SEVAN DRILLING LIMITED

Transcription

1 SEVAN DRILLING LIMITED (A company incorporated under the laws of Bermuda) Listing of the Company s Shares on Oslo Børs This prospectus (the Prospectus ) has been prepared by Sevan Drilling Limited (the Company or Sevan Drilling ), solely for use in connection with the listing of the shares of the Company on Oslo Børs (the "Listing"), each with a par value of USD 0.10 (the Shares ). The Listing of the Shares takes place in connection with the move of the parent level of the Sevan Drilling group from Norway to Bermuda (the "Migration") by means of a capital decrease in Sevan Drilling ASA where the Shares of the Company are distributed to the shareholders of Sevan Drilling ASA as repayment of paid in capital (the Capital Decrease ) simultaneously with the Listing and delisting of Sevan Drilling ASA. As of the completion of the Capital Decrease the Company will be the new parent company of the Group. The shareholders of Sevan Drilling ASA, as of 29 June 2015, will in connection with the Listing receive 1 Share in the Company for every 20 shares each shareholder holds in Sevan Drilling ASA. The Company's Shares have been admitted for listing on Oslo Børs and it is expected that the Shares will start trading on 30 June 2015 under the ticker symbol SEVDR. Prior to the Listing, the Shares have not been publicly traded. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO BUY, SUBSCRIBE OR SELL THE SECURITIES DESCRIBED HEREIN, AND NO SECURITIES ARE BEING OFFERED OR SOLD PURSUANT TO THIS PROSPECTUS IN ANY JURISDICTION. Generally investing in the Shares involves a high degree of risk; see Section 2 "Risk Factors" beginning on page 14. Manager Clarksons Platou Securities AS The date of this Prospectus is 29 June 2015

2 Sevan Drilling Limited - Prospectus IMPORTANT INFORMATION All references herein to the "Company" are to Sevan Drilling Limited. All references to "Old Group" are to Sevan Drilling ASA and its consolidated subsidiaries with respect to the situation prior to the simultaneous Capital Decrease and Listing. Following the completion of the Capital Decrease and Listing, all references to the "Group" are to Sevan Drilling Limited and its consolidated subsidiaries. This Prospectus has been prepared solely for use in connection with the Listing. For the definitions of certain terms used throughout this Prospectus, see Section 16 "Definitions and Glossary". This Prospectus has been prepared to comply with the Norwegian Securities Trading and related secondary legislation, including the Prospectus Directive. This Prospectus has been prepared solely in the English language. The Norwegian FSA has reviewed and approved this Prospectus in accordance with Sections 7-7 and 7-8 of the Norwegian Securities Trading Act. The Norwegian FSA has not controlled or approved the accuracy or completeness of the information included in this Prospectus. The approval by the Norwegian FSA only relates to the information included in accordance with pre-defined disclosure requirements. The Norwegian FSA has not made any form of control or approval relating to corporate matters described in or referred to in this Prospectus. The Company is incorporated under the laws of the Bermuda. All of the Shares rank in parity with one another and carry one vote. The Company has entered into a Registrar Agreement with the VPS Registrar Nordea Bank ASA for the registration of the Shares, in book-entry form with the Norwegian Central Securities Depositary, VPS. The Shares carry the ISIN BMG8070J1099. The Company s VPS based register of shareholders is established and managed by the VPS Registrar. For a further description of the VPS registration of the Shares, see section The information contained herein is current as of the date hereof and subject to change, completion and amendment without notice. In accordance with Section 7-15 of the Norwegian Securities Trading Act, significant new factors, material mistakes or inaccuracies relating to the information included in this Prospectus, which are capable of affecting the assessment of the Shares between the time when this Prospectus is approved and the date of Listing of the Shares on Oslo Børs, will be included in a supplement to this Prospectus. Neither the publication nor distribution of this Prospectus shall under any circumstances create any implication that there has been no change in the Group s affairs or that the information herein is correct as of any date subsequent to the date of this Prospectus. The Company has engaged Clarksons Platou Securities AS (the "Manager") as the Manager of the Listing. The Manager is acting for the Company and no one else in relation to the Listing. The Manager makes no representation or warranty, whether express or implied, as to the accuracy or completeness of such information, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation by the Manager. No person is authorized to give any information or to make any representation in connection with the Listing other than as contained in this Prospectus. If any such information is given or made, it must not be relied upon as having been authorized by the Company or the Manager or by any of the affiliates, advisors or selling agents of any of the foregoing. The distribution of this Prospectus in certain jurisdictions may be restricted by law. Persons in possession of this Prospectus are required to inform themselves about and to observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of applicable securities laws. This Prospectus does not constitute an offer or solicitation to buy, subscribe or sell the securities described herein, and no securities are being offered or sold pursuant to this Prospectus in any jurisdiction and the Prospectus is not intended for any jurisdiction where its distribution is unlawful. Generally investing in the Shares involves a high degree of risk. See Section 2 Risk Factors. All Sections of the Prospectus should be read in context with the information included in Section 4 General Information. Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the issue and transfer of the Shares to and between residents and non-residents of Bermuda for exchange control purposes provided that the Shares are listed on Oslo Børs. In granting such consent, neither the Bermuda Monetary Authority nor any other relevant Bermuda authority or government body accepts any responsibility for the Company's financial soundness or the correctness of any of the statements made or opinions expressed in this Prospectus. i

3 Sevan Drilling Limited - Prospectus This Prospectus as set out herein shall be governed by and construed in accordance with Norwegian law. The courts of Norway, with Oslo tingrett as legal venue, shall have exclusive jurisdiction to settle any dispute which may arise out of or in connection with the Listing or this Prospectus. ii

4 TABLE OF CONTENTS 1 SUMMARY RISK FACTORS RESPONSIBILITY FOR THE PROSPECTUS GENERAL INFORMATION THE MIGRATION AND LISTING DIVIDENDS AND DIVIDEND POLICY BUSINESS OF THE GROUP MATERIAL CONTRACTS AND RELATED PARTY TRANSACTIONS BOARD OF DIRECTORS, MANAGEMENT, EMPLOYEES AND CORPORATE GOVERNANCE SELECTED FINANCIAL INFORMATION OPERATING AND FINANCIAL REVIEW CORPORATE INFORMATION AND DESCRIPTION OF SHARE CAPITAL SECURITIES TRADING IN NORWAY TAXATION ADDITIONAL INFORMATION DEFINITIONS AND GLOSSARY APPENDICES Appendix A: Appendix B: Appendix C: Appendix D: Appendix E: Appendix F: Appendix G: MEMORANDUM OF ASSOCIATION AND BYE-LAWS.... A1 SEVAN DRILLING LIMITED FINANCIAL STATEMENTS FOR B1 SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR Q C1 SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR D1 SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR E1 SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR F1 SEVAN DRILLING ASA INTERIM BALANCE SHEET AS OF 17 APRIL G1 1

5 1 SUMMARY Summaries are made up of disclosure requirements known as "Elements". These Elements are numbered in Sections A E (A.1 E.7) below. This summary contains all the Elements required to be included in a summary for this type of securities and the Issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements. Even though an Element may be required to be inserted in the summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case a short description of the Element is included in the summary with the mention of "not applicable". Section A Introduction and Warnings A.1 Introduction and warning This summary should be read as an introduction to the Prospectus; any decision to invest in the securities should be based on consideration of the Prospectus as a whole by the investor; where a claim relating to the information contained in the Prospectus is brought before a court, the plaintiff investor might, under the national legislation of the Member States, have to bear the costs of translating the Prospectus before the legal proceedings are initiated; and civil liability attaches only to those persons who have tabled the summary including any translation thereof, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the Prospectus or it does not provide, when read together with the other parts of the Prospectus, key information in order to aid investors when considering whether to invest in such securities. A.2 Consent to the use of this Prospectus by financial intermediaries Not applicable; no consent is granted by the Company to the use of this Prospectus for subsequent resale or final placement of the Shares. Section B Issuer B.1 Legal and commercial name B.2 Domicile and legal form, legislation and country of incorporation B.3 Current operations, principal activities and markets Sevan Drilling Limited. The Company was incorporated on 20 December 2013 as an exempted company limited by shares, incorporated and registered under the laws of Bermuda in accordance with the Companies Act 1981 of Bermuda. The Company has Bermuda official company number The Group is an international offshore drilling contractor specializing in the ultra deepwater segment, offering the unique Sevan Design for offshore drilling units in the global ultra deepwater market. The Group is a fully integrated drilling contractor and owns (through its subsidiaries) three ultra deepwater drilling units: Sevan Driller, Sevan Brasil and Sevan Louisiana. Sevan Driller and Sevan Brasil each have a six-year employment contract with Petrobras in Brazil. Sevan Louisiana has a four year employment contract with LLOG in the US Gulf of Mexico. The Group also has an additional unit on order, Sevan Developer. The drilling industry consists of a large number of participants. However, the industry has experienced consolidation and some large market participants have significant market shares. Broadly speaking, the drilling industry consists of 2

6 several companies with different types of drilling assets and operations, including ultra deepwater, deepwater, midwater and shallow water. There are only a few companies in the drilling industry which focus exclusively on the ultra deepwater segment. Offshore drilling contracts are generally awarded on a competitive bid basis or through privately negotiated transactions. In determining which qualified drilling contractor is awarded a contract, the key factors are pricing, rig availability, rig location, condition and integrity of equipment, its record of operating efficiency, including operating uptime, technical specifications, safety performance record, crew experience, reputation, industry standing and client relations. B.4a Significant recent trends The Group s results are primarily driven by performance under contractual day rates from the three units operating under long-term contracts. Demand for the Group s services is dependent on the level of activity in the exploration for and development of oil and gas in offshore areas worldwide. A decline in oil and gas prices for an extended period of time, or market expectations of a potential decrease in these prices, may negatively affect the Group's business. Sustained periods of low oil prices typically result in reduced exploration and drilling activity because oil and gas companies capital expenditure budgets are subject to cash flow from such activities. These changes can have a dramatic effect on rig demand. Periods of low demand can cause excess rig supply and intensify the competition in the industry, which often results in drilling units, particularly older and less technologically advanced units, being idle for long periods of time. While the Group has limited exposure to the market in the short-term due to its contract portfolio, it is dependent on demand picking up towards the expiry of its current contracts. The Group believes that the current market conditions will improve in the longer term, but cannot say with any certainty when demand will start picking up or at what rate levels future contracts can be secured. In Q4 2014, the Company revised terms of its revolving credit facility to secure the Group s short to medium term financing requirements. If the revolving credit facility cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Group does not have adequate liquidity beyond

7 B.5 Description of the Group Following the Migration, the Company will be the parent company of the Group. The Company's operations are performed by different subsidiaries. The Company s units are currently owned through different subsidiaries. All subsidiaries, foreign and domestic, are wholly owned directly or indirectly by the Company. Public Seadrill Limited (Bermuda) 49.89% 50.11% Sevan Drilling ASA (Norway) Sevan Drilling Limited (Bermuda) Sevan Brasil Ltd. (Bermuda) Sevan Drilling Pte Ltd. (Singapore) Sevan Drilling Rig V AS (Norway) Sevan Drilling Rig II AS (Norway) Sevan Drilling Rig VI AS (Norway) Sevan Brasil Sevan Driller Ltd. (Bermuda) Sevan Drilling Limited (UK/Norway) Sevan Drilling Rig V Pte Ltd. (Singapore) Sevan Drilling Rig IX Pte Ltd. (Singapore) Sevan Drilling Rig II Pte Ltd. (Singapore) Sevan Drilling Rig VI Pte Ltd. (Singapore) Sevan Driller Sevan Developer Ltd. (Bermuda) Sevan Drilling Management AS (Norway) Sevan Drilling North America LLC (USA).01% Sevan Investimentos do Brasil Ltda (Brazil) 99.99% Sevan Developer Sevan Louisiana Hungary Kft. (Hungary) Swiss Branch Sevan Drilling AS (Norway) Sevan Drilling Rig VIII AS (Norway).01% Sevan Marine Servicos de Perfuracao Ltda (Brazil) 99.99% Sevan Louisiana B.6 Interests in the Company and voting rights Shareholders owning 5% or more of the Shares have an interest in the Company's share capital which is notifiable pursuant to the Norwegian Securities Trading Act. The table below sets out the ownership percentage held by such notifiable shareholders in Sevan Drilling ASA as at 26 June At the date of this Prospectus, prior to completion of the Migration and Listing, the sole shareholder of the Company is Sevan Drilling ASA. Shareholders in Sevan Drilling ASA Number of % Shares 1 DnB NOR Markets, AKS DNB Bank ASA* 211,059, % 2 SKANDINAVISKA ENSKIL EGENHANDELSKONTO (publ) Oslofilialen* 79,575, % 3 J.P. Morgan Chase Ba NORDEA TREATY ACCOUNT 33,018, % 4 WENAASGRUPPEN AS 17,208, % 5 The Bank of New York BNY MELLON 16,389, % *Seadrill holds its Shares in Sevan Drilling ASA through forward contracts with the banks identified above There are no differences in voting rights between shareholders. The Company is not aware of any arrangements the operation of which may at a subsequent date result in a change of control of the Company. B.7 Selected historical key financial information The Company will become the successor of Sevan Drilling ASA after the Listing and the Migration is completed. 4

8 The following selected consolidated financial information has been extracted from the Sevan Drilling ASA Financial Statements as at and for the years ended 31 December 2012, 2013 and 2014 and as at and for the period ended 31 March The years ended 31 December 2012, 2013 and 2014 have been audited by PricewaterhouseCoopers AS, and the period ended 31 March 2015 has been subject to limited review by PricewaterhouseCoopers AS. The Sevan Drilling ASA Financial Statements are included in Appendix C, D, E and F to this Prospectus and should be read together with Section 11 "Operating and Financial Review". The Sevan Drilling Limited Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) that are effective for the period ended 31 December As the Company was incorporated on 20 December 2013, the Sevan Drilling Limited Financial Statements for the period ended 31 December 2014, include the full year 2014 and the 11 days since incorporation. The Sevan Drilling Limited Financial Statements have been audited by PricewaterhouseCoopers AS and is included in Appendix B to this Prospectus and should be read together with Section 11 "Operating and Financial Review". Consolidated Income Statement Income statement IFRS IFRS IFRS IFRS IFRS USD million Audited Unaudited Restated Audited Actual Unaudited Restated Audited Actual Operating revenue Operating expense Depreciation, amortization and impairment Employee benefit expense Other operating expense Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial income Financial expense Foreign exchange gain/(loss) related to financing Net financial items Profit (Loss) before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Group Earnings per share for profit/(loss) attributable to the equity holders of the Group during the year (USD per share): - Basic Diluted Dividend

9 Income statement Q Q IFRS IFRS USD million Unaudited Unaudited Operating revenue Operating expense General and administrative Restructuring expense Depreciation, amortization and impairment Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial expense Net financial items Profit (Loss) before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Group Earnings per share for profit/(loss) attributable to the equity holders of the Group during the year (USD per share): - Basic Diluted Dividend - - Up to 31 December 2013, the Group classified the gross revenue tax in Brazil as tax expense. In Q1 2014, Management reassessed the nature of this expense and determined that it is better classified as a reduction of revenue due to the starting point for determining the amount of tax paid being more dependent on the amount of gross sales than on the concept of a taxable profit. This is a reclassification of an item on the Income Statement which has no impact on net income. There is furthermore no impact on the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, or the Cash Flow Statement. The change has been made retrospectively and is included in all other prior period information presented in this Prospectus. The impact on the Income Statement is as follows: Restated for revenue tax schedule Q Q IFRS IFRS IFRS IFRS IFRS USD million Audited Audited Audited Unaudited Unaudited Impact on operating revenue Impact on tax (expense)/income

10 Consolidated Balance Sheet Balance sheet Q Q USD million IFRS IFRS IFRS IFRS IFRS Audited Audited Audited Unaudited Unaudited ASSETS Non-current assets Drilling units 1, , , , ,833.8 Other fixed assets Intangible assets Deferred income tax assets Other non-current assets Total non-current assets 1, , , , ,859.8 Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 1, , , , ,991.6 EQUITY Capital and reserves attributable to equity holders of the Group Share capital Share premium Other equity Total equity LIABILITIES Non-current liabilities Interest-bearing debt 1, , , ,073.0 Derivative financial instruments, long term Other non-current liabilities Total non-current liabilities 1, , , ,188.4 Current liabilities Trade payables Current portion of interest-bearing debt Other current liabilities Total current liabilities Total liabilities 1, , , , ,433.9 Total equity and liabilities 1, , , , ,

11 Consolidated changes in equity information Attributable to equity holders of the Group Figures in USD million Share capital Share premium General reserve Equity settled employee benefits reserve Foreign currency translation reserve Retained earnings Other equity Total equity January 1, Net profit/(loss) Foreign currency translation Comprehensive loss Transferred from paid in equity to other equity Fair value of share options Other foreign currency items December January 1, Net profit/(loss) Foreign currency translation Comprehensive loss Capital increase Transaction cost equity raise Fair value of share options December January 1, Net profit/(loss) Foreign currency translation Comprehensive loss December Selected consolidated cash flow information Cash flow Q Q USD million IFRS IFRS IFRS IFRS IFRS Audited Audited Audited Unaudited Unaudited Cash flows from operation activities Cash from operations Tax paid Interest paid Net cash (used in)/generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment (PPE) Interest rate swap settlement Net cash used in investing activities Cash flows from financing activities Net proceeds from capital increase Proceeds from interest-bearing debt , Deferred transaction fees on interest-bearing debt Repayment of interest-bearing debt Net cash generated from/(used in) financing activities Net cash flow for the period Cash balance at beginning of period Cash balance at end of period*

12 Financial Statements for the Company As the Company was incorporated on the 20 December 2013, the Sevan Drilling Limited Financial Statements for the period ended 31 December 2014 include the full year 2014 and the 11 days since its incorporation. Income statement As of 31 December 2014 IFRS USD million Audited Operating revenue - Operating expense -1,4 Total operating expense -1,4 Operating (loss)/profit -1,4 Intercompany interest income 3,1 Interest expense -4,4 Net financial items -1,3 Loss before tax -2,8 Tax (expense)/income - Net loss -2,8 Balance sheet As of 31 December 2014 USD million IFRS Audited ASSETS Financial assets Investments in subsidiaries Other investments - Accounts receivables from Group companies Total financial assets Total non-current assets Current assets Receivables Accounts receivables from Group companies Total receivables Cash and bank deposits - Total current assets Total assets 1,161.6 EQUITY AND LIABILITIES Restricted equity Share capital 3.1 Share premium Total restricted equity Retained earnings Other equity -2.8 Total retained earnings -2.8 Total equity LIABILITIES Borrowings Accounts payable to the Group companies Total long-term liabilities Current liabilities Accounts payable to the Group companies Total short term liabilities Total liabilities Total equity and liabilities 1,

13 B.8 Selected key pro forma financial information B.9 Profit forecast or estimate B.10 Audit report qualifications B.11 Sufficient working capital Not applicable. There is no pro forma information. Not applicable. No profit forecast or estimate is made. Not applicable. There are no qualifications in the audit reports. The Company is of the opinion that the working capital available to the Group is sufficient for the Group s present requirements and its requirements for the period covering at least 12 months from the date of this Prospectus. Section C Securities C.1 Type of securities and ISIN codes The Shares with ISIN BMG8070J1099. All of the Shares are of the same class and have the same rights attached to them. The Shares will be registered in bookentry form in the VPS. C.2 Currency The Shares have a par value in USD, but trading of the Shares will be effected in NOK on Oslo Børs. C.3 Number of Shares in issue and par value C.4 Rights attached to the shares At the date of this Prospectus, the Company s authorized share capital consists of 10,000,000,000 common Shares of USD 0.10 each, of which 31,000,000 common Shares have been issued. Pursuant to the Bye-laws, the holders of the Shares have no pre-emptive, redemption or conversion rights. The holders of Shares are entitled to one vote per Share on all matters submitted to a vote in the Company's general meeting. Under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of its assets would thereby be less than its liabilities, or in circumstances that would result in an unlawful reduction of share capital or share premium. Under the Bye-laws, each of the Shares is entitled to such dividends as the Board of Directors may from time to time declare. C.5 Restriction on the free transferability of the shares C.6 Application for admission to trading on a regulated market The Shares are freely transferable. On 26 May 2015 the board of directors of Oslo Børs resolved to admit the Shares of the Company for listing on Oslo Børs. The Shares will list simultaneously with the completion of the Capital Decrease and the delisting of Sevan Drilling ASA, ref. section 5.5. The first day of trading of the Company on Oslo Børs is expected to be on or about 30 June The Shares will trade on Oslo Børs under the ticker symbol, SEVDR, as its predecessor Sevan Drilling ASA. The Company has not applied for admission to trading of the Shares on any other stock exchange or regulated market. C.7 Dividend policy The Company has not distributed any dividends since the Company s inception. The Company aims at obtaining a sound financial structure, reflecting the capital 10

14 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 investment over time, in terms of dividend and development in share price. All shares rank equal upon distribution of dividends. 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 do not contain restrictions on distribution of dividends. No assurance can be made that the Group s future debt arrangement may or may not contain restrictions. Section D Risks D.1 Key risks specific to the Company or its industry Risks relating to Company's relocation from Norway to Bermuda The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions, such as Norway. It is not known whether courts in Bermuda will enforce judgments obtained in other jurisdictions against the Company or its directors or officers. The Company's Bye-laws may limit the right of shareholders to bring legal action against its officers and directors. Risks relating to the Group's Operations The current downturn in activity in the oil and gas drilling industry causing decline in the demand for drilling units has had and is likely to continue to have an adverse impact on the Group s business and results of operations. The Group depends on its customers willingness and ability to fund operating and capital expenditures to explore, develop and produce oil and gas, and to purchase drilling and related equipment. An extended period of adverse development in the outlook for the world economy could reduce the overall demand for oil and gas and for the Group s services, which could adversely affect the Group s results of operations and cash flows beyond what might be offset by the simultaneous impact of possibly higher oil and gas prices. Oil and gas prices have a significant indirect effect on the Group's earnings. They are extremely volatile and are affected by numerous factors beyond the Group s control. Low oil and gas prices may cause lower utilization and day rates which will adversely affect the Group s revenues and profitability. As a consequence of the current state of the drilling market, prolonged periods of low utilization and dayrates could result in a reduction in the market value of the Drilling Units. The operation of drilling units is subject to hazards, considerable risks 11

15 and liabilities inherent in the drilling industry and requires very high standards of safety. The risks include technical, operational, commercial and political risks. If substantial liabilities are incurred by the Group, policy limits within the insurance coverage may not be sufficient to cover the liability which could significantly and adversely affect the financial position, results of operations or cash flows of the Group. An over-supply of drilling units in the market may lead to a reduction in day rates and/or lower utilization of drilling units which could negatively impact the Group's revenues, profitability and cash flows. The Group has a limited number of customers so if any of these customers failed to compensate the Group for it services; terminated its contracts with or without cause; failed to renew its existing contract, the Group's operations could be materially affected. The Group relies on timely delivery of goods and services by numerous vendors and suppliers, and the performance in full by the operators of the Group s units. Failure to perform or financial difficulties encountered by vendors and suppliers can adversely affect the financial and/or operational condition of the Group. The Group relies on a related party, Seadrill, for the operation of the Drilling Units. The Group s financial condition and client relationships could be adversely affected if the Management Agreements are terminated or Seadrill fails to provide services in accordance with the terms of these contracts. The Group s existing or future debt arrangements could limit the Group s liquidity. Should any unforeseen consequences or liabilities in operations occur, the Company may be required to draw down fully on the revolving credit facility and thereafter have limited actions other than equity financing or seek additional assistance from the guarantor of the bank loan facility, Seadrill. Additional indebtedness, equity financing or support from Seadrill 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. The Group cannot control Seadrill's ability to comply with its liabilities and therefore the Group is vulnerable to a risk of crossdefault in the event of default by Seadrill. Regulatory risks Governmental laws and regulations could affect operations, increase operating costs, reduce demand for services from and restrict the ability of drilling rig owners to operate its drilling units or otherwise. Tax risk The tax laws of the various jurisdictions in which the Group operates or may operate are complex, open to different interpretations, and subject to change, possibly with retroactive effect. D.3 Key risks specific to the securities 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 12

16 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. 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. The Company may be unwilling or unable to pay any dividend in the future. Section E Offer E.1 Net proceeds and estimated expenses The Company will not receive any proceeds in connection with the Listing. The total expenses which will be covered by the Company in connection with the Listing is expected to amount to approximately NOK 4 million. No securities are being offered or sold pursuant to this Prospectus in any jurisdiction. E.2 Reasons for the Listing and use of proceeds During 2014 the board of directors of Sevan Drilling ASA reviewed the corporate organization of the Old Group and concluded that it was not optimal to maintain the parent company function in Norway. On this background the general meeting of Sevan Drilling ASA resolved in an annual general meeting held on 15 May 2015 to move the parent level of the Sevan Drilling group from Norway to Bermuda by means of a Capital Decrease in Sevan Drilling ASA where the Shares of the Company are distributed to the shareholders of Sevan Drilling ASA as repayment of paid in capital. See description in Section 5 The Migration and Listing. The Company will not receive and proceeds in connection with the Listing. E.3 Terms and conditions of the Listing All the shareholders of Sevan Drilling ASA will following the Record Date receive 1 Share in the Company for every 20 shares owned in Sevan Drilling ASA. The Shares will be delivered on the VPS accounts of the Shareholders of the Company after the second settlement cycle of VPS on the Record Date, being visible on the VPS accounts of the shareholders in the morning 2 July E.4 Material and conflicting interests E.5 Selling shareholder and lock-up agreements E.6 Dilution resulting from the Listing E.7 Estimated expenses charged to the investor Thereare no conflicts of interest in connection with the Listing and the Migration. There are no selling shareholders nor any lock-up agreements in connection with the Listing. There will be no dilution for the shareholders in connection with the Listing. Not applicable. No costs will occur for the Shareholders in connection with the Listing. 13

17 2 RISK FACTORS 2.1 Risks related to the Company s relocation from Norway to Bermuda The Company is incorporated in Bermuda. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions, such as Norway. The Company is an exempted company limited by shares, incorporated under the laws of Bermuda. The rights of holders of the Shares will be governed by Bermuda law and the Company's memorandum of association and Byelaws in force from time to time. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. It is not known whether courts in Bermuda will enforce judgments obtained in other jurisdictions against the Company or its directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against the Company or its directors or officers under the securities laws of other jurisdictions. Tax implications for shareholders if the Company pays dividends. Dividends declared and paid by a Bermuda exempted company may be subject to local tax in the investors' home country, and each shareholder should therefore make its own investigations. Norwegian investors will generally be subject to taxation as dividends will be deemed as taxable income for the receiver, and such dividends will be subject to 27% tax. The same tax rate will generally apply with respect to capital gains for such investors. See Section 14 Taxation below for more details. The Company's Bye-laws may limit the right of shareholders to bring legal action against its officers and directors. The Company's Bye-laws contain a broad waiver by the Company's shareholders of any claim or right of action, both individually and on the Company's behalf, against any of the Company's officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against the Company's officers and directors unless the act or failure to act involves fraud or dishonesty. 2.2 Risks relating to the Group's Operations The current downturn in activity in the oil and gas drilling industry causing decline in the demand for drilling units has had and is likely to continue to have an adverse impact on the Group s business and results of operations. The oil and gas drilling industry is cyclical. The industry has recently entered a downcycle. Crude oil prices have fallen during the past year. The price of Brent crude has fallen from over USD 100 per barrel in March 2014, to approximately USD 63 per barrel as of 26 June, In response a number of oil and gas companies have announced decreases in budgeted expenditures for offshore drilling. Declines in capital spending levels, coupled with additional newbuild supply, have and are likely to continue to put significant pressure on day rates and utilization. The decline and the perceived risk of a further decline in oil and/or gas prices could cause oil and gas companies to further reduce their overall level of activity or spending, in which case, demand for the Group s services may decline and revenues may be adversely affected through lower drilling unit utilization and/or lower day rates. Oil and gas prices and market expectations of potential changes in these prices also significantly affect the level of activity and demand for drilling units. The Group does not know when the market for offshore drilling units may recover, or the nature or extent of any future recovery. There can be no assurance that the current demand for drilling units will not further decline in future periods. The continued or future decline in demand for drilling units would adversely affect the Group s financial position, operating results and cash flows. 14

18 The Group depends on its customers willingness and ability to fund operating and capital expenditures to explore, develop and produce oil and gas, and to purchase drilling and related equipment. An extended period of adverse development in the outlook for the world economy could reduce the overall demand for oil and gas and for the Group s services, which could adversely affect the Group s results of operations and cash flows beyond what might be offset by the simultaneous impact of possibly higher oil and gas prices. The Group depends on its customers willingness and ability to fund operating and capital expenditures to explore, develop and produce oil and gas, and to purchase drilling and related equipment. There has historically been a strong link between the development of the world economy and demand for energy, including oil and gas. The world economy is currently facing a number of challenges. Concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations and the overall stability of the euro. An extended period of adverse development in the outlook for European countries could reduce the overall demand for oil and natural gas and consequently for the Group s services. These potential developments, or market perceptions concerning these and related issues, could affect the Group s financial position, results of operations and cash available for distribution. This includes uncertainty surrounding the sovereign debt and credit crises in certain European countries. In addition, turmoil and hostilities in Ukraine, Korea, the Middle East, North Africa and other geographic areas and countries are adding to the overall risk picture. In addition, worldwide financial and economic conditions could cause the Group s ability to access the capital markets to be severely restricted at a time when the Group would like, or need, to access such markets. This could impact the Group s ability to react to changing economic and business conditions. Worldwide economic conditions could impact the lenders participating in the Group s credit facilities and the Group s customers, causing them to fail to meet their obligations to the Group. If economic conditions preclude or limit financing, the Group may not be able to obtain financing on terms that are acceptable to the Group, or at all, even if conditions outside Europe remain favorable for lending. An extended period of adverse development in the outlook for the world economy could reduce the overall demand for oil and gas and consequently for the Group s services. Such changes could adversely affect the Group s results of operations and cash flows beyond what might be offset by the simultaneous impact of possibly higher oil and gas prices Oil and gas prices are extremely volatile and are affected by numerous factors beyond the Group s control. Low oil and gas prices may cause lower utilization and day rates which will adversely affect the Group s revenues and profitability. Oil and gas prices are extremely volatile and are affected by numerous factors beyond the Group s control, including the following: worldwide production and demand for oil and gas; the cost of exploring for, developing, producing and delivering oil and gas; expectations regarding future energy prices; advances in exploration, development and production technology; the ability of the Organization of Petroleum Exporting Countries ( OPEC ), to set and maintain levels and pricing; the level of production in non-opec countries; government regulations, including restrictions on offshore transportation of oil and natural gas; local and international political, economic and weather conditions; domestic and foreign tax policies; development and exploitation of alternative fuels and non-conventional hydrocarbon production; the policies of various governments regarding exploration and development of their oil and gas reserves, accidents, severe weather, natural disasters and other similar incidents relating to the oil and gas industry; and the worldwide political and military environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East, eastern Europe or other geographic areas or further acts of terrorism in the United States, or elsewhere. 15

19 In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, including: the availability of competing offshore drilling units; the level of costs for associated offshore oilfield and construction services; oil and gas transportation costs; the level of rig operating costs, including crew and maintenance; the discovery of new oil and gas reserves; the political and military environment of oil and gas reserve jurisdictions; and regulatory restrictions on offshore drilling. Any of these factors could reduce demand for the Group s services and adversely affect the Group s business and results of operations. Prolonged periods of low utilization and dayrates could result in a reduction in the market value of the Group s units (the Drilling Units ), and recognition of further impairment charges. During the period ended 31 December 2014, the Group recognized a charge of USD million relating to the impairment of Sevan Driller and Sevan Basil. Prolonged periods of low utilization and dayrates could result in a future reduction in the market value of the Drilling Units. This could lead to the recognition of further impairment charges if future cash flow estimates, based on information available to management at the time, indicate that the carrying value of the Group Drilling Units may not be recoverable. In addition, if the market value of the Drilling Units decreases and the Group sells any of them at a time when prices for drilling units have fallen, such a sale may result in a loss, which would negatively affect the Group s results of operations. The Group does not know if or when the market for offshore drilling units will recover, or the nature or extent of any future recovery. There can be no assurance that the current demand for drilling units will not further decline in future periods. The continued or future decline in demand for drilling units would adversely affect the Group s financial position, operating results and cash flows. The operation of drilling units is subject to hazards, considerable risks and liabilities inherent in the drilling industry and requires very high standards of safety. The risks include technical, operational, commercial and political risks. If substantial liabilities are incurred by the Group, policy limits within the insurance coverage may not be sufficient to cover the liability which could significantly and adversely affect the financial position, results of operations or cash flows of the Group. The operation of drilling units is subject to hazards inherent in the drilling industry and requires very high standards of safety. Such operations are therefore associated with considerable risks and liabilities. These include technical, operational, commercial and political risks. The Group maintains insurance for its business but it is impossible to insure against all applicable risks and liabilities. Pollution and environmental risks are generally not totally insurable. Further, depending on the prevailing market, the Group may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. In general, insurance cover offered to drilling rig owners, including the Group, contains policy limits which mean that owners such as the Group retain the risk for any losses in excess of these limits, that could be substantial. A pollution disaster could exceed the Group s insurance coverage, which could harm the Group s business, financial condition and operating results. In addition, the Group s insurance may be voidable by the insurers as a result of certain of the Group s actions. Under some contracts or legal regimes the Group may have unlimited liability for losses caused by its own gross negligence, and such liability may not be covered by the Group s insurance policies. The Group may also incur liability for pollution and other environmental damage without being able to recover said liabilities through insurance. 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 Group. 16

20 An over-supply of drilling units may lead to a reduction in day rates and/or lower utilization of the drilling units which could negatively impact the Group's revenues, profitability and cash flows. Significant increases in the prices for oil and gas have historically resulted in a large number of construction orders being placed for new units. This has historically resulted in an over-supply of drilling units and has caused a subsequent decline in utilization and day rates when the drilling units have entered the market. Owners of older, inefficient units are retiring them as they approach periodic classing activities and not opting to invest the significant expenditures required to continue working. A relatively large number of the ultra deepwater and harsh environment drilling units currently under construction have not been contracted for future work, and a number of units in the existing worldwide fleet are currently off contract. The supply of available uncontracted units is likely to intensify price competition as scheduled delivery dates occur and additional contracts terminate without renewal and lead to a reduction in day rates as the active fleet grows. In general, drilling unit owners are bidding for available work extremely competitively with a focus on utilization over returns, which has and will likely continue to drive rates down to or below cash breakeven levels. Any reductions in drilling activity by the Group s customers may not be uniform across different geographic regions. Locations where costs of drilling and production are relatively higher may be subject to greater reductions in activity. Such reductions in high cost regions may lead to relocation of drilling units, increasing the supply of available drilling units in regions with relatively less reductions in activity. To maintain the continued employment of the Drilling Units it may also accept contracts at lower day rates or on less favorable terms due to market conditions. In addition, may in the future request renegotiation of existing contracts to lower day rates. In an over-supplied market, the Group may have limited bargaining power to renegotiate on more favorable terms. Lower utilization and day rates will adversely affect the Group s revenues and profitability. 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 the Group will be dependent in part upon its ability to improve existing services and related equipment, to address the increasingly sophisticated needs of its customers and to anticipate changes in technology and industry standards and respond to technological developments on a timely basis. If the Group does not successfully acquire new equipment or upgrade its existing equipment on a timely and costeffective basis in response to technological developments or changes in standards in the industry, it may have a material adverse effect on the Group s business. The cost of upgrading the Group s equipment may increase as its fleet ages, which could adversely affect the Group s financial performance. In addition, the Group s operations may also 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. The drilling industry is highly competitive and fragmented, and several large companies compete in the markets served by the Group as do numerous small companies. 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 and they may be favored by clients due to better perceived reliability due to greater size and balance sheet. They also compete with the Group on recruitment. In general, drilling unit owners are bidding for available work extremely competitively with a focus on utilization over returns, which has and will likely continue to drive rates down to or below cash breakeven levels. To maintain the continued employment of the Drilling Units it may accept contracts at lower day rates than those enjoyed today or on less favorable terms due to market conditions. In addition, customers may request renegotiation of existing 17

21 contracts to lower day rates. In an over-supplied market, the Group may have limited bargaining power to renegotiate on more favorable terms. Lower utilization and day rates will adversely affect the Group s revenues and profitability. The Group s drilling operations are international in scope and expose the Group to additional risks or additional costs of compliance. The Group operates in various jurisdictions and its international operations involve additional risks, including risks of: general economic conditions in each such jurisdiction; terrorist acts, war, civil disturbances and piracy; seizure, nationalization or expropriation of property or equipment; political unrest; labor unrest and strikes; the inability to repatriate income or capital; complications associated with repairing and replacing equipment in remote locations; unexpected changes in regulatory requirements and complying with a variety of foreign laws and regulations; climate change and regulation of greenhouse gases having a negative impact on the Group's business. impositions of sanctions or trade 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; management spread over various jurisdictions; regulatory or financial requirements to comply with foreign bureaucratic actions; and overlapping and/or changing tax policies. In addition, international contract drilling operations are subject to laws and regulations in relevant countries and jurisdictions, including laws and regulations relating to: the equipment required 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 units and related equipment; requirements for local registration or ownership of drilling units 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 units 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 the Group s ability to compete in those regions. It is difficult to predict whether 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. Increased political and economic instability in some of the geographic markets in which the Group operates, or may operate in the future may cause further disruption to financial and commercial markets and contribute to even higher level of volatility in prices. In addition, acts of terrorism, piracy, war and other threats of armed conflicts in or around various areas in which the Group operates, or may operate in the future could limit or disrupt the Group s markets and operations, including disruptions from evacuation of personnel, cancellation of contracts or the loss of personnel or assets. No assurance can be given that the Group will have sufficient insurance coverage in place for losses incurred due to such circumstances. 18

22 The Group's ability to operate drilling units in the U.S. Gulf of Mexico could be restricted by governmental regulation. The Group has one ultra deepwater drilling unit operating in the U.S. Gulf of Mexico. Guidelines and regulatory requirements implemented as a result of hurricane damage to drilling units and/or major incidents such as the Macondo incident could increase the cost of operations or reduce the area of operations for the Group's ultra deepwater drilling unit, thereby reducing their marketability. Implementation of new guidelines or regulations that may apply to ultra deepwater drilling units may subject the Group to increased costs and limit the operational capabilities of the drilling units, although such risks to the extent possible should rest with the Group's clients. The current and future regulatory environment in the U.S. Gulf of Mexico could also impact the demand for drilling units in the U.S. Gulf of Mexico in terms of overall number of units in operations and the technical specification required for offshore units to operate in the U.S. Gulf of Mexico. Additional governmental regulations concerning licensing, taxation, equipment specifications, training requirements or other matters could increase the costs of the Group's operations, and escalating costs borne by the Group's customers, along with permitting delays, could reduce exploration and development activity in the U.S. Gulf of Mexico and, therefore, reduce demand for the Group's services. In addition, insurance costs across the industry are expected to increase as a result of the Macondo incident and, in the future, certain insurance coverage is likely to become more costly, and may become less available or not available at all. The Group's cash flow and financial position could be adversely affected if the Group's drilling unit in the U.S. Gulf of Mexico should be affected by any of the risks mentioned above. Failure to comply with the U.S. Foreign Corrupt Practices Act or the UK Bribery Act could result in fines, criminal penalties, drilling contract terminations and an adverse effect on the Group's business. The Group currently operates, and historically has operated, its drilling units in countries throughout the world, including some with developing economies. The Group's business interaction with national oil companies as well as state or government-owned shipbuilding enterprises and financing agencies puts it in contact with persons who may be considered foreign officials under the U.S. Foreign Corrupt Practices Act of 1977 ("FPCA"), and the Bribery Act 2010 of the United Kingdom (the "UK Bribery Act"). The Group is subject to the risk that the Group or the Group's affiliated companies or their respective officers, directors, employees and agents may take actions determined to be in violation of anti-corruption laws, including the FCPA and the UK Bribery Act. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, curtailment of operations in certain jurisdictions, and might adversely affect the Group's business, results of operations or financial condition. In addition, actual or alleged violations could damage the Group's reputation and ability to do business. Furthermore, detecting, investigating and resolving actual or alleged violations is expensive and can consume significant time and attention of the Group's senior management. In order to effectively compete in some foreign jurisdictions, the Group utilizes local agents and/or establishes entities with local operators or strategic partners. All of these activities may involve interaction by the Group's agents with government officials. Even though some of the Group's agents and partners may not themselves be subject to the FCPA, the UK Bribery Act or other anti-bribery laws to which the Group may be subject, if the Group's agents or partners make improper payments to government officials or other persons in connection with engagements or partnerships with it, the Group could be investigated and potentially found liable for violation of such anti-bribery laws and could incur civil and criminal penalties and other sanctions, which could have a material adverse effect on the Group's business and results of operation. 19

23 The Group has a limited number of customers so if any of these customers failed to compensate the Group for it services; terminated its contracts with or without cause; failed to renew its existing contract, the Group's operations could be materially affected. The Group relies on timely delivery of goods and services by numerous vendors and suppliers, and the performance in full by the operators of the Group s units. Failure to perform or financial difficulties encountered by vendors and suppliers can adversely affect the financial and/or operational condition of the Group. The Group s contract drilling business is subject to the risks associated with having a limited number of customers for its services. Petrobras and LLOG are currently the Group's only customers for contract drilling services. The Group is exposed to a risk of payment default which could significantly and adversely impair the Group s liquidity and no assurance can be given that the Group will be able to avoid this risk. The Group s results of operations could be materially adversely affected if either of its current customers or future customers, failed to compensate the Group for it services; terminated its contracts with or without cause; failed to renew its existing contract; or refused to award new contracts to the Group. In any of these circumstances, the Group may be unable to enter into contracts with new customers at comparable or better day rates. The Group's ability to obtain new contracts will depend on the prevailing market conditions. There can be no assurance that it will be able to enter into any such contracts on commercially acceptable terms or at all. In cases where the Group is not able to obtain new contracts in direct continuation, the Group may idle or stack its units. When idled or stacked, drilling units do not earn revenues, but continue to require cash expenditures for crews, fuel, insurance, berthing and associated items. If the Group s lenders are not confident that the Group is able to employ the Group s assets, the Group may be unable to secure additional financing on terms acceptable to the Group or at all for the remaining instalment payments it is obligated to make before taking delivery of its newbuild and the Group s other capital requirements including principal repayments. Where new contracts are entered into at day rates substantially below the day rates of the existing contracts or on terms less favorable than those contained therein, it could materially impact the Group s business and financial conditions. The Group relies on timely delivery of goods and services by numerous vendors and suppliers, and the performance in full by the operators of the Group s units. Failure to perform or financial difficulties encountered by any such counterparty can adversely affect the financial and/or operational condition of the Group. Consistent with standard industry practice, the customer generally assumes and indemnifies the Group against, e.g., pollution from reservoirs and blowouts. The Group will endeavor to include similar provisions in future drilling contracts. However, there can be no assurance that the counterparties will be willing or financially able to indemnify the Group against all such risks. Since the Group's fleet presently consists of only a limited number of units, any operational downtime or any failure to secure employment at satisfactory rates will affect the Group's results more significantly than for a group with a larger fleet. Furthermore, frequent rig mobilizations could be disruptive to the Group's financial results if it experiences delays due to adverse weather, third party services or physical damage to its units. Further, the Group will be more vulnerable to specific economic, political, regulatory, environmental or other developments than would a company holding a more diversified portfolio of assets. In a situation where a drilling unit faces long idle periods, reductions in costs may not be immediate due to costs of preparing drilling units for stacking and maintenance in the stacking period. The Group relies on a related party Seadrill Limited group for the operation of drilling units. The Group s financial condition and client relationships could be adversely affected if the agreements are terminated or Seadrill fails to provide services in accordance with the terms of the contracts. The Group has established a close relationship with Seadrill Limited and its group companies ( Seadrill ), which controls a majority of the Shares, through Management Agreements, which allows the Group to leverage existing relationships with clients and suppliers, realize economies of scale through their infrastructure and have access to a larger labor resource pool. 20

24 The Management Agreements cover provision by Seadrill of operations, project management, and marketing services for the Group s fleet. The Group is reliant on Seadrill s systems and ability to perform under the contracts. The Group s financial condition and client relationships could be adversely affected if the agreements are terminated or Seadrill fails to provide services in accordance with the terms of the contracts. 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 labor; 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 or the Group; 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 labor 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. The construction of the Sevan Developer is complete, and the unit is stacked at the shipyard in a warm-stack condition. China Ocean Shipping Company Qidong ( COSCO ) has 60 days to commission and deliver the unit for delivery should the Group secure an acceptable drilling contract and request delivery. COSCO could be delayed for various reasons or additional upgrades needed for a new contract award may not be completed timely, which could have a delay on commencement of the drilling contract and adversely affect the Group s financial position, results of operations and cash flows or the cancellation or termination of the drilling contract. The Group 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 and US Gulf of Mexico regions for the three existing units, potentially also other regions for the newbuild currently under construction, and future growth in arctic harsh environments. 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 or the US Gulf of Mexico, 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 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 and Seadrill s ability to attract and retain skilled professionals with appropriate experience and expertise. The Group s success depends, to a 21

25 significant extent, on the continued services of the individual members of its management team and Seadrill s 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 or Seadrill. Any loss of the services of key members of the management team could have a material adverse effect on its business and operations. Group's relies on the Sevan Technology License and other Intellectual Property Rights. Third-parties may question, challenge or infringe these intellectual property rights which could have a material adverse effect on the Group s results of operation. The Group utilizes the patented Sevan platform concept for its Drilling Unites through the Sevan Technology License, and along with other patented or proprietary technology, this is an essential part of the Group s business concept. The Sevan Technology License will be utilized in drilling rig operations and on drilling units. 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 Group into a legal dispute. In the event that a member of the Group or one of the Group s suppliers or sub-suppliers becomes involved in a dispute over infringement of intellectual property rights relating to equipment owned or used by the Group, the Group may lose access to repair services, replacement parts, or could be required to cease use of some equipment. The Group could also be required to pay royalties for the use of equipment. Technology disputes involving the Group s suppliers, sub-suppliers or the Group could adversely affect the Group s financial results and operations. Certain of the Group 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 Group s suppliers will be willing or financially able to indemnify the Group against these risks, or that such contractual indemnities will protect the Group from adverse consequences of such technology disputes. Accordingly, if a third party claim should be successful in claim alleging infringement of intellectual property rights, this could have a material adverse effect on the Group s results of operation. The Group will need to raise a substantial amount of additional funds in order to take delivery of Sevan Developer and to satisfy future liquidity requirements and finance future operations. Currently, no financing is in place for the delivery instalment of USD million for Sevan Developer and no charter contracts have so far been secured for this unit. The Group has no obligation to take delivery of Sevan Developer until it secures a charter contract that is sufficient and satisfactory (with respect to, among other things, the operating day rate, counterparty and term) to enable the Group to obtain secured financing for the unit. If the unit is not delivered within the delivery deferral period (by 15 October 2015 with the potential to extend in sixmonth intervals to 15 October 2017 if mutually agreed with COSCO) the pre-delivery instalment in the amount of USD million will be refunded by COSCO and this obligation is secured by refund guarantees. The refund would improve the liquidity position of the Group. There is a risk that COSCO will challenge any termination by the Group, which could delay a refund being made under the refund guarantees. In the event sufficient funding is obtained and delivery of the unit is accomplished, the Group may still require additional capital in the future due to unforeseen liabilities or in order for it to invest in construction of the next generation Sevan Drilling Design, to take advantage of opportunities for acquisitions, joint ventures or other business opportunities that may be presented to it. The failure to consummate or integrate acquisitions of other businesses and assets in a timely and cost-effective manner could have an adverse effect on the Group s financial condition and results of operations. Acquisition of assets or businesses, including taking delivery of Sevan Developer that expand the Group s drilling operations is an important component of the Group s business strategy. The Group believes that acquisition opportunities may continue to arise from time to time, and any such acquisition could be significant. Any acquisition could involve the payment by the Group of a substantial amount of cash, the incurrence of a substantial 22

26 amount of debt or the issuance of a substantial amount of equity. Certain acquisition and investment opportunities may not result in the consummation of a transaction. In addition, the Group may not be able to obtain acceptable terms for the required financing for any such acquisition or investment that arises. The Group cannot predict the effect, if any, that any announcement or consummation of an acquisition would have on the trading price of the Group s Shares. The Group s future acquisitions could present a number of risks, including the risk of incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets, the risk of failing to successfully and timely integrate the operations or management of any acquired businesses or assets and the risk of diverting management s attention from existing operations or other priorities. If the Group fails to consummate and integrate the Group s acquisitions in a timely and cost effective manner, the Group s financial condition and results of operations could be adversely affected. The Group s existing or future debt arrangements could limit the Group s liquidity, inter alia the Group is vulnerable to a risk of cross-default in the event of default by Seadrill. The Company may be required to draw down fully on the revolving credit facility and have limited actions other than equity financing or seek additional assistance from the guarantor of the bank loan facility, Seadrill. Additional indebtedness, equity financing or support from Seadrill 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. The Group s bank loan agreement contains customary cross-default provisions, takes first priority mortgages in the assets, and is guaranteed by Seadrill. The Group cannot control Seadrill's ability to comply with its liabilities and therefore the Group is vulnerable to a risk of cross-default in the event of default by Seadrill. In particular, the Company as the parent company of the Group, has limited 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 limited by interest payments and debt amortizations under the bank loan facility. As a consequence, the Company may have little or no access to operational cash from its rig-owning subsidiaries, which could have a negative impact on the Company's ability to gain access to the necessary liquidity for fulfilment of other obligations. Liquidity is based on access to the revolving credit facility provided by Seadrill and cash from operations, which is subject to the performance of operational efficiencies of the units. Should any unforeseen consequences or liabilities in operations occur, the Company may be required to draw down fully on the revolving credit facility and have limited actions other than equity financing or seek additional assistance from the guarantor of the bank loan facility, Seadrill. 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. The Group s debt agreements may (i) affect the Group 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. The Group s ability to meet all or part of its debt service obligations and to fund planned expenditures, including the delivery instalment from Sevan Developer project, 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 or part 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. If the revolving credit facility cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Group does not have adequate liquidity beyond

27 Additional indebtedness, equity financing or support from Seadrill 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. Interest rate fluctuations could affect the Group s profitability, earnings and cash flow. The Group has incurred, and is expected to continue to incur, significant amounts of debt. The Group has not entered any interest rate hedging arrangements. Movements in interest rates may adversely affect the Group s profitability, earnings and cash flow. The principal amount which could be covered by interest rate swaps is evaluated continuously and determined based on the Group s debt level, the Group'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 contract with LLOG is in USD, and the day rates under its contracts with Petrobras are payable in a combination of USD and Reais. The Group incurs 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 denominated in USD. Although the Group will attempt to achieve a match of incoming and outgoing cash flows 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 minimize exchange rate fluctuation effects. The Company is a holding company and is dependent upon cash flow from subsidiaries to meet its obligations and in order to pay dividends to its shareholders. The Company conducts its operations through, and most of the Company's assets are owned by, its subsidiaries. As such, the cash that the Company obtains form its subsidiaries are the principal source of funds necessary to meet its obligations. The rig owning subsidiaries are currently the borrowers under the Group's secured bank loan facility. As a result of this, the Company may need to support the subsidiaries' servicing of their loan with cash. No assurance can be made that the Company can support its subsidiaries over a prolonged period of time. If the Company fails to support the subsidiaries under such circumstances, the banks providing the subsidiaries' loan facilities may become entitled to declare the loan facilities to be in default, following which all amounts under the loan facilities will become due and payable. 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 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 in the future, may 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 Group s ability to pay dividends and service debt, because of potential negative outcomes, the costs associated with instigating or defending such lawsuits, and the diversion of management's attention to these matters. Risk of unexpected incidents and occurrences. There is a risk that the Group will be subject to unexpected incidents and occurrences. Such incidents and occurrences may have a material adverse effect on its business, financial condition, results of operations and cash flow. 24

28 Risk related to critical accounting estimates and assumptions. The Group makes estimates and assumptions concerning the future, specifically regarding impairment of assets, income taxes, and residual value and useful life of capital assets. 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 include. 2.3 Market and political risks Lower utilization and day rates may adversely affect the value of drilling assets. The market value of drilling units have decreased, 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. Such loss could materially and adversely affect the Group s business prospects, financial condition, liquidity, results of operations. If the offshore contract drilling industry suffers further adverse developments in the future, the fair market value of drilling units may decline more. 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. This is, due to various local content requirements, a particular concern in Brazil where two of the Drilling Units are in operation. 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. 2.4 Regulatory risks Governmental laws and regulations could affect operations, increase operating costs, reduce demand for services from and restrict the ability of drilling rig owners to operate its drilling units or otherwise. The Group and its subsidiaries are subject to the international laws and regulations governing the oil and gas industry and, to some extent, the shipping industry. The Group and its subsidiaries are required to comply with the various regulations introduced by the authorities where the operations take place, the applicable legislation of various flag states as well as the guidelines introduced by international agencies such as the International Maritime Organization (IMO) where applicable. 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; local content requirements; regulation and economic conditions; and taxation. In the event that the Group is unable at any time to comply with the existing regulations or any changes in such regulations, or any new regulations introduced by local or international bodies, the operations may be adversely affected. Any change in or introduction of new regulations, may increase the costs of operations, which could have an adverse effect on the Group s profitability. The future costs of complying with such new laws and regulations 25

29 cannot be predicted. Furthermore, if the units do not comply with the extensive regulations applicable from time to time, the consequence may be that units are unable to continue their operations. 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. 2.5 Risks relating to the Shares The 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 materializing or the anticipation of such risk materializing. 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 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 the 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, ref. section 2.1. 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 reregistration of their Shares or otherwise vote their Shares in the manner desired by such beneficial owners. 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, any US state securities laws or any other jurisdiction outside of Norway and are not expected to be registered there in the future. As such, the Shares may not be offered or sold in the United States 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. Bermuda law permits the transfer of shares listed or admitted to trading on an appointed stock exchange (as such term is defined in the Bermuda Companies Act (an Appointed Stock Exchange )) such as Oslo Børs, to be 26

