%. The swap matures with the maturity of the NOK bond in December 2018.

USD 110.8 million outstanding under the Statoil credit facility established in June 2012. The margin is 3 months LIBOR + 4.75%. As a result of the restructuring, the Company repaid 50% of the liability to Statoil in the amount of USD 110.8 million on 17 January 2014. The remaining balance shall be repaid equally upon delivery of each of the Cat D 1 and 2 from the yard.

USD 105.0 million of the USD 150.0 million of the convertible bond issued on 23 December 2013 is classified as non-current liability, according to IAS 32: Financial Instruments: Presentation. The balance of USD 39.5 million has according to the same accounting standard been recognized as equity.

The convertible bond has a conversion price of USD 0.51032, semi-annual coupon payments at 4.00% per annum and matures at 23 December 2019. At 31 March 2014 the Group had a total of USD 297.3 million in cash and cash equivalents.

Share Capital

On 26 February 2014 the Group announced the completion of the subsequent offering of 61 million shares at NOK 2.50 per share. Following the issue of the shares on March 10 2014, the total number of issued shares in the Group was increased from 812,912,544 to 873,912,544, each with a par value of EUR 0.11.

Main events after the end of first quarter 2014

On 25 April 2014Songa Offshore announced an agreement with Opus Offshore Group for the sale of the Songa Mercur and Songa Venus and the establishment of a strategic joint venture drilling Management Company. Opus Offshore will acquire 100% of the rigs, which will be operated by the Songa-Opus Joint Venture. For further details, please refer to separate paragraph on page 5 in this report.

Approval of interim financial statements

These interim condensed consolidated financial statements were approved by the Board of Directors on 23 May 2014.


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Source: ENP Newswire


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