North Atlantic Drilling US Listing : First quarter 2016 report

NADL Quarterly Report 2016 Q1 North Atlantic Drilling Ltd. (NADL) - First quarter 2016 results‌‌‌‌ Highlights from the first quarter

• North Atlantic Drilling generated first quarter 2016 EBITDA1 of $87.3 million

• North Atlantic Drilling reports first quarter 2016 net loss of $6.1 million and net loss attributable to shareholders of $9.9 million. The loss per share was $0.41.

Financial highlights

First quarter 2016 results

Consolidated revenues for the first quarter 2016 were $151.6 million compared to $150.4 million for the fourth quarter of 2015. The primary reason for the increase is the West Phoenix returned to drilling operations on March 6, 2016 after concluding its idle period under contract which began in the fourth quarter.

Operating income for the first quarter was $33.0 million, an increase of $94.1 million compared to the fourth quarter of 2015 operating loss of $61.1 million. The loss in the fourth quarter of 2015 was mainly attributable to the impairment loss on the West Rigel classified as held for sale, totaling $82m. The increase in operating income is also due to the West Phoenix returning to operations as stated above.

Net financial items for the first quarter of 2016 amounted to a charge of $35.1 million. The charge included $26.0 million in interest expenses and foreign exchange loss of $7.3 million, mainly related to the NOK1,500 million bond loan. The fourth quarter of 2015 incurred a net financial charge of $17.7 million, including interest expenses of $23.9 million, gain on financial derivatives of $0.7 million, and gain on foreign exchange of $8.6 million mainly related to the NOK1,500 million bond loan.

The income tax expense for the first quarter was a $4.0 million , compared to a $34.1 million in the fourth quarter of 2015 primarily due to deferred tax liabilities recorded on unremitted earnings in the fourth quarter of 2015.

Net loss for the first quarter was $6.1 million and net loss attributable to shareholders was $9.9 million, resulting in a basic loss per share of $0.41. This is compared to net loss of $112.9 million and a net loss attributable to shareholders of $116.9 million for the fourth quarter of 2015.

Balance sheet as at March 31, 2016

As at March 31, 2016, total assets decreased to $3,157.0 million from $3,255.1 million compared to the previous quarter.

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1 EBITDA is defined as 'Earnings Before Interest, Tax, Depreciation and Amortization' and has been calculated by taking operating income plus depreciation, but excluding gains or losses on disposals and impairment charges.

Total current assets decreased to $243.5 million from $286.5 million compared to the previous quarter. The decrease was mainly due to the fall in cash balances, partly offset by an increase in accounts receivables.

Total non-current assets decreased to $2,913.5 million from $2,968.6 million compared to the previous quarter. The decrease was mainly due to depreciation on drilling units.

Total current liabilities decreased to $444.2 million from $494.6 million compared to the previous quarter. The decrease is largely due to the decrease in related party payables and fall in other current liabilities.

Long-term interest bearing debt, including related party debt and current portion, decreased to $2,411.6 million from $2,434.9 million during the quarter. Net interest bearing debt, after deducting cash and cash equivalents, increased to $2,324.2 million from $2,284.0 million. During the first quarter the Company repaid net $42.0 million on the $2 billion credit facility, repaid net $12.0 million on the $475 million credit facility and reduced cash by

$63.5 million.

Total equity decreased to $416.6 million from $418.7 million compared to the previous quarter. The decrease is primarily due to the net loss for the quarter, partly offset by other comprehensive gains on the pension plan.

Cash flow

As at March 31, 2016, cash and cash equivalents decreased to $87.4 million from $150.9 million compared to the previous quarter.

For the three-month period ending March 31, 2016, net cash used in operating activities was $15.0 million, net cash provided by investing activities amounted to $2.3 million, and net cash used in financing activities was $53.5 million. Cash from operations compared to the previous period mainly due to an increase in accounts receivables.

Operations

During the first quarter, North Atlantic Drilling had four offshore drilling rigs in operation offshore Norway, one rig returning to operations on March 6, 2016 in the UK sector of the North Sea, and two idle rigs in Norway: the West Navigator and the West Venture. Economic utilization* for the first quarter was 97 percent, compared to 98 percent in the fourth quarter.

Technical utilization for the second quarter 2016 to date is 98%.

Commercial, Revenue Backlog and Newbuild Program

The West Phoenix returned to drilling activities with Total E&P UK Limited on March 6, 2016 after completing its idle period under contract during the winter season. The unit will continue drilling activities through the end of August 2016.

Currently, the Company's revenue backlog is $540 million. Average remaining contract length is approximately 11 months excluding clients' options for extensions.

On December 2, 2015, the Company signed an amendment with Jurong Shipyard for the deferral of the delivery of the semi-submersible drilling unit, the West Rigel, or the Unit. The deferral period lasts until June 2016, following completion of which, the Company and Jurong have agreed to form a joint asset holding company for joint ownership of the Unit, to be owned 23% by the Company and 77% by Jurong, in the event no employment is secured for the Unit and no alternative transaction is completed. Until the end of the deferral period, the Company will continue to market the Unit for an acceptable drilling contract, and the Unit will remain at the Jurong Shipyard in Singapore. The Company and Jurong may also consider other commercial opportunities for the Unit during this period. However, based on current market conditions, management deems the most probable outcome to be that the Unit will be contributed to the joint asset holding company. The West Rigel has no future capex and is classified as an asset held for sale.