30 effected in accordance with the rules of such stock exchange without a written instrument of transfer. Further, the Bermuda Monetary Authority pursuant to the Exchange Control Act 1972 and associated regulations has granted a general permission for the issue and transfer of shares and/or securities in companies incorporated in Bermuda from and/or to a non-resident of Bermuda where such company has any Equity Securities (meaning a share issued by a Bermuda company which entitles the holder to vote for or to appoint one or more directors or a security which by its terms is convertible into a share which entitles the holder to vote for or appoint one or more directors) listed on an Appointed Stock Exchange. Accordingly, the Shares can be registered in the VPS and title to the Shares can be evidenced and transferred without a written instrument and the general permission of the Bermuda Monetary Authority for the issuance and transfer of shares shall apply as long as the Shares are listed and traded on Oslo Børs. If the Shares are no longer listed or admitted to trading on Oslo Børs or any other Appointed Stock Exchange, or if Oslo Børs ceases to be an Appointed Stock Exchange, the Shares may only be transferred by written instrument in accordance with the terms of the Bye-Laws of the Company and with the prior consent of the Bermuda Monetary Authority. Shareholders outside of Norway are subject to exchange rate risk. The Shares are priced 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. The Company may be unwilling or unable to pay any dividend in the future. The Company may choose not, or may be unable, to pay dividends in future years. The amount of dividends paid by the Company, if any, for a given financial period, will depend on, among other things, the Company's future operating results, cash flows, financial condition, capital requirements, the sufficiency of its distributable reserves, the ability of the Company's subsidiaries to pay dividends to the Company, credit terms, general economic conditions, legal restrictions and other facts that the Company may deem to be significant from time to time. The Company has not distributed any dividends since the Company s inception. 2.6 Tax risks Tax laws are complex and subject to change. The tax laws of the various jurisdictions in which the Company may operate are complex, open to different interpretations, and subject to change, possibly with retroactive effect. Future changes in tax laws, including changes in administrative practices or new court decisions, could adversely affect the Company s future earnings and cash flows. The Company may be subject to tax audits. From time to time, the Company and its subsidiaries may be subject to review or investigation by tax authorities of the jurisdictions in which it operates. A successful challenge by any tax authority in such jurisdictions may result in a materially adverse reduction in the Company s earnings and cash flows. In addition, the Company s international operations and the mix of its investors may subject the Company, its subsidiaries, and its investors to special tax rules and regulations. Each investor should seek advice based on its particular circumstances from an independent tax advisor. Norwegian (or other countries with CFC legislation) tax authorities could treat the Company as a Norwegian Controlled Foreign Corporation, which would subject local shareholders to taxation. If Norwegian resident shareholders control a company (i.e. directly or indirectly own or control at least 50% of the shares or the capital of a company) that is resident in a low tax jurisdiction, such Norwegian shareholders may be subject to Norwegian taxation according to the Norwegian Controlled Foreign Corporations regulations (Norwegian CFC-regulations). Such taxation could apply with respect to the Company and/or certain subsidiaries of the Group, if the Group becomes subject to the control of Norwegian shareholders. If the Norwegian shareholders of the Company are subject to Norwegian CFC taxation, such Norwegian shareholders are taxed in Norway on their proportionate share of the net profits generated by the relevant foreign company, calculated according to Norwegian tax regulations. The income will be subject to Norwegian taxation, currently at a rate of 27%. Further, 27

31 there can be no assurance that Norwegian tax legislation is may be subject to future changes which can also possibly be made on a retrospective basis The same principle may apply in the jurisdiction having similar tax legislation. 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 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 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. 28

32 3 RESPONSIBILITY FOR THE PROSPECTUS This Prospectus has been prepared in connection with the Listing described herein. The Board of Directors of Sevan Drilling Limited accepts responsibility for the information contained in this Prospectus. The members of the Board of Directors confirm that, 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 omissions likely to affect its import. Sevan Drilling Limited 29 June 2015 The Board of Directors of Sevan Drilling Limited Erling Lind (Chairman) Birgitte Ringstad Vartdal (Director) Per Wullf (Director) Kristian Johansen (Vice Chairman) Ragnhild M. Wiborg (Director) 29

33 4 GENERAL INFORMATION 4.1 Presentation of financial and other information Financial information Sevan Drilling ASA s audited consolidated financial statements as at and for the years ended 31 December 2014, 2013 and 2012, have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS") (the "Sevan Drilling ASA Financial Statements"). Sevan Drilling ASA unaudited consolidated interim financial statements as at and for three months period ended 31 March 2015 (the "Sevan Drilling ASA Interim Financial Statements"), have been prepared in accordance with IFRS. The financial statements for the Company as at and for the period ended 31 December 2014 have been prepared in accordance with IFRS ("Sevan Drilling Limited Financial Statements"). The Sevan Drilling ASA Financial Statements, the Sevan Drilling ASA Interim Financial Statements, and the Sevan Drilling Limited Financial Statements (collectively referred to as the "Financial Information") are attached hereto as Appendices B to F. The Sevan Drilling ASA Financial Statements and Sevan Drilling Limited Financial Statements have been audited by PricewaterhouseCoopers AS. The Interim Financial Statements are only subject to limited review and unaudited. The Interim balance sheet for Sevan Drilling ASA as at the period ended 17 April 2015 have been prepared in accordance with IFRS and has been included as appendix G in the Prospectus (the "Sevan Drilling ASA Interim Balance") Currency presentation In this Prospectus, all references to "NOK" are to the lawful currency of Norway and all references to "USD" are to the lawful currency of the United States. Items included in the financial statements of each of the entities reported are measured using the currency of the primary economic environment in which each entity operates (the "Functional Currency"). Foreign currency transactions are translated into the Functional Currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of such transactions (realized items) and from translation at exchange rates prevailing at the balance sheet date of monetary assets and liabilities denominated in foreign currencies (unrealized items) are recognized in the income statement. Foreign exchange gains and losses that relate to interest-bearing debt and cash and cash equivalents are presented (net) as a separate line item in the income statement within net financial items. Foreign exchange gains and losses that relate to operations are presented (net) as a separate line item in the income statement within operating expenses Rounding Certain figures included in this Prospectus have been subject to rounding adjustments (by rounding to the nearest whole number or decimal or fraction, as the case may be), accordingly, figures shown for the same category presented in different tables may vary slightly. 4.2 Limitation of liability - Manager The Company has furnished the information in this Prospectus. No representation or warranty, express or implied is made by the Manager as to the accuracy, completeness or verification of the information set forth herein, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. The Manager assumes no responsibility for the accuracy or completeness or the verification of this Prospectus and accordingly disclaim, to the fullest extent permitted by applicable law, any and all liability whether arising in tort, contract or otherwise which they might otherwise be found to have in respect of this Prospectus or any such statement. 30

34 5 THE MIGRATION AND LISTING 5.1 Background During 2014 the board of directors of Sevan Drilling ASA reviewed the corporate organization of the Old Group and concluded that it was not optimal to maintain the parent company function in Norway. The board of directors of Sevan Drilling ASA found disadvantages and additional costs associated with maintaining the parent level of the Old Group in Norway including the following: (i) (ii) (iii) (iv) The Old Group had limited association and presence in Norway and it therefore made sense to discontinue a structure where the parent level for the Group is in Norway; The majority of Sevan Drilling ASA's shareholders are resident in jurisdictions outside the applicable area for the Norwegian exemption model for tax. This means that any dividend paid by Sevan Drilling ASA's to these shareholders would trigger Norwegian withholding tax and thus reduce the amount these shareholders will receive compared to what would be received by Norwegian shareholders and/or shareholders in jurisdictions having a tax treaty with Norway; Sevan Drilling ASA will, as a Norwegian tax subject, have to pay ordinary Norwegian corporate tax on its profits. As a consequence of Sevan Drilling ASA's subsidiaries being incorporated outside the applicable area for the Norwegian exemption model for taxation, Sevan Drilling ASA will be taxed in Norway for dividends and other income it receives from such subsidiaries. Alternatively, Norwegian CFC rules may be applied leading to Sevan Drilling ASA being taxed for the profits generated by the subsidiaries. Given that Sevan Drilling ASA has limited association to Norway and that the majority of its shareholders are non-norwegian, such tax liability to Norway does not appear logical; and The limitations in the deductibility for tax purposes of interest and other financial expenses between Norwegian and non-norwegian group companies which came into effect in 2014 would have hit Sevan Drilling ASA directly as a consequence of Sevan Drilling ASA's affiliate, Seadrill, having guaranteed Sevan Drilling ASA's bank loan and having provided Sevan Drilling ASA with a revolving credit facility. This would have led to Sevan Drilling ASA becoming taxable in Norway earlier than previously anticipated and increase of the taxable profit. On this background the board of directors of Sevan Drilling ASA initiated a restructuring process during 2014 preparing the Migration of the parent level from Norway to Bermuda in 2015 (the "Restructuring"). The first step in this Restructuring process was the establishment of the Company. Subsequently all of Sevan Drilling ASA's assets and liabilities related to its subsidiaries and the revolving credit facility were contributed to the Company in exchange for Shares through a contribution in-kind. The contribution in-kind was completed 10 November Subsequently Sevan Drilling ASA entered into a management transfer agreement with Sevan Management to transfer the management function and associated assets and liabilities of Sevan Drilling ASA to this company in accordance with the Management Transfer Agreement. Accordingly, with effect from 31 December 2014, the Management Transfer Agreement was implemented and day-to-day management responsibilities of Sevan Drilling ASA were transferred to Sevan Management, including the transfer of related assets and corporate employees and the assumption of responsibility for complying with stock exchange obligations Sevan Management entered into management service agreements with both Sevan Drilling ASA and the Company, and will continue to provide services under these agreements also after the Migration. See section for further information. As a result of the Restructuring Sevan Drilling ASA's sole asset prior to the completion of the Capital Decrease and Listing (apart from a limited amount of cash) are the Shares of the Company. See section for further information about the financial accounts related to the Restructuring and Appendix G for the Sevan Drilling ASA balance sheet at 17 April The illustration below sets out the organization of the Old Group prior to the completion of the Capital Decrease and Listing where Sevan Drilling ASA is the parent company. 31

35 Organizational chart before Migration Public Seadrill Limited (Bermuda) 49.89% 50.11% Sevan Drilling ASA (Norway) Sevan Drilling Limited (Bermuda) Sevan Brasil Ltd. (Bermuda) Sevan Drilling Pte Ltd. (Singapore) Sevan Drilling Rig V AS (Norway) Sevan Drilling Rig II AS (Norway) Sevan Drilling Rig VI AS (Norway) Sevan Brasil Sevan Driller Ltd. (Bermuda) Sevan Drilling Limited (UK/Norway) Sevan Drilling Rig V Pte Ltd. (Singapore) Sevan Drilling Rig IX Pte Ltd. (Singapore) Sevan Drilling Rig II Pte Ltd. (Singapore) Sevan Drilling Rig VI Pte Ltd. (Singapore) Sevan Driller Sevan Developer Ltd. (Bermuda) Sevan Drilling Management AS (Norway) Sevan Drilling North America LLC (USA).01% Sevan Investimentos do Brasil Ltda (Brazil) 99.99% Sevan Developer Sevan Louisiana Hungary Kft. (Hungary) Swiss Branch Sevan Drilling AS (Norway) Sevan Drilling Rig VIII AS (Norway).01% Sevan Marine Servicos de Perfuracao Ltda (Brazil) 99.99% Sevan Louisiana 5.2 Capital Decrease and relocation of parent level of the Group from Norway to Bermuda After the Restructuring was completed the board of directors of Sevan Drilling ASA proposed to the shareholders to do a Migration, i.e. to resolve to relocate the parent level of the Old Group from Norway to Bermuda by distributing all of Sevan Drilling ASA's shares in the Company to Sevan Drilling ASA's shareholders as a capital reduction, i.e. repayment of paid in capital. The shareholders of Sevan Drilling ASA approved the Migration in the annual general meeting of Sevan Drilling ASA held 15 May Further, the shareholders approved in this annual general meeting, the proposal to complete the Migration by distributing shares in the Company to the shareholders by means of a Capital Decrease and repayment of paid in share capital as follows: 1. The Company s share capital shall be reduced from NOK 594,623,436 by NOK 593,623,436 to a share capital of NOK 1,000,000 through a reduction of the nominal value of the Company s shares from NOK 1 to NOK As at the time of the completion of the capital reduction the reduction amount shall be used as follows: a. NOK 179,288,574 shall be used to cover loss which cannot otherwise be covered; b. NOK 386,505,233 shall be distributed to the Company s shareholders as repayment of paid in share capital by distributing the Company's shares in Sevan Drilling Ltd to the shareholders; and c. The remaining amount of NOK 27,829,656 shall be transferred to other equity. According to the Norwegian Public Limited Liability Act a six weeks creditor notice period followed. This notice period took effect from the moment in time the Capital Decrease was registered in the Norwegian Register for Business Enterprises, i.e. 15 may The creditor notice period expired 26 June Upon the completion of the Capital Decrease through registration in the Norwegian Register of Business Enterprises, the Shares will be distributed among Sevan Drilling ASA's shareholders simultaneously with the Listing on a pro rata basis. 32

36 Accordingly, the shareholders will after the Capital Decrease is completed, have approximately the same ownership share in the Company as they had in Sevan Drilling ASA. Simultaneously with the Listing of the Company the shares of Sevan Drilling ASA will be delisted. The shareholders of Sevan Drilling ASA will after the completion of the Capital Decrease be shareholders in the Company. Chapter 12 of this Prospectus provides Corporate Information about the Company including Section 12.9 provides a summary of the Bye-laws. The illustration below sets out the organization of the Group after the completion of the Capital Decrease and Listing: Organizational chart post Migration Seadrill Limited (Bermuda) Public 50.11% 49.89% Sevan Drilling Limited (Bermuda) Sevan Drilling ASA (Norway) Sevan Brasil Ltd. (Bermuda) Sevan Drilling Pte Ltd. (Singapore) Sevan Drilling Rig V AS (Norway) Sevan Drilling Rig II AS (Norway) Sevan Drilling Rig VI AS (Norway) Sevan Brasil Sevan Driller Ltd. (Bermuda) Sevan Drilling Limited (UK/Norway) Sevan Drilling Rig V Pte Ltd. (Singapore) Sevan Drilling Rig IX Pte Ltd. (Singapore) Sevan Drilling Rig II Pte Ltd. (Singapore) Sevan Drilling Rig VI Pte Ltd. (Singapore) Sevan Driller Sevan Developer Ltd. (Bermuda) Sevan Drilling Management AS (Norway) Sevan Drilling North America LLC (USA).01% Sevan Investimentos do Brasil Ltda (Brazil) 99.99% Sevan Developer Sevan Louisiana Hungary Kft. (Hungary) Swiss Branch Sevan Drilling AS (Norway) Sevan Drilling Rig VIII AS (Norway).01% Sevan Marine Servicos de Perfuracao Ltda (Brazil) 99.99% Sevan Louisiana 33

37 Subsidiaries Registered office Function Interest held Sevan Drilling Limited Bermuda Parent Company (post migration) 100% Sevan Drilling Rig II AS Norway Charterer of Sevan Brasil 100% Sevan Drilling AS Norway Dormant 100% Sevan Drilling Rig V AS Norway Administrative, limited activity 100% Sevan Drilling Rig VI AS Norway Administrative, limited activity 100% Sevan Drilling Management AS Norway Management company 100% Sevan Drilling Rig VIII AS Norway Dormant 100% Sevan Drilling Pte Ltd Singapore Administrative, limited activity 100% Sevan Drilling Rig II Pte Ltd Singapore Dormant 100% Sevan Drilling Rig V Pte Ltd Singapore Administrative, limited activity 100% Sevan Drilling Rig VI Pte Ltd Singapore Construction of Sevan Developer 100% Sevan Drilling Rig IX Pte Ltd Singapore Administrative, limited activity 100% Sevan Drilling Limited UK Charterer of Sevan Driller 100% Sevan Drilling North America LLC USA Operator of Sevan Louisiana 100% Sevan Driller Ltd Bermuda Rig Owner of Sevan Driller 100% Sevan Brasil Ltd Bermuda Rig Owner of Sevan Brasil 100% Sevan Developer Ltd Bermuda Dormant 100% Sevan Louisiana Hungary KFT Hungary Rig Owner of Sevan Louisiana 100% Sevan Marine Servicos de Perfuracao Ltda Brazil Operator for the two Brazil Rigs 100% Sevan Investimentos do Brasil Ltda Brazil Administrative, limited activity 100% Administrative activities as referred to under "function" above are limited to managing intercompany accounts receivables and payables, minimal local external party contracts, and additionally, responsibilities related to the external debt facilities. Prior to the completion of the Migration Sevan Drilling ASA provided USD 1,500,000 by way of a contribution to the surplus of the Company in order to ensure that the Company will be in a position to continue to run operations in the same manner as Sevan Drilling ASA did prior to the Migration. 5.3 Admission to trading On 26 May 2015 the board of directors of Oslo Børs ASA resolved to admit the Shares for listing. Further, on 25 June 2015 the administration of Oslo Børs ASA resolved to delist Sevan Drilling ASA subject to the completion of the Capital Decrease and Listing. The Shares will list simultaneously with the completion of the Capital Decrease and the delisting of Sevan Drilling ASA, ref. section 5.5. The first day of trading of the Shares on Oslo Børs is expected to be on or about 30 June The Shares will trade on Oslo Børs under the same ticker symbol, SEVDR, as its predecessor Sevan Drilling ASA. 5.4 Type, class, currency and ISIN number The Company has only one class of shares and has currently issued 31,000,000 Shares, each with a nominal value of USD The Shares have been issued under the laws of Bermuda. The Shares are denominated in USD. The Shares will however, trade in NOK following the Listing. The Shares are registered in book-entry form with the VPS under the International Securities Identification Number (ISIN) BMG8070J1099. The Company's register of shareholders with the VPS will be a branch register and will be administrated by Nordea Bank Norge ASA, Verdipapirservice, Middelthunsgt, 17, 0107 Oslo, Norway. The 34

38 Company's principal register of shareholders will be kept in Bermuda and will be updated on regular basis so as to mirror the branch register in the VPS. 5.5 Distribution and Settlement of the Shares On 26 June the creditor notice period expired and after the end of the trading on 29 June, the Capital Decrease will be registered in the Norwegian Register of Business Enterprises. The last day for trading of the shares in Sevan Drilling ASA on Oslo Børs under ticker SEVDR will be on 29 June This will be the last day the shares of Sevan Drilling ASA will trade inclusive of the right to receive the Shares. The following day, on 30 June 2015, the Shares in Sevan Drilling Limited will start trading on Oslo Børs under the same ticker SEVDR as its predecessor. The delisting of Sevan Drilling ASA will take place simultaneously with the Listing. VPS will, on the Record Date, have a complete list of the shareholders of Sevan Drilling ASA entitled to receive the Shares. The Shares will be delivered to these shareholders on a pro rata basis. Accordingly, all the shareholders of Sevan Drilling ASA will, following the Record Date, receive 1 Share for every 20 shares owned in Sevan Drilling ASA. The Shares will be delivered on the VPS accounts of the shareholders of the Company after the second settlement cycle of VPS on the Record Date, being visible on the VPS accounts of the shareholders in the morning 2 July Shareholders ending up with fractional Shares will be rounded up to the nearest integral number. 5.6 Distribution Ratio The distribution of the Shares among the shareholders of Sevan Drilling ASA will be done on a 20 for 1 basis, i.e. for every 20 shares held in Sevan Drilling ASA the shareholders will receive 1 share in the Company. Shareholders ending up with fractional Shares will be rounded up to the nearest integral number. 5.7 Dilution The Listing will not represent a dilution of the existing shareholders since all shareholders will receive Shares representing approximately the same ownership share in the Company as such shareholder had in Sevan Drilling ASA immediately prior to the distribution. 5.8 Interests of natural and legal persons The Manager or their affiliates have provided from time to time, and may provide in the future, investment and commercial banking services to the Company and their affiliates in the ordinary course of business, for which they may have received and may continue to receive customary fees and commissions. The Manager does not intend to disclose the extent of any such investments or transactions otherwise than in accordance with any legal or regulatory obligation to do so. The Manager will receive a fee as compensation for its service in connection with the Listing. Beyond the above-mentioned, the Company is not aware of any interest, including conflicting ones, of any natural or legal persons involved in the Offering. 5.9 Expenses The Company will not receive any proceeds in connection with the Listing. The total expenses which will be covered by the Company in connection with the Listing is expected to amount to approximately NOK 4 million Governing law The Capital Decrease and the Listing will take place pursuant to Norwegian law and the Norwegian Public Limited Liability Companies Act, save for issues related to the Shares and the Company which are subject to Bermuda law. 35

39 5.11 Timetable Event Date Expiration of creditor notice period 26 June 2015 Registration of Capital Decrease 29 June 2015 Last date of trading Sevan Drilling ASA shares 29 June 2015 First day of Listing of the Shares 30 June 2015 Record date and delivery of the Shares to the Company s shareholders 1 July 2015 The Shares will be visible on the Company's shareholders VPS accounts 2 July

40 6 DIVIDENDS AND DIVIDEND POLICY This section provides information about the Company s expectations about dividends, as well as certain legal constraints on the distribution of dividends under Bermuda law. Any future dividends declared by the Company will be paid in NOK as this is the currency that currently is supported by the VPS, although the Company prepares its financial statements in USD and its dividend policy refers to amounts in USD. 6.1 Dividend policy The Company has not distributed any dividends since its incorporation. 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 drilling units. The Company s goal will be to provide its shareholders with a competitive return on their investment over time, in terms of dividend and development in share price. The Company aims to distribute dividends to its shareholders on a regular basis. All Shares rank equal upon distribution of dividends. 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 do not contain restrictions on distribution of dividends. No assurance can be made that the Group s future debt arrangement may or may not contain restrictions. 6.2 Legal constraints on the distribution of dividends A Bermuda company may not declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the company's assets would thereby be less than its liabilities or in circumstances that would result in an unlawful reduction of share capital or share premium. "Contributed surplus" is defined for purposes of section 54 of the Bermuda Companies Act to include the proceeds arising from donated shares, credits resulting from the redemption or conversion of shares at less than the amount set up as nominal capital and donations of cash and other assets to the Company. Under the Bye-laws, the Board of Directors may declare dividends and distributions without the approval of the shareholders in general meetings. Further, the Company's subsidiaries may be subject to applicable legal constraints on the distribution of dividends in the jurisdiction in which they are incorporated, such as sufficiency of distributable reserves. 6.3 Manner of dividend payments Although any future payments of dividends on the Shares will be denominated in USD, such dividends will be distributed through the VPS in NOK. Any dividend will be paid to the shareholders through the VPS. Investors registered in the VPS whose address is outside Norway and who have not supplied the VPS with details of any NOK account, will however receive dividends by cheque in their local currency, as exchanged from the NOK amount distributed through the VPS. If it is not practical in the sole opinion of Nordea, being the Company's VPS registrar, to issue a cheque in a local currency, a cheque will be issued in USD. The issuing and mailing of cheques will be executed in accordance with the standard procedures of Nordea. The exchange rate(s) that is applied will be Nordea's rate on the date of issuance. Dividends will be credited automatically to the VPS registered shareholders' NOK accounts, or in lieu of such registered NOK account, by cheque, without the need for shareholders to present documentation proving their ownership of the Shares. 37

41 7 BUSINESS OF THE GROUP This section provides an overview of the business of the Old Group/ Group as of the date of this Prospectus. 7.1 Corporate information Sevan Drilling Limited is an exempted company limited by shares and was incorporated in Bermuda on 20 December 2013 in accordance with and pursuant to the Companies Act 1981 of Bermuda ( Bermuda Companies Act ), with Bermuda registration number The legal and commercial name of the Company is Sevan Drilling Limited. The registered office is Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda. The Group's management organization is headquartered are at Drammensveien 288, 0283 Oslo, Norway, telephone: The Company s website is The Company History Sevan Drilling ASA was established for the purpose of building state-of-the-art drilling units based on the Sevan Design. In 2007, its former parent company, Sevan Marine ASA, placed its first rig order for Sevan Driller with COSCO and a six-year drilling contract with Petrobras was secured for Sevan Driller. In 2008, the Company secured its second six-year contract with Petrobras for a deepwater drilling unit and Sevan Brasil was ordered from COSCO. In 2009, the Old Group was fully staffed and took delivery of the Sevan Driller, which commenced drilling operations for Petrobras off the coast of Brazil in June On 3 May 2011, the shares of Sevan Drilling ASA were admitted to trading on Oslo Axess. In May 2011, contracts were entered into with COSCO for the construction of two newbuilds, Sevan Louisiana and Sevan Developer with options for two additional newbuilds of the same design. In December 2011, Seadrill became the owner of 28.52% of the Sevan Drilling ASA shares, thereby becoming the largest shareholder. In February 2012, the Norwegian Financial Supervisory Authority (Norwegian: Finanstilsynet) approved the listing transfer of the Sevan Drilling ASA shares from Oslo Axess to Oslo Børs with effect from 13 February In July 2012, Sevan Brasil commenced work under its six year contract with Petrobras in Brazil. In April 2013, a 3 year contract with LLOG was secured for Sevan Louisiana for drilling in the US Gulf of Mexico. Operations commenced in May In July 2013, Seadrill ltd. acquired control of 50.1% and subsequently announced a mandatory offer of all of the outstanding shares of Sevan Drilling ASA and gained control of 50.11% of the outstanding shares. In October 2014, delivery of Sevan Developer was deferred for up to 12 months. In November 2014, the term of the contract with LLOG regarding Sevan Louisiana was amended to a total of 4 years. In May 2015, the Migration was approved by the shareholders of Sevan Drilling ASA, ref. Section 5 The Listing. 7.3 Business overview The Group is an international offshore drilling contractor specializing in the ultra deepwater segment, offering the unique Sevan Design for offshore drilling units in the global ultra deepwater market. The Group is a fully integrated drilling contractor and owns (through its subsidiaries) three ultra deepwater Drilling Units Sevan Driller, Sevan Brasil and Sevan Louisiana. Sevan Driller and Sevan Brasil each have a six-year employment contract with Petrobras in Brazil. Sevan Louisiana has a four year employment contract with LLOG in the US Gulf of Mexico. The Group also has an additional unit on order, Sevan Developer. The Company has Management Agreements with Seadrill Management for operation and marketing of its fleet as well as for corporate services, which provides numerous benefits to its operations and administration functions, ref. section

42 7.4 Competitive strengths Premium units for ultra deepwater Through the Sevan Design, a simple, compact and robust cylindrical rig design with high variable drilling load capacity, the Group's units provide safe and efficient operations with high variable drilling load capacity and generous stability margin, paired with generous tank capacity for bulk and drilling fluids (specifically Sevan Driller is fitted with crude oil storage capacity) which reduces the need for resupply and is suitable for drilling in remote areas with limited infrastructure. The load capacity is in line with that of a drillship and two to three times that of a semi-submersible rig. The Sevan Design, enables the units to respond accurately regardless of the direction of wind, waves and currents, facilitating optimized operations and optional mooring, further design changes can be made for development drilling and harsh environment conditions. Traditional drilling units are challenged by bi-directional waves, wind and currents limiting the free range of movement and ability to optimize heading with respect to motions, station keeping and power consumption. The extended bilge keel design incorporated on two of the units has improved their motion characteristics. Timing for incorporating similar improvement on the Sevan Driller is being evaluated History of operations in deepwater regions The Group has an established position in Brazil through existing operations with long term contracts with Petrobras and in the US Gulf of Mexico with a long-term contract with LLOG. Based on the current performance, assessments by operations management and existing clients, the Company believes it has proven its drilling concept and new operations systems. The Brazilian continental shelf and the US Gulf of Mexico are two of the largest ultra deepwater markets in the world demanding high standards with respect to personnel, equipment, health safety and environment, and operational procedures. With an established foothold in these markets, the Group is positioned for further growth Arctic and harsh environment operations Arctic regions are estimated to contain approximately 13% of the world s undiscovered oil and approximately 30% of undiscovered gas. The development of the offshore arctic regions requires purpose-built units able to operate under extreme low temperatures and in icy waters. The Group has developed a moored cylindrical drilling unit concept for operation under such extreme arctic conditions. The cylindrical concept s inherent qualities make it suited for arctic operations with: simple and robust hull construction that is easy to ice strengthen compact design simplifying winterization large load carrying capacity (autonomy with reduced need for re-supply) no ice-vaning required (no need for propulsion for directional control) moored without complex and expensive turret solution limited propulsion required during normal drilling operations (reduced environmental impact; emissions and noise) suitable for operation in the pan-arctic locations in water depths up to 1,000 m cost efficient construction The Group has also developed a harsh environment version suitable for operation under typical North Sea Conditions. The Company has access to an exclusive license agreement with Sevan Marine ASA for these arctic and harsh environment concepts. 7.5 Strategy Based on the key strengths outlined in section 7.4 above, the Group believes that it has a strong basis for fulfilling its overall goal of being recognized one of the leading and fully integrated drilling contractor with specific capability in ultra deep water. The main operational focus is currently safe operations, improved reliable uptime and improved maintenance planning, while efficiently managing operating costs and onshore support. Recent initiatives include restructuring of operations under the Management Agreements with Seadrill, including organization of local technical support and 39

43 local management, replacing maintenance system with integrated planning to improve efficiency, safety training, and significant improvements in purchasing and logistics controls and access to spare parts. The Group will continue to focus on the needs of existing clients to deliver results that maintain high customer satisfaction and continue to prove the design and management of the units. 7.6 The ultra deepwater units - Sevan Driller, Sevan Brasil, Sevan Louisiana and Sevan Developer The ultra deepwater units - Specification Sevan Driller, Sevan Brasil, Sevan Louisiana and Sevan Developer (not delivered), are all ultra deepwater drilling units, capable of operating in water depths of up to 10,000 feet. The rig concept is based on the Sevan Design. The Sevan Design is a semi-submersible drilling rig consisting of an upper working and living quarters deck connected to a cylindrical hull. Such units operate in a "semi-submerged" floating position, in which the lower hull is below the waterline and the upper deck protrudes above the surface. The unit is situated over a wellhead location and remains stable for drilling in the semi-submerged floating position, due in part to its wave transparency characteristics at the water line. There are two types of semi-submersible units, moored and dynamically positioned. Moored semi-submersible units are positioned over the wellhead location with anchors, while the dynamically positioned semi-submersible units are positioned over the wellhead location by a computercontrolled thruster system. Currently, the Sevan Design is dynamically positioned and has the capabilities to be converted to a moored unit. Depending on country of operation, semi-submersible units generally operate with crews of 65 to 100 people. Main particulars: Design... Classification... Water depth... Drilling depth... Main Deck (Length)... Breadth... Displacement... Variable deck load... Diesel generators... Thrusters... Station keeping... Living quarters... Helicopter deck... Deck cranes... Oil storage... Transit speed... Sevan Design Det Norske Veritas (DNV) 3,000 m (10,000 feet) 10,500 m (35,000 feet) (Sevan Brasil 8,000 feet upgradeable to 10,000 feet) 86 m 75 m (at waterline) About 55,000 to 60,000 mt at operating draft >15,000 mt 8 x 5,535 kw 8 x 3,800 kw DP3 150 persons Sikorsky S92 and S-61N, Superpuma AS332L2, EC225 and EH ea, max capacity: 100 mt at 15 m 150,000 bbl (Sevan Driller) 6-8 knots 40

44 Drilling particulars: Type... Hook load, main/aux... Set back load... BOP... Mud pumps... Mud pit volume... Mud storage... Cement... Barite / bentonite... Riser tensioner... Drill water... Brine... Base oil... Parallel operations. Independent handling of BOP and X-mas trees 2,000,000 lbs (907 mt) 2,000,000 lbs (907 mt) 18 3/4", 15,000 psi, 6 rams (upgradeable to 7), Sevan Brasil has 5 rams and Sevan Louisiana has 7 rams 4 x 2,200 hp, 7,500 psi 900 m3 2,850 m3 500 m3 (6 tanks) 600 m3 (6 tanks) DAT 3,200 kips 3,200 m3 1,400 m3 1,400 m The Drilling Units - Contract overview The Group currently has three charter contracts with external customers, one for each of Sevan Driller and Sevan Brasil, both of which are chartered to Petrobras, and one for Sevan Louisiana chartered to LLOG. An overview of the Group operational contract structure is set out in the table immediately below and the contracts As of the date of the Prospectus, the remaining value of the Driller Contracts for the fixed term until June 2016 is approximately USD million considering exchange rates and escalations, excluding the bonus potential. As of the date of the Prospectus, the remaining value of the Brasil Contracts for the fixed term until July 2018 is approximately USD million considering exchange rates and escalations, excluding the bonus potential. As of the date of the Prospectus, the remaining value of the Louisiana Contracts for the fixed term until May 2018 is approximately USD million. 7.7 Sevan Driller Sevan Driller commenced operations in June 2010 and earns a base day rate of USD 410,000 subject to annual escalation based on certain price indices. The Driller Contract have a 6 year term and can be extended for a period up to 6 years upon mutual agreement. 41

45 The Brasil Contracts may be terminated for a number of reasons, including but not limited to non-compliance, or irregular compliance with the contract terms, certain corporate changes, termination of the service contract, declaration of bankruptcy or company dissolution. 7.8 Sevan Brasil Sevan Driller commenced operations in July 2012 and earns a base day rate of USD 388,000 subject to annual escalation based on certain price indices. The Brasil Contracts with Petrobras covering Sevan Driller have a 6 year term and can be extended for a period up to 6 years upon mutual agreement. The Brasil Contracts may be terminated for a number of reasons, including but not limited to non-compliance, or irregular compliance with the contract terms, certain corporate changes, termination of the service contract, declaration of bankruptcy or company dissolution. 7.9 Sevan Louisiana Sevan Louisiana commenced operations in May 2014 and receives an amended base day rate of USD 350,000. The Louisiana Contract period is for a firm period of 3 years and was extended by 365 days in November The extension may be cancelled by LLOG with 365 days' notice, but no later than 27 May LLOG has the option to extend the contract period for an additional 1 year, subject to agreement between the parties. The Group has the right to market the Sevan Louisiana for alternate opportunities until May In the event such an opportunity is identified, LLOG and Sevan can agree to amend operating rate or the term of the contract, or Sevan can (subject to certain notice provisions) terminate the Contract and move forward with the alternate opportunity. Only one such alternate opportunity option can be presented. The contract may be terminated for a number of reasons, including but not limited to non-compliance, or irregular compliance, with the contract, certain corporate changes, declaration of bankruptcy or company dissolution Sevan Developer The total all-in turnkey price for Sevan Developer (including project management, pre-delivery financing, spare parts, drilling tools, design fee and pre-operations cost, but excluding any mobilization costs for Sevan Developer) is USD 526 million, of which 20% (USD million) has been paid. The balance is payable upon delivery of Sevan Developer Sevan Developer Deferral Agreement. Included in the purchase price is payment to the Group under separate agreements for project management, preoperations equipment, and a license fee for the Sevan rig concept paid to Sevan Marine ASA. The Sevan Developer contractual delivery date was in April Due to an extensive delay in the completion, the delivery terms were renegotiated, and the delivery date has been postponed through October 2015, with four six month options to extend the delivery period further to October Delivery will occur in the delivery period, if and when an operating contract which can support financing has been secured. The final instalment of the purchase price will then be due for payment to COSCO. The contract will terminate on agreed dates, if no option to extend is executed. COSCO has provided refund guarantees for the initial investment (USD million), effective through the maximum 36 months deferral period, securing the Group's claim for a refund of the pre-delivery payments on termination. The construction of Sevan Developer is complete, with the exception of sea trials, final commissioning and maritime registration. The unit remains in a warm stack condition, under the ownership and responsibility of COSCO at its shipyard in Qidong, China. The Group is providing management support to COSCO during the deferral period and the Group is actively marketing the unit as part of its fleet Relationship with COSCO COSCO, one of the major multinational enterprises in the world, is China's largest and the world's leading group specializing in global shipping, modern logistics and ship building and repairing. 42

46 The Group enjoys a strong relationship with COSCO and has, through this relationship been able to secure competitive pricing for its newbuilds. The shipyard has also built up experience from the construction of the first three Drilling Units which benefits the execution of the construction of the Sevan Developer. The Group and COSCO emphasize joint lessons learned processes, whereby experience from one project is collected and discussed, and utilized in the next project Technology license agreement between the Company and Sevan Marine ASA The Company has, pursuant to the Sevan Marine License Agreement with Sevan Marine ASA, non-exclusive rights including rights to use the Sevan Designs, i.e. designs, technology and know-how relating to a cylinder shaped floater hull design (i.e. the Sevan Design) and the Sevan trademarks. The license is restricted to commercial utilization of the intellectual property rights in connection with exploratory drilling, development drilling, wellintervention and production drilling. License fees for the existing fleet have been paid during rig construction. Should the Company decide to construct additional units, a further license fee will be payable. The Company has the exclusive right to use the name "Sevan" in conjunction with "Drilling" subject to a right of termination by Sevan Marine ASA triggered if the Company (itself or through subsidiaries)exits the drilling market, in which event the Company and its subsidiaries must complete a name change, if practically possible, within 12 months from notice. The Sevan Design is patented but there is nevertheless an inherent risk of a legal dispute involving a third-party challenge or infringement of the patents relating to equipment owned or used by the Group, which could result in a loss to the Group of access to repair services, replacement parts, or use of some equipment. The Group could also be required to pay royalties for the use of equipment. COSCO has been granted a non-exclusive and non-transferable technology sub-license agreement to use the Sevan Marine ASA's designs, technology and know-how in the construction of the units. The Company has access to an exclusive license agreement with Sevan Marine ASA for the next generation, arctic and harsh environment concepts that the Group has assisted in developing Management and organization The Company has engaged its subsidiary, Sevan Management, to perform management services to the Group. Fees for the agreements were set at market level at the time of execution and terms are customary for an intragroup management service agreement. The Group's acting CEO, Scott McReaken, and other members of management are employed by Sevan Management in Norway. An internal agreement allows Sevan Management to engage other parties to support the services to be provided. Accordingly, third party providers are utilized for specific topics or specialties, such as investor relations, legal, tax, and IT services. In 2014, the Group completed an internal restructure, whereby corporate and regional activities were consolidated and direct employment was significantly reduced and replaced by services provided by Seadrill through the Seadrill Management Agreements. See sections 5.1, and section 9.2 for further information Principal market and activities Since the easiest extractable oil and gas reserves have already been found and developed, oil and gas companies have been induced to explore more marginal oil and gas field prospects. As a result of this offshore activity has steadily moved towards deeper waters and harsher environments. One of the current frontiers is ultra deepwater, where drilling operations are performed at water depths beyond 7,500 feet. The industry commonly classifies offshore drilling into four main water depth categories: shallow water (up to 500 feet), midwater (up to 3,000 feet), deepwater (up to 7,500 feet) and ultra deepwater (beyond 7,500 feet). 43

47 Shallow water represents the majority of offshore activity. Of the nearly 30 million barrels per day of liquids (oil and condensate) that is produced offshore, close to 70 per cent emanates from shallow waters. According to Energyfiles Ltd. 1, oil production in shallow water has been close to million barrels per day the last 10 years. In the last five years oil production has, however, declined close to five per cent. Unless the oil recovery rate improves significantly and new attractive shallow water areas are found and opened, oil production in shallow water is likely to decline further. Accordingly, focus has shifted and new oil and gas production is more likely to be developed in deeper waters. This is demonstrated by the growth rate in the number of deepwater wells drilled relative to the growth in the number of shallow water wells drilled. The trend towards deeper waters requires a different set of tools and equipment to extract the oil and gas successfully and in general this trend also drives increased drilling intensity per field developed. The number of offshore drilling vessels addressing the deep and ultra deep water market consists of approximately 190 units of which 155 units are ultra deep water capable. Additionally there 88 floaters under construction of which 64 are ultra deep water capable taking the deep and ultra deepwater fleet to about approximately 250 units. Currently the offshore contract drilling industry is experiencing weakness driven by a softness in commodity prices (oil and gas) that again has resulted in a significant cut in the exploration and production spending 2. The effect on the contracting activity, dayrates and utilization of the world fleet of drilling units has been negative with lower contracting, activity, contract duration, dayrates and fleet utilization as a consequence. In order to rebalance supply and demand the industry needs to scrap and/or coldstack a significant portion of the existing fleet, a process that is expected to last through Competitive position The offshore drilling industry is competitive, with market participants ranging from large multinational companies to smaller companies with fewer than five drilling units. Such companies with ultra deepwater units include Songa Offshore, Odfjell Drilling, Fred Olsen Energy, Awilco Drilling and Northern Offshore listed in Norway, and non- Norwegian listed companies such as Transocean, Noble Corp, Ensco, Ocean Rig, Diamond Offshore, Atwood Oceanonics, Pacific Drilling, and Vantage Drilling. Although, the drilling industry comprises a large number of participants, consolidation has resulted in some large market participants having significant market shares. The Company has competitors that are significantly larger in size, both in respect to fleet and market capitalization, however, few small companies have the support of, and relationship with a large organization such as Seadrill. The Company s focus is to establish a fleet of modern ultra deepwater cylindrical drilling units and has a competitive advantage since only a few companies in the drilling industry focus exclusively on the ultra deepwater segment. Broadly speaking, the drilling industry consists of several companies with different types of drilling assets and operations, including ultra deepwater, deepwater, midwater and shallow water using jack-up rigs, tender rigs, semi-submersible rigs, drillships and other types of drilling units, operating at various water depths. The Company s units can operate up to 10,000 feet water depths and are considered ultra deepwater units. Offshore drilling contracts are generally awarded on a competitive bid basis or through privately negotiated transactions, where key factors are pricing, rig availability, rig location, condition and integrity of equipment, its record of operating efficiency, including high operating uptime, technical specifications, safety performance record, crew experience, reputation, industry standing and client relations. The drilling market is a global market but competition may varies from region to region at any particular time. New orders of drilling units, upgrades of existing units and new technology may also increase competition. 1 Source: Drilling for Offshore Oil and Gas Global report March 2010 (Datamonitor). Datamonitor acquired Energyfiles Ltd in May See section 2.2 Risk Factors under Oil and gas prices are extremely volatile and are affected by numerous factors beyond the Group s control. Low oil and gas prices may cause lower utilization and day rates which will adversely affect the Group s revenues and profitability 44

48 The demand for offshore drilling services is driven by oil and natural gas companies exploration and development drilling programs. These drilling programs are affected by oil and natural gas companies expectations regarding oil and natural gas prices, anticipated production levels, worldwide demand for oil and natural gas products and many other factors. The availability of quality drilling prospects, exploration success, availability of qualified units and operating personnel, relative production costs, availability and lead time requirements for drilling and production equipment, the stage of reservoir development and political and regulatory environments also affect customers drilling programs. Oil and natural gas prices are volatile, which has historically led to significant fluctuations in expenditures by customers for drilling services. Variations in market conditions can impact the Group in different ways, depending primarily on the length of drilling contracts in place for the units. Short-term changes in these markets may have a minimal short-term impact on revenues and cash flows, unless the timing of contract renewals coincides with short-term movements in the market Patents and licenses - Intellectual property It is the Company s opinion that the Group s business or profitability is not dependent on any patents, licenses or other intellectual property rights, other than the license granted to the Group under Sevan Marine License Agreement described at section 7.12 above Quality, health, safety and environment policy The Group s core business principles involve ensuring the health and safety of employees and taking care of the environment. The Group strives for a working environment which provides job satisfaction and good health conditions, by aiming for a safe and inspiring working environment characterized by mutual respect and cooperation. The Group has adapted its policies for compliance with these laws and regulations with Seadrill policies and procedures for health, safety and the environment. The basic fundamentals of safety performance at Seadrill are based on continuous improvement through proactive initiatives in four key areas: safety leadership, risk assessment and hazard recognition, management system and auditing and control. Seadrill has laid down a series of procedures in its management system to contribute to keeping the environment as clean as possible. Emergency response plans have been established to limit harm to the environment in the case of accidental emissions. The Group reviews the performance of the management system daily and at regular intervals as defined in the management agreements with Seadrill. The Drilling Units have an environmentally friendly profile and work continuously to minimize and reduce the environmental impacts of its operations. However, its operations involve activities that entail potential risks to the external environment Property, plant and equipment The Group owns the tangible assets described below and have been included in historical the Sevan Drilling ASA Financial Statements and Sevan Drilling ASA Interim Financial Statements, ref Appendix C, D, E and F. Drilling Units 31 December 31 December 31 December 31 March 2015 In millions of USD Cost 1, , , ,913.6 Accumulated depreciation Net book value 1, , , ,700.0 Depreciation and amortization expenses

49 Newbuilding 31 December 31 December 31 December 31 March In millions of USD Cost Accumulated depreciation Net book value Depreciation and amortization expenses Transferred to drilling units and drillships Other fixed assets 31 December 31 December 31 December In millions of USD March 2015 Cost Accumulated depreciation Net book value Depreciation and amortization expenses Please see section for a description of financing terms for the Drilling Units, section for description of the technical capabilities of the units, and section for a description of operating contract overview. The Company operates and manages its business from a number of locations globally and no single location, owned or leased, is considered material to the Company. All the principal operating locations are leased property. Environmental risk factors that may affect the utilization of or contribution from the Group s tangible fixed assets are described in section 7.19 below and in section 2 Risk Factors above. Other than the above mentioned encumbrances, there are no major encumbrances on the above mentioned assets or in relation to the property leases Regulatory, political and environmental factors which could influence the Company's and the Group s business The Company and the Group are subject to the international laws and regulations governing the oil and gas industry and, to some extent, the shipping industry. The Company and the Group are required to comply with the various regulations introduced by the authorities where the operations take place, the applicable legislation of various flag states as well as the guidelines introduced by international agencies such as the International Maritime Organization (IMO) where applicable. 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; local content requirements; regulation and economic conditions; and taxation. The drilling business is also 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 46

50 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 fulfil 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 rig Deepwater Horizon sank in 2010 after a blowout of a well on the Macondo field. In order to obtain drilling permits and resume drilling activities after the accident, operators in the US Gulf of Mexico have been required to submit applications that demonstrate compliance with enhanced regulations, which now require among other things independent third-party inspections and certification of well design and well control equipment. It is possible that similar new regulations may also be introduced in other regions. There could therefore be additional equipment or procedure requirements imposed in certain regions or worldwide by either oil and gas companies or regulators. These additional requirements could impact the capital cost of the units, or could impact the operating costs of the Group. 47

51 8 MATERIAL CONTRACTS AND RELATED PARTY TRANSACTIONS 8.1 Material Contracts As of the date of this Prospectus the only material contracts, other than contracts entered into in the ordinary course of business, is the license agreement as described in section Related party transactions Background Following Seadrill s acquisition of majority control in the Old Group, the board of directors of Sevan Drilling ASA restructured the organization to improve financial and operational performance through leveraging benefits of being a part of a significantly larger organization. As a result, the Company has the following arrangements and contracts with Seadrill through the Company and its subsidiaries: Financing Seadrill has guaranteed the Group's bank loan facility. The terms of the guarantee are set out in a written guarantee agreement and Seadrill's support of the Group's financing means there are no financial covenants applicable to the Company or the Group in the bank loan agreement. The Group is, however, exposed to drilling rig covenants customary for bank loan facilities, the risk of Seadrill meeting its financial covenants and complying with its own bank loan agreements due to the cross-default provision in the Group's bank loan agreement, refer to Risk Factors describing the Group s existing or future debt arrangements and section describing the loan agreements. Seadrill has provided the Company with a revolving credit facility in order to meet the Group's financing needs beyond what is covered by the Group's bank loan facility. The cost of this financing is lower than what the Group would have incurred on a stand-alone basis and was amended in Q to address liquidity concerns that arose at this time. As of 31 March 2015, USD million was outstanding and in the first quarter the Company incurred USD 6.0 million of interest, guarantee and commitment fee expenses (USD 15.9 million in total year 2014). For further information on the revolving credit facility refer to section describing the loan agreements Management Agreements The board of directors of Sevan Drilling ASA completed an assessment of the Old Group s operating structure in connection with the Restructuring, and as a result transferred offshore and onshore employees and administrative functions into the Seadrill organization and executed the Management Agreements that will continue also after the Migration. As part of this process the employment of the Old Group was reduced from 520 employees in 2013 to three employees, which is also the number of employees of as as of the date of this Prospectus. The three employees include the Chief Executive Officer, responsible for day-to-day management subject to the direction of the Board of Directors, and two employees responsible for managing design and engineering specific to the Sevan Design. The Seadrill group companies continue to provide personnel necessary for day-to-day management of operations, marketing and shared administrative services in regional and corporate locations. The following summarizes the management services with Seadrill, each outlined in separate management agreements with respective Group counterparties: a) Management services for the three units in operations in Brazil, US Gulf of Mexico, and for construction management oversight and pre-operations management of Sevan Developer. Such services include: o Operations Services: assistance and support for the development of technical standards, supervision of third-party contractors, development of maintenance practices and strategies, development of operating policies, improvement of efficiency, minimizing environmental and safety incidents, periodic auditing of operations and purchasing and logistics; o Technical Supervision Services: assistance and advice on maintaining vessel classification and compliance with local regulatory requirements, compliance with contractual technical requirements for the drilling units, ensuring that technical operations are professional and satisfactory in every respect; 48

52 o o Accidents Contingency Plans: assistance in handling all accidents in the course of operations, and development of a crisis management procedure, and other advice and assistance in connection with crisis response, including crisis communications assistance; and General Administrative Services: any general administrative services as needed. b) Marketing services for the Group's fleet, according to which Seadrill is responsible for promoting the contracting of the Drilling Units and Sevan Design throughout the world. c) Management services to assist in fulfilling the day-to-day management provided by Sevan Management for the Group and duties required under the Company s governance. Services include: o Corporate Governance Services: assistance in the provision of general company secretarial services; o Company Records Services: the safekeeping and professional filing of all original corporate documents; o Treasury Services: assistance in the operation of bank accounts in accordance with such principles as its board of directors from time to time shall approve; assistance in collection of accounts receivable and payment of accounts payable; o Financing: assistance in all matters relevant to the financing of its activities, including the identification of sources of potential financing and negotiation of financing arrangements; o Insurance: assistance in arranging to insure the Drilling Units and other necessary insurance and assistance in management of insurance claims; o Sale and Purchase of Assets: assistance in the sale and purchase of assets including reviewing the market for the sale and purchase of assets, arranging the financing in the case of a purchase and if necessary renegotiating existing financing, and arranging any other contractual arrangements required by such transaction and the general completion of the specific transaction; o Accidents Contingency Plans: assistance in handling all accidents in the course of operations, and development of a crisis management procedure, and other advice and assistance in connection with crisis response, including crisis communications assistance; o Disputes: assistance in the prosecution or defense of any and all legal proceedings by or against us; and o General Administrative Services: any general administrative services as the Group may require. All of the Management Agreements are terminable based on performance and/or control conditions. The Group retains authority in respect of all material decisions. Fees payable by the Group under the agreements were set at market level at the time of execution. In exercising the powers and authorities under the described agreements Seadrill is obliged to protect and promote the Group s interest, observe all applicable laws and regulations relevant to Group s activities, and always act in accordance with good and professional management practice. The Management Agreements provide that fair distribution of resources shall be provided without preference to units or companies in Seadrill. Discounts, commissions and other benefits enjoyed by Seadrill shall be passed on to the Group. In the quarter ending 31 March 2015, the Group incurred USD 1.7 million of management and administrative service fees (USD 24.5 million for the total year 2014). The Group had a total current liability (including the commitment, guarantee and management fees) of USD 41.3 million to Seadrill as of 31 March The Group is reliant on Seadrill s systems and ability to perform under the Management Agreements. Accordingly, it is a risk that the Group s financial condition and client relationships could be adversely affected if the Management Agreements are terminated or Seadrill fails to provide services in accordance with the terms of the agreements. 8.3 Legal and regulatory proceedings The Group is not, nor has been, during the course of the preceding twelve months, involved in any legal, governmental or arbitration proceedings which may have, or have had in the recent past, significant effects on its financial position or profitability. The Company is not aware of any such proceedings which are pending or threatened. 49

53 9 BOARD OF DIRECTORS, MANAGEMENT, EMPLOYEES AND CORPORATE GOVERNANCE 9.1 Board of Directors Overview The Board of Directors is responsible for the overall management of the Company and may exercise all of the powers of the Company not reserved to the Company's shareholders by its Bye-laws or Bermuda law. The Bye-Laws states that the shareholders shall determine at the annual general meeting the minimum and maximum number of directors. The directors are elected by the shareholders at the annual general meeting or any special general meeting called for that purpose, unless there is a casual vacancy. If there is a casual vacancy the general meeting may appoint a new director or alternatively the Board of Directors may appoint a director to fill the vacancy provided always a quorum of directors remains in office. The directors serve until re-elected or their successors are appointed at the next annual general meeting. The Company s business address at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda, serves as c/o addresses for the members of the Board of Directors in relation to their directorships of the Company Board of Directors of the Company The table below sets out the names of the current members of the Board of Directors of the Company and their positions. Name Position Served since* Term expires Erling Lind Chairman 2015 (2012) 2016 Birgitte Ringstad Vartdal Director 2015 (2013) 2016 Ragnhild M. Wiborg Director 2015 (2014) 2016 Kristian Johansen Vice Chairman 2015 (2012) 2016 Per Wullf Director 2015 (2012) 2016 *The year in brackets indicate the time the director first was elected as a director of the board of Sevan Drilling ASA. Erling Lind, Chairman Mr Lind joined the Board of Directors of Sevan Drilling ASA in January 2012 and was re-elected as a Director and Chairman in the Annual General Meeting held 15 May Lind was elected as Director and chairman of the Company 23 June He is currently a partner at Wiersholm, an Oslo based leading law firm. Mr. Lind practices primarily finance law, company law and mergers and acquisitions. He became a partner in the firm in Mr. Lind holds a law degree from University of Oslo. Mr. Lind is a Norwegian citizen. Mr. Lind does not own any shares in Sevan Drilling ASA and will accordingly post Migration not hold any Shares. Birgitte Ringstad Vartdal, Director Ms. Vartdal joined the Board of Directors of Sevan Drilling ASA in July 2013 and was re-elected as a director of this company in the Annual General Meeting held 15 May Ms. Vartdal was elected as a Director of the Company 23 June She is currently CFO of Golden Ocean Management AS. Ms. Vartdal has held several positions within finance, risk management and investments in the Torvald Klaveness Group, as well as in Norsk Hydro Energy. Ms. Vartdal holds a degree as Siv.Ing. (MSc) in Physics and Mathematics from the Norwegian University of Science and Technology (NTNU) and an MSc in Financial Mathematics from Heriot-Watt University, Scotland. Ms. Vartdal is a Norwegian citizen. Ms. Vartdal does not own any shares in Sevan Drilling ASA and will accordingly post Migration not hold any Shares. 50

54 Ragnhild M. Wiborg, Director Ms. Wiborg joined the Board of Directors of Sevan Drilling ASA in June 2014 and was re-elected as a director of this company in the Annual General Meeting held 15 May Ms. Wiborg was elected as a Director of the Company 23 June She has 27 years of experience from the financial markets and an extensive network both within the international and Nordic business communities. Ms. Wiborg is Chairman of EAM Solar and board member of two Swedish listed companies. Ms. Wiborg holds a Bachelor of Science in Economics from Stockholm School of Economics and Business Administration and a Master degree from Fundacao Getulio Vargas in Sao Paulo, Brazil. Ms Wiborg is a Swedish citizen. Ms. Wiborg does not own any shares in Sevan Drilling ASA and will accordingly post Migration not hold any Shares. Kristian Johansen, Director Mr. Johansen joined the Board of Directors of Sevan Drilling ASA in January 2012 and was re-elected as a director of this company in the Annual General Meeting held 15 May Mr. Johansen was elected as a Director of the Company 23 June He is currently CFO/COO of TGS-Nopec Geophysical Company ASA. Prior to joining TGS, Kristian was the Executive Vice President and CFO of EDB Business Partner ASA. Mr. Johansen also has executive experience in the Construction and Investment Banking industries. Johansen holds a MBA from University of New Mexico, USA. Mr. Johansen is a Norwegian citizen. Mr Johansen owns 17,000 shares of Sevan Drilling ASA and will post Migration hold an equivalent number of Shares. Per Wullf, Director Mr Wullf joined the Board of Directors of Sevan Drilling ASA in January 2012 and was re-elected as a director of this company in the Annual General Meeting held 15 May Mr. Wullf was elected as a board member of the Company 23 June Mr Wullf started working for Seadrill in February 2009 and is now the CEO of Seadrill. He has 28 years of experience from the drilling industry. 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 London. Mr. Wullf does not own any shares in Sevan Drilling ASA and will accordingly post Migration not hold any Shares Board of Directors independence The composition of the Company s Board of Directors is in compliance with the independence requirements of the Code Prior to 2015, director and Chairman Erling Lind regularly acted as external counsel to the Group's largest shareholder, Seadrill, and may for this reason not be regarded as independent of the Group's main shareholder. Per Wullf, Director, is CEO of Seadrill Management Ltd and thus linked to both the largest shareholder and the provider of management services to the Group. The other three directors, Ms. Wiborg, Ms. Ringstad Vartdal and Mr. Johansen, are all independent of the Group's executive management, material business contacts and larger shareholders. The Company s executive management is not represented on the Board of Directors Board of Directors Committees Audit Committee: The Audit Committee consists of two members of the Board of Directors and acts as a preparatory body to the Board of Directors with respect to the fulfilment 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 of Directors 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 Birgitte Ringstad Vartdal and Kristian Johansen. Compensation Committee: The Compensation Committee consists of two members of the Board of Directors, each of whom is independent of the executive management. The Committee acts as a preparatory body to the Board of Directors with respect to terms and conditions of employment for the Chief Executive Officer and with 51

55 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 Birgitte Ringstad Vartdal and Per Wullf. As of the date of this Prospectus, the Company does not have a nomination committee. It will be considered by the Board of Directors following the Listing, inter alia in light of the shareholder structure of the Company whether to propose to the Company's shareholders appointment of a nomination committee. In any case the Board of Directors will focus on consulting shareholders when proposing new directors for election by the shareholders. 9.2 Executive management The Company's executive management team consists of the Chief Executive Officer. It has been decided that the Company shall have no employees and that all of the Company's management requirements shall be contracted in from subsidiaries and third parties, ref. section describing the Management Agreements with Seadrill. In so doing, the Board of Directors retains sole authority on all issues that are either of an unusual nature or of major importance to the Company and its activities. The Company also entered into a Management Transfer Agreement with Sevan Management for the purpose of using this entity as the provider of all the administrative services required in the day-to-day management of the Company, ref. section The business address of Sevan Management, Drammensveien 288, 0283 Oslo, Norway, serves as c/o address for the executive management team responsible for the day-to-day management of the Group. Scott McReaken, Chief Executive Officer Mr McReaken has been the Chief Executive Officer of the Company since 1 November Mr. McReaken is employed by Sevan Management. Mr. McReaken has 14 years of experience in finance, accounting and management in the international oilfield services industry. He is a Certified Public Accountant (CPA) licensed by the Texas State Board of Public Accountancy, Certified Internal Auditor (CIA) certification designated by the International Institute of Internal Auditors, and completed the American Institute of Certified Public Accountants IFRS Certificate Program, and holds a Bachelors in Business Administration in Accounting from The University of Texas at Austin and a Master s of Science in Accountancy from the University of Phoenix. Mr McReaken is a US citizen and resides in Oslo. Mr. McReaken does not hold any Shares in the Company. 9.3 Directorships and positions Over the five years preceding the date of this Prospectus, directors and members of the executive management team hold or have held the following directorships and leading positions (apart from their directorships and leading positions within the Old Group/ Group). Name Position in Sevan Drilling Limited Current other directorships and management positions Previous directorships and management positions (last 5 years) Erling Lind Chairman Wiersholm (Partner) Avance Gas Holding ltd. (Board member) Scorpion Offshore Ltd. (Board member), Asia Offshore Drilling ltd. Birgitte Ringstad Vartdal Director Golden Ocean Management AS (CFO), Golden Ocean Management AS (Director), KVART Invest AS (Director), Vartdal Fiskeriselskap AS(Director) Ragnhild M. Director Chairperson EAMSolar; Non Executuve Director (NED) of CEO/Partner Wiborg Kapital Förvaltning AB, NED EAMSolar, 52

56 Wiborg Intrum Justitia AB (SWeden), Borregaard ASA, Gränges AB (Sweden), RECSilicon ASA, IM Skaugen RECSolar, Borregaard ASA, IM Skaugen ASA, Interoil ASA AF Gruppen ASA (Executive VP, Kristian Johansen Vice Chairman TGS-Nopec Geophysical Company ASA (CFO) CFO), EDB Business Partner ASA (Executive VP, CFO), Production Energy Company AS, Agrinos AS, TGS Subsidiaries (Board member) Per Wullf Director Seadrill Limited (CEO) Maersk Norway (MD) Scott McReaken CEO Secretary and Treasurer for the International Association of Drilling Contractors (IADC) Secretary and Treasurer for the International Association of Drilling Contractors (IADC) There are no family relationship between any of the persons listed above. 9.4 Remuneration of the Board of Directors and the members of the executive management The table below sets forth remuneration paid by Sevan Drilling ASA to the Board of Directors, executive management team and other key personnel for the year ended 31 December No remuneration has been paid by the Company to the Board of Directors as at the date of this Prospectus. Name Title Salaries (in USD) Retirement benefits (in USD) Other benefits (in USD) Scott McReaken CEO 710,055 13,787 31,835 Erling Lind Chairman 79, Benedicte Schilbred Fasmer Director 30, Kristian Kuvaas Johansen Vice Chairman 60, Per Winther Wullf Director 55, Birgitte Ringstad Vartdal Director 60, Ragnhild M. Wiborg Director 27, The total amount of compensation in Sevan Drilling ASA accrued by the directors and the members of the executive management team was USD 2.6 million in 2014 (including the compensation to employees that were terminated through the restructure in the first half of 2014) compared to USD 8.6 million in 2013, USD 4.5 million in In addition, in 2014, the Sevan Drilling ASA paid premiums totaling USD 30,100 in respect of pension arrangements for certain members of the executive management team. None of the directors have service contracts with the Company. However, upon termination Mr. McReaken will receive a payment compensation and benefit of NOK 1,243,384 plus an adjustment for foreign exchange during the termination period from Sevan Management. 9.5 Board of Director s and management s shareholdings and options The following table sets forth information concerning shares of Sevan Drilling ASA held by the members of the Board of Directors and executive management as of the date of this Prospectus. The holdings of shares of the Company by these people after completion of the Migration will be approximately the same as the holdings in Sevan Drilling ASA as set out below since the distribution of Shares is done pro rata. As of the date of this Prospectus, the Company does not have outstanding options. 53

57 Name Position Shares Erling Lind Chairman 0 Birgitte Ringstad Vartdal Director 0 Ragnhild M. Wiborg Director 0 Kristian Johansen Vice Chairman 17,000 Per Wullf Director 0 Scott McReaken CEO Pensions The Old Group and the Sevan Management pension schemes meet the requirements of the law on compulsory occupational pension. The Group has a defined benefit pension plan for the employees of Sevan Management. The pension plan was transferred from Sevan Drilling ASA to Sevan Management as part of the Management Transfer Agreement. 9.7 Loans and guarantees Neither the Company nor Sevan Drilling ASA has granted any loans, guarantees or other commitments to any of its Directors or to any member of the executive management team of the Group. 9.8 Employees As of the date of this Prospectus, three persons are direct employees in Sevan Management. On 1 January 2014, the offshore and onshore operational personnel used in the Group's operations were hired in from Seadrill. The Management Agreements, ref. section 8.2.3, requires Seadrill to provide competent and appropriate crew to maintain operations, client and regulatory compliance. As of As of As of 31 December 31 December 31 December As of the date of the Employees Prospectus Sevan Drilling ASA Sevan Management Onshore/ Offshore employees Total Group Conflicts of interests etc. During the last five years preceding the date of this Prospectus, no member of the Board of Directors or the executive 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. Prior to 2015 director and chairman Erling Lind regularly acted as external counsel to Seadrill. Further, the director Per Wullf is the CEO of Seadrill. Seadrill is 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 Mr. Lind and Mr. Wullf will from time to time, due to their connection with Seadrill, have conflicting interests with the Company. Except for the above, there are as far as the Company is aware 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 executive management or the Board of Directors. 54

58 9.10 Corporate governance requirements As a company incorporated in Bermuda, the Company is subject to Bermuda laws and regulations with respect to corporate governance. Bermuda corporate law is based on English law. In addition, the Listing subjects it to certain aspects of Norwegian securities law, which include an obligation to report on the Company s compliance with the Code in its annual report on a comply or explain basis. The Company is committed to ensuring that high standards of corporate governance are maintained and supports the principles set out in the Code. It is the opinion of the Board of Directors that the Company in all material respects complies with the Code, subject to the following exceptions: Pursuant to the Company s memorandum of association the objects for which the Company was formed and incorporated are unrestricted. In accordance with Bermuda law, the Board of Directors is authorized to repurchase treasury shares, and to issue any unissued shares within the limits of the authorized share capital. These authorities are neither limited to specific purposes nor to a specified period as recommended in the Code, and there is thus a deviation from section 3 of the Code which restrict the increase of share capital to defined purposes. The bye-laws of the Company provide that at least 7 days' notice of a general meeting shall be given to each shareholder entitled to attend and vote thereat, stating the date, time, place and the general nature of the business to be considered at the meeting. This is a deviation from the Code, which requires a minimum of 21 days' notice period but is in line with practice for Bermuda companies. The Bye-laws of the Company provide that the Chairman of the Board of Directors shall preside as chairman at every general meeting. This is a deviation from the Code, which requires routines to ensure an independent chairing in the general meeting. The Bye-laws are in line with practice for Bermuda companies. As at the date of this Prospectus the Company does not have a nomination committee. This is a deviation from Section 7 of the Code which recommends that all listed companies shall have a Nomination Committee. 55

59 10 SELECTED FINANCIAL INFORMATION 10.1 Introduction The Company will become the successor of Sevan Drilling ASA after the Listing and the Migration is completed, ref. section 5 The Listing. The following selected consolidated financial information has been extracted from the Sevan Drilling ASA Financial Statements as at and for the years ended 31 December 2012, 2013 and 2014 and as at and for the period ended 31 March The years ended 31 December 2012, 2013 and 2014 have been audited by PricewaterhouseCoopers AS, and the period ended 31 March 2015 has been subject to limited review by PricewaterhouseCoopers AS. The Sevan Drilling ASA Financial Statements are included in Appendix C, D, E and F to this Prospectus and should be read together with Section 11 "Operating and Financial Review". The Sevan Drilling Limited Financial Statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) that are effective for the period ended 31 December As the Company was incorporated on the 20 December 2013, the Sevan Drilling Limited Financial Statements for the period ended 31 December 2014 include the full year 2014 and the 11 days since the incorporation. The Sevan Drilling Limited Financial Statements has been audited by PricewaterhouseCoopers AS and is included in Appendix B to this Prospectus and should be read together with Section 11 "Operating and Financial Review" Sevan Drilling ASA Financial Statements Basis of presentation The Sevan Drilling ASA Financial Statements include the accounts of Sevan Drilling ASA, the Company and its subsidiaries (the Old Group) during the periods stated above, where Sevan Drilling ASA has been the parent company until the Listing and Migration set out in section 5.2 occur. Adjusted financial statements have not been prepared to reflect Sevan Drilling Limited as the parent company, as there was limited activity in the Company prior to the transactions to prepare for the Migration in Q so that the Financial Statements of the Old Group also reflect the situation for the Group post completion of Listing and Migration, as described in section

60 Selected consolidated income statement information The table below sets out a summary derived from the Sevan Drilling ASA audited consolidated statement of comprehensive income for the years ended 31 December 2012, 2013 and 2014 and the unaudited first quarter ended 31 March Income statement IFRS IFRS IFRS IFRS IFRS USD million Audited Unaudited Restated Audited Actual Unaudited Restated Audited Actual Operating revenue Operating expense Depreciation, amortization and impairment Employee benefit expense Other operating expense Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial income Financial expense Foreign exchange gain/(loss) related to financing Net financial items Profit (Loss) before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Group Earnings per share for profit/(loss) attributable to the equity holders of the Group during the year (USD per share): - Basic Diluted Dividend Income statement Q Q IFRS IFRS USD million Unaudited Unaudited Operating revenue Operating expense General and administrative Restructuring expense Depreciation, amortization and impairment Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial expense Net financial items Profit (Loss) before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Group Earnings per share for profit/(loss) attributable to the equity holders of the Group during the year (USD per share): - Basic Diluted Dividend

61 Up to 31 December 2013, the Old Group classified the gross revenue tax in Brazil as tax expense. In Q1 2014, management of the Old Group reassessed the nature of this expense and determined that it is better classified as a reduction of revenue due to the starting point for determining the amount of tax paid being more dependent on the amount of gross sales than on a concept of a taxable profit. This is a reclassification of an item on the Income Statement which has no impact on net income. There is furthermore no impact on the statement of comprehensive income, the balance sheet, the statement of changes in equity, or the cash flow statement. The change has been made retrospectively and is included in all other prior period information presented in this Prospectus. The impact on the Income Statement is as follows: Restatement for revenue tax schedule Q Q IFRS IFRS IFRS IFRS IFRS USD million Audited Audited Audited Unaudited Unaudited Impact on operating revenue Impact on tax (expense)/income In the period ended 31 December 2011, USD 4.8 million was restated for the Old Group classification of gross revenue tax in Brazil as tax expense Selected consolidated balance sheet information The table below sets out a summary derived from the Sevan Drilling ASA audited consolidated balance sheet for the years ended 31 December 2012, 2013 and 2014 and the unaudited first quarter ended 31 March Balance sheet Q Q USD million IFRS IFRS IFRS IFRS IFRS Audited Audited Audited Unaudited Unaudited ASSETS Non-current assets Drilling units 1, , , , ,833.8 Other fixed assets Intangible assets Deferred income tax assets Other non-current assets Total non-current assets 1, , , , ,859.8 Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 1, , , , ,991.6 EQUITY Capital and reserves attributable to equity holders of the Group Share capital Share premium Other equity Total equity LIABILITIES Non-current liabilities Interest-bearing debt 1, , , ,073.0 Derivative financial instruments, long term Other non-current liabilities Total non-current liabilities 1, , , ,188.4 Current liabilities Trade payables Current portion of interest-bearing debt Other current liabilities Total current liabilities Total liabilities 1, , , , ,433.9 Total equity and liabilities 1, , , , ,

62 Selected consolidated changes in equity information The table below sets out a summary derived from the Sevan Drilling ASA audited consolidated statement of changes in equity for the years ended 31 December 2012, 2013 and 2014 and the unaudited first quarter ended 31 March Attributable to equity holders of the Group Equity settled employee benefits reserve Other equity Foreign currency translation reserve Figures in USD million Note Share capital Share premium General reserve Retained earnings Total equity January 1, Net profit/(loss) Foreign currency translation Comprehensive loss Transferred from paid in equity to other equity Fair value of share options Other foreign currency items December January 1, Net profit/(loss) Foreign currency translation Comprehensive loss Capital increase Transaction cost equity raise Fair value of share options December January 1, Net profit/(loss) Foreign currency translation Comprehensive loss December

63 Consolidated Statement of Changes in Equity (Unaudited, in USD million) Share Capital Share Premium General Reserve Equity Settled Employee Benefits Reserve Foreign Currency Translation Reserve Retained Earnings Total Equity Equity as at 1 January Net profit/(loss) Translation differences Equity as at 31 March, Equity as at 1 January Net profit/(loss) Translation differences Equity as at 31 March, Selected consolidated cash flow information The table below sets out a summary derived from the Sevan Drilling ASA audited consolidated statement of cash flows for the years ended 31 December 2012, 2013 and 2014 and the unaudited first quarter ended 31 March Cash flow Q Q USD million IFRS IFRS IFRS IFRS IFRS Audited Audited Audited Unaudited Unaudited Cash flows from operation activities Cash from operations Tax paid Interest paid Net cash (used in)/generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment (PPE) Interest rate swap settlement Net cash used in investing activities Cash flows from financing activities Net proceeds from capital increase Proceeds from interest-bearing debt , Deferred transaction fees on interest-bearing debt Repayment of interest-bearing debt Net cash generated from/(used in) financing activities Net cash flow for the period Cash balance at beginning of period Cash balance at end of period*

64 10.3 Financial Statements for Sevan Drilling Limited The tables below sets out a summary of financial information derived from the Sevan Drilling Limited s audited income statement and the statement of financial position for period ended 31 December Income statement 2014 IFRS USD million Audited Operating revenue - Operating expense -1,4 Total operating expense -1,4 Operating (loss)/profit -1,4 Intercompany interest income 3,1 Interest expense -4,4 Net financial items -1,3 Loss before tax -2,8 Tax (expense)/income - Net loss -2,8 Balance sheet As of 31 December 2014 USD million IFRS Audited ASSETS Financial assets Investments in subsidiaries Other investments - Accounts receivables from Group companies Total financial assets Total non-current assets Current assets Receivables Accounts receivables from Group companies Total receivables Cash and bank deposits - Total current assets Total assets 1,161.6 EQUITY AND LIABILITIES Restricted equity Share capital 3.1 Share premium Total restricted equity Retained earnings Other equity -2.8 Total retained earnings -2.8 Total equity LIABILITIES Borrowings Accounts payable to the Group companies Total long-term liabilities Current liabilities Accounts payable to the Group companies Total short term liabilities Total liabilities Total equity and liabilities 1,

65 11 OPERATING AND FINANCIAL REVIEW The following discussion and analysis of the Old Group s/ Group s financial condition and results of operations should be read together with the Old Group s Financial Statements, including the accompanying notes, included in this Prospectus as appendix B to F Principal factors affecting the Group s financial condition and results of operations The Group s results are primarily driven by performance under contractual day rates from the three Drilling Units operating under long-term contracts. Demand for the Group s services is dependent on the level of activity in the exploration for and development of oil and gas in offshore areas worldwide. A decline in oil and gas prices for an extended period of time, or market expectations of a potential decrease in these prices, may negatively affect the Group's business. Sustained periods of low oil prices typically result in reduced exploration and drilling activity because oil and gas companies capital expenditure budgets are subject to cash flow from such activities. These changes can have a dramatic effect on rig demand. Periods of low demand can cause excess rig supply and intensify the competition in the industry, which often results in drilling units, particularly older and less technologically advanced units, being idle for long periods of time. In Q4 2014, the Company revised the terms of its revolving credit facility to secure the Group s short to medium term financing requirements. If the revolving credit facility cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Group does not have adequate liquidity beyond Recent developments and trends The market for ultra deepwater drilling services turned dramatically down in the latter part of 2014 and has continued its negative development so far in The ultra deepwater drilling market continues to remain challenging in this current environment and is likely to remain through the near term. Despite a slight recovery in the oil price during the first quarter, oil companies are continuing to take a cautious approach to capital expenditure and other cost commitments given the severity of the overall oil price decline. In the first half of 2015, the market has seen very little new fixture activity and the new contracts that have materialized are at significantly lower dayrates. In order to manage this downturn, rig owners are stacking or scrapping older units and new build deliveries are being delayed, which will have the potential effect of rebalancing the supply of drilling units 3. While the Group has limited exposure to the market in the short-term due to its contract portfolio, it is dependent on demand picking up towards the expiry of its current contracts Off balance sheet arrangements As of the date of this Prospectus, the Group is not subject to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Group s financial condition Application of critical accounting policies, estimates and judgments The Group prepares its financial statements in accordance with IFRS, which requires it to make estimates in the application of its accounting policies based on the Group s best assumptions, judgments and opinions. On a regular basis, the management intends to review the accounting policies, assumptions, estimates and judgments to ensure that the Financial Information of the Group is presented fairly and in accordance with IFRS. However, because future events and their effects cannot be determined with certainty, actual results could differ from the Group s assumptions and estimates, and such differences could be material. Accounting estimates and assumptions discussed in this section are those that are considered by the Group to be the most critical to an understanding of the Group s financial Statements because they inherently involve significant judgments and uncertainties. See appendices B to F for the Financial Information s accounting policies and explanatory notes. 3 See section 2.2 Risk Factors under Oil and gas prices are extremely volatile and are affected by numerous factors beyond the Group s control. Low oil and gas prices may cause lower utilization and day rates which will adversely affect the Group s revenues and profitability 62

66 11.5 Impairments related to Group Tangible Assets and Restructuring Impairments related to the Group s tangible assets In accordance with IAS 36, the Old Group reviewed the carrying amounts of its tangible assets at the end of the reporting period 31 December 2014 to determine whether there was any indication that the assets may be impaired. The net asset value of the Old Group exceeded its market capitalization at this period end date and was an indicator of a need for impairment of major assets. Each of the Old Group's units was identified as a cash-generating unit and tested for impairment through a value in use calculation based on Management assumptions. As a result, Management concluded that recoverable values of Sevan Driller and Sevan Brazil were less than their carrying amounts. Therefore, the carrying amounts of these units were reduced to their estimated recoverable values through a USD million non-cash impairment. Specifically, Sevan Driller was impaired with USD 29.3 million and Sevan Brazil was impaired with USD 72.3 million. The impairment was recorded for Old Group reporting in the Sevan Drilling ASA Financial Statements for the period ended 31 December Impairments related to the Restructuring In preparation for the Migration (see section 5 for details on the Migration and Restructuring) on 10 November 2014, Sevan Drilling ASA's assets and liabilities related to its subsidiaries and the revolving credit facility were contributed to the Company in exchange for Shares through a contribution in-kind. Sevan Drilling ASA impaired the investment in subsidiaries for USD 117,186,489 in the statutory financial accounts. The impairment was recognized to fair value investments prior to contributing in exchange for equity in the Company of USD 708,547,365. In the first quarter 2015, after Sevan Drilling ASA s board approved the Migration plan Sevan Drilling ASA assessed the recoverable value of the investment in the Company. In accordance with Norwegian GAAP Sevan Drilling ASA concluded that the value would not be recoverable in the short-term, as the Migration include distributing the investment in the Company to the shareholders of Sevan Drilling ASA. Therefore, an impairment of USD 597,273,459 was recorded in the statutory financial statements of Sevan Drilling ASA to fair value the investment to the sales price (closing share price of Sevan Drilling ASA on Oslo Børs at 31 December 2014 plus a sales premium). The resulting fair value of the investment held by Sevan Drilling ASA was USD 111,273,906 at 31 December On 23 April 2015, Sevan Drilling ASA assessed the recoverable value of investment in the Company that was proposed in the annual general meeting (held 15 May 2015) to be distributed through a share capital reduction to the shareholders. The value was determined to be equal to the amount that will be distributed to the shareholders based on the closing share price (NOK 0.65) of Sevan Drilling ASA at the balance sheet dated 17 April Sevan Drilling ASA impaired the investment in the Company with NOK 493, 232,048 resulting in an ending balance of NOK 386,505,233. Additionally as a result of the Migration, Sevan Drilling ASA changed the functional reporting currency from USD to NOK with effect as of 31 January 2015 in order to simplify the capital distribution of equity to shareholders holding shares in NOK. The impairments recorded in the Sevan Drilling ASA Financial Statements are based on fair value and not value in use calculations. The fair value application is a consequence of the Migration being completed in the short-term, whereas the value in use calculation technique is applicable for the Old Group and continuing business activities Financial condition The following discussion and analysis of the Old Group s financial condition and results of operation refers to the unaudited three months period ended 31 March 2015, and the audited annual periods ended 31 December 2012, 2013 and 2014, and should be read in conjunction with the Financial Statements incorporated as appendix B to F. The reason reference is made to the Financial Statements of the Old Group is that adjusted financial statements have not been prepared to reflect Sevan Drilling Limited as the parent company, as there was limited activity in the Company prior to the transactions to prepare for the Migration in Q so that the Financial Statements of the Old Group also reflect the situation for the Group post completion of Capital Decrease and Migration, as described in section 5.1 and

67 Results of operations three months ended 31 March 2015 compared to three months ended 31 March 2014 Income Statement Operating Revenue The Old Groups Operating revenue Q was USD 83.1 million compared to USD 60.1 million in Q The revenue increase is explained by Sevan Louisiana commencing operations in Q compared to the unit not operating in Q The increase was offset by lower performance on the Sevan Brasil at 71.8% compared to 89.9% in Q Operating Costs Total operating expense was USD 63.3 million in Q2 compared to USD 59.3 million in Q The increase is the result of Sevan Louisiana operating in this quarter offset by improved operating expenses on Sevan Driller and Sevan Brazil. Average operating costs per day were at USD 151,000 in Q1 2015, which result from cost reduction initiatives realized through the Seadrill management service agreements, specifically reducing labor costs offshore and onshore, and through deferring non-critical maintenance into later periods. General and administrative, and Restructuring expenses were in total reduced USD 4.0 million from costs to transition under the Management Agreements. Depreciation expense increased USD 3.6 million as a consequence of Sevan Louisiana in service through Q Net Financial Items Net financial items amounted to USD 17.4 million in Q compared to USD 11.5 million in Q1 2014, which increased USD 2.9 million from interest and commitment fees on the revolving credit facility and USD 2.3 million from capitalizing interest on Sevan Louisiana in Q The Old Group s result for Q was a profit of USD 2.2 million compared to a loss of USD 10.4 million in Q Balance Sheet Total assets decreased from USD 1,991.6 million at 31 December 2014 to USD 1,975.5 million at 31 March The decrease is primarily caused by USD 9.6 million of changes to non-current assets from USD 18.5 million of depreciation offset by USD 8.9 million of capital additions to units in operations. Additionally, current assets were reduced by increase in collections from accounts receivables offset slightly by a greater cash balance at 31 March Total liabilities decreased from USD 1,433.9 million at 31 December 2014 to USD 1,415.7 million at 31 March Of this amount at 31 March 2015, USD 1,312.5 million represented outstanding debt (66% of total equity and liabilities). The decrease in total liabilities is primarily related to USD 35 million of repayments of the principal loan under the Old Group's bank loan facility and USD 1.2 million of amortization of deferred financing fees, off-set by a USD 25.0 million drawdown under the revolving credit facility. Cash Flows The Old Group's cash and cash equivalents amounted to USD 39.3 million as at 31 March 2015 compared to USD 30.2 million as of 31 March The Old Group used cash generated from its operations and the revolving credit facility to fund investment and financing activities in Q At 31 March 2015, the Old Group has USD million of available liquidity through the cash and cash equivalents and undrawn revolving credit facility, and with exception to normal business activities, no material transaction has occurred through the date of the Prospectus. Net cash generated from operating activities during Q was USD 25.7 million compared to net cash used in Q of USD (7.7) million. This represented an increase in cash from operations of USD 33.4 million. The increase is primarily driven by Sevan Louisiana being in operations through Q compared to the mobilization period in Q1 2014, lower operating expenses for the units working in Brazil and lower overhead costs resulting from the cost reduction initiatives implemented in Q Interest costs in Q were USD 9.3 million lower resulting from lower floating interest rate on the bank facility. 64

68 Net cash used in investing activities during Q was USD (6.6) million compared to USD (20.2) million in Q The decrease is primarily a result of the mobilization and final commissioning of Sevan Louisiana taking place in Q Net cash used in financing activities during Q was USD (10.0) million compared to USD (55.0) million in Q The decrease of net cash in financing activities is from completing two principle repayments on the bank facility in Q and offset by greater drawdown on the revolving credit facility in Q Results of operations twelve months ended 31 December 2014 compared to twelve months ended 31 December 2013 Income Statement Operating Revenue The Old Group's operating revenue in 2014 was USD million compared to USD million in Sevan Louisiana commencing operations in May 2014 increased revenues with USD 64.0 million and the rigs operating in Brazil contributed an increase of USD 5.7 million from improved operating performance and additional bonus awards under the drilling contracts. Operating Costs Total operating expense was USD million compared to USD million in The Old Group recognized a non-cash impairment of USD million in The impairment was a consequence of a lower value in use estimate for each of Sevan Driller and Sevan Brasil compared to their carrying values following the decline in the rate levels obtainable in the ultra deep-water drilling market in late In 2014, total operating expense was impacted negatively by Sevan Louisiana commencing operations in May Whereas the Old Group benefited by less Restructuring costs in 2014 and lower costs under the Management Agreements. As such, operating expenses reduced with USD 45.3 million and other operating expenses increased with USD 43.3 million through reducing direct costs to the Old Group and reimbursements to related parties increased through the management service agreements with Seadrill. In total, employee benefit expense had a net increase of USD 0.1 million. The net change resulted from an increase of USD 16.6 million in salary and benefits from Sevan Louisiana commencing operations in 2014 and severance costs related, which were offset by USD 16.5 million by lower employer contribution tax after as a result of operating under the Management Agreements. Net Financial Items Net financial items in 2014 amounted to USD 70.2 million compared to USD 89.1 million for Amortization of deferred finance costs was USD 34.1 million less than in 2013 due to a 36.7 million onetime write-off of fees associated with the debt restructuring which took place in Interest expense increased by USD 2.1 million from 2013 as a consequence of a higher debt level in 2014, primarily due to the drawdown of debt to cover the final instalment paid for Sevan Louisiana. Net financial items in 2013 included a non-recurring gain of USD 10.1 million on interest rate swaps. No swaps have been held in Tax Expense Tax expense in 2014 was USD 6.5 million compared to USD 52.9 million in A non-cash write off of deferred tax assets for USD 52.9 million was recorded in 2013 and offset in 2014 from a USD 2.7 million settlement provision related to an income tax liability in China and USD 3.8 million of taxes expensed as a consequence of Sevan Louisiana's operations in the US Gulf of Mexico. The Old Group s result for 2014 was a loss of USD million compared to a loss of USD million in

69 Balance Sheet Total assets decreased from USD 2,164.2 million in 2013 to USD 1,991.6 million in The decrease is primarily caused by the USD million non-cash impairment of Sevan Driller and Sevan Brasil. Cash and cash equivalents was USD 98.5 million lower mainly as a consequence of the mobilization of the Sevan Louisiana until commencement in May As a result of Sevan Louisiana being in service, USD million was transferred from construction in progress to units in operations within non-current assets. Inventory for the year increased USD 19.6 million, mainly from Sevan Louisiana inventory transferring from construction in progress at commencement and adjusting inventory balances on the fleet as a consequence of transitioning processes under the Management Agreements. Other fixed assets decreased by USD 18.1 million, of which USD 14.9 million related to transferring Sevan Driller and Sevan Brasil spare equipment to drilling units (in operations). Total liabilities decreased from USD 1,480.5 million in 2013 to USD 1,433.9 million in Of this amount in 2014, USD 1,321.0 million represented outstanding debt (66% of total equity and liabilities). The decrease in total liabilities is primarily related to USD million in repayments of principal under the Group's bank loan facility, amortization of deferred financing fees and a write-off of USD 6.9 million deferred financing fees related to the cancelling of Tranche B of the bank loan facility, off-set by USD million of drawdowns under the revolving credit facility. Trade payables decreased with USD 33.4 million and related party payables increased with USD 41.0 million, as a consequence of Restructuring where direct costs to the Old Group are reduced and related party costs increase under Seadrill management. Cash Flows The Old Group's cash and cash equivalents amounted to USD 30.2 million as of 31 December 2014 compared to USD million as of 31 December The Old Group used cash generated from its operations and the revolving credit facility to fund investment and financing activities throughout Net cash used in operating activities during 2014 was USD -9.5 million compared to USD million in This represented an increase in cash from operations of USD 12 million. This increase was primarily driven by Sevan Louisiana commencing operations and lower operating expenses for the units working in Brazil. Net cash used in operating activities in 2014 was USD million less than the Old Group's total loss before taxes. This was primarily caused by the non-cash impairment on Sevan Driller and Sevan Brasil in Net cash used in investing activities during 2014 was USD million compared to USD million in The decrease is primarily a result of the financing required in order to take delivery of Sevan Louisiana in October Net cash used in financing activities during 2014 was USD million compared to net cash generated from financing activities of USD million in The decrease of net cash in financing activities is primarily a result of closing a bank credit facility in 2013 that allowed refinancing of the then existing term loans and take-out financing for Sevan Louisiana Results of operations 2013 compared to 2012 consolidated results Income Statement Operating Revenue The Old Group's operating revenue in 2013 was USD million compared to USD million in Sevan Brasil positively contributed to revenue through a full year of operations in 2013, and slightly offset by lowered performance on Sevan Driller compared to Operating Costs Total operating expense was USD million in 2013 compared to USD million in Operating expense increased with USD 38.2 million from the full year of Sevan Brasil in service. In 2013, the Old Group 66

70 recognized additional costs of repair and maintenance activity related to downtime events and costs associated with transitioning processes under the Management Agreements beginning July 2013, which included renegotiating supplier contracts, replacing rental of contract required equipment and increased overheads until restructuring was completed. Employee benefit expense increased USD 33.8 million from Sevan Brasil being in service for the full year of 2013 and costs related to transitioning onshore and offshore employment under the Management Agreements, including severance costs. Other operating expense increased USD 8.7 million as a result of one-time costs related to writeoffs of intangibles and assistance from advisors to complete the Restructuring. Net Financial Items Net financial items in 2013 were USD 89.1 million compared to USD 42.3 million in In 2013 the Old Group recognized USD 36.7 million in write off of deferred financing costs offset by gains from unrealized hedging gains of USD 10.1 million, as a consequence of refinancing the USD 480 million and USD 525 million project financing and refinancing with a bank credit facility where USD 1,400 million was drawn. The drawdown was used to refinance the term loans, provide take-out financing and mobilization for the Sevan Louisiana upon delivery and other general corporate activities. Tax Expense Tax expense in 2013 was USD 52.9 million compared to tax income of USD 24.5 million in 2012, which consisted of a non-cash write off of deferred tax assets for USD 52.9 million as a consequence of the Old Group not expecting to have taxable profit in Norway in the foreseeable future. The Old Group s result for 2013 was a loss of USD million compared to a loss of USD 11.7 million in Balance Sheet Total assets amounted to USD 2,164.2 million, compared to USD 1,719.7 million in 2012, of which USD 1,916.6 million was the capitalized value of the Drilling Units. The increase is a result of the completion of the construction of Sevan Louisiana completing construction and its delivery in October Additionally, the Old Group s cash increased USD 51.9 million after the refinancing of the term loans and utilization of the new bank credit facility. Deferred income tax assets was reduced with USD 51.5 million compared to 2012, as a consequence of a non-cash write off of deferred tax assets because the Old Group did not expect to have taxable profits in Norway in the foreseeable future. The book value of equity in 2013 was USD million, compared to USD million in Total liabilities were USD 1,480.5 million, compared to USD 1,057.3 million in The Old Group refinanced the term loans with a drawdown of USD 1,400 million on a bank credit facility and entered into a revolving credit facility with Seadrill for USD million, of which no drawdowns were made in Additionally, the Old Group cancelled related interest rate swaps related to the term loan facilities, and did not hold derivative financial instruments at 31 December Cash Flows The Old Group's cash and cash equivalents amounted to USD million as of 31 December 2013 compared to USD 76.8 million as of 31 December The Old Group used cash from operations and the drawdown of the bank credit facility to fund investment and financing activities throughout Net cash used in operating activities during 2013 was USD million compared to net cash generated in operating activities in 2012 of USD 6.1 million. This represented an increase in cash used by operating activities of USD 27.6 million. The difference is mainly related to finance costs after the refinancing in 2013, depreciation and changes in working capital related to project management on the Sevan Developer. Net cash used in investing activities during 2013 was USD million compared to USD million in The increase is primarily a result of the capital required to take delivery of Sevan Louisiana in October 2013, 67

71 complete deferred delivery payment on Sevan Brasil and provide liquidity through the mobilization period of Sevan Louisiana. Net cash generated from financing activities during 2013 was USD million compared to net cash used financing activities in 2012 of USD million. The increase is primarily a result of closing a bank credit facility in 2013 that allowed refinancing of the then existing term loans and take-out financing for Sevan Louisiana Results of operations for Sevan Drilling Limited 2014 The Company had no activity until 2014, when steps to prepare for the Migration were completed. Income Statement The Company had no revenues for Operating expenses were USD 1.4 million as a result of intra-group transactions in November and December. Net Financial items were USD 1.4 million as a result of intra-group income on related party debt and interest expense for the revolving credit facility in November and December. The Company s result for 2014 was a loss of USD 2.8 million. Balance Sheet On 10 November 2014, in preparation for the Migration the Company contributed USD million of equity to Sevan Drilling ASA in exchange for USD million of investment in subsidiaries and received USD million of net assets and liabilities, including the revolving credit facility. Total assets were USD 1,161.6 million, including USD million of investment in subsidiaries and USD million in current and non-current assets from Old Group companies. Total liabilities were USD million, including USD million of revolving credit facility with Seadrill and USD million in current and non-current liabilities from Group companies. Cash Flows The Company had no cash activities in Liquidity and capital resources Overview Historically, the Old Group s primary sources of liquidity have been equity, interest-bearing debt including loans from companies in the parent company groups (Sevan Marine ASA previously and Seadrill currently) and revolving facilities. The Old Group equity ratio as per 31 March 2015 was 28.3%. The interest coverage ratio as per 31 March 2015 was 1.8%. Interest bearing debt as per 31 March 2015 was USD 1,330.0 million (USD 1,190.0 million bank facility and USD million RCF). Adjusted financial statements have not been prepared to reflect Sevan Drilling Limited as the parent company, as there was limited activity in the Company prior to the transactions to prepare for the Migration in Q4 2014, as described in section Loan agreements Bank Facility In October 2013, the Old Group entered into a USD 1,750 million secured bank loan facility with ING as agent for a syndicate of lenders. The facility is composed of a USD million export credit facility provided by GIEK and a USD 1,400 million commercial facility provided by a syndicate of several commercial banks. The commercial facility had two tranches. Tranche A in the amount of USD 1,400 million (USD 200 million GIEK and USD 1,200 million 68

72 commercial), and tranche B in the amount of USD 350 million (USD 150 million GIEK and USD 200 million commercial). Tranche A was drawn in full in 2013, and as of 31 December 2014, has USD 1,225 million outstanding (USD 175 million has been repaid). The tranche B was reserved for the take out financing of Sevan Developer and has been cancelled with effect as of 5 December 2014, due to executing the Sevan Developer Deferral Agreement with COSCO. Should the Company decide to take delivery of Sevan Developer, new financing will have to be secured to cover the instalment delivery. The availability of such financing is expected to depend on a satisfactory drilling contract having been secured for Sevan Developer. The GIEK tranche matures in September 2023 and incurs interest on the amounts outstanding at a rate of LIBOR + 2.5%, payable quarterly in arrears. The commercial tranche matures in September 2018 and incurs interest on the amounts outstanding at a rate of LIBOR + 2.9%, payable quarterly in arrears. The Group's bank facility is guaranteed by Seadrill at a cost of 1.0% per annum on amounts drawn, and subject to cross-default, see section for further details on financing and relationship with Seadrill Revolving credit facility Effective 29 December 2014, the revolving credit facility was increased to USD 300 million. The revolving credit facility matures in December 2016, is secured with second priority in the Group's assets (Sevan Driller, Sevan Brasil and Sevan Louisiana) and incurs interest on drawn amounts at a rate of LIBOR + 6.0% (+5.5% previously), payable quarterly in arrears. There is a commitment fee of 2.4% (2.2% previously) per annum on the undrawn balance of the revolving credit facility Cash flows Cash flow from operations relates to revenues from Sevan Driller, Sevan Brasil and Sevan Louisiana less interest payments, operating expense and general administration. Cash flow from investment activities relates to investments in relation to asset improvement and enhancements of units in operations and to construction of new units. Sevan Developer construction was completed in 2014 and delivery is contingent on securing an acceptable operating contract. If no contract can be secured, the contract will be terminated on agreed dates set out in the Sevan Developer Deferral Agreement (ref. section 7.10), the construction liability will not be due and the initial investment refunded Contractual obligations and contingencies The Group is not party to material contractual obligations or contingencies, with the exception of the Sevan Developer Deferral Agreement (ref. section 7.10), that are not normal and customary to continue operating its business. Should the Company decide to take delivery of Sevan Developer, new financing will have to be secured to cover the instalment delivery. The availability of such financing is expected to depend on a satisfactory drilling contract having been secured for Sevan Developer Payments As of 31 December 2014, the Old Group s unaudited contractual debt obligations for future periods were as follows: Payment schedule 2014 (in USD millions) 0 6 month 6 12 month Year 2 Year 3 Year 4-5 Later Borrowings (including interest) Trade payable Accrued expenses relating to trade payables Total

73 11.8 Investing activities The table below sets out the Old Group s principal investments for each financial year and the recent quarter from the Financial Information. All investments in the period are additions to the Old Group s property, plant and equipment, mainly related to shipyard payments and maintenance capital expenditures on operating units. In USD millions Q Additions to property, plant and equipment Total investments In the period ending 31 March 2015, the Old Group invested USD 8.9 million in maintenance capital expenditures for the rig in service. In 2014, the Old Group recorded non-cash additions of USD 52.6 million for 20% payment of the contract price for Sevan Developer made through a settlement of a deferred liability with COSCO. The Old Group made deferred delivery payment of USD 7.5 million for Sevan Louisiana after subsea equipment commissioning was completed. In 2013 in connection with securing the USD 1,700 billion bank facility, the Old Group made a payment of USD million for the Sevan Louisiana at delivery, deferred milestone payment of USD 26.5 million for Sevan Brasil, and deferred delivery payment of USD 7.5 million for Sevan Louisiana after thruster replacements were completed. In 2012, the Old Group made USD million of investment in Sevan Brasil in a shipyard delivery instalment payment and contract required equipment for its operating contract, and made a payment for 10% of the construction contract price of USD 26.3 million for Sevan Developer. The Old Group utilized drawdowns on the USD million project financing facility, USD 45.2 million Sevan Brasil mobilization fee from Petrobras, USD 80.0 million in vendor credits and cash from operations to fund the year s investment. At 31 March 2015, the Old Group had a contingent construction liability for Sevan Developer in the amount of USD million that is due upon conditions met under the Sevan Developer Deferral Agreement, which include delivery will occur and liability will be due upon successfully obtaining an operating contract that can secure acceptable financing for the construction liability Significant change in the Group s financial or trading position In the period after the balance sheet day of 31 March 2015 and up to the date of this Prospectus, the Old Group or Group has not completed any significant transactions nor has a significant change to market and financial condition occurred Information on holdings The Company or the Group does not have any ownership interests or investments other than those mentioned in 5.2, which are likely to have a significant effect on the assessment of the Group s own assets and liabilities, financial position or profit or losses Working capital The Company is of the opinion that the working capital available to the Group is sufficient for the Group s present requirements, for the period covering at least 12 months from the date of this Prospectus. If the revolving credit facility cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Group does not have adequate liquidity beyond Insurance The Group s operations are subject to hazards inherent in the drilling of oil and natural gas wells, including blowouts and well fires, which could cause personal injury, suspend drilling operations, destroy the equipment involved or cause serious environmental damage. Offshore drilling contractors, such as the Group, are also subject to hazards particular to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. The Group s marine insurance package policy provides insurance coverage for physical damage to the Drilling Units, loss of hire and third-party liability. 70

74 The Group s insurance claims are subject to a deductible, or non-recoverable, amount. The Group currently maintains a deductible per occurrence of up to USD 1.25 million related to physical damage to the drilling units. However, a total loss of, or a constructive total loss of, a Drilling Unit is recoverable without being subject to a deductible. For general and marine third-party liabilities, the Group maintains a deductible of up to USD 500,000 per occurrence on personal injury liability for crew claims, non-crew claims and third-party property damage including oil pollution from the Drilling Units. Furthermore, the Group purchased insurance to cover loss due to the drilling unit being wholly or partially deprived of income as a consequence of damage to the unit. The loss of hire insurance has a deductible period of 45 days after the occurrence of physical damage. Thereafter, coverage is limited to 180 days. If the repair period for any physical damage exceeds the number of days permitted under the loss of hire policy, the Group will be responsible for the costs in such period Financial risk management Generally The Group s activities expose it to a variety of financial risks. 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 risk management program includes focusing on the unpredictability of financial markets and seeks to minimize potential adverse effects of such risks on its financial performance. Risk management for the Group is carried out by the Treasury function of Seadrill on behalf of the Group, ref. the management agreements described in Section However, final authority is retained in the Company. The treasury function of Seadrill identifies, evaluates and hedges financial risks in close co-operation with the Drilling Units within the Group. The Board of Directors approves the principles for overall risk management, as well as policies covering specific areas, such as foreign currency risk, price risk interest rate risk, credit risk, and liquidity risk Treasury and funding policy The treasury activities are conducted within corporate financing and cash management policies. The overall objective outlined in these policies is to secure sufficient funding and keeping adequate liquidity reserves and available credit lines for the short and long term capital requirements, while generating satisfactory returns on excess funds. Cash and cash equivalents are held primarily in USD and NOK with some balances held in GBP, SGD, and EUR. The Sevan Drilling Group has historically not made use of derivative instruments other than for interest rate and currency risk management purpose. At the date of this Prospectus, the Group has not entered into any derivative instruments in order to hedge currency or interest rate risks Foreign currency risk The Group s assets are nominated in US Dollar and most of the Group s revenues are also nominated in US Dollar. Part of the revenue from both Sevan Driller and Sevan Brasil contracts with Petrobras is nominated in Brazilian Reais. This revenue split on Brazil contracts corresponds to the Group s costs in Reais and represent a natural hedge. The Group may use forward contracts to manage the foreign exchange risk arising from future commercial transactions and recognized assets and liabilities. As of the date of this Prospectus, no forward contracts have been entered into. The Group s sensitivity to foreign currency has increased during the current year mainly due to the increase in sales and purchases denominated in BRL in the last quarter of the financial year which has resulted in higher BRL denominated trade receivables and payables Price risk Changes to the price level of goods and services acquired may affect the Group, thereafter price developments are carefully monitored. The Group seeks to handle the risk through contract clauses with its customers. Furthermore, operating cost inflation is mitigated through annual dayrate adjustments with Petrobras in Brazil for Sevan Driller and Sevan Brasil Interest rate risk All of the Group s debt is subject to interest rates which fluctuate with the market. A sensitivity analysis is completed annually to quantify a 100 basis point increase or decrease that is used to assess the impact of rate 71

75 changes. The Group continuously considers whether part of the interest rate exposure should be hedged. As of 31 March 2015, no interest rate hedges have been entered Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Group has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. The market for the Group s services is the offshore oil and gas industry. The customers consist primarily of major integrated oil companies, independent oil and gas producers and government-owned oil companies. The Group performs ongoing credit evaluations of its customers and generally do not require collateral in the business agreements. The current counterparties are Petrobras for Sevan Driller and Sevan Brasil, and LLOG for Sevan Louisiana. The Group has not had a history of collection problems or significant disputes, and continues to monitor specific situations with these customers. Thus no provision for doubtful accounts has been recognized in the periods presented Liquidity risk The Group s objective is to maintain flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This may include maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity is sensitive to operational uptime on the units performing contracts in connection with management s ability to control costs. The Group has an unfunded contingent construction liability for USD million for the final instalment when the Sevan Developer is delivered. Delivery is contingent on securing a drilling contract for the unit that can provide secured financing for the final instalment. The Group has security through the deferral period for the initial investment, ref section 7.10 describing the Sevan Developer. In December 2014, the Company amended the terms of the revolving credit facility. The amended terms increased the available amount to USD 300 million and extended the expiry date to December At 31 March 2015, USD 140 million was drawn on the facility. With these amended terms and cash flow from operations, the Company is forecasting adequate liquidity for the Group more than 12 months. If the revolving credit facility cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Group does not have adequate liquidity beyond The Company and the Group have no financial covenants at the balance sheet date. However, the Company and the Group could be impacted if Seadrill breaches any of its covenants Capitalization and Indebtness This Section provides information about the Sevan Drilling Limited Financial Statements capitalisation and net financial indebtedness on an actual basis as of 31 March 2015 which has been derived from the Financial Statements. Since the Company was incorporated in December 2013, the information below is not representative for the business of the Group going forward. The information presented below should be read in conjunction with the other parts of this Prospectus, in particular Section 10 "Selected Financial Information", Section 11 "Operating and Financial Review", and the Group s Financial Information and the notes related thereto included in Appendix B to F, to this Prospectus. 72

76 Capitalization The following table sets forth information about the Group s unaudited capitalisation on an actual basis as of 31 March Capitalisation In USD millions 31 March 2015 Indebtedness Total current financial debt Guaranteed Secured Unguaranteed/unsecured... - Total non-current financial debt... 1, Guaranteed... 1, Secured... 1, Unguaranteed/unsecured... - Total indebtedness... 1,312.5 Shareholders equity Invested equity attributable to the shareholders of the Company Minority interests... - Total equity Total capitalisation... 1, Indebtedness The following table sets forth information about the Group s net indebtedness as of 31 March Indebtedness (Figures in USD millions) 31 March 2015 Net indebtedness (A) Cash (B) Cash equivalents (Undrawn revolving credit facility) (C) Trading securities... - (D) Liquidity (A)+(B)+(C) (E) Current financial receivables (F) Current bank debt... (G) Current portion of long-term debt (H) Other current financial debt (current trade and other payables) (I) Current financial debt (F)+(G)+(H) (J) Net current financial indebtedness (I)-(E)-(D) (K) Non-current bank loans... 1,038.4 (L) Bonds issued... - (M) Other non-current loans (revolving credit facility) (N) Non-current financial indebtedness (K)+(L)+(M)... 1,178.4 (O) Net financial indebtedness (J)+(N)... 1,190.0 The bank debt includes USD 17.5 million of unamortized deferred financing costs (USD 5.9 million current and USD 11.6 million non-current portion). The Group is not aware of any indirect or contingent indebtedness, except for the Sevan Developer Deferral Agreement as explained in Section 2 Risk Factors and Section 7.10 above. 73

77 12 CORPORATE INFORMATION AND DESCRIPTION OF SHARE CAPITAL The following is a summary of certain material information relating to the Shares and share capital of the Company and certain other shareholder matters, including summaries of certain provisions of the Memorandum of Association, Bye-laws and applicable Bermuda law in effect as of the date of this Prospectus. The summary does not purport to be complete and is qualified in its entirety by the Memorandum of Association, Bye-laws and applicable law. Adjusted financial statements have not been prepared to reflect Sevan Drilling Limited as the parent company, as there has been limited activity in the Company since its incorporation and the Restructuring in 2014, as described in section Corporate information The Company s commercial and legal name is Sevan Drilling Limited and its Bermuda company number is The Company was incorporated in December The Company is incorporated in Bermuda in accordance with, and operates under, the Bermuda law. The registered address of the Company is Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda. The Company s executive office is located in Drammensveien 288, 0283 Oslo, Norway. The telephone number to that address is The Company s website is The Shares have been created under the laws of Bermuda and are registered in book-entry form in the VPS under ISIN BMG8070J1099 and will trade under the same ticker code "SEVDR" as its predecessor Sevan Drilling ASA. All the Shares rank in parity with one another. The Shares carry equal rights in all respects. Each Share has the right to one vote at General Meetings Authorized and issued share capital At the date of this Prospectus, the Company s authorized capital stock consists of 10,000,000,000 common Shares. The Company's current share capital is USD 3,100,000 represented by 31,000,000 Shares each with a par value of USD All issued Shares have been fully paid. The Board of Directors is entitled to propose and adopt increases in the issued share capital up to the size of the authorized share capital. The Board of Directors currently has no plans to issue additional shares, although such resolutions could be made on short notice. Likewise, the Board of Directors is entitled to propose and issue options, warrants and loans convertible into shares up to the size of the authorized share capital. No such warrants or loans have been issued or proposed. The Bye-laws do not provide the Company s shareholders with any pre-emptive, redemption or conversion rights. See Section Summary of certain rights of the Company s shareholders under Bermuda law, the Memorandum of Association and Bye-laws, for a further description of certain matters pertaining to the Company s Shares, including dividend rights, voting rights, rights to share in profits and right to share in surplus in the event of winding up and liquidation Share capital history The table below shows the development in the Company s authorized share capital for the period from incorporation to the date hereof: Type change of Change in issued share capital (USD) New issued share capital (USD) Date No. of issued Par value per Shares share (USD) 7 January 2014 Issuance 100, ,000 1,000, November 2014 Issuance 3,100,00 3,000,000 30,000, As at 1 January 2015, a total of 31,000,000 Shares each with a par value of USD 0.10 had been issued. 74

78 2-May-11 2-Jul-11 2-Sep-11 2-Nov-11 2-Jan-12 2-Mar-12 2-May-12 2-Jul-12 2-Sep-12 2-Nov-12 2-Jan-13 2-Mar-13 2-May-13 2-Jul-13 2-Sep-13 2-Nov-13 2-Jan-14 2-Mar-14 2-May-14 2-Jul-14 2-Sep-14 2-Nov-14 2-Jan-15 2-Mar-15 2-May-15 Share price (NOK/share) 12.4 Treasury shares The Board of Directors can approve the purchase of common Shares for cancellation or to be held as treasury shares in accordance with the Company s Bye-laws, subject to the rules of Oslo Børs, if applicable, or of any other stock exchange or quotation system upon which any of the Company s Shares are listed at the time. The Company does not currently hold any treasury shares Rights to subscribe or acquire shares Neither the Company 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 the Company or its subsidiaries. Furthermore, neither the Company nor any of its subsidiaries has issued subordinated debt or transferable securities other than the shares in the Company and the shares in Sevan Drilling s subsidiaries which are held directly or indirectly by the Company Share price development Sevan Drilling ASA has been listed on Oslo Axess since 3 May 2011 and on Oslo Børs since 13 February 2012, ref. section 7.2. The graph below shows the development in trading price (closing price) and traded volume for the Sevan Drilling ASA shares in the period listed on Oslo Axess to 26 June The closing price on 26 June 2015 was NOK Sevan Drilling share price development Source: Bloomberg (26 June 2015) 75