Market Development and Outlook

As a result of the decline in oil prices and reductions in oil company expenditures, the North Sea drilling market is currently entering its third year of a downturn. Current marketed utilization in the North Sea for floaters and jack ups is 84% and 93%, respectively. Nearly half of these existing contracts will conclude over the next 12 months. If extensions or new contracts cannot be secured, rig owners will need to decide how to stack idle units (warm or cold) and ultimately if they should scrap their older or less capable units.

Contract awards and tender activity has been slow over the last year, however we are seeing new interest in the North Sea from independent oil companies as the cost basis is being reset for offshore activities. Recent tendering activity has generally been for shorter terms with multiple options which have commencement dates in mid-2017 or later. Interest also continues for drilling services combined with production activities and decommissioning of aging fields. Rig owners are bidding for this available work extremely competitively with a focus on utilization over returns.

In the current environment, units with contracts expiring will likely face challenges securing follow on work. Our first order of priority is working to get units extended, in some cases we may offer reducing the current dayrate. However, this often is not enough to secure an extension due to customer budgetary constraints.

When faced with potential idle periods we first need to consider what other opportunities are in the market at the time, potential work that may be expected in the foreseeable future, the duration and timing of these projects, and the dayrate. In this highly competitive environment there are many units chasing each opportunity, leading to dayrates at, or often below cash flow breakeven levels.

If rates are too low to justify operation we will consider stacking the unit. When determining what dayrate is too low we also take into account preservation, stacking and reactivation cost.

Generally speaking, if a floater is not expected to find a suitable contract for a year or more, economics suggest that cold stacking may be the preferred option. Conversely, if we feel there may be economic work within this time period we will consider warm stacking the unit. For jack-ups there is not a material difference between warm and cold stacking, therefore we will immediately go to minimum crewing levels to preserve cash while idle.

However, we also must consider the strategic impact of these decisions rather than strictly applying the economic view. Afloater that is cold stacked will find itself at the back of the queue in a recovery due to the cost of reactivation, and require a higher dayrate than a warm unit.

Our current strategy is to have a sufficient number of units ready for work relative to near term opportunities and strategically positioned to pursue work in an efficient manner. The condition of our units, current classing status and appropriate preservation prior to stacking allows us to minimize expected reactivation costs and remain competitive while preserving cash in the idle period.

Financing update

On April 28, 2016 the Company reached agreement with its banking group to extend its US$2.0 billion credit facility to the end of June 2017 and to temporarily amend certain of Seadrill's financial covenants contained within the Company's secured loan agreement. These amendments are part of a broader package of measures Seadrill Limited, our majority shareholder, is undertaking to refinance and recapitalize the business.

The covenant amendments extend to June 30, 2017 and include resetting the leverage ratio, revising the definition of the equity ratio to exclude the impact of any change to the market value of our rigs, and suspension of the provision that allows lenders to receive a prepayment if rig values decline below a minimum value relative to the loan balance outstanding. As part of this agreement, Seadrill has agreed a set of milestones which provide a timetable for advancing discussions around a longer term solution.

By deferring our credit facility, amending a number of covenants and removing the risk of facility prepayments related to declining rig values, we have established a more stable platform to pursue and conclude negotiations with our stakeholders. We are pleased with the support shown by our banking group and Seadrill Limited, and continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge us to a recovery in the sector.

We expect to conclude a broader package of measures by the year end.

Forward Looking Statements

This report includes forward looking statements. Such statements are generally not historical in nature, and specifically include statements about the Company's plans, strategies, business prospects, changes and trends in its business and the markets in which it operates. These statements are made based upon management's current plans, expectations, assumptions and beliefs concerning future events impacting the Company and therefore involve a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, which speak only as of the date of this news release. Important factors that could cause actual results to differ materially from those in the forward- looking statements include, but are not limited to offshore drilling market conditions, including supply and demand, day rates, customer drilling programs and effects of new rigs on the market, contract awards and rig mobilizations, contract backlog, dry-docking and other costs of maintenance of the drilling rigs in the Company's fleet, the cost and timing of shipyard and other capital projects, the performance of the drilling rigs in the Company's fleet, delay in payment or disputes with customers, our ability to successfully employ our drilling units, procure or have access to financing, ability to comply with loan covenants, liquidity and adequacy of cash flow from operations, fluctuations in the international price of oil, international financial market conditions including the international financial crisis, changes in governmental regulations that affect the Company or the operations of the Company's fleet, increased competition in the offshore drilling industry, and general economic, political and business conditions globally. Consequently, no forward-looking statement can be guaranteed. When considering these forward-looking statements, you should keep in mind the risks described from time to time in the Company's filings with the SEC, including its Annual Report on Form 20-F.

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

May 26, 2016

The Board of Directors North Atlantic Drilling Ltd. Hamilton, Bermuda

Questions should be directed to North Atlantic Management AS represented by: Scott McReaken: Chief Financial Officer