79 12.7 Major shareholders As of 26 June 2015, Sevan Drilling ASA had a total of 2,245 registered shareholders in the VPS. The table below shows the 20 largest shareholders in Sevan Drilling ASA as registered in the VPS on 26 June Shareholders in Sevan Drilling ASA Number of Shares % 1 DnB NOR Markets, AKS DNB Bank ASA** 211,059, % 2 SKANDINAVISKA ENSKIL EGENHANDELSKONTO (publ) Oslofilialen** 79,575, % 3 J.P. Morgan Chase Ba NORDEA TREATY ACCOUNT 33,018, % 4 WENAASGRUPPEN AS 17,208, % 5 The Bank of New York BNY MELLON 16,389, % 6 SKAGEN VEKST 13,252, % 7 US BK EVERMORE GLO V BNY MELLON SA/NV 10,392, % 8 VERDIPAPIRFONDET DNB 9,221, % 9 J.P. Morgan Chase Ba JPMCB NA RE DEPO JPM 6,014, % 10 PERESTROIKA AS 5,778, % 11 NORDNET BANK AB 3,239, % 12 JENSSEN NILS HENRY 2,792, % 13 DNB LIVSFORSIKRING A 2,552, % 14 ASMYR JON MAGNE 2,500, % 15 NIKI A/S 2,500, % 16 SIVILØKONOM OLE KRIS 2,480, % 17 NILSEN GEIR 2,300, % 18 MP PENSJON PK 2,106, % 19 DANSKE BANK A/S 3887 OPERATIONS SEC. 2,019, % 20 HAAV HOLDING AS Platåveien 10 2,011, % Total 20 largest shareholders 426,414, % Other shareholders 168,209, % Total shareholding 594,623, % * Registered as nominee shareholder with VPS. **Seadrill holds its Shares in Sevan Drilling ASA through forward contracts with the banks identified above. As of the date of this Prospectus, the Company only has one shareholder. However, following the completion of the Capital Decrease, Listing and settlement of the Shares the Company will have the similar shareholding structure as illustrated in the table above, ref section 5.5. Shareholders owning 5% or more of the Shares will have an interest in the Company s share capital which is notifiable pursuant to the Norwegian Securities Trading Act. Please refer to section 13.6 below for a description of the disclosure obligations under the Norwegian Securities Trading Act. As of the date of this Prospectus the following investors own more than 5% are of Sevan Drilling ASA and will following the completion of the Capital Decrease, Listing and settlement of the Shares have similar shareholdings in the Company: Shareholder Number of Shares % 1 DnB NOR Bank ASA EGENHANDELSKONTO DnB NOR Markets 211,059, % 2 SKANDINAVISKA ENSKIL EGENHANDELSKONTO (publ) Oslofilialen 79,575, % 3 J.P. Morgan Chase Ba NORDEA TREATY ACCOUN 33,018, % The Group is not aware of any other persons or entities who, directly or indirectly, have an interest in 5% or more of the Sevan Drilling ASA shares or after completion of the Capital Decrease and Listing the Company's Shares. Seadrill controls interest in 297,941,358 of Sevan Drilling ASA s shares as of the date of this Prospectus, which corresponds to 50.11% of the issued and fully paid Shares. Seadrill will control approximately the same number of proportional Shares of the Company after completion of the Migration and Listing, ref. Section 5.6 for further information about the distribution ratio. As a result of this substantial ownership interests in Sevan Drilling ASA and post Migration, the Company, Seadrill has the ability to exercise significant influence over certain actions requiring shareholder approval. This influence must be exercised in accordance with the Bye-laws, applicable Bermuda law and the rules of Oslo Børs. Please see section 12.9 for a summary of the Company s Bye-laws. Apart from the aforesaid, there are no specific measures in place regulating the exercise of the influence which follows from holding a majority of the Shares in the Company. 76

80 On 27 June 2013 Seadrill Limited made a mandatory offer for all the shares of Sevan Drilling ASA. On 5 September 2013 Seadrill Limited announced the final result of the mandatory offer. Seadrill Limited had received acceptance for a total of 47,394 Sevan Drilling ASA shares, representing approximately 0.01% of the issued shares in Sevan Drilling ASA. Together with the 297,893,964 shares that already was held by the Seadrill Limited, Seadrill Limited resulted in controlling 297,941,358 shares, representing 50.11% of all the issued shares of the Sevan Drilling ASA. As the Company only has one shareholder, the Company has not received any takeover bids during the last or current financial years. See section 9.5, for the total number of shares of Sevan Drilling ASA held by Directors and the executive management team of the Group, as of the date of this Prospectus. As of the date of this Prospectus, to the knowledge of the Company, there are no arrangements or agreements, which may at a subsequent date result in a change of control in the Company Options As of the date of this Prospectus, the Company does not have outstanding options Summary of certain rights of the Company s shareholders under Bermuda law, the Memorandum of Association and Bye-laws Summary of certain rights of the Company s shareholders under Bermuda law, the Memorandum of Association and Bye-laws: Objects pursuant to the Memorandum of Association Pursuant to clause 6 of the Company s Memorandum of Association, the objects for which the Company was formed and incorporated are unrestricted. Special shareholder meetings Under the Bermuda Companies Act, a special general meeting of shareholders must be convened by the board of directors of a company on the requisition of shareholders holding not less than one-tenth of the paid-up capital of the company as at the date of the deposit carrying the right to vote at a general meeting. The Company s Bye-laws provide that the Board may whenever it thinks fit, and shall when required by the Bermuda Companies Act, convene a special general meeting of the shareholders. Shareholder action by written consent The Bermuda Companies Act provides that, except in the case of the removal of an auditor or director and subject to a company s bye-laws, anything which may be done by resolution of a company in a general meeting or by resolution of a meeting of any class of the members of a company, may be done by resolution in writing. The Company s Bye-laws provide for action by written consent of shareholders. Shareholder meeting quorum; voting requirement; voting rights The Company s Bye-laws provide that save as otherwise provided by the Bye-laws the quorum at any general meeting shall be constituted by one or more Shareholders, either present in person or represented by proxy, holding in the aggregate shares carrying 33 1/3% of the voting rights entitled to be exercised at such meeting. Except where a greater majority is required by the Bermuda Companies Act or the Bye-laws, any question proposed for consideration at any general meeting shall be decided on by a simple majority of votes cast provided that any resolution to approve an amalgamation or merger shall be decided on by a simple majority of votes cast and the quorum necessary for such meeting shall be two persons at least holding or representing by proxy 33 1/3% of the issued shares of the Company (or the class, where applicable). There is no cumulative voting. Every shareholder of the Company who is present in person or by proxy has one vote for every Share of which he or she is the holder. However, the Company s Bye-laws establish a right to divide the share capital into different classes of shares with varied rights attached to the shares. The Board may exercise all the powers of the Company to divide 77

81 the Company s shares into several classes and attach thereto respectively any preferential, deferred, qualified or special rights, privileges or conditions. Notice of shareholder meetings The Bermuda Companies Act requires that all companies hold a general meeting at least once in each calendar year (which meeting shall be referred to as the annual general meeting ) and that shareholders be given at least five days advance notice of a general meeting, but the accidental omission to give notice to, or the non-receipt of a notice of a meeting by, any person entitled to receive notice does not invalidate the proceedings of the meeting. The Company s Bye-laws provide that an annual and special shareholder meeting shall be called by not less than 7 days notice in writing, and that the notice period shall be exclusive of the day on which the notice is served or deemed to be served and of the day on which the meeting to which it relates is to be held. If a general meeting is called on shorter notice, it will be deemed to have been properly called if it is so agreed (i) in the case of a meeting called as an annual general meeting by all the shareholders entitled to attend and vote thereat; and (ii) in the case of any other meeting by a majority in number of the shareholders having the right to attend and vote at the meeting, being a majority together holding not less than 95% in nominal value of the shares giving that right. No shareholder is entitled to attend any general meeting by proxy unless a proxy signed by or on behalf of the shareholder addressed to the Company Secretary is deposited (by post, courier, facsimile transmission or other electronic means) at the Company s registered office at least 48 hours prior to the time appointed for holding the general meeting. Notice of shareholder proposals Under the Bermuda Companies Act, shareholders holding not less than one-twentieth of the total voting rights of all shareholders having a right to vote at the meeting to which the requisition relates, or not less than 100 shareholders, may, as set forth below, at their own expense (unless the company otherwise resolves), require a company to give notice of any resolution which may properly be moved and is intended to be moved at the next annual general meeting and/or to circulate a statement (of not more than 1000 words) in respect of any matter referred to in a proposed resolution or any business to be conducted at the annual general meeting. Board meeting quorum; voting requirement The Company s Bye-laws provide that the quorum necessary for the transaction of the business of the Board may, subject to the requirements of the Bermuda Companies Act, be fixed by the Board and, unless so fixed at any other number, shall be a majority of the Board present in person or by proxy, provided that a quorum shall not be present unless a majority of the Directors present are neither physically located in or resident in the United Kingdom. Questions arising at any meeting of the Board shall be determined by a majority of votes cast. In the event of an equality of votes, the motion shall be deemed to have been lost. Number of Directors Under the Bermuda Companies Act, the minimum number of directors on the board of directors of a company is one, although the minimum number of directors may be set higher, and the maximum number of directors may be set by the shareholders at a general meeting or in accordance with the Bye-laws of the company. The maximum number of directors is usually fixed by the shareholders in a general meeting. Only the shareholders may increase or decrease the number of directors seats last approved by the shareholders. Removal of Directors Subject to the Company s Bye-laws, the Bermuda Companies Act states that the shareholders of a company may, at a special general meeting called for that purpose, remove any director. Any director whose removal is to be considered at such a special general meeting is entitled to receive not less than 14 days notice and shall be entitled to be heard at the meeting. The Company s Bye-laws provide that a director may be removed from office at a special general meeting called for that purpose provided notice of any such special general meeting is served upon the director concerned not less than 14 days before the meeting. Such director is entitled to be heard at the meeting. 78

82 Newly created directorships and vacancies on the Board of Directors Under the Bermuda Companies Act, the directors shall be elected at each annual general meeting of the company or elected or appointed by the shareholders in such other manner and for such term as may be provided in the bye-laws. Additionally, a vacancy created by the removal of a director at a special general meeting may be filled at that meeting by the election of another director or in the absence of such election, by the other directors. Unless the Bye-laws of a company provide otherwise and provided there remains a quorum of directors in office, the remaining directors may fill a vacancy on the board. The Bye-laws provide that, so long as a quorum of directors remains in office, the Board has the power to fill casual vacancies on the Board. In addition, the Bye-laws provide that any vacancy created by the removal of a director at a special general meeting may be filled at the special general meeting by the election of another person as director or, in the absence of any such election, by the Board. Under the Company s Bye-laws, any vacancy in the board of directors may be filled by the election or appointment by the shareholders at a general meeting, and the board of directors may also fill any vacancy in the number left unfilled. A director so appointed holds office until the next annual general meeting. Interested Directors Under the Company s Bye-laws, any director, or any director s firm, may hold any other office or place of profit with the Company (except that of auditor) for such period and on such terms as the Board may determine and shall be entitled to remuneration as if such director were not a director. So long as, where it is necessary, a director declares the nature of his interest at the first opportunity at a meeting of the Company s board of directors or by writing to the Company s board of directors as required by the Bermuda Companies Act, a director shall not by reason of his office be accountable to the Company for any benefit which he derives from any office or employment to which the Company s Bye-laws allow him to be appointed or from any transaction or arrangement in which the Company s Bye-laws allow him to be interested, and no such transaction or arrangement shall be liable to be avoided on the ground of any interest or benefit. Duties of Directors The Bermuda Companies Act also imposes a duty on directors and officers of a Bermuda company to: (i) act honestly and in good faith with a view to the best interests of the company; and (ii) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The Bye-laws provide that the Company s business is to be managed and conducted by the Board. At common law, members of a board of directors owe a fiduciary duty to the company to act in good faith in their dealings with or on behalf of the company and exercise their powers and fulfill the duties of their office honestly. This duty includes the following elements: (i) a duty not to make a personal profit from opportunities that arise from the office of director; (ii) a duty to avoid conflicts of interest; and (iii) a duty to exercise powers for the purpose for which such powers were intended. The Bermuda Companies Act provides that, if a director or officer has an interest in a material contract or proposed material contract with a company or any of its subsidiaries or has a material interest in any person that is a party to such a contract, the director or officer must disclose the nature of that interest at the first opportunity either at a meeting of directors or in writing to the board of directors. In addition, the Bermuda Companies Act imposes various duties on directors and officers of a company with respect to certain matters of management and administration of the company. Director liability The Bermuda Companies Act permits a company to exempt or indemnify any director, officer or auditor from loss or liability in circumstances where it is permissible for the company to indemnify such director, officer or auditor, as indicated in Indemnification of Officers and Directors below. Indemnification of Directors and officers. The Bermuda Companies Act permits a company to indemnify its directors, officers and auditor with respect to any loss arising or liability attaching to such person by virtue of any rule of law concerning any negligence, default, breach of duty, or breach of trust of which the director, officer or auditor may be guilty in relation to the company or any of its subsidiaries; provided that the company may not indemnify a director, officer or auditor against any liability arising out of his or her fraud or dishonesty. The Bermuda Companies Act also permits a company to 79

83 indemnify a director, officer or auditor against liability incurred in defending any civil or criminal proceedings in which judgment is given in his or her favor or in which he or she is acquitted, or when the Supreme Court of Bermuda (the Court ) grants relief to such director, officer or auditor. The Bermuda Companies Act permits a company to advance moneys to a director, officer or auditor to defend civil or criminal proceedings against them on condition that these moneys are repaid if the allegation of fraud or dishonesty is proved against them. The Court may relieve a director, officer or auditor from liability for negligence, default, breach of duty or breach of trust if it appears to the Court that such director, officer or auditor has acted honestly and reasonably and, having regard to all the circumstances of the case, ought fairly to be excused The Company s Bye-laws provide that every Director, Alternate Director, Officer, person or member of a duly authorized committee of the Company, Resident Representative of the Company and their respective heirs, executors or administrators of the Company as well as current and former directors and officers of the Company s subsidiaries, shall be indemnified and held harmless out of the funds of the Company to the fullest extent permitted by Bermuda law against all liabilities, loss, damage or expense (including but not limited to liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable) incurred or suffered by him as such Director, Alternate Director, Officer, person or committee member or Resident Representative, and the indemnity contained in the Bye-law shall extend to any person acting as such Director, Alternate Director, Officer, person or committee member or Resident Representative in the reasonable belief that he has been so appointed or elected notwithstanding any defect in such appointment or election. Such indemnity shall not extend to any matter which would render it void pursuant to the Bermuda Companies Act. Variation of shareholders rights The Bye-laws provide that, subject to the Bermuda Companies Act, all or any of the rights for the time being attached to any class of shares for the time being issued may from time to time be altered or abrogated with the consent in writing of the holders of not less than 75% in nominal value of the issued shares of that class or with the sanction of a resolution passed by a majority of 75% of the votes cast at a separate general meeting of the holders of such shares voting in person or by proxy. As previously stated, the Company currently has one class of shares. The Company s bye-laws specify that the rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the rights attaching to or the terms of issue of such shares, be deemed to be altered by the creation or issue of further shares ranking pari passu therewith. Amendment of the Memorandum of Association The Bermuda Companies Act provides that the memorandum of association of a company may be amended by a resolution passed at a general meeting of shareholders of which due notice has been given. Except in the case of an amendment that alters or reduces a company s share capital, the holders of an aggregate of not less than 20% in par value of a company s issued share capital or any class thereof, or the holders of not less than 20% of a company s debentures entitled to object to amendments to the memorandum of association, have the right to apply to the Court for an annulment of any amendment to the memorandum of association adopted by shareholders at any general meeting. Upon such application, the alteration will not have effect until it is confirmed by the Court. An application for an annulment of an amendment to the memorandum of association passed in accordance with the Bermuda Companies Act may be made on behalf of persons entitled to make the application by one or more of their number as they may appoint in writing for the purpose. No application may be made by shareholders voting in favour of the amendment. Amendment of the Bye-laws Under Bermuda law, the adoption of a company s bye-laws and any rescission, alteration, or other amendment of the company s bye-laws must be approved by a resolution of the board of directors and by a resolution of the shareholders, provided that any such amendment shall only become operative to the extent that it has been confirmed by a resolution of the shareholders. The Company s bye-laws provide a resolution of the shareholders to approve the adoption or amendment of the Bye-Laws shall be decided on by a simple majority of votes cast. 80

84 Inspection of books and records; shareholder lists The Bermuda Companies Act provides the general public with a right of inspection of a Bermuda company s public documents at the office of the Registrar of Companies in Bermuda. These documents include the Company s Memorandum of Association and all amendments to the Memorandum of Association. The Bermuda Companies Act also provides shareholders of a Bermuda company with a right of inspection of a company s bye-laws, minutes of general (shareholder) meetings and the audited financial statements. The Bermuda register of shareholders is also open to inspection by the members of the public free of charge. A Bermuda company is required to maintain its share register at its registered office in Bermuda or upon giving notice to the Registrar of Companies at such other place in Bermuda notified to the Registrar of Companies. A company may, in certain circumstances, establish one or more branch registers outside of Bermuda. A Bermuda company is required to keep at its registered office a register of its directors and officers that is open for inspection by members of the public without charge. The Bermuda Companies Act does not, however, provide a general right for shareholders to inspect or obtain copies of any other corporate records. Amalgamations, mergers and business combinations The Bermuda Companies Act is silent on whether a company s shareholders are required to approve a sale, lease or exchange of all or substantially all of a company s property and assets. The Bermuda Companies Act does require, however, that shareholders approve amalgamations and mergers. Pursuant to the Bermuda Companies Act, an amalgamation or merger of two or more non-affiliated companies requires approval of the board of directors and the approval of the shareholders of each Bermuda company by a three-fourths majority and the quorum for such a meeting must be two persons holding or representing by proxy more than one-third of the issued shares of the company, unless the bye-laws otherwise provide. For purposes of approval of an amalgamation or merger, all shares whether or not otherwise entitled to vote, carry the right to vote. A separate vote of a class of shares is required if the rights of such class would be altered by virtue of the amalgamation or merger. The Company s Bye-laws provide that the Board may, with the sanction of a resolution passed by a simple majority of votes cast at a general meeting of the Company s shareholders with the necessary quorum for such meeting of two persons at least holding or representing 33 1/3% of the issued shares of the Company (or the class, where applicable) amalgamate or merge the Company with another company. Pursuant to the Bermuda Companies Act, a company may be acquired by another company pursuant to a scheme of arrangement effected by obtaining the agreement of a company and of the holders of its shares, representing in the aggregate a majority in number and at least 75% in value of the shareholders (excluding shares owned by the acquirer, who would act as a separate class) present and voting at a court-ordered meeting held to consider the scheme of arrangement. The scheme of arrangement must then be sanctioned by the Court. If a scheme of arrangement receives all necessary agreements and sanctions, upon the filing of the Court order with the Bermuda Registrar of Companies, all holders of common shares could be compelled to sell their shares under the terms of the scheme of arrangement. Appraisal rights Under the Bermuda Companies Act, a shareholder who did not vote in favor of an amalgamation or merger between non-affiliated companies and who is not satisfied that he or she has been offered fair value for his or her shares may, within one month of the giving of the notice of the shareholders meeting to consider the amalgamation, apply to the Court to appraise the fair value of his or her shares. If the Court appraised value is greater than the value received or to be received in the amalgamation or merger, the acquiring company must pay the Court appraised value to the dissenting shareholder within one month of the appraisal, unless it decides to terminate the amalgamation or merger. Under another provision of the Bermuda Companies Act, the holders (the purchasers) of 95% or more of the shares of a company may give notice to the remaining shareholders requiring them to sell their shares on the terms described in the notice. Within one month of receiving the notice, any remaining shareholder may apply to the Court for an appraisal of its shares. Within one month of the Court s appraisal, the purchasers are entitled to either acquire all shares involved at the price fixed by the Court or cancel the notice given to the remaining shareholders. Where shares had been acquired under the notice at a price less than the Court s appraisal, the purchasers must either pay the difference in price or cancel the notice and return to 81

85 each shareholder concerned the shares acquired and each shareholder must repay the purchaser the purchase price. Dissenter s rights The Bermuda Companies Act also provides that where an offer is made for shares or a class of shares in a company by another company not already owned by, or by a nominee for, the offeror or any of its subsidiaries and, within four months of the offer, the holders of not less than 90% in value of the shares which are the subject of the offer approve the offer, the offeror may by notice, given within two months from the date such approval is obtained, require the dissenting shareholders to transfer their shares on the same terms of the offer. Dissenting shareholders will be compelled to sell their shares to the offeror unless the Court, on application to the Court within a one month period from the date of such offeror s notice, orders otherwise. Shareholder suits Class actions and derivative actions are generally not available to shareholders under Bermuda law. Bermuda courts, however, would ordinarily be expected to permit a shareholder to commence an action in the name of a company to remedy a wrong to the company where the act complained of is alleged to be beyond the corporate power of the company or illegal, or would result in the violation of the company s memorandum of association or bye-laws. Furthermore, consideration would be given by a Bermuda court to acts that are alleged to constitute a fraud against the minority shareholders or, for instance, where an act requires the approval of a greater percentage of the company s shareholders than that which actually approved it. However, generally a derivative action will not be permitted where there is an alternative action available that would provide an adequate remedy. Any property or damages recovered by derivative action go to the company, not to the plaintiff shareholders. When the affairs of a company are being conducted in a manner which is oppressive or prejudicial to the interests of some part of the shareholders, one or more shareholders may apply to the court, which may make such order as it sees fit, including an order regulating the conduct of the company s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or by the company or that the company be wound up. A statutory right of action is conferred on subscribers to shares of a Bermuda company against persons (including directors and officers) responsible for the issue of a prospectus in respect of damage suffered by reason of an untrue statement contained in the Prospectus, but this confers no right of action against the Bermuda company itself. In addition, an action can be brought by a shareholder on behalf of the company to enforce a right of the company (as opposed to a right of its shareholders) against its officers (including directors) for breach of their statutory and fiduciary duty to act honestly and in good faith with a view to the best interests of the company. Preemptive rights Under the Bermuda Companies Act, no shareholder has a pre-emptive right to subscribe for additional issues of a company s shares unless, and to the extent that, the right is expressly granted to the shareholder under the byelaws of a company or under any contract between the shareholder and the company. The Company s Bye-laws do not provide for pre-emptive rights. Form and transfer of Shares The shares in the Company are freely transferable and, subject to the Bermuda Companies Act, the Company s Bye-laws and any applicable securities laws, there are no restrictions on trading in the Shares. The Board is however required by the Bye-laws to decline to register the transfer of any share to a person where the Board is of the opinion that such transfer might breach any law or requirement of any authority or any stock exchange or quotation system upon which the shares of the Company are listed, from time to time, until it has received such evidence as the board may require to satisfy itself that no such breach would occur. 82

86 Issuance of common Shares The Board s mandate to increase the Company s issued share capital is limited to the extent of the authorized share capital of the Company in accordance with its Memorandum of Association and Bye-laws, which are in accordance with Bermuda law. The authorized share capital of the Company may be increased by a resolution passed by a simple majority of votes cast at a general meeting of the Company s shareholders. Capital reduction The Company may by a resolution passed by a simple majority of votes cast at a general meeting of the Company s shareholders cancel Shares which at the date of the passing of the resolution have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the Shares so cancelled. Redeemable preference Shares The Company s Bye-laws provide that, subject to the Companies Act, preference shares may, with the sanction of a resolution of the Board of Directors, be issued on terms that they are (a) to be redeemed on the happening of a specified event or an a given date; and/or (b) liable to be redeemed at the option of the Company; and/or (c) if authorized by the memorandum of association of the Company liable to be redeemed at the option of the holder. The terms and manner of redemption shall be provided for in such resolution of the Board of Directors and shall be attached to but shall not form part of the Bye-laws. The Company has not issued any redeemable preference shares as at the date of this Prospectus. Annual accounts The Board is required to cause to be kept accounting records sufficient to give a fair presentation in all material respects of the state of the Company s affairs. The accounting records are kept at the Company s registered office or at such other place(s) as the Board thinks fit. No shareholder has any right to inspect any accounting records of the Company except as required by law, a stock exchange or quotation system upon which the Company s shares or listed or as authorized by the Board or by a resolution passed by a simple majority of votes cast at a general meeting of the Company s shareholders. A copy of every balance sheet and statement of income, which is to be presented before the Company in a general meeting, together with a copy of the auditor s report is to be sent to each the Company s shareholder in accordance with the requirements of the Company s Bye-laws and the Bermuda Companies Act. Dividends The Company shareholders have a right to share in the Company s profit through dividends. The Board may from time to time declare cash dividends (including interim dividends) or distributions out of contributed surplus to be paid to the Company s shareholders according to their rights and interests as appear to the board to be justified by the position of the Company. The Board is prohibited by the Bermuda Companies Act from declaring or paying a dividend, or making a distribution out of contributed surplus, if there are reasonable grounds for believing that (a) the Company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the Company s assets would thereby be less than the aggregate of its liabilities. The Board may deduct from a dividend or distribution payable to any shareholder all monies due from such shareholder to the Company on account of calls or otherwise. The Company s Bye-laws provide that any dividend or distribution out of contributed surplus unclaimed for a period of six years from the date of declaration of such dividend or distribution shall be forfeited and shall revert to the Company, and that the payment by the board of directors of any unclaimed dividend or distribution into a separate account shall not constitute the Company a trustee in respect thereof. There are no dividend restrictions or specific procedures for non-bermudian resident shareholders under Bermuda law or the Company s Bye-laws and Memorandum of Association. 83

87 Winding up In the event of the winding up and liquidation of the Company, the liquidator may, with the sanction of a resolution passed by a simple majority of votes cast at a general meeting of the Company s shareholders, and any other sanction required by the Bermuda Companies Act, divide among the shareholders in specie or kind all or any part of the assets of the Company and may for such purposes set such values as he deems fair upon any property to be divided and may determine how such division is to be carried out between the shareholders or different classes of shareholders. The liquidator may, with the like sanction, vest all or part of the Company s assets in trustees upon such trust for the benefit of the shareholders, however, no shareholder will be compelled to accept any shares or other assets in respect of which there is any liability. 84

88 13 SECURITIES TRADING IN NORWAY Set out below is a summary of certain aspects of securities trading in Norway. The summary is based on the rules and regulations in force in Norway as at the date of this Prospectus, which may be subject to changes occurring after such date. The summary does not purport to be a comprehensive description of securities trading in Norway. Shareholders who wish to clarify the aspects of securities trading in Norway should consult with and rely upon their own advisors Trading and settlement Trading of equities on Oslo Børs is carried out in the electronic trading system Millennium Exchange. This trading system is in use by all markets operated by the London Stock Exchange, including the Borsa Italiana, as well as by the Johannesburg Stock Exchange. Official trading on Oslo Børs takes place between 09:00 hours (CET) and hours (CET) each trading day, with pre-trade period between 08:15 hours (CET) and 09:00 hours (CET), closing auction from 16:20 hours (CET) to 16:25 hours (CET) and a post trade period from 16:25 hours (CET) to 17:30 hours (CET). Reporting of after exchange trades can be done until 17:30 hours (CET). The total settlement period for trading on Oslo Børs is two trading days (T+2). This means that securities will be settled on the investor's account in VPS two days after the transaction took place, and that the seller will receive payment after two days. From 18 June 2010 it became mandatory to clear all trades in shares, equity certificates, depository receipts and exchange traded funds on Oslo Børs and Oslo Axess. Clearing entails that a company authorized to act as a socalled central counterparty assumes the role as an intermediary, acting as a buyer to the seller and seller to the buyer in transactions, in order to reconcile orders and also guarantee for settlement and delivery of securities between the transacting parties. Oslo Clearing ASA ("Oslo Clearing"), a wholly-owned subsidiary of SIX x-clear AG, a company in the SIX group, has a license from the Norwegian FSA to act as a central clearing service. LCH.Clearnet Group Ltd. ("LCH.Clearnet"), a majority owned company by the London Stock Exchange, is authorized as a central counterparty to offer services and activities in the European Union in accordance with the European Markets Infrastructure Regulation (EMIR). Further, LCH.Clearnet also has a license from the Norwegian FSA to act as a central counterparty in accordance with the Norwegian Securities Trading Act. Both Oslo Clearing and LCH.Clearnet offer clearing services to Oslo Børs. Further, the two clearing houses have signed a master link agreement and inter-ccp operational procedures to operate a link to co-clear the cash equity markets of Oslo Børs and Oslo Axess. Investment services in Norway may only be provided by Norwegian investment firms holding a license under the Norwegian 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. However, 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 Information, control and surveillance Under 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. 85

89 The Norwegian FSA controls the issuance of securities in both the equity and bond markets in Norway and evaluates whether the issuance documentation such as the Prospectus contains the required information and whether it would otherwise be unlawful to carry out the issuance. Under Norwegian law, a company that is listed on a Norwegian regulated market, or has applied for listing on such market, must promptly release any inside information directly concerning the company. Inside information means precise information about financial instruments, the issuer thereof or other matters which are likely to have a significant effect on the price of the relevant financial instruments or related financial instruments, and which 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 The VPS and transfer of Shares VPS maintains a branch register in addition to the principal share register of the Company maintained at the registered office of the Company in Bermuda pursuant to the provisions of the Bermuda Companies Act. Bermuda law permits the transfer of shares listed or admitted to trading on Oslo Børs to be effected in accordance with the rules of Oslo Børs (provided that it remains an Appointed Stock Exchange). Accordingly, the title to the Shares will be evidenced and transferred without a written instrument by VPS in accordance with the Company's Bye-laws, provided that they are listed or admitted to trading on Oslo Børs. VPS is the Norwegian paperless centralized securities register. It is a computerized book-keeping system in which the ownership of, and all transactions relating to, Norwegian listed shares must be recorded. VPS and Oslo Børs are both wholly-owned by Oslo Børs VPS Holding ASA. All transactions relating to securities registered with VPS are made through computerized book entries. No physical share certificates are, or may be, issued. 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 (being, 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. As a matter of Norwegian law, the registration of a transaction in a VPS account is prima facie evidence for 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. 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 VPS' control which VPS could not reasonably be expected to avoid or overcome the consequences of. Damages payable by VPS may, however, be reduced in the event of contributory negligence by the aggrieved party. 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 VPS regarding any individual's holdings of securities, including information about dividends and interest payments Nominee registration Norwegian law 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 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. 86

90 13.5 Foreign investment in shares listed in Norway Foreign investors may trade shares listed on the Oslo Børs through any broker that is a member of the Oslo Børs, whether Norwegian or foreign Disclosure obligations If 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, 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. The Company will have Norway as its home state after completion of the Migration and Listing Insider trading According 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 Mandatory offer requirement The 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 company listed on a Norwegian regulated market (with the exception of certain foreign companies but not including the Company) 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 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. 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, 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 company listed on a Norwegian regulated market (with the exception of certain foreign companies not including the Company) is obliged to make an offer to purchase the remaining shares of the company (repeated offer obligation) 87

91 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 of the above mentioned thresholds 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 Foreign exchange controls There 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 company that has its shares registered with the VPS 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. The Bermuda Monetary Authority has given its consent for the issue and free transferability of the Shares to and between residents and non-residents of Bermuda for exchange control purposes provided that the Shares are listed on Oslo Børs. Approvals or permissions given by the Bermuda Monetary Authority do not constitute a guarantee by the Bermuda Monetary Authority as to the Company s performance or its creditworthiness. Accordingly, in giving such consent or permissions, the Bermuda Monetary Authority shall not be liable for the financial soundness, performance or default of the Company s business or for the correctness of any opinions or statements expressed in this Prospectus. Certain issues and transfers of Shares involving persons deemed resident in Bermuda for exchange control purposes require the specific consent of the Bermuda Monetary Authority. The Company has been designated by the Bermuda Monetary Authority as a non-resident for Bermuda exchange control purposes. This designation allows the Company to engage in transactions in currencies other than the Bermuda dollar, and there are no restrictions on the Company s ability to transfer funds (other than funds denominated in Bermuda dollars) in and out of Bermuda or to pay dividends to non-residents who are holders of Shares. 88

92 14 TAXATION 14.1 Introduction The following summary does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of the shares of the Company. Shareholders who wish to clarify their own tax situation should consult with and rely upon their own tax advisors Tax consequences of the Migration The distribution of the shares in the Company to the Sevan Drilling ASA s shareholders as a repayment of paid-in capital entails a capital reduction. The Board of Directors considers it unlikely that any adverse tax consequences for Sevan Drilling ASA will be triggered as the input price of the shares in the Company exceeds the market price at the time of the repayment of capital. A repayment of paid-in capital, including share premium, is not considered a dividend distribution for Norwegian tax purposes. Nor is it considered a capital gain. Given the amount of paid-in capital of the shares in Sevan Drilling ASA (which is materially higher than their expected market value), the Board of Directors considers it unlikely that any tax liability will be triggered for Sevan Drilling ASA s shareholders by the transaction. However, a repayment of paid-in capital will decrease correspondingly the input-value (tax cost-price) of the shares for each shareholder. This may impact the loss/gain calculation upon a later realization or disposal of the shares in Sevan Drilling ASA. No withholding tax will be triggered for non-norwegian shareholders in relation to the distribution of the shares in the Company as repayment of paid-in capital is not considered as dividends. The Company and Sevan Drilling ASA will not assume responsibility for any withholding of tax, capital gains tax or any other taxes that may apply to the shareholder associated that with purchase, holding or disposal of shares e.g. future dividends or future capital gains. Shareholders who wish to clarify their own tax situation should consult with and rely upon their own tax advisors Bermuda taxation At the present time, there is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by the Company or by the Company's shareholders in respect of the Shares. The Minister of Finance of Bermuda, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given the Company an assurance that in the event any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, such tax shall not until 31 March 2035 be applicable to the Company or any of its operations, or its Shares, debentures or other obligations, except insofar as such tax applies to persons ordinarily resident in Bermuda or is payable by the Company in respect of real property owned or leased by the Company in Bermuda. Given the limited duration of the Minister of Finance of Bermuda's assurance, it cannot be assured that the Company will not be subject to any Bermuda tax after 31 March Norwegian taxation General Below 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. The statements only apply to shareholders who are beneficial owners of the shares. Please note that special rules apply for shareholders that cease to be tax resident in Norway or that for some reason are no longer considered taxable to Norway in relation to their shareholding in the Company. Such shareholders are encouraged to consult their own tax advisors. 89

93 Please note that for the purpose of the summary below, a reference to a Norwegian or non-norwegian shareholder or companies refers to the tax residency rather than the nationality of the shareholder or company Taxation of dividends Norwegian personal shareholders Dividends received by Norwegian shareholders who are individuals ( Norwegian Personal Shareholders ) from the Company are subject to tax in Norway as general income at a flat rate of 27%. Such shareholders are 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 Calculated Allowance ). The risk-free interest rate is based on the average interest rate after tax on 3-month treasury bills (Nw: statskasseveksler) in the relevant year. Any unused allowance on a share in one year can be carried forward and included in the basis for calculating the allowance for that share the next year, and can be set off against future dividends received on, or against gains upon the realization of, the same share Norwegian corporate shareholders Dividends distributed to Norwegian shareholders who are limited liability companies, equities funds, savings banks, mutual insurance companies or similar entities tax-resident in Norway ( Norwegian Corporate Shareholders ) from the Company are subject to tax at a flat rate of 27% as Bermuda is regarded as a low tax jurisdiction situated outside the EEA Foreign shareholders As a general rule, dividends received by foreign shareholders are not taxable in Norway. However, if a foreign shareholder is carrying on business activities in Norway and the shares are effectively connected with such business activities, the foreign shareholder will generally be subject to the same dividend taxation as Norwegian Corporate Shareholders, as described above 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 in the Company is taxable or tax deductible in Norway. Such capital gain or loss is included in or deducted from the basis for computation of general income in the year of disposal. The general income is taxable at a rate of 27%. The gain is subject to tax and the loss is tax deductible irrespective of the duration of the ownership and the number of shares disposed of. In case the loss exceeds the ordinary income of that year, the excess amount can be carried forward and set off against the next year s ordinary income. The capital gain is calculated as the consideration received less the cost price of the share, generally including costs incurred in relation to the acquisition or realization of the share. From this capital gain, Norwegian Personal Shareholders are entitled to deduct any unused Calculated Allowance from previous years when calculating their taxable gain on realization of the share, conf above. The Calculated Allowance may only be deducted in order to reduce a taxable gain, and may not be deducted in order to increase or produce a deductible loss. The Calculated Allowance is allocated to the personal shareholders holding shares at the expiration of each calendar year. 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 Norwegian Corporate Shareholders A capital gain or loss derived by a Norwegian Corporate Shareholder from a disposal of Shares in the Company is generally taxable or tax deductible in Norway. Such capital gain or loss is included in or deducted from the basis for computation of general income in the year of disposal at a rate of 27%. In case the loss exceeds the ordinary income of that year, the excess amount can be carried forward and set off against the next year s ordinary income. 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. 90

94 Foreign shareholders As a general rule, capital gains generated by foreign shareholders are not taxable in Norway. However, such gains may be subject to Norwegian taxation for foreign shareholders who hold the shares in connection with the conduct of a trade or business in Norway. The foreign shareholder will in such case generally be subject to the same capital gains taxation as Norwegian shareholders, as described above Controlled Foreign Corporation ( CFC ) taxation If Norwegian shareholders (and foreign shareholders that hold the shares in connection with a business that is taxable in Norway), in the aggregate, directly or indirectly own or control 50% or more of the share capital of a company resident in a low-tax jurisdiction at the beginning and end of a fiscal year, or more than 60% at the end of a fiscal year, then such shareholders may become subject to CFC taxation (NW:NOKUS) in Norway. A jurisdiction is considered a low tax jurisdiction if the general income tax on the company s total profits amount to less than two thirds of the tax that would be assessed on the company had it been a Norwegian resident company. Bermuda is currently on the list of countries that are generally considered low tax jurisdictions. In the event that the conditions regarding ownership share and/or control are fulfilled and CFC taxation applies, the relevant company's annual profits will be taxable (at a rate of 27%) for the Norwegian shareholders according to their proportionate share of the Company's equity. A loss may however only be carried forward for deduction in future profits from the same company. CFC taxation applies regardless of whether, and to what extent, the profits are distributed to the Norwegian shareholders. The relevant company's profits will, for the purpose of the CFC taxation, be calculated according to Norwegian tax rules as if the relevant company was a Norwegian taxpayer. For a Norwegian Corporate Shareholder who is subject to CFC taxation, dividends distributed from the relevant company are exempt from further taxation to the extent the dividends do not exceed such shareholder's taxable share of the relevant company's net income. For a Norwegian Personal Shareholder who is subject to CFC taxation, 73% of the dividends distributed from the relevant company, plus any local tax paid by the company which the shareholder has previously deducted from Norwegian tax on the profits of the company, will be taxable provided that such distributions exceed the calculated tax-free allowance (see Taxation of dividends, Norwegian personal shareholders above). Shareholders subject to CFC taxation may generally deduct in the Norwegian tax a pro rata share of the taxes the Company has paid in the low tax jurisdiction. Special rules may apply for Norwegian shareholders if a company subject to CFC taxation ceases to be subject to CFC taxation. Special rules also apply to the calculation of taxable gains/losses upon realization of shares by a Norwegian Corporate Shareholder that is or has been subject to CFC taxation. Such rules will not be discussed further herein Net wealth tax Norwegian limited liability companies and certain similar entities are exempt from Norwegian net wealth tax. For other resident Shareholders (i.e. Shareholders who are individuals), the shares will form part of the basis for the calculation of net wealth tax. The current marginal net wealth tax rate is 0.85% of taxable values. Listed shares are valued at 100% of their quoted value on 1 January in the assessment year (the year following the income year) Inheritance tax Norway does not impose inheritance tax. However, the heir acquires the donor's tax input value of the shares based on principles of continuity. Thus, the heir will be taxable for any increase in value during the donor's ownership, at the time of the heir's realization of the shares VAT and transfer taxes No VAT, stamp or similar transfer taxes/duties are currently imposed in Norway on the transfer of shares whether on acquisition or disposal. 91

95 15 ADDITIONAL INFORMATION 15.1 Auditor The Company s auditor is PricewaterhouseCoopers AS, with registered address Dronning Eufemias, Gate 8, 0191 Oslo, Norway. PricewaterhouseCoopers AS and the signing partner, Henrik Nessler, are member of the Norwegian Institute of Public Auditors (Norwegian: Den Norske Revisorforening ). PricewaterhouseCoopers AS has been the Company s auditor since the Company s incorporation. The Sevan Drilling ASA Financial Statements and Sevan Drilling Limited Financial Statements have been audited by PricewaterhouseCoopers AS Advisors Clarksons Platou Securities AS is acting as the Manager of the Listing. Wiersholm Advokatfirmaet is acting as Norwegian legal counsel to the Company. MJM Limited is acting as special Bermuda counsel to the Company 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 12 months from the date of this Prospectus: the Memorandum of Association of the Company; the Bye-laws of the Company; the Sevan Drilling ASA Financial Statements for the years ended 31 December 2012, 2013 and 2014; the Sevan Drilling ASA Interim Financial Statements for the first quarter ended 31 March 2015; the Sevan Drilling Limited Financial Statements for the year ending 31 December 2014; the annual accounts for the major subsidiaries for ; stock exchange notices, including quarterly reports, distributed by the Company through Oslo Børs information system; and all reports, letters, and other documents and statements prepared by any expert at the Company s request any part of which is included or referred to in this Prospectus. 92

96 16 DEFINITIONS AND GLOSSARY bbl... Oil barrel Bermuda Companies Act... The Companies Act 1981 of Bermuda. Board of Directors... The Board of Directors of the Company. Brasil Contracts... Charter contracts with Petrobas dated 1 September 2009 and 25 July 2008 with respect to Sevan Driller and Sevan Brasil Bye-laws... The bye-laws of the Company. Capex... Capital expenditures. Capital Decrease... The capital decrease in Sevan Drilling ASA resolved by the shareholders in the annual general meeting held 15 May 2015 as further described in section 5.1 and 5.2. CFC... Controlled Foreign Corporation ( CFC ) taxation. Company... Sevan Drilling Limited. Corporate Governance Code or the The Norwegian Code of Practice for Corporate Governance, dated 30 Code... October COSCO... China Ocean Shipping Company Qidong, the China shipyard. Drilling Contracts... The Louisiana Contracts and the Brasil Contract. EBITDA... Earnings before interest, tax, depreciation, amortization and impairment. Financial Information... The Sevan Drilling ASA Financial Statements, the Sevan Drilling ASA Interim Financial Statements, and the Sevan Drilling Limited Financial Statements, combined. GIEK Tranche... A USD million export credit facility provided by GIEK as described in section Group... Sevan Drilling Limited and its wholly owned consolidated subsidiaries and sister company Sevan Drilling ASA after completion of the Migration and Listing. Drilling Unit(s)... The four cylindrical drilling units, Sevan Driller, Sevan Brasil, Sevan Louisiana and Sevan Developer when appropriate. IAS... International Accounting Standard. IFRS... International Financial Reporting Standards as adopted by the European Union. Listing... The listing of the Shares on Oslo Børs. Louisiana Contract... Charter contract with LLOG dated 25 March 2013 regarding Sevan Louisiana. LLOG... LLOG Bluewater Holdings LLC. Management Agreements... The management agreements with Seadrill as Described in section Management Transfer Agreement... Agreement between Sevan Drilling ASA and Sevan Drilling Management AS dated 17 December 2014 regarding the transfer of management from Sevan Drilling ASA to Sevan Drilling Management AS. Manager... Clarksons Platou Securities AS. Memorandum of Association... The Company s memorandum of association. Migration... The relocation of the parent level of the Group from Norway to Bermuda through the completion of the Capital Decrease and Listing of the Company. NOK... Norwegian Kroner, the lawful currency of Norway. Norwegian Corporate Shareholders... Norwegian shareholders who are limited liability companies (and certain similar entities) resident in Norway for tax purposes. Norwegian FSA... The Norwegian Financial Supervisory Authority (Nw.: Finanstilsynet). 93

97 Norwegian Personal Shareholders... Individuals resident in Norway for tax purposes Norwegian Securities Trading Act... The Norwegian Securities Trading Act of 28 June 2007, no. 75 (Nw.: verdipapirhandelloven). Old Group... Sevan Drilling ASA and its wholly owned consolidated subsidiaries including the Company prior to the completion of the Migration and Listing. OPEC... Organization of Petroleum Exporting Countries. Oslo Børs... Oslo Børs ASA. Oslo Clearing... Oslo Clearing ASA, a wholly-owned subsidiary of SIX x-clear AG, a company in the SIX group, has a license from the Norwegian FSA to act as a central clearing service. Petrobras... Petróleo Brasileiro S.A. Prospectus... This Prospectus, dated 29 June Prospectus Directive... Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003, and amendments thereto, including the 2010 PD Amending Directive to the extent implemented in the Relevant Member State. RCF... Revolving Credit Facility Record Date... 2 July Registrar Agreement... The agreement between the Company and the VPS registrar for the registration of the Shares in book-entry form in the VPS. Relevant Member State... Each Member State of the European Economic Area which has implemented the EU Prospectus Directive. Restructuring... The restructuring process of the Old Group during 2014 initiated by the board of directors of Sevan Drilling ASA in order to prepare for the Migration. Seadrill... Seadrill Limited. Sevan Brasil... Ultra deepwater cylindrical drilling unit, capable of drilling at depths of 3,000 m (10,000 ft) named Sevan Brasil, ref. sections 7.6.1, 7.8. Sevan Design... The designs, technology and know-how relating to a cylinder shaped floater hull design licensed by the Company in accordance with an agreement with Sevan Marine ASA. Sevan Developer... Ultra deepwater cylindrical drilling unit, capable of drilling at depths of 3,000 m (10,000 ft) named Sevan Driller, ref. sections 7.6.1, Sevan Driller... Ultra deepwater cylindrical drilling unit, capable of drilling at depths of 3,000 m (10,000 ft) named Sevan Driller, ref. sections 7.6.1, 7.7. Sevan Drilling ASA... Sevan Drilling ASA, a public limited liability company, organized and existing under the laws of Norway in accordance with and pursuant to the Norwegian Public Limited Liability Companies Act with registration number Sevan Drilling ASA Financial Sevan Drilling ASA s audited consolidated financial statements as at and for Statements... the years ended 31 December 2014, 2013 and 2012 and consolidated interim financial statements as at and for three months period ended 31 March Sevan Drilling ASA Interim Financial Sevan Drilling ASA s unaudited consolidated interim financial statements as Statements... at and for three months period ended 31 March 2015 Sevan Drilling Limited... Sevan Drilling Limited, an exempted limited liability company incorporated in Bermuda on 20 December 2013 with Bermuda registration number Sevan Drilling Limited Financial The financial statements for Sevan Drilling Limited as at and for the period Statements December December Sevan Developer Deferral Agreement between Sevan Drilling Rig VI Pte Ltd and Cosco (Qidong) Agreement... Offshore Co. Limited dated 30 September 2014 (effective 15 October 2014) 94

98 regarding the Company's option to deferral delivery of Sevan Developer. Sevan Drilling ASA Interim Balance The interim balance sheet for Sevan Drilling ASA as at and for the period Sheet... from 1 January 2015 until 17 April Sevan Marine Licenses Agreement... Agreement between Sevan Drilling Limited and Sevan Marine ASA dated 3 February 2015 regarding the Group's right to use the Sevan Design. Sevan Drilling Unit(s)... See Drilling Units description above. Sevan Louisiana... Ultra deepwater cylindrical drilling unit, capable of drilling at depths of 3,000 m (10,000 ft) named Sevan Louisiana, ref. sections 7.6.1, 7.9. Sevan Management... Sevan Drilling Management AS. Sevan Technology License... License granted by Sevan Marine ASA entitling the Group to utilize the patented Sevan platform concept for its Drilling Unites. Share(s)... The shares of the Company, consisting as at the date of this Prospectus of 31,000,000 common shares each with a par value of USD Trade Date June UK... The United Kingdom. USD... United States Dollars, the lawful currency in the United States. VPS... The Norwegian Central Securities Depository (Nw.: Verdipapirsentralen ASA). VPS account... An account with VPS for the registration of holdings of securities. VPS Registrar... Nordea Bank ASA. BOP... Blow out preventer. X-mas trees... A vertical assembly of mechanical elements used in oil exploration and production in surface and underwater oil and gas wells, primarily for flow control. The Christmas tree are onboard the topside. 95

99 Appendix A - MEMORANDUM OF ASSOCIATION AND BYE-LAWS A 1

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119 Appendix B - SEVAN DRILLING LIMITED FINANCIAL STATEMENTS FOR 2014 Sevan Drilling Limited Financial Statements for the Period Ended 31 December 2014 Sevan Drilling Limited Sevan Drilling Limited Financial Statements Sevan Drilling Limited Statement of Income Figures in USD Note 2014 Operating revenue - Operating expense -1,435,654 Total operating expense -1,435,654 Operating loss -1,435,654 Intercompany interest income 5 3,103,819 Interest expense -4,486,702 Net financial items -1,382,883 Loss before tax -2,818,537 Tax (expense)/income - Net loss -2,818,537 Brought forward To other equity -2,818,537 Net brought forward -2,818,537 Sevan Drilling Limited Comprehensive Income 2014 Net loss -2,818,537 Other comprehensive income for the period net of tax - Comprehensive loss -2,818,537 Attributable to: Equity holders of the Company -2,818,537 B 1

120 Sevan Drilling Limited Sevan Drilling Limited Statement of Financial Positions Note 2014 Assets Financial assets Investments in subsidiaries 7 386,056,639 Other investments 1,838 Accounts receivables from group companies 6 325,242,407 Total financial assets 711,300,884 Total non-current assets 711,300,884 Current assets Receivables Accounts receivables from group companies 6 450,391,783 Total receivables 450,391,783 Cash and bank deposits - Total current assets 450,391,783 Total assets 1,161,692,667 Equity and liabilities Restricted equity Share capital 3, 4 3,100,000 Share premium 3 705,448,964 Total restricted equity 708,548,964 Retained earnings Other equity 3-2,818,537 Total retained earnings -2,818,537 Total equity 705,730,427 Liabilities Borrowings 8 115,000,000 Accounts payable to group companies 6 187,938,263 Total long term liabilities 302,938,263 Current liabilities Accounts payable to group companies 6 153,023,977 Total short term liabilities 153,023,977 Total liabilities 455,962,240 Total equity and liabilities 1,161,692,667 The financial statements were approved by the board of directors and authorised for issue on 21 April Signed on its behalf by: Scott McReaken Director Sevan Drilling Limited Notes to Sevan Drilling Limited Financial Statements General information Sevan Drilling Limited (the Company ) is a company incorporated in Bermuda. The address of the registered office is Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda. Note 1- Accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied across the financial period presented. The presentation currency of the Company is USD which corresponds to the functional currency of the majority of the entities in the Sevan Drilling Group. All figures are in USD 1 unless otherwise stated. Basis of Preparation The financial statements of the Company have been prepared in accordance with the International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) that are effective for the period ended 31 December The financial statements have been prepared on a going concern basis under the historical cost convention as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company s accounting policies. Changes in Accounting Policy and Disclosures a) New and amended standards adopted by the Company In the current period, the Company has applied a number of new and revised IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. These new and revised standards include: Amendments to IAS 32 Offsetting financial assets and financial liabilities Amendments to IAS 36 Impairment of assets Amendments to IAS 39 Financial instruments: recognition and measurement Amendments to IFRS 10, IFRS 12, and IAS 27 Investment entities Other standards, amendments and interpretations which are effective for a financial period beginning on 1 January 2014 or after are not material to the Company. b) New standards and interpretations not yet adopted, The following new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2015, and have not been applied in preparing these financial statements: IFRS 9 Financial instruments 2 IFRS 15 Revenue from contracts with customers 1 1 Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 January 2018 The directors of the Company do not anticipate that the application of these standards and amendments will have a significant impact on the Company s financial statements in the period of initial application. B 2

121 Sevan Drilling Limited Revenue Recognition Revenue is recognised according to the percentage of completion method. The degree of completion is calculated as expenses incurred as a percentage of estimated total expense. Expenses are recognized as the goods and services are provided. Total expenses are reviewed on a regular basis. If the projects are expected to result in losses, the total estimated loss is recognised immediately. Main principle for evaluation and classification of assets and liabilities Current assets and current liabilities include items with a due date within one year after the transaction date, as well as items relating to the operating cycle. Other items have been classified as non-current assets and non-current liabilities. Current assets are measured at the lower of purchase cost and fair value. Short-term liabilities are recognized in the balance sheet at nominal value at the establishment date. Fixed assets are measured at purchase cost. The fixed assets are written down to net realizable value if a value reduction occurs that is expected to be permanent. Borrowings are recognized in the balance sheet at amortized value on the establishment date, equal to nominal value deducted for transaction costs. Other non-current liabilities are recognized at nominal value. Receivables Trade receivables and other receivables are recognized in the balance sheet at nominal value after deduction of provision for bad debt. Bad debt is provided for on the basis of an individual assessment of each receivable. Fixed assets Fixed assets are recognized in the balance sheet and depreciated over the asset's expected useful life on a straight-line basis. Maintenance of an asset is expensed under operating expenses as incurred. Additions or improvements are added to the asset's cost price and depreciated together with the asset. When the recoverable amount of the asset is exceeded by the carrying amount of the asset an impairment charge is recognized, and the asset is written down to recoverable amount. Recoverable amount is the highest of net sales value and value in use. Value in use is the net present value of future cash flows, which are expected to be generated from the asset. Leased assets are reflected in the balances sheet as assets if the leasing contract is considered a financial lease. Research and development Cost associated with research activities are expensed as incurred. Qualifying expense associated with development activities are capitalized and depreciated over their expected useful life. Cash and bank deposits Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. Currency Cash and bank deposits, current assets, and short-term liabilities nominated in other than functional currencies are converted using exchange rates that prevail on the balance sheet date. Taxes Deferred income tax liability/deferred tax asset is provided using the liability method on temporary difference at the balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. Sevan Drilling Limited Leases Leases in which more than an insignificant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Shares in subsidiaries The cost method is applied to investments in other companies. Sevan Drilling Group The Company will be consolidated into the Sevan Drilling Group (the parent company Sevan Drilling ASA and its subsidiaries) accounts as of 31 December 2014, with business address in Oslo. Cash flow statement The Company does not prepare a cash flow statement as the company did not have cash or cash equivalents at the reporting date. Note 2 Financial risk management The Company s activities expose it to a variety of financial risks. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company s financial performance. The risk management program includes focusing on the unpredictability of financial markets and seeks to minimise potential adverse effects of such risks on its financial performance. Risk management for the Company is carried out by the Treasury function that is integrated in Seadrill. However, final authority is retained in the Company. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign currency risk, price risk interest rate risk, credit risk, and liquidity risk. Foreign Currency risk The Company s assets are nominated in US Dollar. The Company may use forward contracts to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. As of 31 December 2014, no forward contracts have been entered. The Company s sensitivity to foreign currency is minimal due to the Company s limited use of currencies aside from US Dollar Price risk The Company has limited price risk as the Company has no contracts with customers or suppliers. All contracts with external parties are handled elsewhere in the Sevan Drilling Group. Interest rate risk All of the Company s debt is subject to interest rates which fluctuate with the market. A change in interest rate of +/- 1% would affect the Company s interest cost with +/- USD 1.2 million. This sensitivity analysis has been determined based on an assumption that the amount of the liability outstanding at the end of the reporting period was outstanding for the whole period. A 100 basis point increase or decrease is used when reporting interest rate risk internally to the Board and represents Management s assessment of the reasonably possible change in interest rates. The Company continuously considers whether part of the interest rate exposure should be hedged. As of 31 December 2014, no interest rate hedges have been entered. B 3

122 Sevan Drilling Limited Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Company has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. Liquidity risk The Company s objective is to maintain flexibility of financing in the Sevan Drilling Group, by providing sufficient withdrawal facilities when managing liquidity. This may include maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity is sensitive to operational uptime on the units performing contracts in connection with management s ability to control costs. In December 2014, the Company amended the terms of the Revolving Credit Facility ( RCF ). The amended terms increased the available amount to USD 300,000,000 with an interest margin of 6.00% and extended the expiry date to December At period-end, USD ,000 was drawn on the facility. With these amended terms and cash flow from operations, the Company is forecasting adequate liquidity for the next 12 to 24 months. If the RCF cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Company does not have adequate liquidity beyond The Company and the Sevan Drilling Group has no covenants at the balance sheet date. However, the Company and the Sevan Drilling Group could be impacted if Seadrill breaches any of its covenants. Note 3- Equity Share capital Share premium Other equity Total Equity 1 January Issue of share capital 7 January , ,000 Issue of share capital 10 November ,000, ,448, ,448,964 Net result for the period ,818,537-2,818,537 Equity 31 December ,100, ,448,964-2,818, ,730,427 Note 4- Share capital and shareholder information Nominal value (USD) Registered (USD) Share capital Number Ordinary shares 31,000, ,100,000 Total 31,000,000 3,100,000 The Company is wholly owned by the immediate parent company, Sevan Drilling ASA, a company based in Norway. Note 5- Employee benefit expense The company had no employees during the period. Sevan Drilling Limited Note 6- Intercompany transactions Statement of financial positions 2014 Accounts receivables from Group companies 775,634,190 Total receivables from Group companies 775,634,190 Accounts payables to Group companies 340,962,240 Total liabilities to Group companies 340,962,240 Statement of Income 2014 Interest income from Group Companies 3,103,819 Total income from Group companies 3,103,819 Note 7- Investments in subsidiaries Company Address Ownership Book value Sevan Drilling AS Oslo 100% 1 Sevan Drilling Rig V AS Oslo 100% 1 Sevan Drilling Rig VI AS Oslo 100% 1 Sevan Drilling Management AS Oslo 100% 1 Sevan Drilling Rig VIII AS Oslo 100% 1 Sevan Driller Ltd Bermuda 100% 1,000 Sevan Brasil Ltd Bermuda 100% 1,000 Sevan Developer Ltd Bermuda 100% 1,000 Sevan Louisiana Hungary KFT Hungary 100% 180,653,631 Sevan Drilling Pte Ltd Singapore 100% 205,400,000 Sevan Drilling Rig IX Pte Ltd Singapore 100% 1 Sevan Drilling Limited UK 100% 1 Total 386,056,639 Note 8- Borrowings 2014 Non-current liabilities Borrowings from related parties 115,000,000 Total non-current liabilities 115,000,000 Borrowings from related parties USD 300,000,000 revolving credit facility with Seadrill Limited Interest is charged on the principal amount outstanding at Libor %. A commitment fee is calculated at 2.40% per annum on the unutilized commitment of the facility. The borrowing with related parties can not be cancelled by either party until the final maturity date set out in the revolving credit facility contract (31 December 2016). The Company has the following undrawn borrowing facilities: Floating rate - Expiring within one year - - Expiring beyond one year 185,000,000 Total un-drawn debt facilities 185,000, The USD 185,000,000 undrawn facility expiring beyond one year is the RCF. This has a commitment fee at market rates. B 4

123 Sevan Drilling Limited Note 9- Related Party Transactions Seadrill is providing the RCF of which USD 115,000,000 was outstanding as of 31 December The RCF was transferred to the Company as part of the contribution agreement with Sevan Drilling ASA. In 2014, Seadrill charged interest on the RCF and guarantee and commitment fees, of which USD 4,486,702 is expensed to the Company. Note 10- Events After Balance Sheet Date On 24 March 2015, the Company received USD 6,562,691 of an interest receivable in exchange for additional paid in capital in the Company to Sevan Drilling ASA. The balance is an interest receivable related to an intercompany loan with another subsidiary that has been contributed to the Company on 10 November Sevan Drilling Limited B 5

124 Appendix C - SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR Q SEVAN DRILLING ASA INTERIM FINANCIAL REPORT FIRST QUARTER 2015 Page 1 Highlights Operating revenue in Q1 was USD 83.1 million (Q USD 60.1 million). EBITDA in Q1 was USD 38.3 million (Q USD 15.7 million). Net profit in Q1 was USD 2.2 million (Q net loss of USD 10.4 million) On 15 May, Sevan Drilling ASA held an Annual General Meeting where the 2014 annual accounts, report, and all proposals were approved by the shareholders. On 26 May, the Board of Directors of Oslo Børs resolved to admit the shares in Sevan Drilling Limited to listing on Oslo Børs. Unaudited figures in USD million, except where noted Q Q Operating revenue EBITDA (1) Operating profit/(loss) Net financial items Net profit/(loss) EPS - basic and diluted (USD) Company performance: Available days (2) Technical Utilization (3) 82.5% 91.9% Economic Utilization (4) 81.7% 86.8% Average daily revenue (5) $373,000 $363,000 Average daily operating expense (6) $151,000 $188,000 (1) EBITDA equals net profit/loss adding back net financial items, tax income/expense, depreciation and amortization expense and impairment expense (2) Available Days are the total number of operating rig calendar days in the period. A rig is operating when accepted by the customer. (3) Technical Utilization is the actual number of revenue earning days divided by Available Days. A revenue earning day is defined as a day on which a rig earns its dayrate after commencement of operations. (4) Economic Utilization is operating revenue divided by total potential charter revenue for the period. (5) The Average Daily Revenue is operating revenue divided by revenue earning days. The Average Daily Revenue will differ from the contract dayrate due to billing adjustments for any non-productive time, bonus and amortized mobilization and demobilization fees. (6) Average daily operating expense is total operating expense less general and administrative expenses, restructuring costs, depreciation and foreign exchange (loss)/gain related to operations divided by Available Days in the period. Page 2 C 1

125 Financial performance summary For the three months ended 31 March 2015 Operating revenue Operating revenue was USD 83.1 million compared to USD 60.1 million in Q The revenue increase is explained by Sevan Louisiana commencing operations in Q and achieving a Q technical utilization of 80.8% (mobilization in Q1 2014). Sevan Driller technical utilization was 94.9% (93.8% in Q1 2014), which was partly offset by Sevan Brasil at 71.8% (89.9% in Q1 2014). Operating expenses Total operating expense was USD 63.3 million compared to USD 59.3 million in Q The increase is the result of Sevan Louisiana operating in this quarter offset by improved operating expenses on Sevan Driller and Sevan Brazil. Average operating costs per day were at USD 151,000 in Q1 2015, which result from cost reduction initiatives realized through the Seadrill management service agreements, specifically reducing labor costs offshore and onshore, and through deferring non-critical maintenance into later periods. General and administrative and restructuring expenses were reduced from conclusion of the integration. Depreciation expense increased as a consequence of Sevan Louisiana in service through Q Net financial items Net financial items amounted to USD 17.4 million in Q compared to USD 11.5 million in Q1 2014, which increased USD 2.9 million from interest and commitment fees on the revolving credit facility ( RCF ) and USD 2.3 million from capitalizing interest on Sevan Louisiana in Q Net profit for Q was USD 2.2 million compared to a net loss of USD 10.4 million in Q Balance sheet Cash and cash equivalents amounted to USD 39.3 million as of 31 March 2015 compared to USD 30.2 million as of 31 December In Q1 2015, interest and principal payments under the debt facility and RCF were USD 11.3 million and USD 35.0 million, respectively. As of 31 March 2015, USD million was drawn on the RCF. Sevan is preparing its accounts on the assumption that the company is a going concern. Liquidity is sensitive to performance of the rigs under their contracts and the continued availability of the RCF. Operations performance summary In Q1 2015, the Sevan rigs achieved technical utilization at 82.5% and economic utilization at 81.7%. Sevan Driller achieved an acceptable technical utilization of 94.9%, while Sevan Louisiana and Sevan Brasil worked at 80.8% and 71.8%, respectively. The lower downtime experienced on the two rigs was a consequence of repairs to subsea equipment, which have been resolved. Sevan Developer remains ready for delivery (warm stacked) at the Cosco shipyard in China. Sevan Developer continues to be actively marketed for an acceptable drilling contract and, if such is obtained, delivery can occur under the deferral agreement. At 31 March, 2015, the fleet s backlog revenue is USD 1.0 billion. As of the date of this report, the fleet is operating at acceptable technical utilizations. Page 3 Outlook While the Q1 fleet operating performance was at 82.5%, Sevan still achieved USD 38.3 million in EBITDA by diligently managing costs and maintenance programs. The main drivers of cost reductions include reducing labor costs and deferring non-critical maintenance. These initiatives were completed to align our business with the currently depressed market and maintain a sustainable operating level through this downcycle. The savings realized have not been done at the sacrifice of safety, performance or asset quality. The ultra deepwater drilling market continues to remain very challenging and is likely to remain through the near term. Despite a slight recovery in the oil price during the first quarter, oil companies are continuing to take a cautious approach to capital expenditure and other cost commitments given the severity of the overall oil price decline. During the quarter, the market has seen very little new fixture activity and the new contracts that have materialized are at significantly lower dayrates. In order to manage this downturn, rig owners are stacking or scrapping older rigs and new build deliveries are being delayed, which will have the potential effect of rebalancing the supply of drilling rigs. With the cash balance at the end of the quarter, cost reduction initiatives and the drawing rights under the revolver, Sevan is forecasting adequate liquidity for more than 12 months. The board believes these factors and its modern high specification fleet allow Sevan to continue performing through this downcycle and be well positioned when recovery occurs. On 15 May, Sevan held an Annual General Meeting where the 2014 annual accounts, report, and all proposals were approved by the shareholders. The board will continue the plan set out to migrate the parent company function and expects to list shares of Sevan Drilling Ltd at the end of June and complete the migration. The parent company migration is the last major step in the board's restructuring plan. Starting in 2013, the board initiated a restructuring of Sevan's capital structure, asset management systems and management structures whereby improving safety in operations, quality of the assets and overall performance of the business. The end result is a more efficient company that is better positioned to meet its strategy for competing in the global drilling market with its unique ultra deepwater cylindrical rig design. Oslo, 27 May 2015 The Board of Directors Sevan Drilling ASA Page 4 C 2

126 Interim financial statements Consolidated Income Statement Unaudited figures in USD million Note Three months ended 31 March, 2015 Three months ended 31 March, 2014 Operating revenue Operating expense General & administrative expense Restructuring expense Depreciation, amortization and impairment Foreign exchange gain/(loss) related to operations Total operating expense Operating profit/(loss) Financial expense Net financial items Profit/(loss) before tax Tax expense Net profit/(loss) Attributable to: Equity holders of the Company Earnings per share for profit/(loss) attributable to the equity holders of the Company during the period (USD per share): - Basic and diluted Consolidated Statement of Comprehensive Income Three months ended 31 March, 2015 Three months ended 31 March, 2014 Unaudited figures in USD million Note Net profit/(loss) Foreign currency translation Comprehensive income/(loss) Attributable to: Equity holders of the Company Page 5 Interim financial statements (continued) Consolidated Balance Sheet Unaudited figures in USD million Note As at 31 March, 2015 As at 31 December, 2014 ASSETS Drilling rigs 4 1, ,833.8 Other fixed assets Other non-current assets Total non-current assets 1, ,859.8 Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 1, ,991.6 EQUITY Share capital (594,623,436 shares authorized, issued, and outstanding as at 31 March 2015 and 31 December 2014, par value of NOK 1 per share) Share premium Other equity Total equity LIABILITIES Non-current portion of bank borrowings 5 1, ,073.0 Non-current loan from related party Other non-current liabilities Total non-current liabilities 1, ,188.4 Trade and other payables Current portion of bank borrowings Other current liabilities 8, Total current liabilities Total liabilities 1, ,433.9 Total equity and liabilities 1, ,991.6 Page 6 C 3

127 Interim financial statements (continued) Consolidated Statement of Changes in Equity Unaudited figures in USD million Share Capital Share Premium General Reserve Equity Settled Employee Benefits Reserve Foreign Currency Translation Reserve Retained Earnings Total Equity Equity as at 1 January Net profit/(loss) Translation differences Equity as at 31 March, Equity as at 1 January Net profit/(loss) Translation differences Equity as at 31 March, Consolidated Cash Flow Statement Unaudited figures in USD million Note Three months ended 31 March, 2015 Three months ended 31 March, 2014 Cash flows from operation activities Cash from operations Interest paid Net cash (used in)/generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment and other noncurrent assets Net cash flow used in investment activities Cash flows from financing activities Proceeds from interest-bearing debt Repayment of interest-bearing debt Net cash flow generated from/(used in) financing activities Net cash flow for the period Cash balance at beginning of period Cash balance at end of period * * Contains restricted cash of USD nil for employees' tax deduction fund cash balance contained restricted cash of USD 0.5 million for employees' tax deduction fund. Page 7 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization and basis of preparation General information - Sevan Drilling ASA and Sevan Drilling Limited Sevan Drilling ASA (the "Company") and its subsidiaries (the Company and the subsidiaries collectively referred to as the Group ) is an international offshore drilling contractor specializing in the ultradeepwater segment. The Group has three ultra-deepwater drilling rigs (Sevan Driller, Sevan Brasil, and Sevan Louisiana) in operation and a fourth (Sevan Developer) waiting delivery. Sevan Driller and Sevan Brasil are operating under six-year, fixed term contracts with Petrobras in Brazil expiring in June 2016 and July 2018, respectively. Sevan Louisiana is contracted through 2018 with LLOG in the US Gulf of Mexico. The delivery date of Sevan Developer has been deferred until October 2015 following agreements concluded in Q4 2014, and can be extended for four additional periods of six months at the Group's option up to October Sevan Drilling ASA is a public limited liability company, incorporated and domiciled in Norway. Its shares are listed on the Oslo Børs. On 15 May 2015, the shareholders of Sevan Drilling ASA resolved to move the holding level of the group from Norway to Bermuda (the "Migration"). Further, the shareholders resolved that the Migration will be completed by means of a capital decrease in Sevan Drilling ASA where the reduction amount will be distributed among the shareholders of the Company in the form of shares in its wholly owned subsidiary Sevan Drilling Limited. The distribution will be done on pro rata basis, so that the shareholders of the Company will have relatively the same shareholding in Sevan Drilling Limited after the Migration as they have in the Company at the date of the distribution. Sevan Drilling Limited is an exempted company incorporated under the laws of Bermuda and is currently the holding company of all of the operating subsidiaries of the Group (below the Company). Sevan Drilling Limited's application for listing on Oslo Børs was approved 26 May, and is conditional on the Company being able to complete the capital decrease and other requirements. The Company expects the listing and simultaneous Migration to be completed on or about 30 June Upon completion of the Migration, Sevan Drilling Limited will be the new parent of the Group listed on Oslo Børs. Sevan Drilling ASA will be delisted. After completion of the Migration, the board of directors will assess the Company's future and present available alternatives for the shareholders in an extraordinary general meeting which shall be held by the end of Basis of preparation These consolidated financial statements as at and for the three months ended 31 March, 2015 (the Interim Financial Statements ) have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting. They do not include all disclosures that would be required in a complete set of financial statements and should be read in conjunction with the 2014 annual report. The Interim Financial Statements have been prepared on a historical cost basis. The Group s financial instruments consist of cash, trade receivables, trade payables, and bank borrowings measured at amortized cost with variable interest rates. Management believes that the carrying value, excluding financing fees, approximates fair value for all the Group s financial instruments. The accounting policies adopted in the preparation of the Interim Financial Statements are consistent with those followed in the preparation of the 2014 annual report. The Interim Financial Statements are unaudited and were approved by the Board of Directors on 27 May Page 8 C 4

128 Note 2 - Results of the interim period During the three months ending on 31 March, 2015, the Group earned USD 83.1 million of revenue from the operation of Sevan Driller and Sevan Brasil in Brazil and Sevan Louisiana in the US. Total operating expenses for Q were USD 63.3 million. Operating expense in Q amounted to USD 40.8 million, which result from rigs operating under contracts and non-capital expenses related to pre-commencement and construction of the rig under construction. General and administrative costs were USD 4.1 million and depreciation and amortizations were USD 18.5 million. As the Group s revenue and operating expenses are based on contractual day rates, the Group is not exposed to significant fluctuations in revenue and expense as a result of seasonality or cyclicality. Net financial items in Q amounted to USD 17.4 million and included amortization of deferred financing costs, interest expense, and commitment and guarantee fees. The Group performed its obligations under its bank facility and the revolving credit facility in Q1. The Group drew USD 25.0 million under the revolving credit facility in Q Sevan repaid USD 35.0 million of principal on the current bank facility during Q1, bringing cash and cash equivalents to USD 39.3 million at 31 March Note 3 - Segment information Basis of segmentation The Board of Directors of the Company, which is identified as the chief operating decision maker in the Group ("CODM"), aggregates the rigs into a single reporting unit representing the fleet as a whole. The CODM evaluates the operating results of each rig but is primarily focused on the results of the overall fleet with a focus on several key metrics at the Group level, including revenue, operating profit, EBITDA and utilization rates. Note 4 - Property, plant and equipment The rigs are aggregated for reporting purposes as they all provide the same service, have the same production process, are marketed to the same customer base, are based on the same design/ use the same methods to provide their services and operate in the same regulatory environment. The rigs form a single global fleet and each rig can be redeployed to other locations based on demand. Page 9 Property, Plant and Equipment Unaudited figures in USD million Construction in process (CIP) Units in operation (UIO) Drilling rigs Other fixed assets Total fixed assets As at 31 December, 2014 Cost , , ,038.8 Accumulated depreciation Net book value , , ,834.9 As at 31 March, 2015 Cost , , ,047.5 Accumulated depreciation Net book value , , ,825.1 Three months ended 31 March, 2015 Beginning net book value , , ,834.9 Additions Disposals Depreciation charge Ending net book value , , ,825.1 Unaudited figures in USD million As at 31 March, 2015 As at 31 December, 2014 Rig net book value Sevan Driller Sevan Brasil Sevan Louisiana Sevan Developer Total 1, ,833.8 No capitalization of borrowing costs were included in the additions to CIP during Q The contract with Cosco for the construction of Sevan Developer is payable in instalments as construction milestones are completed. No payments were made during the Q As at 31 March, 2015, our subsidiary, Sevan Drilling Rig VI Pte Ltd, had an estimated commitment of USD million payable upon delivery of Sevan Developer. Following the conclusion of the agreement with Cosco in Q4 2014, the delivery period has been extended to 15 October 2014 with an option, exercisable at six months' intervals to extend the delivery period for a further 24 months. The maximum deferral of the delivery date as per the agreement is thus 36 months. Sevan Drilling Rig VI Pte Ltd has the option to cancel the construction contract on each of the deferred delivery dates. Cosco will, in such case, refund the instalments paid under the construction contract. Cosco provided Sevan Drilling Rig VI Pte Ltd security through bank refund guarantees, effective for the 36 month potential deferral period. The Company reviews the carrying amounts of its tangible assets at the end of each reporting period to determine whether there is any indication that those assets may be impaired. The net asset value of the Group exceeded its market capitalization as at 31 March This is identified as an indicator of a need for impairment of major assets. As a result, each of the Group's rigs was, as of 31 March 2015, identified as a cash-generating unit and tested for impairment. Page 10 C 5

129 The key assumptions applied for the purpose of impairment testing of rigs in operation include a discount rate and expected future cash flows. To discount the future cash flows, management used a pre-tax weighted average cost of capital (WACC) of 9.5%. Estimated future cash flows are based on the Group s five-year forecast and utilize several assumptions including forecasted operational expense, operational taxes, utilization and day rates. Day rates are based on current contract amounts for the remaining contract term and expected market rates in the rigs re-contract years for forecasts beyond the contracted periods. Management has assumed no growth above these expected market rates for the remainder of the rig lives beyond the five-year forecast. Based on sensitivity analyses performed, Management believes that reasonable movements in the key assumptions would not result in an impairment loss to be recognized. Neither an increase in the WACC of 100 basis points nor a reduction of 10% of future market rate would result in impairment of a rig. Note 5 - Financing activities In October 2013, the Group entered into a USD 1,750 million secured bank loan facility with ING as agent for a syndicate of lenders. The facility was composed of a USD 350 million export credit facility provided by GIEK and a USD 1,400 million commercial facility provided by a syndicate of several commercial banks. The commercial facility had two tranches. Tranche A in the amount of USD 1,400 million (USD 200 million GIEK and USD 1,200 million commercial) and Tranche B in the amount of USD 350 million (USD 150 million GIEK and USD 200 million commercial). Tranche A was drawn in October 2013 and used to, inter alia, refinance existing debt at the time. Tranche B was intended to be used to finance the delivery instalment for Sevan Developer and was cancelled in Q as a consequence of the agreement made with Cosco to defer delivery of Sevan Developer. Should the Company decide to take delivery of Sevan Developer, new financing will have to be secured to cover the instalment delivery. The availability of such financing is expected to depend on a satisfactory drilling contract having been secured for Sevan Developer. The GIEK tranche matures in September 2023 and incurs interest on the amounts outstanding at a rate of LIBOR + 2.5%, payable quarterly in arrears. The commercial tranche matures in September 2018 and incurs interest on the amounts outstanding at a rate of LIBOR + 2.9%, payable quarterly in arrears. The Company's bank facility is guaranteed by Seadrill at a cost of 1.0% per annum on amounts drawn. Effective 29 December 2014, the revolving credit facility ( RCF ) was increased to USD million. The RCF matures in December 2016, is secured with second priority in the Group's assets and incurs interest on drawn amounts at a rate of LIBOR + 6.0% (+5.5% previously), payable quarterly in arrears. There is a commitment fee of 2.4% (2.2% previously) per annum on the undrawn balance of the RCF. Financing Activities Unaudited figures in USD million GIEK Tranche Commercial Tranche Total bank facility RCF with Seadrill Total As at 31 December, 2014 Principal outstanding , , ,340.0 Unamortized deferred financing costs Total borrowings , , ,320.9 Page 11 Financing Activities GIEK Tranche Commercial Tranche Total bank facility RCF with Seadrill Total Unaudited figures in USD million Current portion Non-current portion , ,188.0 Undrawn facility (available for utilization) Three months ended 31 March, 2015 Additional drawdowns Amortization of deferred financing costs Principal repayments Interest payments As at 31 March, 2015 Principal outstanding , , ,330.0 Unamortized deferred financing costs Total borrowings , , ,312.5 Current portion Non-current portion , ,178.4 Undrawn facility (available for utilization) Deferred financing costs were recognized on the bank facility as a whole and not allocated to the individual tranches Unaudited figures in USD million Three months ended 31 March, 2015 Three months ended 31 March, 2014 Financial expense Interest expense Amortization of finance fees Interest on RCF, commitment and guarantee fees to Seadrill Total Note 6 - Other non-current assets Unaudited figures in USD million As at 31 March, 2015 As at 31 December, 2014 Other non-current assets Net late delivery penalties Net mobilization expense Other non-current assets Total Page 12 C 6

130 Note 7 - Trade and other receivables Unaudited figures in USD million As at 31 March, 2015 As at 31 December, 2014 Trade and other receivables Trade receivables Other receivables Total Note 8 - Other current liabilities Unaudited figures in USD million As at 31 March, 2015 As at 31 December, 2014 Other current liabilities Income and gross revenue tax payable Other taxes payable Related party payable (Note 9) Other current liabilities Total Note 9 - Related party activities Balances and transactions between the entities within the Group have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Seadrill has guaranteed the bank facility referred to in Note 5. Seadrill is also providing the RCF (in the amount of USD million) of which USD million was outstanding as of 31 March Seadrill charged the Group interest on the RCF and guarantee and commitment fees in a total amount of USD 6.0 million during the first quarter. Seadrill also provides management support and administrative services to the Group for which a fee of USD 1.7 million was charged during the first quarter. As a consequence of being responsible for the day-to-day operation of the Group's rigs, Seadrill entities incur direct costs on behalf of the Group. The Group had a total current liability (including the commitment, guarantee and management fees mentioned above) of USD 41.3 million to Seadrill as at 31 March 2015 (compared to USD 47.8 million as at 31 December 2014). Page 13 Note 10 - Events after balance sheet date The Group has evaluated subsequent events after the balance sheet date through the date the accompanying consolidated financial statements became available to be issued. On 15 May, Sevan Drilling ASA held an Annual General Meeting where the 2014 annual accounts, report, and all proposals on the agenda were adopted by the shareholders. On 26 May, the Board of Directors of Oslo Børs resolved to admit the shares in Sevan Drilling Limited to listing on Oslo Børs. Oslo, 27 May 2015 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Birgitte Ringstad Vartdal Board Member Ragnhild M. Wiborg Board Member Per Wullf Board Member Scott McReaken Chief Executive Officer Kristian Johansen Vice Chairman Page 14 C 7

131 Annual Report and Financial Statements For the Period Ended 31 December 2014 Sevan Drilling Table of Contents Board of Directors Report Introduction 3 Vision and Values 3 Operations in Financial Review 4 Relationship with Seadrill 5 Restructuring and Migration 7 Outlook 8 Risk Factors 9 Corporate Social Responsibility 11 Corporate Governance 12 Remuneration and Benefits 17 Responsibility Statement 18 Consolidated Financial Statements Consolidated Income Statement 20 Consolidated Comprehensive Income 20 Consolidated Balance Sheet 21 Consolidated Statement of Changes in Equity 22 Consolidated Cash Flow Statement 23 Notes to the Consolidated Financial Statements 24 Sevan Drilling ASA Financial Statements Sevan Drilling ASA Statement of Income 48 Sevan Drilling ASA Statement of Financial Positions 49 Sevan Drilling ASA Statement of Cash Flow 51 Notes to Sevan Drilling ASA Financial Statements 52 Report of Independent Auditors 62 Appendix D - SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR 2014 D 1

132 Sevan Drilling BOARD OF DIRECTORS REPORT INTRODUCTION Sevan Drilling ASA (the "Company" and, together with its subsidiaries, the "Group" or Sevan ) is an international offshore drilling contractor specialising in operations in the ultra deep-water segment. The Group owns three ultra deep-water cylindrical drilling units. Two of these operate in Brazil and the third operates in the US sector of the Gulf of Mexico. The Group has a fourth unit, Sevan Developer, on order with Cosco (QiDong) Offshore Co. Limited ( Cosco ). The unit is, subject to completion of final commissioning and sea trials, ready for delivery. The delivery terms allows the Group to await the conclusion of a drilling contract for the unit before taking delivery. Such drilling contract needs to be at a rate level and for a period that, taken together, will support the financing of the delivery instalment due to Cosco. The contract will terminate on set dates if no such contracts are secured and no options to extend are exercised. The Company is a Norwegian public limited company maintaining its corporate headquarters at Drammensveien 288, Oslo, Norway. The Group has regional offices in Rio de Janeiro, Brazil, Houston, USA and Singapore and a design office in Bergen, Norway. The Company has operating subsidiaries in these countries and in Bermuda, Hungary and United Kingdom. The Company's shares are listed on the Oslo Stock Exchange and trades there under the symbol "SEVDR". The Company's website is: The Group's proprietary management team (the "Management") is employed in Sevan Management AS. The Group's chief executive officer is employed by this entity. Sevan Management AS provides management support to all entities in the Group. The Group's rigs are managed by subsidiaries of Seadrill in Brazil, the US and Singapore. The terms for these assignments are set out in written management agreements. The Group also has a marketing agreement with Seadrill Management Ltd. pursuant to which the Seadrill Group is responsible for the marketing of the Group's fleet. Lastly, Seadrill Management Ltd. provides general administrative support to the Group, supplementing the efforts of Management. VISION AND VALUES The Company's vision is, by taking advantage of its unique cylindrical design for offshore drilling rigs, to capture a significant share of the global market for offshore drilling in the ultra deep-water segment. This vision shall be achieved by maintaining a high operational and ethical standards in all of the Group's relations with customers, suppliers and employees. The Board has defined the Company's values and has adopted ethical guidelines which apply to all employees in the Group. The Company's vision and values are set out in further detail on the Company's website. Ethical guidelines applicable to all the Group s employees can also be found there. OPERATIONS IN 2014 The Group's oldest rig, "Sevan Driller", continued operations in Brazil under a 6 year contract with Petroleo Brasileiro S.A. ("Petrobras") which commenced in June The rig will be employed under this contract until June Petrobras has an option to extend the contract beyond this date. Technical utilisation for Sevan Driller during 2014 was at 89.9%. Economical utilisation for the same period was at 87.0%. The Group's second rig, "Sevan Brasil", continued operations in Brazil under a 6 year contract with Petrobras. This contract commenced in July 2012, and expires in July Petrobras has an option to extend the contract period. Technical utilisation for the rig during the year was at 91.7%. Economical utilisation was at 89.9%. The Group's third rig, "Sevan Louisiana", commenced operations in May 2014 under a 3 year contract with LLOG in the US sector of the Gulf of Mexico. The contract terms were revised in November 2014 as a Sevan Drilling consequence of the rig not meeting the agreed operational targets under the contract. The day rate agreed following the revision is USD 350,000 per day, subject to various adjustments linked to performance. The contract term was extended by 12 months to May 2018, cancellable by the client with a 365 day notice until May Technical utilisation for the rig during the part of the year it was in operation was at 65.6%. Economical utilisation was at 63.4%. The Board is not satisfied with the performance of the Group's fleet in 2014 as the targeted utilisation rate (both technical and economical) was higher than what was achieved. Steps have been taken to improve the quality of operations so as to meet these targets in The Group has a fourth rig, "Sevan Developer", on order from Cosco pursuant to an all-in, turn-key construction contract at a price of USD 526 million. The original delivery date for this rig was end April Due to an extensive delay in the completion of the rig on the part of Cosco, delivery terms were renegotiated in Q This led to the delivery date being extended to October 2015 with four six month options to extend the delivery date further until October Cosco has now completed the construction of Sevan Developer with the exception of final commissioning and sea trials. The Group will be providing management support to Cosco until the delivery date or termination and is actively marketing Sevan Developer to customers. The Group intends to take delivery of Sevan Developer if and when a drilling contract which can support financing of the final instalment of USD 425 million can be secured. If no contract has been secured and no mutual agreement to extend the delivery further has been made by the end of the deferred delivery period, or the subsequent option periods, the contract will terminate. The Group will, in such case, receive a refund of the initial investment made by the Group in the unit of USD million. Cosco has provided guarantees for its liability to repay this to the Group from commercial banks, effective through the maximum 36 month deferred delivery period. FINANCIAL REVIEW The following constitutes a brief summary of the Group's financial performance and result during the 12 months ending 31 December 2014 versus the same period ending 31 December Income statement The Group's operating revenue in 2014 was USD million compared to USD million in The result for the period was a loss of USD 48.3 million compared to a loss of USD 14.6 million in The Group's EBITDA (operating profit less depreciation, amortisation and impairment) in 2014 was million compared to USD 49.5 million in The increase was a consequence of Sevan Louisiana commencing operations in The effects of the Group's integration in the Seadrill s management systems contributed to the improvements made to the EBITDA in The Group recognised a non-cash impairment of USD million in The impairment was a consequence of a lower value in use estimate for each of Sevan Driller and Sevan Brasil compared to their carrying values following the decline in the rate levels obtainable in the ultra deep-water drilling market in late Net financial items in 2014 amounted to USD 70.2 million compared to USD 89.1 million for Amortisation of deferred finance costs was USD 34.1 million less than in 2013 due to a 36.7 million onetime write-off of fees associated with the debt restructuring which took place in Interest expense increased by USD 2.1 million from 2013 as a consequence of a higher debt level in 2014, primarily due to the drawdown of debt to cover the final instalment paid for Sevan Louisiana. Net financial items in 2013 included a non-recurring gain of USD 10.1 million on interest rate swaps. No swaps have been held in Tax expense in 2014 was USD 6.5 million and consisted of a USD 2.7 million provision related to an income tax liability in China in Q4 and taxes paid as a consequence of Sevan Louisiana's operations in the US Gulf of Mexico. Balance sheet Total assets decreased from USD 2,164.2 million in 2013 to USD 1,991.6 million in The decrease is primarily caused by the USD million non-cash impairment of Sevan Driller and Sevan Brasil, and D 2

133 Sevan Drilling lower cash and cash equivalents as a consequence of the mobilisation of the Sevan Louisiana for its contract in the US Gulf of Mexico. The Group reviews the carrying values of its tangible assets at the end of each reporting period to determine whether there is any indication that such assets may be impaired. The net asset value of the Group exceeded its market capitalisation as of 31 December This is identified as an indicator of a need for impairment on major assets. As a result, each of the Group's rigs was, as of 31 December 2014, identified as a cash generating unit and tested for impairment. The key assumptions applied in relation to rigs in operation include a discount rate and expected future cashflows. To discount future cash-flows, Management used a pre-tax weighted average cost of capital of 9.5%. Estimated future cash-flows are based on the Group's five year forecast and utilise several assumptions (including forecasted operational expense, operational tax, utilisation and expected day-rates). Expected dayrates are based on current contract amounts for the remaining term of these and expected market rates for the period beyond the contract periods. Due to the significant decline in the demand and day-rates in the ultra deep-water drilling market and the timeline for a projected recovery thereof, the Board concluded that the recoverable values of each of Sevan Driller and Sevan Brasil were less than their carrying amounts. The carrying amounts of these rigs were thus reduced through their estimated recoverable values through a noncash impairment. Specifically, Sevan Driller was impaired USD 29.3 million while Sevan Brasil was impaired USD 72.3 million in Q Total liabilities decreased from USD 1,480.5 million in 2013 to USD 1,433.9 million in Of this amount, USD 1,321 million represented outstanding debt (66% of total equity and liabilities). The decrease in total liabilities is primarily caused by repayments of principal under the Group's bank loan facility, amortisation of deferred financing fees and a write-off of USD 6.9 million deferred fees related to the cancelling of Tranche B of the bank loan facility, off-set by drawdowns under a revolving credit facility in the amount of USD million made available to the Group by its majority shareholder, Seadrill ( RCF ). Cash flows The Group's cash and cash equivalents amounted to USD 30.2 million as of 31 December 2014 compared to USD million as of 31 December The Group used cash generated from its operations and the drawings made under the RCF to fund investment and financing activities throughout Net cash used in operating activities during 2014 was USD 9.5 million compared to USD 21.5 million in This represented an increase in cash generated by operating activities of USD 12 million. This increase was primarily driven by Sevan Louisiana commencing operations and lower operating expenses for the rigs working in Brazil. Net cash used in operating activities in 2014 was USD million less than the Group's total loss before taxes. This was primarily caused by the non-cash impairment on Sevan Driller and Sevan Brasil in Net cash used in investing activities during 2014 was USD 29.0 million compared to USD million in The decrease is primarily a result of the financing required in order to take delivery of Sevan Louisiana in October 2013 and to mobilise it for its contract in the US Gulf of Mexico. Net cash used in financing activities during 2014 was USD 60.0 million compared to USD million in The decrease is primarily a result of closing a bank facility in 2013 that allowed refinancing of the then existing bank debt and take-out financing for Sevan Louisiana. RELATIONSHIP WITH SEADRILL Seadrill Limited ( Seadrill ) controls 50.11% of the shares in the Company and is thus our parent company from a corporate law point of view. Seadrill has financed most of this investment through forward contracts. Seadrill is represented on the Board through Mr. Per Wullf, Seadrill Managemrnt Ltd s Chief Executive Officer. The Company's financial reporting is, as a consequence of Seadrill's ownership share, fully coordinated with that of Seadrill. Seadrill consolidates the accounts of the Group with its own. Sevan Drilling Seadrill has guaranteed the Group's bank loan. The terms of the guarantee is set out in a written guarantee agreement. The Company pays a guarantee fee to Seadrill of 1.0% of the outstanding amount of the loan. The total fee paid in 2014 was USD 13.3 million. Seadrill's support of the Group's financing means that there are no financial covenants applicable to the Company in the bank loan agreement. Further, the costs of the bank financing are significantly lower than what could be achieved had the Group had been a stand-alone entity. The Group is, however, exposed to the risk of Seadrill not meeting its financial covenants and other terms in the guarantee and its own loan agreements due to the cross-default provision in the Group's loan agreement. Seadrill has provided the Group with the RCF in order to meet the Group's financing needs beyond what is covered by the Group's bank loan. The terms of the RCF are set out in a loan agreement, which was revised in Q The main terms are an interest rate of 6.0% plus LIBOR, a commitment fee of 2.4% on any undrawn amounts and a term of 24 months expiring 31 December The cost of this financing is significantly lower than what the Group would have incurred if such financing should have been arranged on a stand-alone basis. The Group is party to several management agreements with subsidiaries of Seadrill. These make Seadrill s organisation fully responsible for the day-to-day operation of the Group's (through its subsidiaries in Brazil and USA) and the marketing of the rigs in operation and Sevan Developer (through Seadrill Management Ltd. in the UK). Further, Seadrill Management Ltd. supports Management at the general administrative level. The terms of these management agreements are market based. Total payments to the Seadrill organisation under these agreements in 2014 were USD 24.5 million. The Group has realised numerous benefits from its access to Seadrill's infrastructure and management organisation through these agreements. Operationally, the Group has improved compliance and integrity in its management systems compared to if relied on its proprietary management organisation. Further benefits are access to a larger labour resource pool, improved pricing for insurance, savings through access to vendor master service agreements and increased reliance on internal resources in maintenance and engineering (as opposed to contracting these from third parties). Changes in the philosophy for project management such as integrating newbuild deliveries with acceptance testing have led to significant operating efficiencies being realised. The Group has, as an example, been able to reduce the annual operating expenses on average for each of its rigs in operation by approximately USD 25,000 per day while improving the safety and quality of the asset and minimizing out-of-service time for the customer. The Seadrill marketing function provides the Group's rig fleet with the benefit of Seadrill's extensive client relationships and access to geographical regions where Seadrill has a presence and proven performance history. The Seadrill organisation actively markets the Group's fleet in all geographical regions and towards all of its own clients, highlighting the advantages of the Group's unique cylindrical design. Administratively the Group has significantly reduced its payroll through consolidation of its former offices with those of Seadrill. Further, merging corporate functions such as accounting, treasury, supply chain and human resource management with those of Seadrill has realised benefits. The Group's general and administrative costs for 2014 were, as an example, reduced by USD 18.8 million compared to The Board expects further savings and reductions to be realised in the years to come through the support of Seadrill. The Board is satisfied with the manner in which the Group has been integrated in Seadrill's management systems. This has both financially and operationally been a significant benefit for the Group and its shareholders. The Board is monitoring the quality and costs of all services provided by the Seadrill organisation and will, regularly, benchmark these against third party providers of similar services. The Board is aware of the potential conflict of interest of Seadrill but is confident that the Seadrill organisation treats the Group's rigs on par with other rigs in the overall Seadrill fleet. D 3

134 Sevan Drilling RESTRUCTURING AND MIGRATION The Board reviewed the Group's corporate organisation during 2014 and concluded that it was not optimal to maintain the parent company function in Norway. The reasons for this were several. 1. The Board found disadvantages and additional costs associated with maintaining the parent level of the Group in Norway. The Group has limited association and presence in Norway and it therefore makes sense to discontinue a structure where the parent level for the Group is in Norway. 2. The majority of the Company's shareholders are resident in jurisdictions with whom Norway does not have tax treaties. This means that any dividend paid by the Company to such shareholders will trigger Norwegian withholding tax and thus reduce the amount these shareholders will receive compared to what would be received by Norwegian shareholders and/or shareholders in jurisdictions having a favourable double tax treaty with Norway. 3. The Company will, as a Norwegian tax subject, have to pay ordinary Norwegian corporate tax on its profits once its accumulated tax losses have been utilised. As a consequence of the Company's subsidiaries being incorporated outside the applicable area for the Norwegian exemption method for taxation, the Company will be taxed in Norway for dividends and other income it receives from such subsidiaries. Alternatively, Norwegian CFC rules may be applied, leading to the Company being directly taxed for any profits generated by the subsidiaries whether distributed to the Company or not. Given that the Group has little or no association to Norway other than through the parent company function, and that the majority of its shareholders are non-norwegian, such tax liability does not appear logical. 4. The limitations in deductibility for tax purposes of interest and other financial expenses between group companies which came into effect in 2014 will affect the Company directly as a consequence of Seadrill having guaranteed the Group's bank loan and having provided the Group with the RCF. This will accelerate the time it will take the Company to become tax liable on its profits in Norway. Summarising the above the Board found that the disadvantages and additional costs associated with maintaining the parent level of the Group in Norway were sufficiently negative to the Group going forward to neutralise the short term cost of migrating the parent level to Bermuda. Consequentially, the Board initiated a restructuring process in 2014 with the aim of enabling the Group to migrate its parent level to Bermuda in The initial step in this process was the establishment of a wholly owned subsidiary of the Company in Bermuda under the name Sevan Drilling Limited. ("Sevan Limited"). Subsequent to this, all of the Company's assets and liabilities were transferred to Sevan Limited in exchange for shares as a contribution in-kind. Hence the Company's sole asset (apart from a limited amount of cash), as of the date hereof, is the shares in Sevan Limited. The Board will propose to the Company's annual general meeting (the "AGM") that the migration of the parent company level in the Group, from Norway to Bermuda, is realised through a repayment of paid-in capital in the Company by way of a distribution of all shares in Sevan Limited to the Company s shareholders in a proportion securing that they will hold the same relative ownership in Sevan Limited as they have in the Company. The Board further intends to make the closing of such capital decrease subject to ordinary creditors notice and Sevan Limited being accepted for listing on the Oslo Stock Exchange (the application process for this having been initiated). The current timeline for the process indicates that the capital decrease can be completed late-june. The Company will, following the closing of the capital decrease, continue to exist but will then have no subsidiaries and only a limited amount of cash. This is sufficient for the Company to operate as a going concern and will enable the Board to consider such alternatives that are available. Its shareholder base will be identical to that of Sevan Limited and it could be an option to raise further equity in order to invest in new businesses within the current scope set forth in the Company's articles of association. This could enable the Company to utilise its tax position in Norway. Sevan Drilling An alternative option would be to liquidate the Company, in which case the Board will seek to reach an agreement with Sevan Limited ensuring that Sevan Limited will guarantee to fund the costs of such liquidation against compensation equal to whatever cash remains in the Company at the end of the liquidation period. It is the Board's intention to present its proposal for the future of the Company to the shareholders in a general meeting during the second half 2015, ensuring that a decision is made and implemented before yearend At the listing date, the board of Sevan Limited will be identical to that of the Company. The Board intends to call a general meeting in Sevan Limited in Q for the purpose of electing a new board to allow Sevan Limited's shareholders to reconsider the board composition in light of the requirements of Sevan Limited going forward. As a result of these decisions made by the Board subsequent to year-end 2014, the Company recorded a noncash impairment of USD million to the book value of the investment of Sevan Limited in the Company s statutory financial statements. While the Company is expected to continue as a going concern after the migration activity, the asset impairment is recognized to align the book value to the fair value of the Sevan Limited investment at year-end 2014, taking into account the capital distribution to the shareholders expected to occur in the short-term. The impairment was calculated based on the lower of cost versus sales price less selling costs, in accordance with Norwegian GAAP. At the date of the AGM notice, the Company again assessed the book value of Sevan Limited compared to the market value. An additional impairment based on the same valuation method is recorded in the Company s statutory financial statements to reflect the proposed distribution. The Board will provide an interim audited Company statutory balance sheet with functional currency in Norwegian Kroner and propose a share capital reduction to NOK 1.0 million. The share capital reduction is required to allow adequate other equity to cover losses, mainly from the second impairment, and distribute the shares of Sevan Limited to the Company s shareholders. OUTLOOK The Board is pleased with the various restructuring efforts which was completed during 2014 and believes the Company is now well positioned for the current and coming years. Operating costs have been brought down significantly through the integration of the Group in Seadrill's management systems. Significant market and financial risks were furthermore reduced through the agreement for deferred delivery of Sevan Developer. The fact that the Company has the possibility of terminating the contract and recovering the investment strengthens the Group financially. The commencement of Sevan Louisiana's operations and the subsequent revision of the contract terms with LLOG have, while reducing short term earnings, improved the Group's contract backlog. The revision of the terms of the RCF has furthermore secured the Group's short to medium term financing needs on acceptable terms. Summarising the above, the Group has a competitive cost base, a stable and predictable cash-flow and no further known unfunded financial needs in 2015, (utilization of the RCF as and when needed). However, the Group remains sensitive to operating performance of its rigs and will have to refinance the RCF at the end of its term in 2016 in order to continue to operate beyond this point. This remains the two main short to medium term risks. The market for ultra deep-water drilling services turned dramatically down in the latter part of 2014 and has continued its negative development so far in Demand is now at a very low level and day-rates are, to the extent contracts are concluded, materially lower than what was experienced prior to the downturn. While the Company is not exposed to the market in the short term due to its contract portfolio, it is dependent on demand picking up towards the expiry of its current contracts. The Board believes that the D 4

135 Sevan Drilling current market conditions will improve in the longer term, but cannot say with any certainty when demand will start picking up or at what rate levels future contracts can be secured. The Board has noted, with interest, that there are certain demands for rigs utilising the Group's cylindrical design for new prospects. These covers both drilling operation in harsh environment (notably in Arctic areas where ice is a factor) and in areas where the design has a competitive advantage through its storage capacity. Various customers have expressed interest in the Group's Mark II, III and Arctic designs directed towards such specifications and have initiated studies. Whether these projects will lead to business opportunities for the Group is too early to conclude. The interest is, however, encouraging for the longer term. Finally, the Board remains confident that the proposed migration of the parent company level to Bermuda will improve the Group's cost base and make it more competitive from an equity investment point of view. Therefore, the Company has prepared its accounts on the assumption that the Group is a going concern. RISK FACTORS The Group s activities expose it to a variety of risks, many of which are beyond the Company s control. The Group has a risk management program covering these factors (among others) and seeks to minimise overall exposure to risk and the impact of external factors on performance. Market risk The offshore drilling industry is cyclical and volatile. The Group's business depends on the level of activity in the exploration for and development and production of oil and gas in offshore areas worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments affect the demand for our services. Oil and gas prices and market expectations of potential changes in these also significantly affect the demand for drilling units specialised in the ultra deep-water segment. A decline in oil and gas prices for an extended period of time, or market expectations of a potential decrease in these prices, may negatively affect the Group's business. Sustained periods of low oil prices typically result in reduced exploration and drilling activity because oil and gas companies capital expenditure budgets are subject to cash flow from such activities. These changes can have a dramatic effect on rig demand. Periods of low demand can cause excess rig supply and intensify the competition in the industry, which often results in drilling rigs, particularly older and less technologically advanced units, being idle for long periods of time. The Company cannot predict the future level of demand for its services or future conditions of the oil and gas industry. Any decrease in exploration, development or production expenditures by oil and gas companies could reduce the Group's revenues and materially harm its business and result of operations. Operational risk Drilling operations The operation of drilling rigs requires very high standards of safety. Such operations are associated with considerable risks and liabilities. These include technical, operational, commercial and political risks. The Group will obtain insurance deemed appropriate by it for its business, but it is impossible to insure against all applicable risks and liabilities. As a result of this, the Group could be exposed to substantial liabilities. For instance, under some contracts or legal regimes the Group may have unlimited liability for losses caused by its own negligence, and such liability may not be covered by its insurance policies. The Group may also incur liability for pollution and other environmental damage without being able to recover said liabilities through insurance. Small fleet size Since the Group's fleet consists of only three units in operation, any operational downtime or any failure to secure employment at satisfactory rates will affect the Group's results more significantly than for a group with a larger fleet. Furthermore, frequent rig mobilisations could be disruptive to the Group's financial results if it experiences delays due to adverse weather, third party services or physical damage to its rigs Sevan Drilling Financial risk The Group s activities expose it to a variety of financial risks. The Group s overall risk management program seeks to minimise potential adverse effects on the Group s financial performance. Risk management for the Group is carried out by the treasury function that is integrated in Seadrill's management organisation. Final authority is, however, retained within the Company. Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units within the Group. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign currency risk, price risk interest rate risk, credit risk, and liquidity risk. Foreign Currency risk The Group s assets are nominated in USD and most of the Group s revenues are also nominated in USD. Part of the revenue from the Group's contracts with Petrobras is nominated in Brazilian Reais. The revenue split on these contracts corresponds to the Group s costs in Reais and represent a natural hedge. The Group may use forward contracts to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. As of 31 December 2014, no forward contracts have been entered. The consequence of a +/- 5% change in exchange rates on profit or loss and equity for USD / BRL is USD 0.3 million. The Group s sensitivity to foreign currency has increased during the current year mainly due to the increase in sales and purchases denominated in BRL in the last quarter of the financial year which has resulted in higher BRL denominated trade receivables and payables. Price risk Changes to the price level of goods and services acquired may affect the Group, whereafter price developments are carefully monitored. The Group seeks to handle the risk through contract clauses with its customers. Furthermore, operating cost inflation is mitigated through annual dayrate adjustments for Sevan Driller and Sevan Brasil. Interest rate risk All of the Group s debt is subject to interest rates which fluctuate with the market. A change in interest rate of +/- 1% would affect the Group's interest cost with +/- USD 15.2 million (2013: 14.0 million). This sensitivity analysis has been determined based on an assumption that the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to the Board and represents management s assessment of a reasonably expected change in interest rates. The Group continuously considers whether part of the interest rate exposure should be hedged. As of 31 December 2014, no interest rate hedges have been entered. Credit risk Credit risk arises from derivative financial instruments and deposits with banks and financial institutions, as well as exposures to customers. The Group has no significant concentration of credit risk towards any single financial institution and has policies that limit the amount of credit exposure to individual institutions. The Company s customers are all engaged in the offshore oil and gas industry and consist primarily of major integrated oil companies, independent oil and gas producers and government-owned oil companies. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for amounts outstanding. The Company's current counterparties are Petrobras for Sevan Driller and Sevan Brasil, and LLOG for Sevan Louisiana. The Group has not had a history of collection problems, significant disputes, and continues to closely monitor ongoing material matters with these customers. No provision for doubtful accounts has been recognised in the periods presented. D 5

136 Sevan Drilling Liquidity risk The Group s objective is to maintain flexibility of financing by providing sufficient credit lines when managing liquidity. This may include maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity is sensitive to operational uptime on the units performing contracts. Reference is made to Note 16 for a maturity analysis of the Group s financial liabilities. The Group will have to finance the USD million of final instalment of Sevan Developer and any mobilisation costs and customer required variations, if and when delivery of the rig occurs. This, however, will only be done if a satisfactory employment contract has been secured upon which external financing can be raised. If the contract is terminated, the paid instalments of USD million will be refunded. The Company cancelled tranche B under the bank loan facility that was available for funding the final delivery instalment for Sevan Developer in In December 2014, the Company amended the RCF. The amended terms increased the available amount to USD million with an interest margin of 6.0% and extend the term to December At year-end, USD million was drawn thereunder. With these amended terms and cash flow from operations, the Company is forecasting adequate liquidity for the next 12 to 24 months. If the RCF cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Company does not have adequate liquidity beyond CORPORATE SOCIAL RESPONSIBILITY Being socially responsible is integrated throughout the Group s business. The Board has defined the Group s values and adopted ethical guidelines applicable to all employees and contractors. Health, safety and environment The Group s core business principles involve ensuring the health and safety of employees and taking care of the environment. The Group strives for a working environment which provides job satisfaction and good health conditions. The aim is a safe and inspiring working environment characterized by mutual respect and cooperation. The Group had 28 incidents in 2014, of which 1 was a fatality. The Total Recordable Injury Rate amounted to 0.74 for 2014, which is below the industry average of Sick leave amounted to approximately 3.0 percent for the Group for the year. The Group s operations are subject to numerous laws and regulations in the form of international treaties and maritime regimes, flag state requirements and national environmental laws and regulations in force in the jurisdictions in which our drilling units operate or are registered. The Group conforms its policies for compliance with these laws and regulations through the Seadrill policies and procedures for health, safety and the environment. The basic fundamentals of safety performance at Seadrill are based on continuous improvement through proactive initiatives in four key areas: safety leadership, risk assessment and hazard recognition, management system and auditing and control. Seadrill has laid down a series of procedures in its management system to contribute to keeping the environment as clean as possible. Emergency response plans have been established to limit harm to the environment in the case of accidental emissions. The Group reviews the performance of the management system daily and at regular intervals as defined in the management agreements with Seadrill. The Group s drilling units have an environmentally friendly profile. The Group works continuously to minimize and reduce the environmental impacts of their operations. However, their operations involve activities that entail potential risks to the external environment. Sevan Drilling Employment and labour practices The Group makes efforts to ensure all employees are given equal opportunities for personal and professional development. Every employee is treated equally regardless of gender, age, ethnic origin and functional ability. The Group does not tolerate harassment or victimization of another employee or colleague, whether sexual, racial or otherwise. The Board and Management continue to focus on equal opportunities for men and women among its direct employees and board members. Two of five board members are women. On average for the year, approximately 8 percent of the employees in the Group are women. In 2014, the Group completed an internal restructure, whereby corporate and regional activities were consolidated, and direct employment was significantly reduced due to general administrative service being provided by Seadrill through the management agreements. At 31 December 2014, the Company has 4 direct employees in Norway and approximately 514 employees seconded into operating subsidiaries. The Group has not implemented any specific measures in order to meet the objectives of the Discrimination Act and of the Anti-discrimination and Accessibility Act. The need for specific measures in this respect is continuously considered by the Board and Management. Human rights The Group's aim is to carry out its business without any violation of basic human rights. Operations are carried out in accordance with internationally recognized human rights standards. The Group supports the UN s Universal Declaration of Human Rights and its work to end forced labour, discrimination and child labour. Anti-corruption The Group rejects all forms of corruption, and seeks to identify and eliminate all facilitation payments and enhance transparency in all business transactions. If any employee is in doubt, it is an obligation to elevate the ethical dilemma to their supervisor or manager. In November 2013, the Board aligned its anti-bribery and corruption compliance manual with Seadrill. At least once a year a risk assessment is conducted and the results communicated to the Board. In 2014, no additional risks were identified that were not documented in the manual. CORPORATE GOVERNANCE The Company is committed to sound corporate governance principles contributing to optimal value creation over time. The objective of the Company's corporate governance is to regulate the division of roles between shareholders, the Board and Management more comprehensively than what is required by legislation. Section 1 - Implementation and reporting on corporate governance The Board has the ultimate responsibility for ensuring that the Company governance is adequate and has, as a consequence, prepared and approved the Company s policy for corporate governance. The Company, through the Board and Management, carries out an annual review of the policy. The Norwegian Accounting Act includes provisions on corporate governance in its Section 3-3b which impose a duty on the Company to issue an annual statement on its principles and practice for corporate governance. These provisions also stipulate minimum requirements for the content of this report. The Norwegian Corporate Governance Board has issued the Norwegian Code of Practice for Corporate Governance (the "Code"). Adherence to the Code is based on the comply or explain principle, which means that a company must comply with the recommendations of the Code or explain why it has chosen an alternative approach to specific recommendations. Oslo Børs requires listed companies to publish an annual statement of their policy on corporate governance in accordance with the Code in force at the time. The Continuing Obligations of listed companies are available on D 6

137 Sevan Drilling The Company complies with the above mentioned rules and regulations, including the current Code, unless otherwise specifically stated. The Company has not established separate guidelines for corporate social responsibility as recommended by the Code. The Company was established and listed on Oslo Børs in 2011 and is continuously considering the need for developing further guidelines. Section 2 Business activity The Company s business objective is set out in its articles of association section 3, which defines it as: "To own and/or operate, directly or indirectly, drilling rigs and activities related thereto, as well as investing in other companies." The Company s articles of association are available at the Company s website, The Company s long term objective, following the clause above, is to become a premier drilling contractor owning units specialising in offshore drilling in ultra-deep water. The Company will pursue the following main strategies to reach its overall objective (1) Monetise its current design and technology by delivering safe, efficient and cost effective service to its customers, (2) pursue technological advancements with its unique hull design and (3) develop a strong and motivated work force that delivers outstanding service and results. Section 4 Health, safety and environment guidelines The Company believes that all incidents and accidents that cause personal injury or environmental damage should be prevented. It strives to achieve zero incidents and accidents by developing a culture where all employees take responsibility for their own safety, for the safety of their co-workers, for process safety and to protect the environment. The Company encourages all employees to report all unsafe activity or conditions and to stop activities until appropriate risk measures are in place. A management system is established in cooperation with the employees, ensuring commitment to health, safety, the environment, quality management, continuous improvement of operations and risk management. Section 5 Ethical guidelines The Company aims to maintain a high ethical standard in its relations with customers, suppliers and employees. Section 6 Company capital and dividend The Board aims to maintain a satisfactory equity ratio in the Company suitable to the Company s goals, strategy and risk profile, thereby ensuring that there is an appropriate balance between equity and other sources of financing. The Board regularly assesses the Company s capital requirements. The Company s objective is to generate a return for its shareholders through dividends and increases in its share price that is at least in line with the return available on similar investment opportunities of comparable risk. Due to the current market conditions, the Company does not intend to pay dividend to shareholders in the short term. The Group has no restrictions for making dividend payments in its loan agreements. The Board will not, as a main rule, propose that authorisation is granted to it to increase the share capital and/or to repurchase the Company's shares for periods longer than until the next AGM. Section 7 - One class of shares The Company has one class of shares with equal rights. Sevan Drilling Section 8 Transactions with related parties Any transactions, agreements or arrangements between the Company and its shareholders, members of the Board, members of Management or close associates of any such parties shall only be entered into as part of the ordinary course of business and on arm s length market terms. All such transactions shall comply with the procedures set out in the Norwegian Public Limited Liability Companies Act or similar provisions, as applicable. The Board shall always consider to obtain a valuation from an independent third party unless the transaction, agreement or arrangement in question are immaterial. The Company s financial statements shall provide further information about transactions with related parties. Section 9 - Freely negotiable shares The shares in the Company are freely tradable. Section 10 - The general meeting The AGM is the Company s highest authority. The Board strives to ensure that the AGM is an effective forum for communication between the shareholders and the Board, and encourages shareholders to participate in the meeting. The notice of the AGM is made available on the Company s website, and sent to shareholders no later than 21 days prior to the meeting, as recommended by the Code. The deadline for shareholders to give notice of their intention to attend the meeting is set as close to the date of the meeting as possible. Further information regarding the agenda for the AGM and supporting documents for the matters to be considered at the AGM is set out in section 7 of the Company's articles of association. The notice will set out information about how to attend through a proxy, including a form to appoint a proxy. The person chairing the AGM will make appropriate arrangements for the AGM to vote separately on each candidate nominated for election to the Company`s corporate bodies. Members of the Board and the nomination committee, as well as, the Company s auditor shall be present at the AGM. Section 11 - Board of directors composition Nomination Committee According to section 5 of the Company s articles of association, the Board shall consist of three to nine members. The Board is appointed by the Company's general meeting (normally the AGM), after proposal from the Nomination Committee, cf. section 6 of the articles of association. The current Board does not include any members from the Management. All members, save for Mr. Per Wullf (who is the CEO of Seadrill Management) are considered independent of the Company s material business contacts and the Company s main shareholder, Seadrill. The members of the Board represent varied and broad experience from relevant industries and areas of technical speciality, and the members bring experience from both Norwegian and international companies. More information about the board members expertise and background, as well as their holdings of shares in the Company can be found on the Company s website, According to section 6 of the Company s articles of association the Company has a nomination committee consisting of three members. The members of the nomination committee are elected by the AGM. The following three members were elected at the Company s AGM in 2014: Harald Thorstein, chairman Jarle Sjo Geir Tjetland The members were elected for a period of two years. At the same AGM, instructions to the committee were approved. The members are independent of the Board and the management of the Company. Pursuant to section 6 of the articles of associations, the nomination committee shall propose candidates to the Board to the general meeting in connection with notices thereof. The nomination committee shall also make proposal D 7

138 Sevan Drilling for the remuneration of the Board. The nomination committee shall consult with shareholders, board members and the CEO of the Company as a basis for the nomination of candidates to the Board. Section 12 Sub-committees of the Board The Company shall have a remuneration committee appointed by the Board. The purpose of the committee is to (i) evaluate and propose the compensation of the Company s chief executive officer (the "CEO") and other senior executives, (ii) produce an annual report on the compensation of the executive management team, which shall be included in the Company s annual accounts pursuant to applicable rules and regulations, including accounting standards, promulgated from time to time and (iii) evaluate and propose incentive compensation plans and equity based plans for the Company and any subsidiaries. Further details on the committee s duties and responsibilities are included in the instructions to the remuneration committee approved by the Board. The Board has appointed Birgitte R. Vartdal and Per Wullf as members of the remuneration committee. The Company has an audit committee appointed by the Board as set out in the Norwegian Public Limited Liability Companies Act. The audit committee is appointed by the Board to assist the Board in fulfilling its obligations and responsibilities in respect to financial reporting, auditing and internal control. The Board has appointed Kristian Johansen and Birgitte R. Vartdal to the audit committee, both being independent and having accounting qualifications. The audit committee will not make any decisions on behalf of the Board, but will present its assessment and recommendations to the Board. The Board has approved instructions to the audit committee. The Board may also appoint other sub-committees, as deemed necessary or appropriate. Section 13 Responsibilities of the Board The Board prepares an annual plan for its work with special emphasis on goals, strategy and implementation. The Board s primary responsibility is the development and approval of the Company s strategy, performing necessary monitoring functions, and acting as an advisory body for the management team. The Company s strategy is regularly subject to review and evaluation by the Board. Its duties are not static, and the focus will depend on the Company s ongoing needs. The Board is also responsible for ensuring that the operation of the Company complies with the Company s values and ethical guidelines. The Chairman of the Board is responsible for ensuring that the Board s work is performed in an effective and correct manner. The Board is responsible for the appointment of the CEO. The Board shall ensure that the Company has satisfactory management resources with clear internal distribution of responsibilities and duties. Further details on the duties of the Board are included in the instructions to the Board. In accordance with the provisions of the Norwegian company law, the terms of reference for the Board are set out in a formal mandate that includes specific rules and guidelines on the work of the Board and decision making. The Board does not include any members from Sevan s executive management team and all members are considered independent of Sevan s material business contracts. Board member Per Wullf is currently the CEO and President of Seadrill Management. The four other members who served on the Board during the year are considered independent of Sevan s main shareholder. Section 14 - Risk management and internal control The Board shall ensure that the Company has sound internal control systems and risk management procedures that are appropriate in relation to the extent and nature of the Company s activities. The internal control and risk management systems shall also encompass the Company s corporate values and ethical guidelines. The objective of the risk management and internal control systems shall be to manage exposure to risks in order to ensure successful conduct of the Company s business and to support the quality of its financial reporting. The Board shall carry out an annual review of the Company s most important areas of exposure to risk and its internal control arrangements. Sevan Drilling Section 15 - Board Compensation Remuneration of the members of the Board shall be reasonable and based on the Board s responsibilities, work, time invested and the complexity of the enterprise. This remuneration shall be set by the AGM based on a proposal from the nomination committee. The compensation shall be a fixed, annual amount. The Chairman of the Board may receive a higher compensation than the other members. The Board shall be informed if individual members perform other tasks for the Company than exercising their role as directors. Work in sub-committees may be compensated in addition to the remuneration received for board membership. The Company s annual accounts provide information about the Board s compensation. Section 16 Compensation of executive management The Board decides the salary and other compensation to the CEO, however so that any compensation linked to the value of the Company s shares shall be approved by the AGM in accordance with the Norwegian Public Limited Companies Act. The CEO determines the remuneration of executive employees based on guidelines for the remuneration prepared by the Board through the remuneration committee. The Company does not, at present, operate a management incentive scheme and the Board has no plans at this stage to propose such a scheme. The Company has certain outstanding options issued to previous management, which are described in further details under the Remuneration and Benefits section. Section 17 - Information and communications The Company maintains a proactive dialogue with analysts, investors and other stakeholders of the Company. The Company strives to continuously publish relevant information to the market in a timely, effective and non-discriminatory manner and has a clear goal to attract both Norwegian and foreign investors and to promote higher stock liquidity. All stock exchange announcements are made available on the Oslo Børs website, as well as on the Company s website, The announcements are also distributed to news agencies and other online services through Thomson Reuters. The Company publishes the dates for important events such as general meetings, reports, open presentations, payment of dividends etc. annually. The Company publishes its preliminary annual accounts by the end of February and the complete annual report, including its final annual accounts and the annual report from the Board, is available no later than 30 April each year. Section 18 - Auditor The Company's accounts are audited by PricewaterhouseCoopers AS. Each year the auditor presents a plan to the Board for the audit work and confirms that the auditor meets established requirements as to his independence and objectivity. The auditor shall be present at the Board meeting where the annual accounts are considered. Whenever necessary, the Board shall meet with the auditor to review the auditor s view on the Company s accounting principles, risk areas, internal control routines etc. The use of the auditor as a financial advisor to the Company shall be limited to cases where such use will not affect or question the auditors independence and objectiveness as such. Only the CEO shall have the authority to enter into agreements in respect of such advisory assignments. In connection with the auditor s presentation to the Board of the annual work plan, the Board should specifically consider if the auditor to a satisfactory degree also carries out a control function. The Board shall arrange for the auditor to attend general meetings as and where appropriate. D 8

139 Sevan Drilling Section 19 - Take-overs The Board has established guiding principles for how it will act in event of a take-over bid for the Company. It sets out that the Board will seek to follow the general principle of equal treatment; seek to ensure that the Company s business activities are not disrupted unnecessarily; seek to ensure that shareholders are given sufficient information and time to form a view of the takeover bid; not unjustly seek to prevent the take-over bid, unless this is believed to be in the interests of the Company and all of the shareholders; in due course issue a statement on the take-over bid in accordance with statutory requirements and applicable Norwegian corporate governance recommendations; and consider and, if deemed necessary or purposeful, arrange for a valuation of the take-over bid by an independent expert, the conclusion of which will be made available to shareholders. Any transaction that is in effect a disposal of the Company s activities will be submitted to a general meeting for approval. REMUNERATION AND BENEFITS The remuneration payable to the directors will be set by the AGM. No member of the Board is entitled to severance pay or other benefits upon termination of his/her term. The CEO receives a base salary, bonus and benefits, which are evaluated in accordance with Section 16 of Governance and disclosed in Note 6 to the Consolidated Financial Statements. The Company has established a long-term incentive scheme based on grants of share options to certain management members and other employees, based on an authorisation granted to the Board in the extraordinary general meeting on 9 January As of this date, the Board does not intend to issue any further grants and all grants are held by former employees, except one employee not in senior management. The outstanding options fully vested upon the change of control in July 2013 and will expire by the end of December The option program comprises of 9,738,326 options issued. Each of the options entitles the holder to subscribe for one new ordinary share in the Company or a cash settlement, at an exercise price per share of NOK 5.75 (market price at the time of grant). As of 31 December 2014 the Company had not set aside or accrued any amounts for pensions, retirement or similar benefits, except from what is specified in note 13. Sevan Drilling RESPONSIBILITY STATEMENT The Board and the CEO have today considered and approved the report and the financial statements for the Sevan Drilling Group and the parent company Sevan Drilling ASA for the year ending 31 December The consolidated financial statements of Sevan Drilling ASA have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and such additional disclosure requirements as stated in the Norwegian Accounting Act that are applicable per 31 December The financial statements for Sevan Drilling ASA have been prepared in accordance with the Norwegian Accounting Act and those Generally Accepted Accounting Principles in Norway that are applicable per 31 December The Director s report for the Sevan Drilling Group and Sevan Drilling ASA has been prepared in accordance with the Norwegian Accounting Act and the Norwegian Accounting Standard no. 16 applicable per 31 December We confirm that, to the best of our knowledge: the financial statements for the Sevan Drilling Group and Sevan Drilling ASA for the year ending 31 December 2014 have been prepared in accordance with applicable accounting standards; the information in the financial statements gives a true and fair view of the Sevan Drilling Group s and Sevan Drilling ASA s assets, liabilities, financial position as of 31 December 2014 and results of operations for the year ending 31 December 2014; and our report for the year ending 31 December 2014 includes a fair view of: the development, results of operations and position for the Sevan Drilling Group and Sevan Drilling ASA; and the principal risks and uncertainties relevant to the operation of the Sevan Drilling Group and Sevan Drilling ASA. Oslo, 23 April 2015 The Board of Directors Erling Lind Kristian Johansen Ragnhild Wiborg Chairman Vice chairman Board member Per Wullf Birgitte Ringstad Vartdal Scott McReaken Board member Board member Managing Director D 9

140 Sevan Drilling Consolidated Financial Statements For the Period Ended 31 December 2014 Sevan Drilling Consolidated Financial Statements Consolidated Income Statement Figures in USD million Note Operating revenue Operating expense Depreciation, amortisation and impairment Employee benefit expense Other operating expense Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial income Financial expense Foreign exchange gain/(loss) related to financing Net financial items Loss before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Company Earnings per share for profit/(loss) attributable to the equity holders of the Company during the year (USD per share): Note Basic earnings per share Diluted earnings per share Consolidated Comprehensive Income Figures in USD million Net loss Foreign currency translation Comprehensive loss Attributable to: Equity holders of the Company The notes on pages 24 to 46 are an integral part of these consolidated financial statements D 10

141 Sevan Drilling Consolidated Balance Sheet Figures in USD million Note ASSETS Drilling rigs 11 1, ,916.6 Other fixed assets Other non-current assets Total non-current assets 1, ,976.2 Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 1, ,164.2 EQUITY Share capital Share premium Other equity Total equity LIABILITIES Interest-bearing debt 16, 21 1, ,196.1 Other non-current liabilities Total non-current liabilities 1, ,196.2 Trade payables Current portion of interest-bearing debt 16, Other current liabilities Total current liabilities Total liabilities 1, ,480.5 Total equity and liabilities 1, ,164.2 The notes on pages 24 to 46 are an integral part of these consolidated financial statements Oslo, 23 April 2015 The Board of Directors Erling Lind Kristian Johansen Ragnhild Wiborg Chairman Vice chairman Board member Per Wullf Birgitte Ringstad Vartdal Scott McReaken Board member Board member Managing Director Sevan Drilling Consolidated Statement of Changes in Equity Share capital Share premium General reserve Equity settled employee benefits reserve Other equity Foreign currency translation reserve Retained earnings Figures in USD million Note 1 January Net profit/(loss) Foreign currency translation Total equity Comprehensive loss December January Net profit/(loss) Foreign currency translation Comprehensive loss Capital increase Transaction cost equity raise Fair value of share options December The notes on pages 24 to 46 are an integral part of these consolidated financial statements. D 11

142 Sevan Drilling Consolidated Cash Flow Statement Figures in USD million Note Cash flows from operation activities Cash from operations Tax paid Interest paid Net cash (used in)/generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment (PPE) Interest rate swap settlement Net cash used in investing activities Cash flows from financing activities Net proceeds from capital increase Proceeds from interest-bearing debt ,400.0 Deferred transaction fees on interest-bearing debt Repayment of interest-bearing debt Net cash generated from/(used in) financing activities Net cash flow for the period Cash balance at beginning of period Cash balance at end of period* Cash and cash equivalents Figures in USD million Cash at bank and in hand Restricted employees' tax deduction fund Total cash and cash equivalents The notes on pages 24 to 46 are an integral part of these consolidated financial statements. Sevan Drilling Notes to the Consolidated Financial Statements Note 1 Summary of Significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all financial years presented, and are the same as previous periods, except as described in 1.16 and The presentation currency of the Group is USD which corresponds to the functional currency of the majority of the entities in the Group. All figures are in USD million unless otherwise stated. 1.1 Basis of Preparation The consolidated financial statements of the Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) that are effective for the year ended 31 December The consolidated financial statements have been prepared on a going concern basis under the historical cost convention as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note Changes in Accounting Policy and Disclosures a) New and amended standards adopted by the Group In the current year, the Group has applied a number of new and revised IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. These new and revised standards include: Amendments to IAS 32 Offsetting financial assets and financial liabilities Amendments to IAS 36 Impairment of assets Amendments to IAS 39 Financial instruments: recognition and measurement Amendments to IFRS 10, IFRS 12, and IAS 27 Investment entities Other standards, amendments and interpretations which are effective for the financial year beginning on 1 January 2014 are not material to the Group. b) New standards and interpretations not yet adopted, The following new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2015, and have not been applied in preparing these consolidated financial statements: IFRS 9 Financial instruments 2 IFRS 15 Revenue from contracts with customers 1 1 Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 January 2018 The directors of the Company do not anticipate that the application of these standards and amendments will have a significant impact on the Group s consolidated financial statements in the period of initial application.. D 12

143 Sevan Drilling 1.2 Consolidation Subsidiaries Subsidiaries comprise all entities over which the Group has the power to govern the financial and operating policies, where the Group is exposed or has rights to variable returns from its involvement with the investee and where it has the ability to use its power to affect its returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases. The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred assumed at the date of exchange. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of the acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the income statement immediately. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group. 1.3 Segment Reporting The Board of Directors of the Company (which is identified as the chief operating decision maker in the Group ("CODM")), along with management has reassessed the operating segments in Since the first quarter of 2014, the Group has aggregated its rigs into a single reporting unit representing the fleet as a whole, this is mainly based on evaluation of IFRS 8.12 as aggregating same core characteristics. Sevan Louisiana began operations in the second quarter of The construction of Sevan Developer was completed in Q4 2014, except for sea trials and final commissioning. The CODM evaluates the operating performance of each rig but is focused on the overall results of the Group, based on several key metrics at the Group level, including revenue, operating profit, EBITDA and net cash. 1.4 Foreign Currency Translation Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which each entity operates (the "Functional Currency"). The consolidated financial statements are presented in USD, which is the Group s presentation currency. Transactions and balances Foreign currency transactions are translated into the Functional Currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of such transactions (realised items) and from translation at exchange rates prevailing at the balance sheet date of monetary assets and liabilities denominated in foreign currencies (unrealised items) are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. This will be the case only from the point in time when hedge accounting is implemented. Foreign exchange gains and losses that relate to interest-bearing debt and cash and cash equivalents are presented (net) as a separate line item in the income statement within net financial items. Foreign exchange gains and losses that relate to operations are presented (net) as a separate line item in the income statement within operating expenses. Group companies The results and financial position of all Group entities (none of which has the currency of a hyperinflationary economy) that have a Functional Currency different from the presentation currency, are translated into the presentation currency as follows: Assets and liabilities are translated at exchange rates prevailing at balance sheet date. Sevan Drilling Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates in which case income and expenses are translated at exchange rates prevailing at the dates of the transactions). Upon consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments are taken to other comprehensive income if relevant. When a foreign operation is sold, exchange differences that were recorded in equit y are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 1.5 Property, Plant and Equipment Fixed assets are stated at historical cost less accumulated depreciation. The Group has not used, and has no plans of utilising, the revaluation option in IAS 16. Depreciation is calculated using the straight-line method. Historical cost includes expenditure that is directly attributable to the acquisition of the relevant asset. Costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. Received and approved invoices are the basis of capitalisation. Costs related to periodic overhauls of drilling rigs are capitalised under capital assets and amortised over the anticipated period between overhauls. This is generally five years. Related costs are primarily yard costs and the cost of employees directly involved in the work. Amortisation costs for periodic overhauls are included in depreciation, amortisation and impairment expense. Costs for other repair and maintenance activities are included in operating expenses and are expensed as incurred. General and specific borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (which are assets that necessarily take a substantial period of time to get ready for their intended use) are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Each major component of the Group's rigs is depreciated separately when the rigs are available for intended use. A major component is defined as a part with a cost that is significant in relation to the total cost of the asset. An estimation of useful lives indicates an average depreciation period of years. Other fixed assets consist of furniture, fixtures and equipment that are depreciated using the straight-line method over their estimated useful lives ranging from three to ten years. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement. 1.6 Construction in Progress Construction contracts are capitalised as construction in progress based on instalments payable to the yard and other suppliers. Received and approved invoices are the basis of capitalisation. Insurance and net financial expenses during the construction period are capitalised as construction in progress. Cost of labour directly attributable to the construction of the Group's rigs is also capitalised. Costs of training, manning and other pre-operational activities are expensed as incurred. 1.7 Intangible Assets Computer software Acquired computer software is capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives, ranging from three to five years. Costs associated with developing or maintaining computer software programs are recognised in the income statement as incurred. D 13

144 Sevan Drilling Research and Development Costs associated with research are expensed as incurred. Development costs are expensed when the criteria for recognition are not met. 1.8 Impairment of Non-Financial Assets Assets that have an indefinite useful life are not subject to amortisation but are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less cost to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels at which separate cash flows are identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 1.9 Financial Instruments Loans and receivables are measured at fair value at the transaction date and subsequently re-measured at amortised cost. Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. Financial instruments are classified as current, except for those with maturities greater than 12 months after the balance sheet date, in which case they are classified as non-current. Derivative financial instruments are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). Hedge accounting has not been applied in the periods presented Share-based Payments The Group has an equity-settled, share-based compensation plan, under which employees can be awarded equity instruments (options) to subscribe for shares in the Company as a long term incentive. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount expensed has been determined by reference to the fair value of the options granted: including any market performance conditions (for example, an entity s share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions were included in assumptions about the number of options that were expected to vest. The total expense was recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Ninety days after Seadrill s acquisition of a controlling interest in the Company, all outstanding options became vested. No new options have been granted. At the end of each reporting period, the Group revised its estimates of the number of options that were expected to vest based on the non-market vesting conditions. It recognised the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The grant by the Company of options over its shares to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts. Sevan Drilling The social security contributions payable in connection with the grant of the options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction Inventories Inventories consist of diesel and spare parts on the rigs which do not meet the definition of property, plant and equipment. Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost is determined using the average cost method Trade Receivables Trade receivables are amounts due from customers for services performed in the ordinary course of business and are classified as current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The impairment charge is recognised in the income statement as other operating expense Cash and Cash Equivalents In the consolidated statement of cash flow, cash and cash equivalents include cash in hand, bank deposits, and other short-term highly liquid investments with a maturity of less than three months Share Capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company acquires the Company s equity share capital (treasury shares), the consideration paid, including any directly attributable costs (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction cost and income tax, is included in equity attributable to the Company s equity holders Interest-Bearing Debt Interest-bearing debt is initially recognised at fair value, net of transaction cost incurred. Interest-bearing debt is subsequently stated at amortised cost; any difference between the proceeds (net of transaction cost) and the redemption value is recognised in the income statement over the period of the interest-bearing debt using the effective interest method. Interest-bearing debt is classified as a current liability unless the Group has an unconditional right to defer settlement for more than 12 months after the balance sheet date Current and Deferred Income Tax The tax expense for the period comprises current tax and the change in deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rates (and legislation) that have been enacted or substantially enacted by balance D 14

145 Sevan Drilling sheet date and are expected to apply when the deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. The tax base included in the calculation of deferred income tax is calculated in local currency and translated into USD at foreign exchange rates prevailing at the balance sheet date. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. In 2014, Management reassessed the nature of gross revenue tax in Brazil and determined that it is better classified as a reduction of revenue due to the starting point for determining the amount of tax paid being more dependent on the amount of gross sales than on a concept of a taxable profit Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured as the present value of the expected expenditures required to settle the obligation using a pretax discount rate that accounts for time value of money and risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense Trade Payables Trade Payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method and are classified as current liabilities Revenue Recognition Revenue comprises the fair value of the consideration receivable for the sale of services and charter in the ordinary course of the Group s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts and after eliminated sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised as follows: Charter revenues are recognised on a straight-line basis over the contract period during which the services are rendered, and at the rates established in the underlying contracts. Under some contracts, the Company is entitled to additional payments for meeting or exceeding certain performance targets. Such additional payments are recognised when any uncertainties are resolved or upon completion of the drilling program. Penalties imposed as compensation to the customer for delivery of a rig later than contractually agreed shall be accrued for on a separate account in the balance sheet at the date the charter contract commences. If any part of the penalty is recoverable from vendors due to directly correlated delays caused by them, the penalty recoverable from the vendor shall offset the accrual of penalties payable to the customer. The net accrued amount is amortised over the fixed term of the charter contract as a reduction of income. Sevan Drilling Mobilisation expenses are offset by mobilisation revenues and recognised using the straight line method over the full fixed term of the underlying charter contract, and classified as operating expense. Interest income is recognised on a time-proportion basis using the effective interest method. Up to 31 December 2013, the Group classified the gross revenue tax in Brazil as tax expense. In 2014, Management reassessed the nature of this expense and determined that it is better classified as a reduction of revenue due to the starting point for determining the amount of tax paid being more dependent on the amount of gross sales than on a concept of a taxable profit Operating Expenses Rig operating expenses are costs associated with operating a rig that is either in operation or stacked, and include the remuneration of offshore crews and related costs, rig supplies, insurance costs, expenses for repairs and maintenance as well as costs related to onshore personnel in various locations where we operate the rigs and are expensed as incurred Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. When assets owned by the Group are leased to customers under an operating lease, the asset is included in the balance sheet based on the nature of the asset. Note 2 Accounting Estimates and Judgements Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are assumed to be reasonable under current circumstances. 2.1 Critical Accounting Estimates and Assumptions The Group makes estimates and assumptions concerning the future. These estimates and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. 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. Impairment of assets The Group has tested whether its rigs have suffered any impairment, in accordance with the accounting policy stated in Note 1.8. 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 recognises 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 recognised, 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 tax assets relies upon management s judgment of the Group s ability to generate future positive taxable income in each respective jurisdiction. Up to 31 December 2013, the Group classified the gross revenue tax in Brazil as tax expense. In Q1 2014, Management reassessed the nature of this expense and determined that it is better classified as a reduction of revenue due to the starting point for determining the amount of tax paid being more dependent on the amount of gross sales than on a concept of a taxable profit. This is a reclassification of an item on the Income Statement which has no impact on net D 15

146 Sevan Drilling income. There is furthermore no impact on the Statement of Comprehensive Income, the Balance Sheet, the Statement of Changes in Equity, or the Cash Flow Statement. The change has been made retrospectively. Residual value and useful life The Group uses estimates when assessing a capital asset s useful life and residual value to determine the depreciation plan for each unit in operation. The actual lives and residual values of these assets can vary depending on a variety of factors. 2.2 Impairment testing In line with IAS 36, the Group reviews the carrying amounts of its tangible assets at the end of each reporting period to determine whether there is any indication that those assets may be impaired. The net asset value of the Group exceeded its market capitalisation as at 31 December This is identified as an indicator of a need for impairment of major assets. As a result, each of the Group's rigs was, as of 31 December 2014, identified as a cash-generating unit and tested for impairment. The Sevan Developer was not considered for impairment in this period as the rig is not in service and the investment is secured by bank guarantees. Note 3 Financial risk management The Group s activities expose it to a variety of financial risks. The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. The risk management program includes focusing on the unpredictability of financial markets and seeks to minimise potential adverse effects of such risks on its financial performance. Risk management for the Group is carried out by the Treasury function that is integrated in Seadrill. However, final authority is retained in the Company. Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units within the Group. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign currency risk, price risk interest rate risk, credit risk, and liquidity risk. Foreign Currency risk The Group s assets are nominated in US Dollar and most of the Group s revenues are also nominated in US Dollar. Part of the revenue from both Sevan Driller and Sevan Brasil contracts with Petrobras is nominated in Brazilian Reais. This revenue split on Brazil contracts corresponds to the Group s costs in Reais and represent a natural hedge. The Group may use forward contracts to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. As of 31 December 2014, no forward contracts have been entered. The consequence of a change in exchange rates +/- 5% on profit or loss and equity for USD / BRL is USD 0.3 million. The Group s sensitivity to foreign currency has increased during the current year mainly due to the increase in sales and purchases denominated in BRL in the last quarter of the financial year which has resulted in higher BRL denominated trade receivables and payables. Price risk Changes to the price level of goods and services acquired may affect the Group, thereafter price developments are carefully monitored. The Group seeks to handle the risk through contract clauses with its customers. Furthermore, operating cost inflation is mitigated through annual dayrate adjustments with Petrobras in Brazil for Sevan Driller and Sevan Brasil. Interest rate risk All of the Group s debt is subject to interest rates which fluctuate with the market. A change in interest rate of +/- 1% would affect the Group interest cost with +/- USD 15.2 million (2013: 14.0 million). This sensitivity analysis has been determined based on an assumption that the amount of the liability outstanding at the end of the reporting period was Sevan Drilling outstanding for the whole year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to the Board and represents Management s assessment of the reasonably possible change in interest rates. The Group continuously considers whether part of the interest rate exposure should be hedged. As of 31 December 2014, no interest rate hedges have been entered. Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Group has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. The market for the Company s services is the offshore oil and gas industry. The customers consist primarily of major integrated oil companies, independent oil and gas producers and government-owned oil companies. The Company performs ongoing credit evaluations of its customers and generally do not require collateral in our business agreements. Our current counterparties are Petrobras for Sevan Driller and Sevan Brasil, and LLOG for Sevan Louisiana. The Group has not had a history of collection problems or significant disputes, and continues to monitor specific situations with these customers. Thus no provision for doubtful accounts has been recognised in the periods presented. Liquidity risk The Group s objective is to maintain flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This may include maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Liquidity is sensitive to operational uptime on the units performing contracts in connection with management s ability to control costs. Reference is made to Note 16 for a maturity analysis of the Group s financial liabilities. The Group has an unfunded contingent construction liability for USD million for the final instalment when the Sevan Developer is delivered. In October 2014, the Group entered into an agreement with Cosco to defer the delivery date for 12 months with options to extend it for successive 6 month periods until October At the end of the deferral period if options to extend are not exercised, the construction contract will terminate and the USD million initial investment will be refunded. Refund guarantees have been provided for the full deferral period. Delivery will occur when an operating contract can be secured that supports financing of the final delivery instalment. Subsequent to the deferral agreement, the Company cancelled tranche B under the bank facility that was available for funding the final instalment. In December 2014, the Company amended the terms of the RCF. The amended terms increased the available amount to USD 300 million with an interest margin of 6% and extended the expiry date to December At year-end, USD 115 million was drawn on the facility. With these amended terms and cash flow from operations, the Company is forecasting adequate liquidity for the next 12 to 24 months. If the RCF cannot be renewed at expiry or replaced with another facility on similar or better terms there is a risk that the Company does not have adequate liquidity beyond The Group has no covenants at the balance sheet date. However, the Group could be impacted if Seadrill breaches any of its covenants. D 16

147 Sevan Drilling Note 4 Revenue In line with the Group's accounting policies, revenue comprises the fair value of the consideration receivable for the sale of services and charter in the ordinary course of the Group's activities, net after applicable taxes on revenue. All revenue is based on three contracts with two customers. There is no inter-segment revenue. All revenue is from continuing operations. Revenues from external customers by country, based on the destination of the customer: Figures in USD million Brazil US Other countries Total Revenue applicable to Brazil is derived from a single external customer during 2014 and Revenue applicable to US is derived from a single external customer during Note 5 Operating expense Operating expense Figures in USD million Expenses incurred during day to day operations Total operating expense Office cost (IT, rental etc) Consultancy Marketing Other Total other operating expense The amount classified as "Other" includes management charges from subsidiaries of the Group s immediate controlling party, Seadrill Limited. Management fees charged in 2014 amounted to USD 24.5 million. Management charges included pre-commencement rig services, rig crew and staff management services, technical and commercial management services, insurance arrangements, accounting services, fuel procurement as well as other additional services. Specification of auditor's fee (excl. VAT) Figures in USD million Statutory audit Other assurance services Tax consulting Other assistance from auditor Total audit fees Sevan Drilling Note 6 Employee Benefit Expense Figures in USD million Wages and salaries Bonuses Employer's contribution tax Pension costs Share based payment - option cost Other employee benefit expense Total employee expense Average no. of man-years Remuneration of Senior Management and Board of Directors Retirement benefits Other benefits 2014 Share Options (thousand) Figures in USD thousand Salaries Scott McReaken CEO / CFO Pascal Busch VP QHSE Mar-14 Eileen Aspehaug VP HR Erling Lind * Chairman Kristian Johansen Vice chairman Benedicte S. Fasmer Board member Jun-14 Birgitte R. Vartdal Board member Start date Per Wullf Board member Ragnhild M. Wiborg Board member Jun-14 Total remuneration paid 1, ,312.3 End date * Invoiced from Advokatfirmaet Wiersholm AS The table shows compensation paid during the year and calculated using average exchange rates for the year. No loans were granted to the CEO, the Chairman of the Board, or to any other related party. No bonuses were paid in 2014 to direct employees, terminated employees or the Board. Other benefits include severance paid as a result of the restructuring activities. For the Group in total USD 2.3 million was paid in 2014 for severance (2013: USD 6.9 million). In 2014 Kristian Johansen has been the leader of the audit committee and in June 2014, Birgitte R. Vartdal replaced Benedicte Schilbred Fasmer as a member of the audit committee. D 17

148 Sevan Drilling Remuneration of Senior Management and Board of Directors Retirement benefits Other benefits 2013 Share options (thousand) Figures in USD thousand Salaries Scott McReaken CEO / CFO Nov-13 Scott Kerr CEO , ,600 Nov-13 Jon Willmann CFO ,100 Dec-13 Bjørn Egil Gustavsen VP Projects Oct-13 Gilberto Cardarelli VP Brazil Feb-13 Dec-13 Paul Grimen VP Operations , Sep-13 Pascal Busch VP QHSE Eileen Aspehaug VP HR Åsmund Erlandsen COO Jul-13 Sep-13 Erling Lind * Chairman Kristian Johansen Vice chairman Kitty Hall Board member Jul-13 Benedicte S. Fasmer Board member Start date Birgitte R. Vartdal Board member Jul-13 Per Wullf Board member Total remuneration paid 4, ,040.3 End date * Invoiced from Advokatfirmaet Wiersholm AS The table shows compensation paid during the year and calculated using average exchange rates for the year. Share options may be granted to directors and to selected employees as a long term incentive. Due to change of control in July 2013, all options were vested as at 27 September 2013 and expire by 31 December No options were granted in Movements in number of share options outstanding and related weighted average exercise prices are as follows: Average exercise price per share option Options (thousands) Average exercise price per share option Option (thousands) At 1 January NOK ,783.3 NOK ,403.3 Granted - - NOK ,782.8 Forfeited - - NOK ,126.7 Exercised Expired At 31 December NOK ,783.3 NOK ,783.3 Out of the 9,738,326 outstanding options (2013: 9,738,326 options), 9,738,326 options (2013: 9,738,326) were exercisable. No options were exercised in 2014 or 2013, and the options were excluded from the earnings per share calculation as they are antidilutive. Sevan Drilling Note 7 Financial Income and Financial Expense Currency gains and losses relating to operational activities were classified as a separate line item as an operational expense in the Income Statement and are not included in the tables below. Currency gains and losses relating to financing activities were presented as separate line item as a financial income/(expense) in the Income Statement. Figures in USD million Financial income: Interest income Total financial income Financial expense: Interest expense Amortisation of finance fees Realized hedging loss/(gain) Guarantee fees to Sevan Marine ASA Commitment and guarantee fees to Seadrill Other finance (income)/expense Total financial expense Note 8 Income Tax Expense Figures in USD million Current tax Change deferred tax Net tax expense Profit/(loss) before tax Tax at domestic tax rates applicable to profits in holding company (Norway 27%) Currency translation adjustment Write-down of deferred tax asset Additional unrecognized deferred tax asset Impact of change in statutory tax rate Effect of other tax jurisdictions Tax expense Total tax expense in 2014 was USD 6.5 million represented by a provision of USD 2.7 million related to tax liability for operations in China from 2011 to 2014 under the Cosco project management vendor contracts for the Sevan Louisiana and Sevan Developer, and taxes as a consequence of Sevan Louisiana operating in US Gulf of Mexico. At the reporting date, the Group has total Norwegian tax losses carried forward of NOK 2,222.3million (USD million) (2013: NOK 1,507.1 million - USD million) with no expiration date and a tax value of NOK 600.0million (USD 80.7 million) (2013: NOK million - USD 71.7 million) for which no deferred tax asset is recognised in the balance sheet. Note 9 Dividend per Share No dividend was paid in No dividend will be proposed to the 2015 AGM. D 18

149 Sevan Drilling Note 10 Earnings per Share Profit/(loss) attributable to equity holders of the Company (USD thousand) -124, ,562 Weighted average number of ordinary shares on issue (thousands) 594, ,725 Basic and diluted earnings per share (USD per share) Basic earnings per share were calculated by dividing the profit/(loss) attributable to equity holders in the Company by the weighted average number of ordinary shares in issue during the year. Options are anti-dilutive at 31 December 2014 and 2013, and not included in calculating diluted earnings per share. The basic and diluted earnings per share figures are identical in 2014 and Note 11 Property, Plant and Equipment Year ended December 31, 2014 Construction in Unit in Operation Total Drilling Other Fixed Figures in USD million Progress (CIP) (UIO) Rigs Assets Assets Book value 1 January , , ,935.8 Additions Disposals Transfer to UIO Impairment Depreciation Book value 31 December , , ,834.9 Total Fixed Cost , , ,140.4 Transfer to UIO Accumulated impairment Accumulated depreciation Book value 31 December * 1, , ,834.9 * USD million secured by guarantees from the shipyard. Year ended 31 December 2013 Construction in Unit in Operation Total Drilling Other Fixed Figures in USD million Progress (CIP) (UIO) Rigs Assets Assets Book value 1 January , , ,512.9 Additions Depreciation Book value 31 December , , ,935.8 Total Fixed Cost , , ,076.6 Accumulated impairment Accumulated depreciation Book value 31 December , , ,935.8 An interest rate of 5% is used for capitalisation. Capitalised borrowing cost in 2014 was USD 5.5 million (2013: 6.4 million), which are borrowing costs incurred during the construction and mobilisation phase for Sevan Louisiana and Sevan Developer. Security arrangements relating to drilling units are described in Note 21 and commitments relating to capital expenditure are described in Note 22. Sevan Drilling The key assumptions applied in the value in use calculation for the purpose of impairment testing of rigs in operation include a discount rate and expected future cash flows. To discount the future cash flows, Management used a pre-tax weighted average cost of capital (WACC) of 9.5%. Estimated future cash flows are based on the Group s five-year forecast and utilise several assumptions including forecasted operational expense, operational taxes, utilisation (86% to 95%) and day rates (mid 300,000 per day with a recovery to mid 400,000 per day by 2020). Day rates are based on current contract amounts for the remaining contract term and expected market rates in the rigs re-contract years for forecasts beyond the contracted periods. Management has assumed no growth above these expected market rates for the remainder of the rig lives beyond the five-year forecast. Due to the significant decline in demand in the ultra deep-water drilling market and the timeline for a projected recovery thereof, Management concluded that recoverable values of Sevan Driller and Sevan Brazil are less than their carrying amounts. Therefore, the carrying amounts of these rigs have been reduced to their estimated recoverable values through a non-cash impairment. Specifically, Sevan Driller was impaired USD 29.3 million and Sevan Brazil was impaired USD 72.3 million. Based on sensitivity analyses performed, Management believes that reasonable movements in the key assumptions could result in a further impairment loss to be recognised. Thus there is a possibility the Group may recognise impairment in the following year if the facts underlying the key assumptions change during the year. An increase in the WACC of 100 basis points would result in further impairment of approximately USD 94.0 million, and a reduction of expected market rates in the re-contract years of 10% would result in impairment of approximately USD 68.7 million. Note 12 Other Non-Current Assets Figures in USD million Net late delivery penalties Net mobilisation expense Others Total other non-current assets Net late delivery penalties include penalties incurred for the late delivery of the service element of the charter contract for Sevan Driller and Sevan Brasil. Net late delivery penalties will amortise over the fixed contract period as a reduction in operating revenue. Net mobilisation will amortise over the fixed contract period as an operating expense.. D 19

150 Sevan Drilling Note 13 Subsidiaries Overview of the Group structure as of 31 December 2014: Functional Subsidiaries Registered office Interest held currency Sevan Drilling Rig II AS Norway 100% USD Sevan Drilling AS Norway 100% USD Sevan Drilling Rig V AS Norway 100% USD Sevan Drilling Rig VI AS Norway 100% USD Sevan Drilling Management AS Norway 100% USD Sevan Drilling Rig VIII AS Norway 100% USD Sevan Drilling Pte Ltd Singapore 100% USD Sevan Drilling Rig II Pte Ltd Singapore 100% USD Sevan Drilling Rig IV Pte Ltd Singapore 100% USD Sevan Drilling Rig V Pte Ltd Singapore 100% USD Sevan Drilling Rig VI Pte Ltd Singapore 100% USD Sevan Drilling Rig VII Pte Ltd Singapore 100% USD Sevan Drilling Rig VIII Pte Ltd Singapore 100% USD Sevan Drilling Rig IX Pte Ltd Singapore 100% USD Sevan Drilling Limited UK 100% USD Sevan Drilling North America LLC USA 100% USD Sevan Drilling Limited Bermuda 100% USD Sevan Driller Ltd Bermuda 100% USD Sevan Brasil Ltd Bermuda 100% USD Sevan Developer Ltd Bermuda 100% USD Sevan Louisiana Hungary KFT Hungary 100% USD Sevan Marine Servicos de Perfuracao Ltda Brazil 100% BRL Sevan Investimentos do Brasil Ltda Brazil 100% BRL Note 14 Inventories Figures in USD million Diesel stock on-board Spares on-board Sevan Driller Spares on-board Sevan Brasil Spares on-board Sevan Louisiana Inventories net Note 15 Trade and Other Receivables Figures in USD million Trade receivables Trade receivables net Prepayments Other receivables Trade and other receivables The Group did not make any losses on receivables during 2014 and The Group did not make any provisions relating to receivables during 2014 and Sevan Drilling Fair value of trade and other receivables were as follows: Figures in USD million Trade receivables Prepayments Other receivables Total trade and other receivables Trade receivables that are less than three months past due are generally not considered for impairment. Ageing of trade receivables was as follows: Figures in USD million Before due date Up to 3 months after due date Total trade receivables net Carrying amounts of trade receivables were denominated in the following currencies: Figures in USD million USD BRL Total trade receivables net Note 16 Interest-Bearing Debts Figures in USD million Non-current liabilities Bank borrowings 1, ,196.1 Borrowings from related parties Other non-current liabilities Total non-current liabilities 1, ,196.2 Total borrowings Bank loans Bank credit facility 1, ,196.1 Revolving credit facility with Seadrill Non-current 1, ,196.1 Bank credit facility Current Total 1, ,369.2 Total borrowings include secured liabilities (bank and collateralised borrowings) of USD 1,206.0 million (2013: USD 1,369.2 million) see Note 21 for additional discussion of collateral arrangement. The bank credit facility is a USD 1,750 million facility of which USD 1,400 million has been drawn. The undrawn tranche B of the bank credit facility amounting to USD 350 million was cancelled in December 2014 as a consequence of the arrangement made with Cosco to defer the delivery date of Sevan Developer. Bank credit facility As at December 2014, the weighted interest rate is 2.84%.Basic term is divided between Libor +2.50% for GIEK tranche and Libor +2.90% for Commercial tranche. As Seadrill is acting as guarantor on the bank credit facility, the Group incur a guarantee fee payable to Seadrill Limited at 1.00% per annum on the drawn amount of the bank credit facility. D 20

151 Sevan Drilling Borrowings from related parties USD 300 million revolving credit facility with Seadrill Limited Interest is charged on the principal amount outstanding at Libor %. A commitment fee is calculated at 2.40% per annum on the unutilized commitment of the facility. The borrowing with related parties can not be cancelled by either party until the final maturity date set out in the revolving credit facility contract (31 December 2016). The carrying amounts and fair value of the non-current borrowings are as follows: Carrying Amount Fair Value Figures in USD million Bank borrowings 1, , , ,196.1 Borrowings from related parties Total 1, , , ,196.1 The group has the following undrawn borrowing facilities: Floating rate Expiring within one year Expiring beyond one year Total un-drawn debt facilities The USD 185 million undrawn facility expiring beyond one year is the RCF. This has a commitment fee at market rates. Figured in USD millions Payment schedule month 6 12 month Year 2 Year 3 Year 4-5 Later Borrowings (including interest) Trade payable Accrued expenses relating to trade payables Total The table above details the Group s remaining contractual maturity for non-derivative financial liabilities with agreed repayment periods based on undiscounted cash flows on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. Note 17 Current Liabilities Figures in USD million Trade payables Accrued expenses relating to trade payables Total trade payables Current portion of bank borrowings Income and gross revenue tax payable Other taxes payable (advance tax, employer contribution, VAT, etc.) Payable to related parties Other payables Total other current liabilities Total current liabilities Sevan Drilling Note 18 Share Capital The total authorised number of ordinary shares was million (2013: million) with a par value of NOK 1 per share. All issued shares were fully paid in at balance sheet date. Number of Share Share shares Total capital premium 1 January ,623, Proceeds from shares issued December ,623, Number of Share Share shares Capital premium Total 1 January ,625, Proceeds from shares issued 257,998, December ,623, List of 20 major shareholders at January 2, 2015 Shares Voting share **DNB NOR MARKETS, AKS 209,805, % **SKANDINAVISKA ENSKILDA BANKEN AB Oslofilialen 76,828, % J.P. MORGAN CHASE BANK N.A. London NORDEA TREATY ACCOUNT 32,718, % PERESTROIKA AS 20,000, % ODIN OFFSHORE 17,752, % WENAASGRUPPEN AS 17,208, % THE BANK OF NEW YORK MELLON BNY MELLON 15,540, % SKAGEN VEKST 13,252, % US BK EVERMORE GLO VAL 10,392, % VERDIPAPIRFONDET DNB NORGE (IV) 9,221, % J.P. MORGAN CHASE BANK JPMCB NA RE DEPO JPM 6,014, % SKANDINAVISKA ENSKILDA BANKEN AB A/C CLIENTS ACCOUNT 5,250, % DNB LIVSFORSIKRING ASA 3,000, % NIKI A/S 2,500, % MP PENSJON PK 2,106, % NHO- P665AK JP MORGAN CHASE BANK 1,908, % VALSET INVEST AS 1,900, % INVESTTECH INVEST AS 1,800, % NORDNET PENSJONSFORS 1,656, % PER BERGER 1,595, % Total, 20 largest shareholder accounts 450,453, % Total no. of shares 594,623,436 Foreign ownership (Citizenship/Country of registration) 93,723, % **Seadrill holds its shares in the Company through forward contracts with the banks identified above. D 21

152 Sevan Drilling Note 19 Cash Generated from Operations Figures in USD million Profit/(loss) before tax Adjustments for: - Depreciation, amortisation and impairment Net finance items Other non-cash items Changes in working capital: - Inventory Trade and other receivables Trade and other payables Other current liabilities Cash generated from operations Note 20 Operating Leases At balance sheet date, the Group has entered into lease- and rental-obligations: Lease and rental obligations Figures in USD million No later than 1 year Between 1-5 years Total lease and rental obligations Future lease payments receivable under charter contracts: Figures in USD million No later than 1 year Between 1-5 years Later than 5 years Total minimum future charter revenues 1, ,353.0 Order back-log for charter revenue: Fixed term (years) Option Periods (years) Commencement Unit Client Sevan Driller Petrobras S.A. 6 N/A 12 June 2010 Sevan Brasil Petrobras S.A. 6 N/A 24 July 2012 Sevan Louisiana LLOG 4 N/A 28 May 2014 Sevan Driller and Sevan Brasil have option periods available at the expiry of the fixed term of the contract. In November 2014, Sevan Louisiana contract was amended whereby the rig earns a revised dayrate of USD 350,000 per day and the contract was extended for 12 months to May 2018, cancellable with a 365 day notice until May Sevan Drilling Note 21 Securities for Debt The Group has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business. At balance sheet date, the Group is party to the following security arrangements: The bank credit facility is secured, on a cross-collateralized basis, by a first priority mortgage over Sevan Driller, Sevan Brasil, Sevan Louisiana; a guarantee from Seadrill and each of the subsidiaries Sevan Drilling Pte Ltd, Sevan Drilling Rig II Pte Ltd, Sevan Drilling Rig V Pte Ltd, Sevan Driller Ltd, Sevan Brasil Ltd, Sevan Louisiana Hungary Kft, Sevan Drilling Limited, Sevan Drilling Rig II AS and Sevan Drilling North America LLC; a pledge over the shares issued by these subsidiaries; first priority security interest over each of these subsidiaries' rights with respect to all earnings and proceeds of insurance; and a first priority security interests in the bank accounts opened and maintained in the name of each of these subsidiaries in which all hires, freights, income, insurance proceeds and other sums payable in respect of the rigs are credited. The RCF is secured, on a cross-collateralized basis, by a second priority mortgage over Sevan Driller, Sevan Brasil and Sevan Louisiana. Note 22 - Commitments Figures in USD million Sevan Louisiana Sevan Developer Total capital commitments The Group has an unfunded contingent construction liability for USD million for the delivery instalment when the Sevan Developer is delivered. In October 2014, the Group entered an agreement with Cosco to defer the delivery date for 12 months with options to extend the date for subsequent periods of 6 months until October At the end of the deferral period and if options to extend are not exercised, the construction contract will terminate and the USD million initial investment will be refunded and the investment impaired. Refund guarantees have been provided for the full deferral period. Delivery will occur if and when a contract that can support financing of the final delivery instalment is secured. Note 23 Financial Instruments by Category and Credit Quality of Financial Assets The classification of financial instruments as loans and receivables or assets and liabilities at fair value through profit or loss is shown below. The Group s financial instruments held as at 31 December 2014 consist of cash, trade receivables, trade payables, and bank borrowings measured at amortised cost with variable interest rates. Management believes that carrying value approximates fair value for all the Group s financial instruments. Management believes all financial instruments held at 31 December 2014 are classified as Level 3 in the fair value hierarchy. No interest rate swaps were held at 31 December 2014 or The different levels are defined as: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) D 22

153 Sevan Drilling Accounting principles or financial instruments were applied to the line items below as indicated: Figures in USD million 31 December 2014 Financial assets Trade and other receivables Cash and cash equivalents Total financial assets December 2013 Loans and receivables Loans and receivables Assets at fair value through profit and loss Total Assets at fair value through profit and loss Total Financial assets Trade and other receivables Currency forwards Cash and cash equivalents Total financial assets Other financial liabilities Liabilities at fair value through profit and loss Total 31 December 2014 Financial liabilities Interest-bearing debt 1, ,321.0 Trade payables Total financial liabilities 1, ,362.1 Other financial Liabilities at fair value through 31 December 2013 liabilities profit and loss Total Financial liabilities Interest-bearing debt 1, ,369.2 Trade payables Total financial liabilities 1, ,443.7 Credit Quality of Financial Assets The credit quality of financial assets that were neither past due nor impaired was assessed by reference to external credit ratings (where available) and by analysis of historical information about counterparty default rates: Figures in USD million Cash at bank and short-term bank deposits A A A BBB BBB No rating available - - Total cash and cash equivalents Sevan Drilling Figures in USD million Trade receivables - Counterparty with external credit rating BBB BB Total Trade receivables - Counterparty without external credit rating Group Group Group Total Total trade receivables Group I - New customers (less than 6 months) Group 2 - Existing customers (more than 6 months) with no defaults in the past Group 3 - Existing customers (more than 6 months) with some defaults in the past Note 24 Related Party Transactions Balances and transactions between the entities within the Group have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Seadrill owns 50.11% of the Company's shares. The Group has since been consolidated in Seadrill's accounts, which can be found at Seadrill has guaranteed the bank facility referred to in Note 16. Seadrill is providing the RCF of which USD million was outstanding as of 31 December Seadrill charged the Group interest on the RCF and guarantee and commitment fees in a total amount of USD 15.9 million in Seadrill also provides management support and administrative services to the Group for which a fee of USD 24.5 million was charged during the year. As a consequence of being responsible for the day-to-day operation of the Group's rigs, Seadrill entities incur direct costs on behalf of the Group. The Group had a total current liability (including the commitment, guarantee and management fees mentioned above) of USD 47.8 million to Seadrill as at 31 December 2014 (compared to USD 6.8 million as at 31 December 2013). Note 25 Events After Balance Sheet Date The Group has evaluated subsequent events after the balance sheet date through the date the accompanying consolidated financial statements became available to be issued. On 23 April 2015, the Group intends to call the annual general meeting, including consideration of the previously announced migration plan which will move the parent company function from Norway to Bermuda. D 23

154 Sevan Drilling Sevan Drilling ASA Financial Statements For the Period Ended 31 December 2014 Sevan Drilling Sevan Drilling ASA Financial Statements Sevan Drilling ASA Statement of Income Figures in USD Note Operating revenue 4 59,220,333 58,486,824 Operating expense -43,347,407-56,508,720 Employee benefit expense 7,8-6,820,229-8,690,432 Depreciation and amortisation expense 6-298, ,730 Other operating expense -23,281,059-18,785,449 Operating foreign currency gain/(loss) 9, ,809 Total operating expense -73,737,709-84,741,140 Operating (loss)/profit -14,517,376-26,254,316 Gain on sale of assets 1,050,563 - Interest income 1, ,469 Intercompany interest income 11 19,388,952 16,564,027 Interest expense -15,989,126-70,680 Impairment on investment in subsidiaries ,459,948 - Other financial income/(expense) -310, ,484 Financial foreign currency loss - -3,256,741 Net financial items -710,318,695 13,794,559 Loss before tax -724,836,071-12,459,757 Tax (expense)/income ,293,430 Net loss -724,836,071-28,753,187 Brought forward To other equity -724,836,071-28,753,187 Net brought forward -724,836,071-28,753,187 The notes on pages 52 to 61 are an integral part of these financial statements D 24

155 Sevan Drilling Sevan Drilling ASA Statement of Financial Positions Note Assets Non-current assets Tangible fixed assets Equipment and other movables 6-3,946,167 Other non-current assets - 584,829 Total tangible fixed assets - 4,530,996 Financial assets Investments in subsidiaries ,273, ,586,497 Loans to group companies ,379,573 Total financial assets 111,273, ,966,070 Total non-current assets 111,273, ,497,066 Current assets Receivables Accounts receivables 9-35,705 Accounts receivables from group companies 11 7,459,856 27,296,899 Other receivables 9-4,533,521 Total receivables 7,459,856 31,866,125 Cash and bank deposits 10 4,551,270 74,049,297 Total current assets 12,011, ,915,422 Total assets 123,285, ,412,488 The notes on pages 52 to 61 are an integral part of these financial statements Sevan Drilling Sevan Drilling ASA Statement of Financial Positions Equity and liabilities Restricted equity Share capital 2, 3, ,624, ,624,189 Share premium 2 14,660, ,904,128 Total restricted equity 123,285, ,528,317 Retained earnings Other equity 2-84,508,190 Total retained earnings - 84,508,190 Total equity 123,285, ,036,507 Liabilities Pension obligation 7-100,753 Loans from group companies ,173 Total long term liabilities - 508,926 Current liabilities Trade creditors 9-6,447,675 Accounts payable to group companies 11-20,999,976 Tax payable 5-34,639 Public duties payable 9-2,802,678 Other short term liabilities 9-6,582,086 Total short term liabilities - 36,867,054 Total liabilities - 37,375,980 Total equity and liabilities 123,285, ,412,487 The notes on pages 52 to 61 are an integral part of these financial statements Oslo, 23 April 2015 The Board of Directors Sevan Drilling ASA Erling Lind Kristian Johansen Ragnhild Wiborg Chairman Vice chairman Board member Per Wullf Birgitte Ringstad Vartdal Scott McReaken Board member Board member Managing Director D 25

156 Sevan Drilling Sevan Drilling ASA Statement of Cash Flow Figures in USD Note Cash flows from operation activities Profit/(loss) before tax -724,836,071-12,459,757 Depreciation and write downs 298, ,730 Impairment 714,459,948 - Gain on sale of assets -1,050,563 - Other non-cash 3,340,888-9,535,726 Currency effects -9,446 3,457,550 Change in trade and other receivables 3,788,473-3,454,306 Change in trade creditors -5,220,869 3,719,014 Change in other accruals -7,605, ,371 Net cash (used by)/generated from operating activities -16,834,969-51,046,866 Cash flows from investment activities Purchases of tangible assets - -3,460,717 Change in intercompany balances -167,663,058-53,951,410 Net cash used in investing activities -167,663,058-57,412,127 Cash flows from financing activities Increase in loans from related parties 115,000,000 - Increase in equity (share issue) - 184,740,060 Transaction costs on share issue - -5,872,387 Net cash generated from/(used by) financing activities 115,000, ,867,673 Net cash flow for the period -69,498,027 70,408,680 Cash balance at beginning of period 74,049,297 3,263,556 Cash brought in via merger of group companies - 514,315 Currency effect bank deposits ,254 Cash and cash equivalents at end of the year 4,551,270 74,049,297 Cash and bank deposits actual 4,551,270 74,049,297 Difference - - The notes on pages 52 to 61 are an integral part of these financial statements Sevan Drilling Notes to Sevan Drilling ASA Financial Statements Note 1- Accounting policies Sevan Drilling s financial statements have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting principles. The functional currency for the company is USD as this is the currency by which the Company is financed. The functional currency in the subsidiaries is USD and any potential future dividends will be nominated in USD. All numbers are in USD 1 unless otherwise stated. Revenue Recognition Revenue and operating expenses are related to long term contract arrangements with Cosco in China, whereby the Group provides Cosco with services related to project management, site supervision, and engineering consulting, as well as providing pre-ops spare parts to the rigs under construction. The contracts with Cosco were concluded 10 November Revenue is recognised according to the percentage of completion method. The degree of completion is calculated as expenses incurred as a percentage of estimated total expense. Expenses are recognized as the goods and services are provided. Total expenses are reviewed on a regular basis. If the projects are expected to result in losses, the total estimated loss is recognised immediately. This revenue and operating expense is eliminated at the Group level, as the costs are part of the rig value acquired by the rig owning entities. Main principle for evaluation and classification of assets and liabilities Current assets and current liabilities include items with a due date within one year after the transaction date, as well as items relating to the operating cycle. Other items have been classified as non-current assets and non-current liabilities. Current assets are measured at the lower of purchase cost and fair value. Short-term liabilities are recognized in the balance sheet at nominal value at the establishment date. Fixed assets are measured at purchase cost. The fixed assets are written down to net realizable value if a value reduction occurs that is expected to be permanent. Borrowings are recognized in the balance sheet at amortized value on the establishment date, equal to nominal value deducted for transaction costs. Other non-current liabilities are recognized at nominal value. Receivables Trade receivables and other receivables are recognized in the balance sheet at nominal value after deduction of provision for bad debt. Bad debt is provided for on the basis of an individual assessment of each receivable. Fixed assets Fixed assets are recognized in the balance sheet and depreciated over the asset's expected useful life on a straight-line basis. Maintenance of an asset is expensed under operating expenses as incurred. Additions or improvements are added to the asset's cost price and depreciated together with the asset. When the recoverable amount of the asset is exceeded by the carrying amount of the asset an impairment charge is recognized, and the asset is written down to recoverable amount. Recoverable amount is the highest of net sales value and value in use. Value in use is the net present value of future cash flows, which are expected to be generated from the asset. Leased assets are reflected in the balances sheet as assets if the leasing contract is considered a financial lease. Research and development Cost associated with research activities are expensed as incurred. Qualifying expense associated with development activities are capitalized and depreciated over their expected useful life. D 26

157 Sevan Drilling Cash and bank deposits Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. Currency Cash and bank deposits, current assets, and short-term liabilities nominated in other than functional currencies are converted using exchange rates that prevail on the balance sheet date. Taxes Deferred income tax liability/deferred tax asset is provided using the liability method on temporary difference at the balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. Leases Leases in which more than an insignificant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Shares in subsidiaries Investments in subsidiaries are measured under the fair value method. Group The Company will be consolidated into the Group accounts, with business address in Oslo. Cash flow statement The cash flow statement is prepared in accordance with the indirect method. Note 2- Equity Share capital Share premium Equity settled employee benefit reserve Other equity Total Equity 1 January ,624, ,904,128 1,265,403 72,325, ,119,265 Fair value adjustment of investments in subsidiary ,838 1,838 Net result for the year ,836, ,836,071 Distributed from share premium to cover net loss ,243, ,243,285 - Equity 31 December ,624,189 14,660,843 1,265,403-1,265, ,285,032 The other equity balance brought forward from 1 January 2014 has been updated to correct for a USD 10,917,242 misstatement relating to the prior year accounts for the merger of Group companies in Note 3- Share capital and shareholder information Nominal Share capital Number value (NOK) Registered Ordinary shares 594,623, ,623,436 Total 594,623, ,623,436 Sevan Drilling List of 20 major shareholders at 2 January 2015 Shares Voting share **DNB NOR MARKETS, AKS 209,805, % **SKANDINAVISKA ENSKILDA BANKEN AB Oslofilialen 76,828, % J.P. MORGAN CHASE BANK N.A. London NORDEA TREATY ACCOUNT 32,718, % PERESTROIKA AS 20,000, % ODIN OFFSHORE 17,752, % WENAASGRUPPEN AS 17,208, % THE BANK OF NEW YORK MELLON BNY MELLON 15,540, % SKAGEN VEKST 13,252, % US BK EVERMORE GLO VAL 10,392, % VERDIPAPIRFONDET DNB NORGE (IV) 9,221, % J.P. MORGAN CHASE BANK JPMCB NA RE DEPO JPM 6,014, % SKANDINAVISKA ENSKILDA BANKEN AB A/C CLIENTS ACCOUNT 5,250, % DNB LIVSFORSIKRING ASA 3,000, % NIKI A/S 2,500, % MP PENSJON PK 2,106, % NHO- P665AK JP MORGAN CHASE BANK 1,908, % VALSET INVEST AS 1,900, % INVESTTECH INVEST AS 1,800, % NORDNET PENSJONSFORS 1,656, % PER BERGER 1,595, % Total, 20 largest shareholder accounts 450,453, % Total no. of shares 594,623,436 Foreign ownership (Citizenship/Country of registration) 93,723, % **Seadrill holds its shares in the Company through forward contracts with the banks identified above. Shares and options owned or controlled by the Board of Directors Options Shares Scott McReaken, CEO - - Erling Lind, Chairman - - Kristian Kuvaas Johansen, vice chairman - 17,000 Benedicte Schilbred Fasmer, member of board until 19 June Birgitte Ringstad Vartdal, member of board - - Per Winther Wullf, member of board - - Ragnhild M. Wiborg, member of board from 19 June D 27

158 Sevan Drilling Note 4- Operating revenue Sales revenue 57,662,033 58,314,975 Other operating revenue 1,558, ,849 Total 59,220,333 58,486,824 Activity distribution Long term contract arrangements with Cosco 57,662,033 58,314,975 Other 1,558, ,849 Total 59,220,333 58,486,824 Geographical distribution China 57,662,033 58,314,975 Other countries 1,558, ,849 Total 59,220,333 58,486,824 Note 5- Taxes Tax expense Loss before tax -724,836,071-12,459,757 Permanent differences 127,075 6,817,984 Permanent currency differences 747,850,751 15,973,525 Changes in temporary differences -9,265,713-45,845,337 Tax basis 13,876,042-35,513,585 Profit/(loss) to be brought forward -13,876,042 35,513,585 Basis for taxes payable - - Taxes payable - - Change in deferred tax assets - 16,293,430 Tax expense/(income) - 16,293,430 Temporary differences Unrealised forex 45,199,184 35,022,733 Construction contracts 3,030,896 3,703,216 Pension liabilities 82, ,753 Piranema -772, ,825 Net temporary differences 47,540,084 38,274,371 Losses carry forward -72,257,399-86,133,441 Basis for deferred tax asset -24,717,315-47,859,070 Deferred tax asset 27% (2013: 27%) 6,673,675 12,921,949 Deferred tax asset in balance sheet - - Sevan Drilling Tax expense reconciliation Loss before tax -724,836,071-12,459,757 Expected tax charge -195,705,739-3,488,732 Tax charge in the profit and loss accounts - 16,293,430 Difference -195,705,739-19,782,162 Tax on permanent differences - -1,909,035 Effect of changed tax rate from 28% to 27% ,591 28% of permanent currency differences - -4,472,587 Unrecognised temporary differences -195,705,739-12,921,949 Explained difference -195,705,739-19,782,162 Note 6- Fixed assets IT equipment Office equipment Total fixed assets Cost as of 1 January ,335, ,731 4,656,109 Additions Disposals -4,335, ,731-4,656,109 Cost as of 31 December Accumulated depreciation 1 January , , ,942 Depreciation 97, , ,460 Disposals -670, ,658-1,008,402 Accumulated depreciation as of 31 December Net book value as of 31 December Annual rental of non-financial assets Non-financial assets Annual rent Office 49,937 Machines, furniture, fixtures 12,859 Other 81,449 Note 7- Employee benefit expense Employee benefit expense Salaries and vacation pay 5,514,946 3,522,885 Employer's share of social security 824,591 1,622,122 Pension costs 376, ,939 Other salary related costs 103,949 3,085,486 Total employee benefit expense 6,820,229 8,690,432 At December 31, 2014, there are four employees directly employed in the Company. The average man-years for the year ended 31 December 2014 was ten. Employment was transferred from the Company to Sevan Drilling Management AS at 31 December A management agreement was concluded between the parties effective from the same date. Included in salary and vacation pay is USD 100,258 in bonuses for The bonus is related to Group recognition of the bonus program. In 2013 the bonuses was USD 334,039. The Company's pension schemes meet the requirements of the law on compulsory occupational pension. The Group has an immaterial defined benefit pension plan for one employee in 2012, established in 2011 in Sevan Drilling D 28

159 Sevan Drilling Management AS and added to the Company's accounts as a result of the merger in The pension plan has now been transferred to Sevan Drilling Management AS as part of the management transfer agreement. No loans or guarantees have been granted to the CEO, the Chairman of the Board, or to any other related party. Remuneration of Senior Management and the Board of Directors Retirement benefits 2014 Other benefits Share options granted Name Title Salaries Scott McReaken CEO 710,055 13,787 31,835 - Erling Lind Board Chairman 79, Kristian Kuvaas Johansen Vice chairman 60, Benedicte Schilbred Fasmer Board member* 30, Per Winther Wullf Board member 55, Birgitte Ringstad Vartdal Board member 60, Ragnhild M. Wiborg Board member* 27, The Board members are not included in the Group's collective retirement benefit plans * Benedicte Schilbred Fasmer was a Board member until 19 June 2014 and was replaced by Ragnhild Wiborg on the same day Retirement benefits Other benefits Share options granted Name Title Salaries Scott McReaken CEO* 86,203 2,025 5,210 - Scott Kerr CEO* 943,611 21,574 1,290, Jon Wilmann CFO* 951,679 22, , Erling Lind Chairman of the Board 85, Kristian Kuvaas Johansen Vice chairman 61, Benedicte Schilbred Fasmer Board member 61, Kitty Hall Board member** 63, Per Winther Wullf Board member 61, Birgitte Ringstad Vartdal Board member** 21, * Scott Kerr and Jon Wilmann employment was terminated 15 November 2013 and 20 December 2013, respectively ** Kitty Hall was a Board member until 23 July 2013 and was replaced by Birgitte Ringstad Vartdal Auditor fees Statutory audit 279, ,394 Other assurance services 115, ,439 Tax consulting 68,188 46,141 Other assistance from auditor - 266,674 Total audit fees 463, ,648 Sevan Drilling Note 8- Share-based payments Share options may be granted to directors and to selected employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options shall vest with one third each year. Vesting of the options is conditional upon the recipient, on each of the vesting dates, remaining employed by the Company. The options may, once vested, be exercised at any time up to and including the date falling three years after the relevant vesting dates. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Due to change of control in 2013, all options were vested as at 27 September No options have been granted after this date. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows Average exercise price per share option Options (thousands) Average exercise price per share option Options (thousands) At 1 January NOK ,738.3 NOK ,403.3 Granted - - NOK ,376.7 Forfeited ,041.7 Exercised Expired At 31 December NOK ,738.3 NOK ,738.3 Out of the 9,738,326 outstanding options (2013: 9,738,326 options), 9,738,326 options (2013: 9,738,326) were exercisable. No options were exercised in 2014 or 2013, and the options were excluded from the earnings per share calculation as they are antidilutive. No options were granted in 2014 (2013: 1,376.7k). Note 9- Receivables and liabilities The Company has no receivables or liabilities with a due date later than five years as at 31 December 2014 and Note 10- Cash and bank deposits Taxes withheld from employees deposited in a restricted bank account - 1,772,674 Cash and other bank deposits 4,551,270 72,276,623 Total cash and bank deposits 4,551,270 74,049,297 Note 11- Intercompany transactions Remuneration to executives is disclosed in note 7. Statement of financial positions Long-term receivables from Group companies - 463,379,573 Accounts receivables from Group companies 7,459,856 27,296,899 Total receivables from Group companies 7,459, ,676,472 Long-term payables to Group companies - 408,173 Accounts payables to Group companies - 20,999,976 Total liabilities to Group companies - 21,408,149 D 29

160 Sevan Drilling Statement of Income Sales/(Purchases) of services to/from Group companies - - Interest income from Group Companies 19,388,952 16,564,027 Interest cost to Group companies - - Total income / (cost) from Group companies 19,388,952 16,564,027 Note 12- Investments in subsidiaries Net result for Company Address Ownership Book value Equity the year 2014 Sevan Drilling Limited Bermuda 100% 111,273,906 2,818,537 2,818,537 Total 111,273,906 2,818,537 2,818,537 In the fourth quarter 2014, the Company completed a contribution agreement with Sevan Drilling Ltd and a management transfer agreement with Sevan Drilling Management AS. Impairment on investment in subsidiaries for USD 714,459,948 was recognized as a result of the contribution agreement and migration plan. On 10 November 2014, the Company impaired investment in subsidiaries for USD 117,186,489. The impairment was recognized to fair value investments prior to contributing, with related intercompany balances, in exchange for equity in Sevan Drilling Ltd. of USD 708,547,365. In the first quarter 2015, the Company assessed the recoverable value of the Sevan Drilling Ltd. investment in relation to approving the migration plan. The Company concluded it would not be recoverable to the Company in the short-term, as the migration plan includes distributing the investment in Sevan Drilling Ltd to the shareholders of the Company. Therefore, an impairment of USD 597,273,459 was recorded to fair value to sales price (closing share price of the Company on the Oslo Børs at 31 December 2014 plus a sales premium) resulting in a fair value of USD 111,273,906. The management transfer agreement transferred all assets and liabilities to Sevan Drilling Management AS. The migration was carried out using the continuity method for both accounting and tax. Companies owned by subsidiaries Address Owner Ownership Sevan Drilling Rig II AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Drilling AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Rig V AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Rig VI AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Management AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Rig VIII AS Oslo Sevan Drilling Limited (Bermuda) 100% Sevan Driller Ltd Bermuda Sevan Drilling Limited (Bermuda) 100% Sevan Brasil Ltd Bermuda Sevan Drilling Limited (Bermuda) 100% Sevan Developer Ltd Bermuda Sevan Drilling Limited (Bermuda) 100% Sevan Louisiana Hungary KFT Hungary Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Pte Ltd Singapore Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Rig IX Pte Ltd Singapore Sevan Drilling Limited (Bermuda) 100% Sevan Drilling Rig II Pte Ltd Singapore Sevan Drilling Rig II AS 100% Sevan Drilling Rig IV Pte Ltd Singapore Sevan Drilling AS 100% Sevan Drilling Rig V Pte Ltd Singapore Sevan Drilling Rig V AS 100% Sevan Drilling Rig VI Pte Ltd Singapore Sevan Drilling Rig VI AS 100% Sevan Drilling Rig VII Pte Ltd Singapore Sevan Drilling Management AS 100% Sevan Drilling Rig VIII Pte Ltd Singapore Sevan Drilling Rig VIII AS 100% Sevan Drilling Limited UK Sevan Drilling Limited (Bermuda) 100% Sevan Drilling North America LLC USA Sevan Drilling Rig V AS 100% Sevan Investimentos do Brasil Ltda* Brazil Sevan Drilling Rig IX Pte Ltd 99.99% Sevan Marine Servicos de Perfuracao Ltda* Brazil Sevan Drilling Rig IX Pte Ltd 99.99% * 0.01% shareholding in Sevan Investimentos do Brasil Ltda and Sevan Marine Servicos de Perfuracao Ltda held by Sevan Drilling Limited (Bermuda) and Sevan Investimentos do Brasil Ltda respectively. Sevan Drilling Note 13- Earnings per share Profit/(loss) attributable to equity holders -724,836,071-28,753,187 Weighted avg. no. of ordinary shares 594,623, ,725,089 Earnings per share (basic and diluted) Basic earnings per share were calculated by dividing the profit/(loss) attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year. Options are anti-dilutive at 31 December 2014 and 2013, and not included in calculating diluted earnings per share. The basic and diluted earnings per share figures are identical in 2014 and Note 14- Financial risk management The Company s activities expose it to a variety of financial risks: market risk (foreign currency risk), credit risk, and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. Market risk Foreign currency risk The Company operates internationally and is exposed to foreign currency risk arising from various currency exposures, primarily with respect to the NOK, GBP and Euro. Foreign exchange risk arises when future commercial transactions or recognized assets and liabilities are denominated in a currency that is not an entity's functional currency. The Group aims to achieve a natural hedge between cash inflows and cash outflows by matching the currency of operating costs with the currency of revenue as well as the currency of financial assets with the currency of financial liabilities, and thus has minimal exposure of foreign currency risk on its trade receivables and payables. Credit risk Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Company has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. Liquidity risk Prudent liquidity risk management includes maintaining sufficient cash and marketable securities and the availability of funding from an adequate amount of committed credit facilities. It is the Company s objective to maintain flexibility of financing by providing sufficient withdrawal facilities and committed credit lines. Note 15- Related Party Transactions Seadrill owns 50.11% of the Company's outstanding shares. During 2014, the Company received operating revenue of USD 1.6 million from North Atlantic Norway Limited, a related party. North Atlantic Norway Limited entered into a contract with Exxon Exploration Inc. for the development of an Artic Mobile Offshore Drilling Unit and subcontracted this work to the Company. Seadrill is providing the RCF of which USD million was outstanding as of 31 December The RCF was payable by the Company up until the effective date of the contribution agreement. The liability has been transferred to Sevan Limited as part of the contribution agreement. Seadrill charged the Group interest on the RCF and guarantee and commitment fees of which USD 12.2 million is expensed to the Company in The Company has also been charged USD 8.9 million by related parties relating to recharges of personnel and consultancy costs in D 30

161 Sevan Drilling Note 16- Long- term contract Due (to)/from customers under long-term contract Opening balance 2,267,147-39,736,221 Billings -55,000,000-16,311,607 Contract revenue earned 57,662,033 58,314,975 Balance transferred to Sevan Drilling Management AS -4,929,180 - Ending balance - 2,267,147 Note 17- Events After Balance Sheet Date On 24 March 2015, the Company contributed USD 6,562,691 of an interest receivable in exchange for additional paid in capital in Sevan Drilling Ltd. The balance is an interest receivable related to an intercompany loan with another subsidiary that has been contributed to Sevan Limited on 10 November In April 2015, the Company will assess the fair value of the Sevan Drilling Ltd investment in order to present an audited interim balance sheet to the shareholders to propose approval for a share capital reduction in the AGM. An impairment will be recorded to fair value the USD 117, 836,597 investment in Sevan Drilling Ltd. Effective 1 January 2015, Sevan Drilling ASA changed the functional currency from United States Dollar (USD) to Norwegian Kroner (NOK). Sevan Drilling D 31

162 Sevan Drilling D 32

163 Appendix E - SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR OVERVIEW Content OVERVIEW 03 Highlights Key Figures OUR BUSINESS 06 Products and technology ORGANISATION 08 The Board of Directors and Management team OUR RESULTS 10 Board of Directors report Financial statement 20 Notes to the financial statements 47 Financial statement Sevan Drilling ASA 51 Notes to Sevan Drilling ASA 62 Auditor s report 64 Responsibility statement 65 Corporate governance 72 Corporate social responsibility 73 Remuneration and benefits 75 Contact information E 1

164 OVERVIEW 3 Highlights 2013 Sevan Drilling had operating revenues in 2013 of USD million (USD million in 2012) and EBITDA of USD 57.5 million (USD 54.5 million in 2012). Commercial uptime for Sevan Driller for the year was 84.6% (88.1% in 2012). Commercial uptime for Sevan Brasil for the year was 95.0% (73.8% in 2012). Sevan issued USD million of new equity in the first quarter and amended loan terms of the two term loans that were outstanding. In March 2013, LLOG contracted the Sevan Louisiana for a three year contract in the US Gulf of Mexico for commencement in In June 2013, Seadrill increased their ownership interests in Sevan to 50.1 percent. On 22 August 2013, Seadrill completed a mandatory offer and increased their control to percent. In July 2013, Sevan agreed to terms of a new USD 1,750 million five year secured corporate bank facility at significantly improved terms. The purpose was to refinance existing bank debt and to finance the final instalments for the Sevan Louisiana and Sevan Developer. Seadrill guaranteed the facility, and provided a revolving credit facility and additional funding commitment to the lenders. In September 2013, Sevan executed service agreements with Seadrill to provide marketing and management of the operations, construction, mobilization and operations preparation for the entire Sevan Fleet on market terms. On 23 October 2013, Sevan Louisiana was delivered from Cosco. On 15 November Scott McReaken succeeded Scott Kerr as Chief Executive Officer of Sevan Drilling ASA. On 21 December, the Chief Financial Officer, Jon Wilmann, resigned. His responsibilities were assumed by Scott McReaken, Chief Executive Officer. The Sevan Developer is continuing contruction as planned. 4 OVERVIEW Key figures FIGURES IN USD MILLION Operating revenue Operating expenses EBITDA Depreciation, amortisation and impairment Operating (loss) / profit Financial income / (expense) Foreign exchange gain / (loss) Net financial items (Loss) before tax Tax (expense) / income Net (loss) EBITDA margin 22.3% 31.4% Operating margin -2.6% 6.5% Earnings per share UNIT BUILT REGION CLIENT Sevan Driller 2009 Brazil Petrobas Sevan Brasil 2012 Brazil Petrobas Sevan Louisiana 2013 Gulf of Mexico LLOG Sevan Developer Firm contract period Construction period E 2

165 OUR BUSINESS 5 6 OUR BUSINESS The cylindrically shaped Sevan units are a new concept to the offshore drilling industry compared with traditional semi-submersibles and drill ships. The concept is based on Sevan Marine s unique, proven and patented cylindrical hull design utilised for floating production, storage and offloading (FPSO) vessels. The design provides for the following advantages compared to traditional drilling units: RIG DESIGN The cylindrical hull shape enables the units to respond accurately regardless of wind, waves and currents, thus allowing for optimised operations. Weather conditions with bi-directional waves and currents challenges the free range of movement in traditional drilling operations. The Sevan design is not affected by bi-directional conditions. The Sevan design enables drilling operations with minimum power consumption regardless of weather conditions. The extended bilge keel design incorporated on Sevan Brasil, Sevan Louisiana, Sevan Developer and future designs, further improves the motion characteristics. HIGH VARIABLE DECK LOAD CAPACITY With the large displacement and stability reserves of the cylindrical hull, the variable deck load capacity is above 15,000 tons. Paired with generous tank capacities this significantly reduces the need for resupply and thus also the logistic cost. SIMPLIFIED CONSTRUCTION The cylindrical hull is built by using traditional section building method based on prefabrication and pre-outfitting of large modules. Piping and cabling are optimised taking benefit of the compact design. The main hull structure is fabricated using normal shipbuilding steel, and no special welding procedures are required. STORAGE The lower hull of the unit is used for storage of consumable fluids i.e. fuel oil, drilling fluids, dry bulk materials, ballast water in addition to utility systems. Oil storage from extended well tests / early production is an alternative storage solution. UPPER LEVEL The upper section of the hull carries power generation, mud system, cementing system, riser, drilling tubulars, derrick, and temporary equipment such as equipment for well testing. PROTECTED MOON POOL The drilling operation is executed through the moon pool, provides for a protected environment for launch, and recovery of the blowout preventer and riser. The completely enclosed moon pool also protects the riser and allows the vessel to safely operate even in ice-infested areas. E 3

166 STATION KEEPING The Sevan units are equipped with dynamic positioning system in accordance with class 3 requirements (DP3). This system maintains accurate position through eight azimuth thrusters. For operations in shallow waters or in areas with ice, a conventional mooring system may be installed in combination with the dynamic positioning system. DRILLING AND MARINE EQUIPMENT Drilling packages and other marine equipment are provided by leading suppliers. The equipment specification is broadly the same for all of Sevan s fleet. This allows Sevan to simplify training requirements and optimise spare parts for the fleet. Sevan Louisiana and Sevan Developer are prepared for easy interface with equipment for carrying out Managed Pressure Drilling operations. DESIGN DEVELOPMENT The current units are optimised for operations in deep water drilling markets such as Brazil, Gulf of Mexico, West Africa and South East Asia. The current concept has been further developed in a MarkII version focused on development drilling. More deck space and space for drilling functions has been achieved by OUR BUSINESS 7 moving more marine and auxiliary equipment down into the lower hull. For long term infield operations the unit may be equipped with permanent mooring system, reducing fuel consumption and emissions. The unit can also be optimised for harsh environment operations. The compact, simple design with the protected moonpool is ideally suited for operation in arctic areas with low temperatures and danger of sea ice. The simple hull structure is easily strengthened and shaped for drilling operations in ice infested waters. The fact that the unit does not need to change heading as the ice flow direction changes further favours the concept. For operation in ice the unit will be equipped with a mooring system in addition to the DP3 propulsion system. An arctic Sevan unit suitable for operation in extreme low temperatures and ice infested water is currently under development. Sevan has the right to utilise the Sevan design for drilling units in perpetuity, against a royalty payment to Sevan Marine ASA. For the development of the offshore arctic regions purpose built units that are able to cope with the extreme low temperatures and the ice infested waters will be needed. Sevan with the arctic design under development, is well positioned for taking part in this market growth. 8 ORGANISATION THE BOARD OF DIRECTORS AND MANAGEMENT TEAM ERLING LIND Chairman Erling Lind is a Norwegian citizen. Mr. Lind has a law degree from the University of Oslo. Mr. Lind is a partner at Wiersholm, an Oslo based leading law firm. Mr. Lind acts as external legal counsel to Seadrill. Mr. Lind is ranked amongst Norway s most prominent lawyers in his fields of expertise. Mr. Lind has served as a member of the board since January Mr. Lind does not hold any shares in Sevan Drilling. BENEDICTE SCHILBRED FASMER Board member Benedicte Schilbred Fasmer is a Norwegian citizen and has a MSc in Economics and Business Administration from the Norwegian School of Economics. Ms. Schilbred Fasmer is currently head of Corporate Affairs in Argentum Asset Management, previous experience includes being group executive for the Capital Markets Division Sparebanken Vest, finance director in Rieber & Søn ASA, and corporate banking in Citibank. Ms. Schilbred Fasmer has served as a member of the board since May Ms. Schilbred Fasmer has had several board positions; Ms. Schilbred Fasmer is currently Chairman of Oslo Børs VPS Holding and board member of Frydenbø Industri. Ms. Schilbred Fasmer does not hold any shares in Sevan Drilling. KRISTIAN JOHANSEN Board member Kristian Johansen is a Norwegian citizen and he is CFO of TGS NOPEC Geophysical ASA, a geophysical company listed on Oslo Børs. Mr. Johansen has experience from various positions in the construction, banking and oil industries. Mr. Johansen has served as a member of the board since January Mr. Johansen holds 17,000 shares in Sevan Drilling. E 4

167 ORGANISATION 9 PER WULLF Board member Per Wullf is a Danish citizen. Mr. Wullf is CEO of Seadrill. He has 28 years of experience from the drilling industry. Mr. Wullf s extensive experience includes 11 years of international offshore operations and 17 years onshore. Mr. Wullf has served as a member of the board since January Mr. Wullf does not hold any shares in Sevan Drilling. BIRGITTE RINGSTAD VARTDAL Board member Birgitte Ringstad Vartdal is a Norwegian citizen. Ms. Vartdal is currently CFO of Golden Ocean Management AS. Ms. Vartdal has held several positions within finance, risk management and investments in the Torvald Klaveness Group, as well as in Norsk Hydro Energy. Ms. Vartdal holds the degree of Siv.Ing. (MSc) in Physics and Mathematics from the Norwegian University of Science and Technology (NTNU) and an MSc in Financial Mathematics from Heriot-Watt University, Scotland. Ms. Vartdal does not hold any shares in Sevan Drilling. SCOTT MCREAKEN CEO Scott McReaken was appointed CEO in November 2013 leaving Seadrill, where Mr. McReaken has worked since July 2012 as Director Finance for the Americas Region. Mr. McReaken is a US Citizen. Prior to Seadrill, Mr. McReaken held various management positions in Vantage Drilling and Pride International in Houston, Texas and Luanda, Angola. Before working in the contract drilling industry, Mr. McReaken provided audit, assurance and advisory services, as an internal auditor and at Arthur Andersen. Mr. McReaken holds a Bachelor of Business Administration degree in accounting from The University of Texas at Austin, and is a Certified Public Accountant and Certified Internal Auditor. Mr. McReaken currently holds the Secretary-Treasurer position in the International Association of Drilling Contractors (IADC). Mr. McReaken does not hold any shares in Sevan Drilling. 10 OUR RESULTS BOARD OF DIRECTORS REPORT 2013 KEY EVENTS IN 2013 Sevan had operating revenues in 2013 of USD million (USD million in 2012) and EBITDA of USD 57.5 million (USD 54.5 million in 2012). Commercial uptime for Sevan Driller in 2013 was 84.6% compared to 88.1% in Operations of Sevan Driller in 2013 were impacted by downtime in the first quarter for hull inspection, related maintenance and replacing seals in the blowout preventer. Downtime in the second quarter was caused by a small flow of mud from a well which resulted in the replacement of the main shaft bearing. Minor downtime in the fourth quarter occurred in order to repair the crown mounted compensator and upgrade the acoustic system. Commercial uptime for Sevan Brasil in 2013 was 95.0% compared to 73.8% in Operations of Sevan Brasil in 2013 experienced some smaller incidents, including repair of the drilling switch board in the first quarter, repairs to the drawworks and crown mounted compensator in the third and fourth quarter. Sevan issued USD million of new equity in the first quarter and amended loan terms of the two term loans that were outstanding. In March 2013, LLOG contracted the Sevan Louisiana for a three year contract in the US Gulf of Mexico for commencement in In June 2013, Seadrill increased their ownership interests in Sevan to 50.1 percent. On 22 August 2013, Seadrill completed a mandatory offer and increased their interests to percent. On 15 November Scott McReaken succeeded Scott Kerr as Chief Executive Officer of Sevan Drilling ASA. On 21 December, the Chief Financial Officer, Jon Wilmann, resigned. His responsibilities were assumed by Scott McReaken, Chief Executive Officer. ACTIVITIES The Sevan Drilling Group Sevan is a Norwegian public limited liability company. The head office is located in Oslo, Norway. Sevan has offices in Arendal, Norway, Rio de Janeiro, Brazil, Houston, USA, and Singapore that are operated by Seadrill through the management agreements. Sevan has operating subsidiaries in these countries, as well as Bermuda and the United Kingdom, and is considering alternatives to further streamline the legal operating structures. Operations Sevan is an international offshore drilling contractor specialising in the ultra deepwater segment. The Group s vision is to take advantage of its unique cylindrical design to capture a share of the global ultra deepwater market. Sevan is a fully integrated drilling contractor, and owns three of the world s most advanced ultra deepwater drilling units, Sevan Driller, Sevan Brasil, and Sevan Louisiana. Sevan Driller and Sevan Brasil each have a six-year charter contract with Petrobras in Brazil. Sevan Louisiana has a three year contract with LLOG Bluewater Holdings LLC in the US Gulf of Mexico. Sevan has also one additional rig under construction, Sevan Developer (formerly Sevan Rig 4). In July 2013, Sevan agreed to terms of a new USD 1,750 million five year secured corporate bank facility at significantly improved terms. The purpose was to refinance existing bank debt and to finance the final instalments for the Sevan Louisiana and Sevan Developer. Seadrill guaranteed the facility, and provided a USD 100 million revolving credit facility and additional USD 120 million funding commitment to the lenders. The facility is managed by ING Bank N.V. The Sevan Driller commenced operations in June Its contract with Petrobras is for 6 years and expires in The rig receives a day rate of USD 420,000 based on current exchange rates and index levels. The charter contract contains a bonus potential of up to 10 percent of the base day rate, linked to the operational performance on a monthly basis. Part of the day rate is subject to annual escalation based on certain price indexes from the date of contract signature. In September 2013, Sevan executed service agreements with Seadrill to provide marketing and management of operations, construction, mobilization and operations preparation for the entire Sevan fleet. As of 31 December 2013, Sevan has estimated the remaining value of the charter contracts with Petrobras for Sevan Driller to approximately USD 366 million, excluding the bonus potential. On October 23, 2013, Sevan took delivery of the company s third rig, Sevan Louisiana from Cosco. Sevan Brasil commenced operations in July 2012 under a sixyear drilling contract with Petrobras. The rig receives a day rate of USD 399,000 based on current exchange rates and index E 5

168 levels. The charter contract also contains a bonus potential of up to 10 percent of the base day rate, linked to the operational performance on a monthly basis. Part of the day rate is subject to annual escalation based on certain price indexes from the date of contract signature. As of 31 December 2013, Sevan has estimated the remaining value of the charter contract with Petrobras for Sevan Brasil to approximately USD 664 million, excluding the bonus potential. Sevan Louisiana was delivered from Cosco on 23 October Sevan Louisiana arrived in the US Gulf of Mexico in April 2014, and will commence operations in early May The Sevan Louisiana receives a dayrate of USD 505,000 per day under the contract with LLOG. As of 31 December 2013, Sevan has estimated the value of the contract with LLOG to approximately USD 586 million including the USD 33 million mobilization fee. Sevan Developer is being marketed by Seadrill. Construction continues to progress according to plan. Cosco has, however, notified Sevan that delivery will be delayed, and is now likely to be in the third quarter Delays result from delivery of equipment to Cosco from sub-contractors. Sevan has entered into an all-in turn-key construction contracts with Cosco in respect of Sevan Developer, with a total contract value of USD 526 million. A total of USD 55 million has been paid by Cosco to Sevan for project management and pre-operational activities. Furthermore, a USD 6 million in license fee paid to Sevan Marine has been reimbursed by Cosco. For Sevan Developer, the milestone obligations have progressed according to contract terms with Cosco. The remaining 80 percent of the all-in turn-key contract price is due upon delivery. The party to the construction contract is Sevan Drilling Rig VI Pte Ltd. No other substantive Group company is liable under the contract. This provides the Sevan with the opportunity to, effectively, decline taking delivery of Sevan Developer by way of not providing funding to Sevan Drilling Rig VI Pte Ltd to pay the remaining instalment. The Sevan will, in such an event, lose an amount equal to the funds invested in the construction of Sevan Developer. As of 31 December 2013, this is estimated at USD 131 million. The amount will increase with pre-operational costs and other costs in While the preferred option is to take delivery, OUR RESULTS 11 the alternative will be considered if no satisfactory contract of employment is secured for the unit. Impact of Seadrill Management Service Agreements Sevan entered management service agreements with Seadrill in the third quarter of 2013, for the operations, marketing, mobilization and construction of the Sevan fleet. As a result, Sevan is realizing various benefits from having access to the Seadrill infrastructure and management. The Company has improved compliance, integrity in the management system, and has access to a larger labor resource pool. Specific cost saving benefits have materialized and will be further materialized through the improved financing costs and terms of the new debt facility, improved pricing for insurance, access to vendor master service agreements, reliance on internal resources in maintenance and engineering, and changes in the philosophy for project management, deliveries with integrated acceptance testing, and other operating efficiencies. THE FINANCIAL STATEMENTS Pursuant to Section 3-3a of the Norwegian Accounting Act, the Board confirms that the financial statements have been prepared under the assumption that Sevan is a going concern and that this assumption was realistic at the date of the accounts. The consolidated financial statements have been prepared in accordance with the Norwegian Accounting Act and International Financial Reporting Standards (IFRS) as adopted by EU and interpretations adopted by the International Accounting Standards Board (IASB). The accounts for the parent company have been prepared in accordance with the Norwegian Accounting Act. Sevan s financial position has improved following the equity issue and debt restructuring at the start of 2013, and the refinancing completed in the third quarter. Sevan made a USD 15 million drawdown under the revolving credit facility provided by Seadrill on 31 March 2014 and expects to further utilize the facility in Sevan believes that this facility will be sufficient to cover liquidity needs going forward if Sevan decides not to take delivery of Sevan Developer. While the preferred option for Sevan is to take delivery, the alternative will be considered if no satisfactory contract of employment is secured for the unit. Income statement Consolidated operating revenue for 2013 was USD million compared to USD million in EBITDA 12 OUR RESULTS (operating profit less depreciation) in 2013 was USD 57.5 million compared to USD 54.4 million in Net financial items were minus USD 89.1 million compared to minus USD 42.3 million in Loss before tax was minus USD 95.7 million in 2013 compared to minus USD 31.0 million in The Company recognized a net loss in 2013 of minus USD million compared to a net loss of minus USD 11.7 million in EBITDA was negatively influenced by repair and maintenance activity related to downtime events and repairs to equipment. Additionally, unplanned costs to end well programs, rental of contract required equipment, and increased overhead further reduced EBTIDA. Sevan also experienced significant one-time charges related to refinancing, impairment of a deferred tax asset where future benefit no longer exists, and charges for severance, integration and write off of intangible assets. Cash flow and liquidity Cash generated from operations was USD 23.4 million in 2013 compared to USD 52.1 million in The difference between cash generated from operations and the operating loss is USD 30.0 million. The difference is mainly related to finance costs, depreciation and changes in working capital. The net cash flow from operating activities in 2013 was minus USD 21.5 million compared to USD 6.1 million in The net cash flow from investing activities in 2013 was minus USD million compared to minus million in The net cash flow from financing activities amounted USD million compared to minus USD 12.8 million in Cash and cash equivalents was USD (as of 31 December 2013) compared to USD 76.8 million at 31 December See note 8 for further information. Balance sheet At 31 December 2013 total consolidated assets amounted to USD 2,164.2 million, compared to USD 1,719.7 million in 2012, of which USD 1,916.6 million was the capitalised value of the drilling units. The book value of the equity was USD million, compared to USD million in As of 31 December 2013, total liabilities were USD 1,480.5 million, compared to USD 1,057.3 million as of 31 December Capital and financing Sevan issued USD million of new equity in the first quarter of 2013 and amended the terms of the two term loans that were then outstanding. In July, Sevan agreed terms for the refinancing of its bank debt by concluding a bank facility of USD 1,750 million. On 8 October 2013, Sevan made a drawdown of USD 1,400 million under its new term loan. The drawn amount was used to repay the loans secured against Sevan Driller and Sevan Brasil, to pay the final instalment to Cosco for Sevan Louisiana and mobilization, and general corporate purposes. The remaining USD 350 million of the facility is available for the final instalment to Cosco for Sevan Developer. Seadrill has guaranteed the USD 1,750 million bank facility in exchange for a guarantee commission of one percent. Sevan also entered into a revolving credit facility in the amount of USD 100 million with Seadrill. As of 31 December 2013, Sevan has not drawn on the facility, and the first draw of USD 15 million was on 31 March Seadrill has furthermore made a commitment to the Company s lenders in an amount of up to USD 120 million (by way of an increase in the revolving credit facility and/or the underwriting of an equity issue) to cover a possible liquidity shortfall if Sevan takes delivery of Sevan Developer. RISK FACTORS Sevan s activities expose the company to a variety of risks. These include financial risks, operational risks, equipment risks, project delivery and cost, plus volatility in demand for services. The Group has a risk management program covering these factors (among others) and seeks to minimise overall exposure to risk and the impact of external factors on performance. Market and operational risk factors The world fleet of semi-submersible rigs and drillships currently totals 319 units. In addition, there are 100 units under construction, 27 semisubmersible rigs and 73 drillships. Of the total fleet, 152 units were built before These units are mainly moored units and have an average age of 33 years. For the existing 167 rigs built after 1998, the majority have been outfitted with thrusters allowing for dynamic positioning. 28 of the 167 units are capable of operations in water depths up to 7,500ft and 139 of the 167 units are capable of operations in ultra-deep waters (waters deeper than 7,500ft). In addition, there are 73 drillships and 27 semi-submersible rigs rigs under construction. The market has experienced a noticeable weakening going into 2014, as a consequence of a reduction in demand combined with increasing supply of new units. While the short term outlook for the ultra deepwater market is challenging, the Company remains of the opinion that the long term prospects for the Company s services remain positive. E 6

169 The long-term demand from oil companies for drilling services in ultra deepwater conditions is expected to remain strong both in order to explore new areas and to analyse and develop recent discoveries. Contracts in the offshore sector require high standards of performance and safety, entailing considerable risks and responsibilities. These include technical, operational, commercial, environmental and political risks. Changes in the legislative and fiscal framework, including tax rules, governing the activities of the oil companies, could have material impact on exploration, production and development activity or affect Sevan s operations directly. In connection with the construction of drilling units, Sevan has used its best efforts to prepare proper specifications, including the supply and installation of equipment. Despite these efforts, there can be no assurances that delays and cost overruns will not occur and such events, if occurring, could have an adverse impact on the Group s financial position. Financial risk factors and risk management See the consolidated financial statements for more information, especially note 3. The Group is exposed to a variety of financial risks, such as, currency risk, interest rate risk, credit risk, liquidity risk, and funding. Sevan s risk management program includes focusing on the unpredictability of financial markets and seeks to minimise potential adverse effects of such risks on its financial performance. The Group has the ability to manage its currency and interest exposures through certain derivative financial instruments in accordance with market practice and seeks to maintain flexibility by keeping committed credit lines available. Currency risk The Group s assets are nominated in US Dollar and most of the Group s revenues are also nominated in US Dollar. Part of the revenue from both Sevan Driller and Sevan Brasil contracts with Petrobras is nominated in Brazilian Reais. This corresponds to the Group s costs in Reais and represent a natural hedge. Sevan may use forward contracts to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. Price risk Changes to the price level of goods and services acquired may affect Sevan, thereafter price developments are carefully monitored. Sevan seeks to handle the risk through contract OUR RESULTS 13 clauses with its customers. Furthermore, opex cost inflation is mitigated through annual dayrate adjustments with Petrobras in Brazil for Sevan Driller and Sevan Brasil. Interest rate risk All of the Group s debt is subject to interest rates which fluctuate with the market. The Group is therefore exposed to risks due to changes in interest rates. Sevan continuously considers whether part of the interest rate exposure should be hedged. Credit risk The market for our services is the offshore oil and gas industry, and the customers consist primarily of major integrated oil companies, independent oil and gas producers and government-owned oil companies. We perform ongoing credit evaluations of our customers and generally do not require collateral in our business agreements. Our current counterparties are Petrobras for Sevan Driller and Sevan Brasil, and LLOG for Sevan Louisiana. In the opinion of management, our counterparties are creditworthy, and we do not expect any significant loss to result from their non-performance. Liquidity risk It is the Group s objective to maintain flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This may include maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. The Group has an acceptable cash position. However, the liquidity is sensitive to operational uptime on the units performing contracts. Sevan is in discussion with Cosco on when to take delivery of the Sevan Developer. If delivery occurs in the third quarter, Sevan will need to determine additional financing alternative to meet the current estimated shortfalls. All options are being considered, including debt, equity or a combination of both, together with the alternative of not taking delivery of the unit. While the preferred option is to take delivery, the alternative will be considered if no satifactory contract of employment is secured for the unit. Without the delivery, Sevan believes the current capital structure is adequate to support operations. Funding The Group will require additional capital to finance the final instalment due on delivery and the mobilization costs of the Sevan Developer. Sevan will, on the back of an acceptable charter contract, target to finance the remaining payments with 14 OUR RESULTS debt, equity or a combination of debt and equity. In addition to the revolving credit facility, Seadrill has made additional funding commitment to its lenders in an amount of up to USD 120 million. Obtaining such financing may be subject to market risks and other risks that may influence the availability, structure and terms of such financing. Sevan may also require additional capital in the future due to unforeseen operational issues, unforeseen liabilities or potential acquisitions, joint ventures or other business opportunities that may be presented to it. There can be no assurance that the Group will be able to obtain such financing in a timely manner or on acceptable terms. ORGANISATION Health, safety and environment Operating sound health, safety and environment (HSE) principles is a critical success factor for Sevan. See the Corporate Social Responsibility disclosure for more details on page 72. Employment and labour practices The number of employees increased from 463 to 520 at the end of On 01 January 2014, employment of the offshore and onshore operational personnel became the responsibility of Seadrill. The management agreement requires Seadrill to provide competent and appropriate crew to maintain operations, client and regulatory compliance. Management has further implemented a workforce reduction plan that will be complete in the second quarter 2014, which will further reduce the overhead as Sevan integrates into Seadrill s management structure. Currently, the Group has not implemented any specific measures in order to meet the objectives of the Discrimination Act and of the Anti-discrimination and Accessibility Act. The need for specific measures in this respect is continuously considered by the Board and Management. See the Corporate Social Responsibility disclosure for more details on page 72. CORPORATE GOVERNANCE The Board seeks to provide effective governance of business and affairs to ensure long-term benefit to Sevan shareholders, and puts emphasis on transparency and equal treatment of its shareholders. The Group emphasises the importance of maintaining and further developing its corporate governance policy and supports the principles set out in the Norwegian Code of Practice for Corporate Governance. A description of Sevan s compliance with the above recommended corporate governance principles is presented on pages ANNUAL RESULTS AND YEAR END APPROPRIATIONS The Board proposes the following appropriation of the annual loss of USD 28,753,187 in the parent company Sevan Drilling ASA: Loss transferred to other equity: USD 28,753,187. EVENTS AFTER THE BALANCE SHEET DATE Sevan Driller achieved a technical uptime of 93.8% percent in the first quarter of 2013, while Sevan Brasil had a technical uptime of 89.9% percent in the first quarter of Sevan Louisiana arrived in the US Gulf of Mexico in April 2014 and will commence operations in early May. On 31 March 2014, Sevan completed a USD 15 million drawdown on the revolving credit facility with Seadrill. OUTLOOK In 2014, Sevan will have three units generating revenues. All three will be operating on long term contracts for Petrobras in Brazil (Sevan Driller and Sevan Brasil) and for LLOG (Sevan Louisiana). In the second quarter 2014, Sevan is completing a reorganization of its rig owning subsidiaries by transferring ownership of Sevan Driller and Sevan Brasil from subsidiaries incorporated in Singapore to new subsidiaries incorporated in Bermuda. Sevan Louisiana is transferring to a Hungarian subsidiary. All of the rigs flag states will be Panama as part of this process. Construction on the Sevan Developer at Cosco continues to progress according to plan. Sevan continues to discuss the timeline for delivery with Cosco. Currently, Cosco has E 7

170 OUR RESULTS 15 indicated that they are likely to deliver the rig in the third quarter The delay is a result of delays in delivery of subcontractor equipment to Cosco. Sevan will continue to integrate and benefit from synergies with Seadrill. Seadrill has assumed full responsibility for the operation and marketing of Sevan Driller, Sevan Brasil, and Sevan Louisiana, and the construction and marketing of Sevan Developer. Sevan continues to provide support to Seadrill marketing efforts for technical expertise and support specific to the Sevan design to Seadrill. the Seadrill infrastructure and resources. Specifically, Sevan now has access to pricing agreements with Seadrill s vendors, and Seadrill s maintenance and engineering support and construction and yard experience. Sevan has adopted the Seadrill management system and changing the operating and construction procedures. These changes will provide greater integrity, cost control, and safety and regulatory compliance. ANNUAL GENERAL MEETING The date of the Annual General Meeting is scheduled for 19 June Sevan expects to realise significant improvements in operational efficiency, safety and cost control in 2014 as a consequence of this relationship with Seadrill and benefiting from Oslo, 29 April 2014 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kristian Johansen Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Birgitte Ringstad Vartdal Board member Scott McReaken Managing Director 16 OUR RESULTS CONSOLIDATED INCOME STATEMENT FIGURES IN USD MILLION NOTE Operating revenue Operating expense Depreciation, amortisation and impairment Employee benefit expense Other operating expense Foreign exchange gain/(loss) related to operation Total operating expense Operating (loss)/profit Financial income Financial expense Foreign exchange gain/(loss) related to financing Net financial items Loss before tax Tax (expense)/income Net loss Attributable to: Equity holders of the Company Earnings per share for profit/(loss) attributable to the equity holders of the Company during the year (USD per share): - Basic Diluted COMPREHENSIVE INCOME FIGURES IN USD MILLION NOTE Net loss Foreign currency translation Comprehensive income Attributable to: Equity holders of the Company E 8

171 OUR RESULTS 17 CONSOLIDATED BALANCE SHEET FIGURES IN USD MILLION NOTE ASSETS Non-current assets Drilling rigs 6 1, ,500.4 Other fixed assets Intangible assets Deferred income tax assets Other non-current assets Total non-current assets 1, ,586.4 Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 2, ,719.7 EQUITY Capital and reserves attributable to equity holders of the Company Share capital Share premium Other equity Total equity LIABILITIES Non-current liabilities Interest-bearing debt 11 1, Derivative financial instruments, long term Other non-current liabilities Total non-current liabilities 1, Current liabilities Trade payables Current portion of interest-bearing debt Other current liabilities Total current liabilities Total liabilities 1, ,057.3 Total equity and liabilities 2, ,719.8 Oslo, 29 April 2014 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kristian Johansen Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Birgitte Ringstad Vartdal Board member Scott McReaken Managing Director 18 OUR RESULTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY OTHER EQUITY EQUITY FOREIGN SETTLED CURRENCY EMPLOYEE SHARE SHARE GENERAL BENEFITS TRANSLATION RETAINED TOTAL FIGURES IN USD MILLION NOTE CAPITAL PREMIUM RESERVE RESERVE RESERVE EARNINGS EQUITY January 1, Net loss Foreign currency translation Comprehensive income for the year Capital increase Transaction cost equity raise Fair value of share options December 31, January 1, Net loss Foreign currency translation Comprehensive income for the year Transferred from paid in equity to other equity Fair value of share options Other foreign currency items December 31, E 9

172 OUR RESULTS 19 CONSOLIDATED CASH FLOW STATEMENT FIGURES IN USD MILLION NOTE Cash flows from operation activities Cash from operations Interest paid Net cash (used in)/generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment (PPE) Interest rate swap settlement Net cash used in investing activities Cash flows from financing activities Net proceeds from capital increase Proceeds from interest-bearing debt 1, Deferred transaction fees on interest-bearing debt Repayment of interest-bearing debt Net cash generated from/(used in) financing activities Net cash flow for the period Cash balance at beginning of period Cash balance included in contribution in kind Cash balance at end of period* * 2013 cash balance contains restricted cash of USD 1.9 million for employees tax deduction fund cash balance contains restricted cash of USD 71.0 million for debt service repayments and USD 0.5 million for employees tax deduction fund. The accompanying notes are an integral part of these consolidated financial statements. 20 OUR RESULTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: CORPORATE INFORMATION Sevan Drilling ASA (the Group ) is an international offshore drilling contractor specialising in the ultra deepwater segment. The company owns rigs of the cylindrical Sevan design. The Group is a public limited liability company incorporated and domiciled in Norway. The address of its registered office is Tordenskioldsgate 6, 0160 Oslo. These consolidated financial statements were approved by the Board on 29 April Overview of the Group structure as of 31 December 2013: REGISTERED INTEREST FUNCTIONAL SUBSIDIARIES OFFICE HELD CURRENCY Sevan Drilling Rig II AS Norway 100 % USD Sevan Drilling AS Norway 100 % USD Sevan Drilling Rig V AS Norway 100 % USD Sevan Drilling Rig VI AS Norway 100 % USD Sevan Drilling Rig VII AS Norway 100 % USD Sevan Drilling Rig VIII AS Norway 100 % USD Sevan Drilling Pte Ltd Singapore 100 % USD Sevan Drilling Rig II Pte Ltd Singapore 100 % USD Sevan Drilling Rig IV Pte Ltd Singapore 100 % USD Sevan Drilling Rig V Pte Ltd Singapore 100 % USD Sevan Drilling Rig VI Pte Ltd Singapore 100 % USD Sevan Drilling Rig VII Pte Ltd Singapore 100 % USD Sevan Drilling Rig VIII Pte Ltd Singapore 100 % USD Sevan Drilling Rig IX Pte Ltd Singapore 100 % USD Sevan Drilling Limited UK 100 % USD Sevan Marine Servicos de Perfuracao Ltda Brazil % BRL Sevan Investimentos do Brasil Ltda Brazil 100 % BRL NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all financial years presented. The presentation currency of the Group is USD which corresponds to the functional currency of the majority of the entities in the Group. All figures are in USD million unless otherwise stated. 2.1 BASIS OF PREPARATION The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union (EU) that are effective for the year ended 31 December The consolidated financial statements have been prepared on a going concern basis under the historical cost convention as modified by the revaluation of financial assets and some financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. E 10

173 OUR RESULTS CHANGES IN ACCOUNTING POLICY AND DISCLOSURES a) New and amended standards adopted by the Group In the current year, the Group has applied a number of new and revised IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. These new and revised standards include: Amendments to IFRS 7 Disclosures offsetting financial assets and financial liabilities IFRS 10, IFRS 11, IFRS 12, IAS 27 and IAS 28 Consolidation, Joint arrangements, Associates and Disclosures IFRS 13 Fair value measurement Amendments to IAS 1 Presentation of financial statements Amendments to IAS 16 Property, plant and equipment Amendments to IAS 19 Employee Benefits b) New standards and interpretations not yet adopted The following new standards and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2014, and have not been applied in preparing these consolidated financial statements: IFRS 9 Financial instruments 3 Amendments to IFRS 9 and IFRS 7 Mandatory effective date of IFRS 9 and transition disclosures 2 Amendments to IFRS 10, IFRS 12, and IAS 27 Investment entities 1 Amendments to IAS 19 Defined benefit plans: employee contributions 4 Amendments to IAS 32 Offsetting financial assets and financial liabilities 1 Amendments to IAS 36 Impairment of assets 1 Amendments to IAS 39 Financial instruments: recognition and measurement 1 1 Effective for annual periods beginning on or after 1 January Effective for annual periods beginning on or after 1 January Effective date delayed indefinitely 4 Effective for annual periods beginning on or after 1 July 2014 The directors of the Company do not anticipate that the application of these standards and amendments will have a significant impact on the Group s consolidated financial statements in the period of initial application. 2.2 CONSOLIDATION Subsidiaries Subsidiaries comprise all entities over which the Group has the power to govern the financial and operating policies, is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to use its power to affect its returns. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and are de-consolidated from the date that control ceases. The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred assumed at the date of exchange. Acquisition-related costs are expenses as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of the acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the income statement immediately. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group. 2.3 SEGMENT REPORTING Since 31 December 2011, reporting has been divided into three segments. The reporting is based on a split between operating rigs, rigs under construction, and all other (onshore). Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Board. 22 OUR RESULTS 2.4 FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which each entity operates ( the functional currency ). The consolidated financial statements are presented in USD. Transactions and balances Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of such transactions (realised items) and from translation at exchange rates prevailing at balance sheet date of monetary assets and liabilities denominated in foreign currencies (unrealised items) are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. This will be the case only from the point in time when hedge accounting is implemented. Foreign exchange gains and losses that relate to interest-bearing debt and cash and cash equivalents are presented (net) as a separate line item in the income statement within net financial items. Foreign exchange gains and losses that relate to operations are presented (net) as a separate line item in the income statement within operating expenses. Group companies The results and financial position of all Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency, are translated into the presentation currency as follows: Assets and liabilities are translated at exchange rates prevailing at balance sheet date. Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at exchange rates prevailing at the dates of the transactions). Upon consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income if relevant. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Any goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 PROPERTY, PLANT AND EQUIPMENT Fixed assets are stated at historical cost less accumulated depreciation. The Group has not used, and has no plans of utilising the revaluation option in IAS 16. Depreciation is calculated using the straight-line method. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Costs related to periodic overhauls of drilling rigs are capitalised under Sevan capital assets and amortised over the anticipated period between overhauls, which is generally five years. Related costs are primarily yard costs and the cost of employees directly involved in the work. Amortisation costs for periodic overhauls are included in depreciation, amortisation and impairment expense. Costs for other repair and maintenance activities are included in operating expenses and are expensed as incurred. General and specific borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Each major component of the Drilling rigs is depreciated separately when the units are available for intended use. A major component is defined as a part with a cost that is significant in relation to the total cost of the asset. An estimation of useful lives indicates an average depreciation period of years. Other fixed assets consist of capital spare parts for the rigs and furniture, fixtures and equipment that are depreciated using the straight-line method over their estimated useful lives ranging from three to ten years. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement. 2.6 CONSTRUCTION IN PROGRESS Construction contracts are capitalised as construction in progress based on instalments paid to the yard and other suppliers. Insurance and net financial expenses during the construction period are capitalised as construction in progress. Cost of labour directly attributable to the construction of the Sevan units is also capitalised. Costs of training, manning and other pre-operational activities are expensed as incurred. E 11

174 OUR RESULTS INTANGIBLE ASSETS Computer software Acquired computer software is capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives, ranging from three to five years. Costs associated with developing or maintaining computer software programs are expensed as incurred. Research and Development Costs associated with research are expensed as incurred. Development costs are expensed when the criteria for recognition are not met. 2.8 IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation but are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less cost to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels at which separate cash flows are identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.9 FINANCIAL ASSETS AND DERIVATIVES The Group classifies its financial assets and derivatives as fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial instruments were acquired: Management determines the classification of its financial instruments at initial recognition. Loans and receivables are measured at fair value at transaction date and subsequently re-measured at amortised cost. Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. Financial instruments are classified as current, except for those with maturities greater than 12 months after the balance sheet date, in which case they are classified as non-current. Derivative financial instruments are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). Hedge accounting has not been applied in the periods presented SHARE-BASED PAYMENTS The Group previously had an equity-settled, share-based compensation plan, under which the entity received services from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services received in exchange for the grant of the options was recognised as an expense. The total amount expensed was determined by reference to the fair value of the options granted: including any market performance conditions (for example, an entity s share price); excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets and remaining an employee of the entity over a specified time period); and including the impact of any non-vesting conditions (for example, the requirement for employees to save). Non-market performance and service conditions were included in assumptions about the number of options that were expected to vest. The total expense was recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. Ninety days after Seadrill s acquisition of a controlling interest in the Group, all outstanding options became vested, and no new options were granted. At the end of each reporting period, the group revised its estimates of the number of options that were expected to vest based on the non-market vesting conditions. It recognised the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the Group issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The grant by the Group of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts. The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction INVENTORIES Inventories consist of diesel and spare parts on the rigs which do not meet the definition of property, plant and equipment. Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost is determined using the average cost method. 24 OUR RESULTS 2.12 TRADE RECEIVABLES Trade receivables are amounts due from customers for services performed in the ordinary course of business and are classified as current assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The impairment charge is recognised in the income statement as other operating expense CASH AND CASH EQUIVALENTS In the consolidated statement of cash flow, cash and cash equivalents can include cash in hand, bank deposits, and other short-term highly liquid investments with a maturity of less than three months SHARE CAPITAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Where any Group company acquires the equity share capital (treasury shares), the consideration paid, including any directly attributable costs (net of income taxes) is deducted from equity attributable to the Group s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction cost and income tax, is included in equity attributable to the Group s equity holders INTEREST-BEARING DEBT Interest-bearing debt is initially recognised at fair value, net of transaction cost incurred. Interest-bearing debt is subsequently stated at amortised cost; any difference between the proceeds (net of transaction cost) and the redemption value is recognised in the income statement over the period of the interest-bearing debt using the effective interest method. Interest-bearing debt is classified as a current liability unless the Group has an unconditional right to defer settlement for more than 12 months after the balance sheet date CURRENT AND DEFERRED INCOME TAX The tax expense for the period comprises current tax and the change in deferred tax. Tax expense is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rates (and legislation) that have been enacted or substantially enacted by balance sheet date and are expected to apply when the deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. The tax base included in the calculation of deferred income tax is calculated in local currency and translated into USD at foreign exchange rates prevailing at the balance sheet date thus creating volatility. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis PROVISIONS A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured as the present value of the expected expenditures required to settle the obligation using a pre-tax discount rate that accounts for time value of money and risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense TRADE PAYABLES Trade Payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method and are classified as current liabilities. E 12

175 OUR RESULTS REVENUE RECOGNITION Revenue comprises the fair value of the consideration receivable for the sale of services and charter in the ordinary course of the Group s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts and after eliminated sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised as follows: Charter revenues are recognised on a straight-line basis over the contract period during which the services are rendered, and at the rates established in the underlying contracts. Under some contracts, the Company is entitled to additional payments for meeting or exceeding certain performance targets. Such additional payments are recognised when any uncertainties are resolved or upon completion of the drilling program. Penalties imposed as compensation to client for delivery of a unit later than contractually agreed shall be accrued for on a separate account in the balance sheet at the date the charter contract commences. If any part of the penalties is recoverable from vendors due to directly correlated delays caused by them, the penalty recoverable from the vendor shall offset the accrual of penalties payable to the client. The net accrued amount is amortised over the fixed term of the charter contract as a reduction of income. Mobilisation expenses are offset by mobilisation revenues and recognised using the straight line method over the full fixed term of the underlying charter contract. Interest income is recognised on a time-proportion basis using the effective interest method OPERATING EXPENSES Rig operating expenses are costs associated with operating a drilling rig that is either in operation or stacked, and include the remuneration of offshore crews and related costs, rig supplies, insurance costs, expenses for repairs and maintenance as well as costs related to onshore personnel in various locations where we operate the rigs and are expensed as incurred LEASES Leases in which more than an insignificant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. When assets owned by the Group are leased to clients under an operating lease, the asset is included in the balance sheet based on the nature of the asset. NOTE 3: FINANCIAL RISK MANAGEMENT 3.1 FINANCIAL RISK FACTORS The Group s activities expose it to a variety of financial risks: market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. Risk management for the Group is carried out by Treasury. Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units within the Group. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity. The Group has entered into several economical hedges, but does not apply hedge accounting MARKET RISK Foreign currency risk The Group operates internationally and is exposed to foreign currency risk arising from various currency exposures, primarily with respect to the NOK, USD, GBP and BRL. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not an entity s functional currency. The Group aims to achieve a natural hedge between cash inflows and cash outflows by matching the currency of operating costs with the currency of revenue as well as the currency of financial assets with the currency of financial liabilities, and thus has minimal exposure of foreign currency risk on its trade receivables and payables. The entity s debt is denominated in USD and thus has no exposure to foreign currency risk. The consequence of a change in exchange rates +/- 5% on profit or loss and equity for USD / NOK is USD 0.1 million, for USD / GBP is USD 0.1 million and for USD / BRL is USD 0.1 million. 26 OUR RESULTS The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 5% change in foreign currency rates. 5% is the sensitivity rate used when reporting foreign currency risk internally to the Board and represents Management s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the functional currency of the lender or the borrower. A positive number indicates an increase in profit or equity where the USD strengthens 5% against the relevant currency. For a 5% weakening of the USD against the relevant currency, there would be a comparable impact on the profit or equity, and the balances would be negative. Interest Rate Risk The Group s interest rate risk arises from debt, which is subject to floating interest rates. A change in interest rate of +/- 1% would affect the Group interest cost with +/- USD 14.0 million (2012: 4.6 million). This sensitivity analysis has been determined based on an assumption that the amount of the liability outstanding at the end of the reporting period was outstanding for the whole year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to the Board of Directors and represents management s assessment of the reasonably possible change in interest rates. The Group s sensitivity to interest rates has increased during the current year mainly due to the increase in variable rate debt instruments and the cancellation of the interest rate swaps CREDIT RISK Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Group has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. Credit exposures to customers are mainly concentrated around the charter contracts. All sales in 2012 and 2013 were to a single customer, Petrobras. The Group has never had any history of collection problems or significant disputes with this customer; thus no provision for doubtful accounts has been recognised in the periods presented LIQUIDITY RISK Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, including the availability of funding through an adequate amount of committed credit facilities. The Group aims to maintain flexibility in its liquidity by keeping committed credit lines available. Reference is made to note 11 for a schedule of undrawn facilities. The Group has implemented routines to continuously update its cash flow forecast when changes to main assumptions relating to repayment schedules, interest rates changes etc. to be able to foresee the necessary actions taken to rectify any potential adverse effects on its future liquidity position. Reference is made to Note 11 for a maturity analysis of the Group s financial liabilities. The new debt facility has no covenants at the Sevan Group level, and allows for greater flexibility in the use of cash and, specifically, does not require restricted cash balances. These financing terms were not previously available to the company until Seadrill took control and provided the parent company guarantees. The Company has USD 350 million remaining undrawn of its USD 1,750 million bank facility, and an undrawn revolving credit facility of USD 100 million with Seadrill. Seadrill has also provided a letter to the lenders that they will assist Sevan in raising additional capital up to USD 120 million. With the Seadrill guarantee, we are forecasting sufficient capital through the mobilisation of the Sevan Louisiana and construction and subsequent mobilisation of the Sevan Developer for E 13

176 OUR RESULTS 27 NOTE 4: ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are assumed to be reasonable under current circumstances. The Group makes estimates and assumptions concerning the future. These estimates and assumptions are based on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. 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. Impairment of assets The Group has tested whether the drilling rigs have suffered any impairment, in accordance with the accounting policy stated in Note 2.8. At the end of each reporting period, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets may be impaired. The net asset value of the Group exceeded its market capitalisation as at 31 December 2013, which the Group identified as an indicator of impairment for the current period. Additionally, Seadrill identified the Sevan contracts as unfavourable in their purchase price allocation. As a result, the operating rigs, which were identified as cash-generating units, were tested for impairment at the reporting date. Management concluded that the carrying amount of the rigs did not exceed their value-in-use; therefore, no impairment loss was recognised. Furthermore, the unfavourable contracts recorded by Seadrill represent the difference between the current contract amounts and the current market rates for similar contracts as at the date of acquisition; the current contract amounts are still profitable for Sevan and support the existing value-in-use calculation. The key assumptions applied for the purpose of impairment testing of rigs in operation include the discount rate and the expected future cash flows. To discount the future cash flows, management used the pre-tax weighted average cost of capital (WACC) of 7.2%. Estimated future cash flows are based on the Company s five-year forecast and utilise several assumptions, including forecasted operational expense, utilisation and day rates. Day rates are based on current contract amounts for the remaining contract term and current market rates for forecasts beyond the contracted periods. Management has assumed no growth above current market rates for the remainder of the rig lives beyond the five-year forecast. Based on sensitivity analyses performed, Management believes that reasonable movements in the key assumptions would not result in an impairment loss to be recognised. Neither an increase in the WACC of 100 basis points nor a reduction of 20% of future cash flows would result in impairment of either rig. 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 recognises 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 recognised, 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 tax assets relies upon management s judgment of the Group s ability to generate future positive taxable income in each respective jurisdiction. Management has treated taxes in Brazil as a tax expense. These taxes primarily consist of ISS, PIS, and Cofins taxes, which are largely based on gross revenue. Residual value and useful life The Group uses estimates when assessing a Sevan capital asset s useful life and residual value to determine the depreciation plan for each unit in operation. The actual lives and residual values of these assets can vary depending on a variety of factors. 28 OUR RESULTS NOTE 5: SEGMENT INFORMATION The segment results as at 31 December 2013 CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Revenue Operating (loss)/profit / Segment result Net financial items Loss before tax Tax expense Net loss as at 31 December Other segment items included in the income statement are as follows; Depreciation of property, plant and equipment All revenue is from one customer regarding Sevan Driller and Sevan Brasil in Brazil. There is no inter-segment revenue. The total segment assets and liabilities and drilling rigs amounts as at 31 December 2013 are as follows: CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Total assets 1, ,164.2 Total liabilities 1, ,480.5 Drilling rigs 1, ,916.6 All segment assets and liabilities are allocated. The segment results as at 31 December 2012 CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Revenue Operating (loss)/profit / Segment result Net financial items (Loss)/profit before tax Tax income Net (loss)/profit as at 31 December Other segment items included in the income statement are as follows; Depreciation of property, plant and equipment All revenue is from one customer regarding Sevan Driller and Sevan Brasil in Brazil. There is no inter-segment revenue. E 14

177 OUR RESULTS 29 The total segment assets and liabilities and drilling rigs amounts as at 31 December 2012 are as follows: CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Assets 1, ,719.7 Liabilities 1, ,057.3 Drilling rigs 1, ,500.4 All segment assets and liabilities are allocated. Based on the company structure, activity and internal reporting the segment reporting is devided in three different segments. 1. Operation. This segment includes our rigs in operation. 2. Contruction in progress. This segment includes our rigs which are under construction. 3. Other/not allocated. This segment includes all administrative items and items not included in operation or construction in progress. NOTE 6: PROPERTY, PLANT AND EQUIPMENT UNIT IN OTHER TOTAL CONSTRUCTION IN OPERATION DRILLING FIXED FIXED FIGURES IN USD MILLION PROGRESS (CIP) (UIO) RIGS ASSETS ASSETS Year ended December 31, 2013 Book value January , , ,512.9 Additions Impairment Depreciation Book value December , , ,935.8 At December 31, 2013 Cost , , ,076.6 Accumulated impairment Accumulated depreciation Book value December , , ,935.8 Year ended December 31, 2012 Book value January , ,327.9 Additions Transfer to UIO Impairment Depreciation Book value December , , ,512.9 At December 31, 2012 Cost , ,589.6 Transfer to UIO Accumulated impairment Accumulated depreciation Book value December , , ,512.9 An interest rate of 5% is used for capitalisation. Capitalised borrowing cost in 2013 was USD 6.4 million (2012 USD 28.5 million). Security arrangements relating to drilling rigs are described in Note 19 and commitments relating to capital expenditure are described in Note 20. See Note 4 for rig impairment assessment. 30 OUR RESULTS NOTE 7A: FINANCIAL INSTRUMENTS BY CATEGORY The classification of financial instruments as loans and receivables or assets and liabilities at fair value through profit or loss is shown below. The Group s financial instruments held as at 31 December 2013 consist of cash, trade receivables, trade payables, and bank borrowings measured at amortised cost with variable interest rates. Management believes that carrying value approximates fair value for all the Group s financial instruments. Management believes all financial instruments held at 31 December 2013 are classified as Level 3 in the fair value hierarchy. The interest rate swaps held at 31 December 2012 were classified as Level 2. The different levels are defined as: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) 31 December 2013 ASSETS AT FAIR LOANS AND VALUE THROUGH FIGURES IN USD MILLION RECEIVABLES PROFIT AND LOSS TOTAL Financial assets Trade and other receivables Cash and cash equivalents Total financial assets December 2012 ASSETS AT FAIR LOANS AND VALUE THROUGH FIGURES IN USD MILLION RECEIVABLES PROFIT AND LOSS TOTAL Financial assets Trade and other receivables Cash and cash equivalents Total financial assets December 2013 LIABILITIES AT FAIR OTHER FINANCIAL VALUE THROUGH THE FIGURES IN USD MILLION LIABILITIES PROFIT AND LOSS TOTAL Financial liabilities Interest-bearing debt 1, ,369.2 Trade payables Total financial liabilities 1, , December 2012 LIABILITIES AT FAIR OTHER FINANCIAL VALUE THROUGH THE FIGURES IN USD MILLION LIABILITIES PROFIT AND LOSS TOTAL Financial liabilities Interest-bearing debt Trade payables Non-current trade payables Interest rate swaps Total financial liabilities ,003.3 E 15

178 OUR RESULTS 31 Interest and currency swaps 2013 INTEREST RATE SWAPS FAIR VALUE Nil CURRENCY SWAPS FAIR VALUE Nil Interest and currency swaps 2012 INTEREST RATE SWAPS FAIR VALUE MUSD fixed at 2.21% -4.8 MUSD fixed at 2.15% -4.3 MUSD 71.9 fixed at % -0.8 MUSD fixed at 2.975% CURRENCY SWAPS FAIR VALUE Nil NOTE 7B: CREDIT QUALITY OF FINANCIAL ASSETS The credit quality of financial assets that were neither past due nor impaired was assessed by reference to external credit ratings (where available) and by analysis of historical information about counterparty default rates: Trade receivables - Counterparty with external credit rating FIGURES IN USD MILLION BBB BBB Total Trade receivables - Counterparty without external credit rating FIGURES IN USD MILLION Group Group Group Total Total trade receivables Group 1 - New customers (less than 6 months) Group 2 - Existing customers (more than 6 months) with no defaults in the past Group 3 - Existing customers (more than 6 months) with some defaults in the past 32 OUR RESULTS Cash at bank and short-term bank deposits FIGURES IN USD MILLION AA AA A A A BBB No rating available Total cash and cash equivalents NOTE 8: CASH AND CASH EQUIVALENTS FIGURES IN USD MILLION Cash at bank and in hand Restricted employees' tax deduction fund Restricted short-term bank deposits Total cash and cash equivalents MUSD 1.9 restricted employees tax deduction fund relates to customary income taxes withheld from employees. NOTE 9: SHARE CAPITAL AND SHARE PREMIUM The total authorised number of ordinary shares was million (2012: million) with a par value of NOK 1 per share. All issued shares were fully paid in at balance sheet date. NUMBER OF SHARES SHARE CAPITAL SHARE PREMIUM TOTAL January 1, ,625, Proceeds from shares issued 257,998, December 31, ,623, NUMBER OF SHARES SHARE CAPITAL SHARE PREMIUM TOTAL January 1, ,625, Proceeds from shares issued Transferred from paid in equity to other equity December 31, ,625, E 16

179 OUR RESULTS 33 The 20 largest shareholder accounts as at January 7, 2014 SHAREHOLDER ACCOUNTS NO. OF SHARES %-SHARE **DNB NOR MARKETS, AKS 216,062, **SKANDINAVISKA ENSKILDA BANKEN AB Oslofilialen 81,678, J.P. MORGAN CHASE BANK N.A. London NORDEA TREATY ACCOUNT 41,508, GOLDMAN SACHS & CO - EQUITY 28,751, ODIN OFFSHORE 16,988, WENAASGRUPPEN AS 15,220, SKAGEN VEKST 13,252, THE BANK OF NEW YORK MELLON BNY MELLON 11,232, SKANDINAVISKA ENSKILDA BANKEN AB A/C CLIENTS ACCOUNT 10,879, JP MORGAN CLEARING CORP. 10,850, VERDIPAPIRFONDET DNB NORGE (IV) 9,450, FID. FUNDS-EUR. SM. 6,082, US BK EVERMORE GLO VAL 5,923, OP-EUROPE EQUITY FUN 5,617, THE BANK OF NEW YORK MELLON BNY MELLON 4,678, DNB LIVSFORSIKRING ASA 3,893, CITIBANK, N.A. 3,100, VERDIPAPIRFONDET DNB 3,000, SKANDINAVISKE ENSKILDA BANKEN AB A/C SEC FIN 2,795, UBS AG, LONDON BRANCH 2,159, Total, 20 largest shareholder accounts 493,123, Total no. of shares 594,623,436 Foreign ownership (Citizenship/Country of registration) 167,474, ** Seadrill controls 50.11% of the interest in Sevan through forward share contracts held with banks identified. NOTE 10: CURRENT LIABILITIES EXCLUDING CURRENT PORTION OF INTEREST BEARING DEBT FIGURES IN USD MILLION Trade payables Accrued expenses relating to trade payables Total trade payables Income and Gross revenue tax payable Other taxes payable (advance tax, employer contribution, VAT, etc.) Other payables Total other current liabilities Total current liabilities OUR RESULTS NOTE 11: INTEREST-BEARING DEBTS FIGURES IN USD MILLION Non-current liabilities Bank borrowings 1, Derivative financial instruments Other non-current liabilities Total non-current liabilities 1, On 08 October, the company drew USD 1,400 million of a new USD 1,750 million bank facility to refinance the Sevan Driller USD 480 million and Sevan Driller 525 million facility, pay the final instalment to COSCO for delivery of the Sevan Louisiana and mobilization, and general corporate purposes. The debt restructure resulted in the release of previously unamortised transaction costs on the Sevan Driller and Sevan Brasil loans. Paired with the amortisation of these transaction costs in 2013 prior to the restructure, total finance expense in 2013 related to transaction costs on the old term loans was USD 45.3 million. The new debt had transaction costs of USD 30.8 million which are being amortised over the loan term. USD 1.7 million of the new deferred transaction costs had been recognised as expense in the fourth quarter of Total borrowings FIGURES IN USD MILLION Bank Loans Non-Current 1, Sevan Driller USD 480M Loan Sevan Brasil USD 525M Loan Sevan USD 1,750M Loan 1, Current Sevan Driller USD 480M Loan Sevan Brasil USD 525M Loan Sevan USD 1,750M Loan Total 1, Total borrowings include secured liabilities (bank and collateralised borrowings) of USD 1,369.2 million (2012: USD million) - see Note 19 for additional discussion of collateral arrangement. Sevan - USD 1,750 million loan. As at December 2013, the weighted effective interest rate is 3.09%. Basic term is divided between Libor+2.50% for GIEK tranche and Libor+2.90% for Commercial tranche. The carrying amounts and fair value of the non-current borrowings are as follows: CARRYING AMOUNT FAIR VALUE Bank borrowings 1, , Total 1, , E 17

180 OUR RESULTS 35 The group has the following undrawn borrowing facilities: FIGURES IN USD MILLION Floating rate Expiring within one year Expiring beyond one year Fixed rate Expiring within one year Expiring beyond one year Total un-drawn debt facilities The USD 100 million undrawn facility expiring beyond one year is a revolving credit facility with Seadrill. This revolving credit facility has a commitment fee at market rates. Seadrill has also made a commitment to the lenders of an additional USD 120 million of funding. Payment schedule 2013 FIGURES IN USD MILLION 0-3 MONTH 3-12 MONTH 1-3 YEARS LATER Borrowings (including interest) ,043.0 Trade payable Other payables Total ,043.0 The table above details the Group s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. Payment schedule 2012 FIGURES IN USD MILLION 0-3 MONTH 3-12 MONTH 1-3 YEARS LATER Borrowings (including interest) Trade payable Other payables Swaps Total The debt repayments under the old debt prior to the refinancing were not based on a fixed schedule and were variable based on the rigs performance; note the new $1.75b facility has a fixed repayment schedule. 36 OUR RESULTS NOTE 12: DEFERRED INCOME TAX Deferred income tax assets and liabilities are offset when a legally enforceable right to offset current tax assets against current tax liabilities exists. Offsetting amounts were as follows: Deferred tax assets FIGURES IN USD MILLION Deferred tax asset to be recovered after more than 12 months Deferred tax asset to be recovered within 12 months Total deferred tax assets Gross movement on the deferred income tax account was as follows: FIGURES IN USD MILLION Book value January 1, Currency translation adjustment Income statement charge relating to deferred tax assets Book value December 31, Specification of deferred tax assets/deferred tax liabilities: FIGURES IN USD MILLION Unrealized currency gain/(loss) Losses carry forward Total deferred tax assets Group entities incorporated in Singapore have been accepted under the local tax exemption regime. As a consequence, no deferred tax asset resulting from losses carried forward from entities incorporated in Singapore were recognised in the financial statements. At the reporting date, the Group has total Norwegian tax losses carried forward of NOK 1,507.1 million (USD million) (2012: NOK 1,026.8 million - USD million) with no expiration date and a tax value of NOK million (USD 71.7 million) (2012: NOK million - USD 51.5 million) for which no deferred tax asset is recognised in the balance sheet. The Group s total deferred income tax asset was written off in Q as a consequence of Sevan not expecting to have a taxable profit in Norway in the foreseeable future to which it can apply these tax losses. NOTE 13: EMPLOYEE BENEFIT EXPENSE FIGURES IN USD MILLION Wages and salaries Bonuses Employer's contribution tax Pension costs Share based payment - option cost Other employee benefit expense Employee benefit expense Average no. of man-years No loans were granted to the CEO, the Chairman of the Board, or to any other related party. E 18

181 OUR RESULTS 37 Remuneration of Senior Management and Board of Directors 2013 SHARE OPTIONS RETIREMENT OTHER GRANTED START END NUMBERS IN USD THOUSAND SALARIES BENEFITS BENEFITS** (THOUSAND) DATE DATE Scott McReaken CEO Nov 2013 Scott Kerr CEO , , Nov 2013 Jon Willmann CFO , Dec 2013 Bjørn Egil Gustavsen VP Projects Oct 2013 Gilberto Cardarelli VP Brazil Feb Dec 2013 Paul Grimen VP Operations , Sep 2013 Pascal Busch VP QHSE Eileen Aspehaug VP HR Åsmund Erlandsen COO Jul Sep 2013 Erling Lind * Chairman Kitty Hall Board member Jul 2013 Benedicte Schilbred Fasmer Board member Birgitte Ringstad Vartdal Board member Jul 2013 Per Wulff Board member Kristian Johansen Board member Total remuneration paid 4, ,040.3 * Invoiced from Advokatfirmaet Wiersholm AS ** Other Benefits includes severance payments in 2013 Remuneration of Senior Management and Board of Directors 2012 SHARE OPTIONS RETIREMENT OTHER GRANTED START END NUMBERS IN USD THOUSAND SALARIES BENEFITS BENEFITS** (THOUSAND) DATE DATE Scott Kerr CEO ,600 Jon Willmann CFO ,100 Bjørn Egil Gustavsen VP Projects Heitor Gioppo VP Brazil Jul 2012 Paul Grimen VP Operations Pascal Busch VP QHSE Eileen Aspehaug VP HR Erling Lind * Chairman Jan 2012 Anne Breive Board member May 2012 Kitty Hall Board member Benedicte Schilbred Fasmer Board member May 2012 Per Wulff Board member Kristian Johansen Board member Jan 2012 Total remuneration paid 4, * Invoiced from Advokatfirmaet Wiersholm AS The group have an immaterial defined benefit pension plan for one emplyee in 2012, established in The net retirement benefit obligation in the balance sheet is USD thousand. In 2013 Kristian Johansen has been the leader of the audit committee with Benedicte Schilbred Fasmer as a member of the audit committee. Share options are granted to directors and to selected employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options shall vest with one third each year. Vesting of the options is conditional upon the Employee, on each of the vesting dates, remaining employed by the company. The options may, once vested, be exercised at any time up to and including the date falling three years after the relevant vesting dates. The group has no legal or constructive obligation to repurchase or settle the options in cash. Due to change of control in 2013, all options are vested as at 27 September OUR RESULTS Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: AVERAGE EXERCISE AVERAGE EXERCISE PRICE PER SHARE OPTIONS PRICE PER SHARE OPTIONS OPTION (THOUSANDS) OPTION (THOUSANDS) At 1 January NOK ,403.3 NOK Granted NOK ,376.7 NOK ,903.3 Forfeited NOK ,041.7 NOK Exercised NOK NOK Expired NOK NOK At 31 December NOK ,738.3 NOK ,403.3 Out of the 9,738,326 outstanding options (2012: 9,403,334 options), 9,738,326 options (2012: 3,153,344) were exercisable. No options were exercised in 2013 or 2012, and the options were excluded from the earnings per share calculation as they are antidilutive. The weighted average fair value of options granted during the period determined using the Black-Scholes valuation model was NOK 1.51 per option (2012: NOK 1.73). The significant inputs into the model were weighted average share price of NOK 5.75 (2012: NOK 5.75) at the grant date, exercise price shown above, volatility of 39.4 % (2012: 42.5%), dividend yield of 0% (2012: 0%), an expected option life of 2.8 years (2012: 3 years) and an annual risk-free interest rate of 1.38% (2012: 1.37%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices. See above for the total expense recognised in the income statement for share options granted to directors and employees. NOTE 14: FINANCIAL INCOME AND FINANCIAL EXPENSE Currency gains and losses relating to operational activities were classified as a separate line item as an operational expense in the Income Statement and are not included in the tables below. Currency gains and losses relating to financing activities were presented as separate line item as a financial income/(expense) in the Income Statement and are specified in Note 23. Financial income: FIGURES IN USD MILLION Interest income Total financial income Financial expense: FIGURES IN USD MILLION Interest expense Amortization of finance fees Swaps Guarantee fees to Sevan Marine ASA Commitment and guarantee fees to Seadrill Other finance (income)/expense Total financial expense E 19

182 OUR RESULTS 39 NOTE 15: INCOME TAX EXPENSE FIGURES IN USD MILLION Current tax Change deferred tax Net tax income/(expense) FIGURES IN USD MILLION Gross revenue tax Withholding tax Current tax FIGURES IN USD MILLION Loss before tax Tax calculated at domestic tax rates applicable to profits in holding company (Norway 28%) Profit not subject to payable tax in shipping regime Currency translation adjustment Expenses not deductible Write-down of deferred tax asset Additional unrecognised deferred tax asset Impact of change in statory tax rate Effect of other tax jurisdictions Tax (expense)/income NOTE 16: EARNINGS PER SHARE Profit attributable to equity holders of the Company (USD thousands) -156,562-11,676 Weighted average number of ordinary shares on issue (USD thousands) 563, ,625 Basic and diluted earnings per share (USD per share) Basic earnings per share Basic earnings per share were calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year. Options are not in the money at 31 December 2013 and are not included in calculating diluted earnings per share. NOTE 17: DIVIDEND PER SHARE No dividend was paid in 2013 or No dividend is to be proposed at the Annual General Meeting on 19 June OUR RESULTS NOTE 18: CASH GENERATED FROM OPERATIONS FIGURES IN USD MILLION Loss before tax Adjustments for non-cash items in loss before tax: Depreciation, amortisation and impairment Net finance items Other non-cash items Changes in working capital: Inventory Trade and other receivables Trade payables Other current liabilities Other items: Taxes paid Cash generated from operations NOTE 19: SECURITIES FOR DEBT The Group has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business. AT BALANCE SHEET DATE, THE GROUP IS PARTY TO THE FOLLOWING SECURITY ARRANGEMENTS: Security arrangements relating to financing: The USD 1,750,000,000 credit facility is secured, on a cross-collateralized basis, by a first priority mortgage over all the Collateral Drilling Rigs Sevan Driller, Sevan Brasil, Sevan Louisiana, Sevan Developer ; a guarantee from the Guarantor Seadrill Limited and each of the Borrowers Sevan Drilling Pte Ltd, Sevan Drilling Rig II Pte Ltd, Sevan Drilling Rig V Pte Ltd, Sevan Drilling Rig VI Pte Ltd and the Intra-Group Charterers Sevan Drilling Limited, Sevan Drilling Rig II AS, Sevan Drilling North America LLC ; a pledge over the shares of issued by each of the Borrowers and Intra-Group Charterers; first priority security interest over each of the Borrower s and Intra- Group Charterer s rights with respect to all earnings and proceeds of insurance; and a first priority security interests in the bank accounts opened and maintained in the name of each Borrower and/or Intra-Group Charterers in which all hires, freights, income, insurance proceeds and other sums payable in respect of the Collateral Drilling Rigs are credited. NOTE 20: COMMITMENTS FIGURES IN USD MILLION Drilling Rig II Drilling Rig III Drilling Rig IV Total capital commitments E 20

183 OUR RESULTS 41 Payment schedule for Sevan Louisiana and Sevan Developer SEVAN SEVAN MILESTONE LOUISIANA STATUS DEVELOPER STATUS Paid in Paid in a 78.9 Paid in Paid in b Paid in Paid in 2013 at delivery To be paid in 2014 at delivery Paid in 2013 after replacement 7.5 of Thruster 6.8 To be paid in 2014 after commissioning 7.5 of Cameron equipment 3.5 Total commitments Paid in 2013 for late payment interest and VO To be paid in 2014 at delivery for interest and VO Payment schedule for Sevan Louisiana and Sevan Developer SEVAN SEVAN MILESTONE LOUISIANA STATUS DEVELOPER STATUS Paid in Paid in a 78.9 Paid in To be paid in 2014 at delivery 2b To be paid in 2014 at delivery To be paid in 2013 at delivery To be paid in 2014 at delivery Total commitments NOTE 21: RELATED PARTY TRANSACTIONS Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Seadrill Limited ( Seadrill ), obtained a majority interest of Sevan effective at the start of the third quarter, with an ownership of 50.11%. The Group has since been consolidated into Seadrill Limited s accounts, which can be found at Seadrill has guaranteed the new term loan referred to in Note 11. The Group has also entered into a revolving credit facility (RCF) in the amount of USD 100 million with Seadrill. No drawdown had been made under the RCF as at 31 December Seadrill charged the Company guarantee fees and commitment fees at rates comparable to average commercial rates. These fees amounted to USD 4.6 million in 2013, which had not been paid as at the reporting date. These amounts are included in Financial expense and Trade payables. Seadrill has furthermore made a commitment to the Group s lenders to provide additional funding of USD 120 million (by way of an increase in the RCF and/or an underwriting of an equity issue) to cover any possible liquidity shortfall. Seadrill also provides certain management support and administrative services to the Group and charged fees for these services of USD 2.2 million in 2013, which had not been paid as at the reporting date. These amounts are included in Operating expenses and Trade payables. 42 OUR RESULTS NOTE 22: OPERATING LEASES At balance sheet date, the Group has entered into lease- and rental-obligations: Lease- and rental obligations FIGURES IN USD MILLION No later than 1 year Between 1-5 years Later than 5 years Total lease and rental-obligations Future lease payments receivable under charter contracts: FIGURES IN USD MILLION No later than 1 year Between 1-5 years Later than 5 years Total minimum future charter revenues 1, ,029.9 Order back-log for charter revenue: FIXED TERM OPTION PERIODS UNIT CLIENT (YEARS) (YEARS) COMMENCEMENT Sevan Driller I (Sevan Driller) Petrobras S.A. 6 N/A 12 June 2010 Sevan Driller II (Sevan Brasil) Petrobras S.A. 6 N/A 24 July 2012 Sevan Driller III (Sevan Louisiana) LLOG 3 N/A 2014 NOTE 23: FOREIGN EXCHANGE GAIN/(LOSS) RELATED TO FINANCING AND OPERATIONS Foreign exchange gain/(loss) related to operation FIGURES IN USD MILLION Unrealized gain/(loss) Realized gain/(loss) Total foreign exchange gain/(loss) related to operation Foreign exchange gain/(loss) related to financing FIGURES IN USD MILLION Unrealized gain/(loss) Realized gain/(loss) Total foreign exchange gain/(loss) related to financing Total foreign exchange gain/(loss) relates mainly to cash and cash equivalents nominated in other currencies than USD. E 21

184 OUR RESULTS 43 NOTE 24: OTHER OPERATING EXPENSES Other operating expense FIGURES IN USD MILLION Office cost (IT, rental etc) Consultancy (audit, tax and legal) Marketing Other Total other operating expense Specification of auditor s fee (excl. VAT) FIGURES IN USD MILLION Statutory audit Other assurance services Tax consulting Other assistance from auditor Total audit fees NOTE 25: INVENTORIES FIGURES IN USD MILLION Diesel Stock on-board Spares on-board Sevan Driller Consumables Sevan Brasil Spares Sevan Brasil Provision for stock obsoleteness Inventories - net NOTE 26: OTHER NON-CURRENT ASSETS FIGURES IN USD MILLION Net late delivery penalties Net mobilization expense Others Total other non-current assets Net late delivery penalties include penalties incurred for the late delivery of the service element of the charter contract for Sevan Driller and Sevan Brasil. Net late delivery penalties will amortise over the fixed contract period as a reduction in operating revenue. 44 OUR RESULTS NOTE 27: TRADE AND OTHER RECEIVABLES FIGURES IN USD MILLION Trade receivables Provision for impairment of receivables Trade receivables net Prepayments Other receivables Derivative and financial instruments, current Trade and other receivables The Group did not make any losses on receivables during 2013 and The Group did not make any provisions relating to receivables during 2013 and Fair value of trade and other receivables were as follows: FIGURES IN USD MILLION Trade receivables Prepayments Other receivables Derivative and financial instruments, current Total trade and other receivables Trade receivables that are less than three month past due are generally not considered for impairment. Ageing of trade receivables was as follows: FIGURES IN USD MILLION Before due date Up to 3 months after due date Total trade receivables - net Carrying amounts of trade receivables were denominated in the following currencies: FIGURES IN USD MILLION USD BRL Total trade receivables - net E 22

185 OUR RESULTS 45 NOTE 28: EVENTS AFTER BALANCE SHEET DATE Sevan has evaluated its subsequent events from the balance sheet date through the date the financial statements became available to be issued. On 31 March 2013, Sevan Drilling completed a USD 15 million drawdown on the Seadrill revolving credit facility. 46 OUR RESULTS E 23

186 OUR RESULTS 47 STATEMENT OF INCOME SEVAN DRILLING ASA NOTE Operating income and operating expenses Revenue 58,486,824 0 Operating expenses -56,508,720 0 Employee benefit expenses 6, 7-8,690,432 1,612,310 Depreciation and amortisation expense 5-555, ,571 Other operating expenses -18,785,449-8,316,549 Operating foreign currency gain/(loss) ,809-72,717 Total operating expenses -84,741,140-7,262,527 Operating loss -26,254,316-7,262,527 Financial income and expenses Interest income 114,469 1,018,664 Intercompany interest income 10 16,564,027 24,368,825 Interest expense -70,680-83,717 Other financial income/(expense) 443, Financial foreign currency gain/(loss) 14-3,256,741-1,647,485 Net financial income and expenses 13,794,559 23,656,089 (Loss) / profit before tax -12,459,757 16,393,562 Tax expense / (income) 4-16,293,430 5,952,986 Operating result after tax -28,753,187 22,346,548 Brought forward To other equity -28,753,187 22,346,548 Net brought forward -28,753,187 22,346, OUR RESULTS STATEMENT OF FINANCIAL POSITIONS SEVAN DRILLING ASA NOTE ASSETS Non-current assets Intangible fixed assets Deferred tax asset 4 0 3,154,052 Total intangible assets 0 3,154,052 Tangible fixed assets Equipment and other movables 5 3,946,167 1,060,637 Other non-current assets 584,829 0 Total tangible fixed assets 4,530,996 1,060,637 Financial assets Investments in subsidiaries ,586, ,566,972 Loans to group companies ,379, ,358,444 Total financial assets 785,966, ,925,416 Total non-current 790,497, ,140,104 Current assets Receivables Accounts receivables 8 35, ,109 Accounts receivables from group companies 10 27,296,899 2,078,039 Other receivables 8 4,533,521 1,251,531 Total receivables 31,866,125 3,731,679 Cash and bank deposits 9 74,049,297 3,263,556 Total current assets 105,915,422 6,995,235 Total assets 896,412, ,135,339 E 24

187 OUR RESULTS 49 STATEMENT OF FINANCIAL POSITIONS SEVAN DRILLING ASA NOTE Equity and liabilities Restricted equity Share capital 2, 3, ,624,189 61,854,554 Share premium 2 665,904, ,818,154 Total restricted equity 774,528, ,672,708 Retained earnings Other equity 2 84,508, ,483,596 Total retained earnings 84,508, ,483,596 Total equity 859,036, ,156,304 Liabilities Pension obligation 6 100,753 0 Loans from group companies ,173 0 Total long term liabilities 508,926 0 Current liabilities Trade creditors 8 6,447,675 2,385,744 Accounts payable to group companies 10 20,999,976 42,233,311 Tax payable 4 34,639 0 Public duties payable 8 2,802, ,438 Other short term liabilities 8 6,582,086 61,542 Total short term liabilities 36,867,054 44,979,035 Total liabilities 37,375,980 44,979,035 Total equity and liabilities 896,412, ,135,339 Oslo, 29 April 2014 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kristian Johansen Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Birgitte Ringstad Vartdal Board member Scott McReaken Managing Director 50 OUR RESULTS STATEMENT OF CASH FLOWS SEVAN DRILLING ASA NOTE Cash flows (used by) / generated from operating activities Profit/loss before tax -12,459,757 16,393,561 Tax paid during the period 0 0 Depreciation and write downs 555, ,571 Other non-cash -9,535,726 0 Currency effects 3,457, ,654 Change in trade and other receivables -3,454, ,428 Change in trade creditors 3,719,014 1,254,968 Change in other accruals -33,329,371-4,190,370 Net cash flow (used by) / generated from operating activities -51,046,866 14,022,956 Cash flows used in investing activities Purchases of tangible assets -3,460, ,548 Investment in subsidiaries 0-24,643,795 Net cash flow used in investing activities -3,460,717-24,839,343 Cash flow generated from / (used by) financing activities Change in intercompany balances -53,951,410-38,297,105 Increase of equity (share issue) 184,740,060 0 Transaction costs on share issue -5,872,387 0 Net cash flow generated from / (used by) financing activities 124,916,263-38,297,105 Net cash flows for the period 70,408,680-49,113,492 Cash and cash equivalents at the beginning of the year 3,263,556 52,289,359 Cash brought in via merger of group companies 514,315 0 Currency effect bank deposits -137,254 87,689 Cash and cash equivalents at the end of the year 74,049,297 3,263,556 Cash and bank deposits actual 74,049,297 3,263,556 Difference 0 0 E 25

188 OUR RESULTS 51 NOTES TO SEVAN DRILLING ASA NOTE 1: ACCOUNTING POLICIES Sevan Drilling s financial statements have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting principles. The functional currency for the company is USD as this is the currency by which the Company is financed. The functional currency in the subsidiaries are USD and any potential future dividends will be nominated in USD. All numbers are in USD 1 unless otherwise stated. The Company merged Sevan Drilling Management AS, Sevan Drilling Invest AS, and Sevan Drilling Rig IX AS into Sevan Drilling ASA in the current year. The merger was carried out using the continuity method for both accounting and tax as the merged companies were 100% owned subsidiaries. REVENUE RECOGNITION Revenue and operating expenses are related to long term contract arrangements with Cosco in China, whereby Sevan Drilling ASA (and formerly Sevan Drilling Management AS) provide Cosco with services related to project management, site supervision, and engineering consulting, as well as providing pre-ops spare parts to the rigs under construction. Revenue is recognised according to the percentage of completion method. The degree of completion is calculated as expenses incurred as a percentage of estimated total expense. Expenses are recognized as the goods and services are provided. Total expenses are reviewed on a regular basis. If the projects are expected to result in losses, the total estimated loss is recognised immediately. This revenue and operating expense is eliminated at the Sevan Drilling ASA Group level, as the costs are part of the rig value acquired by the Singapore rig owning entities. MAIN PRINCIPLE FOR EVALUATION AND CLASSIFICATION OF ASSETS AND LIABILITIES Current assets and current liabilities include items with a due date within one year after the transaction date, as well as items relating to the operating cycle. Other items have been classified as non-current assets and non-current liabilities. Current assets are measured at the lower of purchase cost and fair value. Short-term liabilities are recognized in the balance sheet at nominal value at the establishment date. Fixed assets are measured at purchase cost. The fixed assets are written down to net realizable value if a value reduction occurs that is expected to be permanent. Borrowings are recognized in the balance sheet at amortized value on the establishment date, equal to nominal value deducted for transaction costs. Other non-current liabilities are recognized at nominal value. RECEIVABLES Trade receivables and other receivables are recognized in the balance sheet at nominal value after deduction of provision for bad debt. Bad debt is provided for on the basis of an individual assessment of each receivable. FIXED ASSETS Fixed assets are recognized in the balance sheet and depreciated over the asset s expected useful life on a straight-line basis. Maintenance of an asset is expensed under operating expenses as incurred. Additions or improvements are added to the asset s cost price and depreciated together with the asset. When the recoverable amount of the asset is exceeded by the carrying amount of the asset an impairment charge is recognized, and the asset is written down to recoverable amount. Recoverable amount is the highest of net sales value and value in use. Value in use is the net present value of future cash flows, which are expected to be generated from the asset. Leased assets are reflected in the balances sheet as assets if the leasing contract is considered a financial lease. RESEARCH AND DEVELOPMENT Cost associated with research activities are expensed as incurred. Qualifying expense associated with development activities are capitalized and depreciated over their expected useful life. CASH AND BANK DEPOSITS Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. 52 OUR RESULTS CURRENCY Cash and bank deposits, current assets, and short-term liabilities nominated in other than functional currencies are converted using exchange rates that prevail on the balance sheet date. TAXES Deferred income tax liability/deferred tax asset is provided using the liability method on temporary difference at the balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. LEASES Leases in which more than an insignificant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. SHARES IN SUBSIDIARIES Investments in subsidiaries are measured under the cost method. GROUP The company will be consolidated into the Sevan Drilling Group accounts, with business address in Oslo. CASH FLOW STATEMENT The cash flow statement is prepared in accordance with the indirect method. NOTE 2: EQUITY EQUITY SETTLED SHARE- SHARE EMPLOYEE OTHER UNIT CAPITAL PREMIUM BENEFIT RESERVE EQUITY TOTAL Equity January 1, ,854, ,818, , ,062, ,156,304 Capital increase 46,769, ,970, ,740,060 Transaction cost equity raise 0-5,872, ,872,387 Changes due to merger of group companies 0-12, ,167-32,066,824-31,719,721 Value of options, cost directly to equity , ,438 Net result for the year ,753,187-28,753,187 Equity December 31, ,624, ,904,128 1,265,403 83,242, ,036,507 NOTE 3: SHARE CAPITAL AND SHAREHOLDER INFORMATION Share capital NUMBER NOMINAL VALUE (NOK) REGISTERED Ordinary shares 594,623, ,623,436 Total 594,623, ,623,436 E 26

189 OUR RESULTS 53 List of 20 major shareholders at January 7, 2014 SHAREHOLDER ACCOUNTS NO. OF SHARES VOTING SHARE **DNB NOR MARKETS, AKS 216,062, **SKANDINAVISKA ENSKILDA BANKEN AB Oslofilialen 81,678, J.P. MORGAN CHASE BANK N.A. London NORDEA TREATY ACCOUNT 41,508, GOLDMAN SACHS & CO - EQUITY 28,751, ODIN OFFSHORE 16,988, WENAASGRUPPEN AS 15,220, SKAGEN VEKST 13,252, THE BANK OF NEW YORK MELLON BNY MELLON 11,232, SKANDINAVISKA ENSKILDA BANKEN AB A/C CLIENTS ACCOUNT 10,879, JP MORGAN CLEARING CORP. 10,850, VERDIPAPIRFONDET DNB NORGE (IV) 9,450, FID. FUNDS-EUR. SM. 6,082, US BK EVERMORE GLO VAL 5,923, OP-EUROPE EQUITY FUN 5,617, THE BANK OF NEW YORK MELLON BNY MELLON 4,678, DNB LIVSFORSIKRING ASA 3,893, CITIBANK, N.A. 3,100, VERDIPAPIRFONDET DNB 3,000, SKANDINAVISKE ENSKILDA BANKEN AB A/C SEC FIN 2,795, UBS AG, LONDON BRANCH 2,159, Total, 20 largest shareholder accounts 493,123, Total no. of shares 594,623,436 Foreign ownership (Citizenship/Country of registration) 167,474, ** Seadrill controls 50.11% of the interest in Sevan through forward share contracts held with banks identified. Shares and options owned or controlled by the Board of Directors NO. OF OPTIONS NO. OF SHARES Scott McReaken, CEO from 15 November Scott Kerr, CEO until 15 November , ,300 Jon Helge Wilmann, CFO 1, ,988 Erling Lind, Chairman - - Benedicte Schilbred Fasmer, member of board - - Birgitte Ringstad Vartdal, member of board - - Kristian Johansen, member of board - 17,000 Per Wullf, member of board OUR RESULTS NOTE 4: TAXES The Company merged Sevan Drilling Management AS, Sevan Drilling Invest AS, and Sevan Drilling Rig IX AS into Sevan Drilling ASA in the current year. The merger was carried out using the continuity method for both accounting and tax as the merged companies were 100% owned subsidiaries. Tax expense Profit before tax -12,459,757 16,393,561 Permanent differences 6,817, ,791 Permanent currency differences 15,973,525-37,667,704 Changes in temporary differences -45,845,337 36,545,560 Tax basis -35,513,586 15,710,207 Loss to be brought forward 35,513,586 0 Basis for taxes payable 0 15,710,207 Taxes payable 0 4,398,858 Change in deferred tax assets 16,293,430-10,232,757 Tax expense/(income) 16,293,430-5,833,899 Temporary differences Unrealised forex 35,022,733-10,306,646 Construction contracts 3,703,216 2,820,895 Pension liabilities -100, ,753 Piranema -350,825 15,539 Net temporary differences 38,274,371-7,570,965 Losses carry forward -86,133,441-50,619,856 Basis for deferred tax asset -47,859,070-58,190,821 Deferred tax asset 27% (28%) 12,921,949 16,293,430 Deferred tax asset in balance sheet 0 16,293,430 Total deferred income tax asset was written off in Q as a consequence of not expecting to have a taxable profit in Norway in the foreseeable future to which it can apply these tax losses. Tax expense reconciliation Profit before tax -12,459,757 16,393,561 Expected tax charge -3,488,732 4,590,197 Tax charge in the profit and loss accounts 16,293,430-5,833,899 Difference -19,782,162-1,243,702 Tax on permanent differences -1,909,035-1,243,702 Effect of changed tax rate from 28% to 27% -478, % of permanent currency differences -4,472,587 0 Unrecognised temporary differences -12,921,949 0 Explained difference -19,782,162-1,243,702 E 27

190 OUR RESULTS 55 NOTE 5: FIXED ASSETS IT EQUIPMENT OFFICE EQUIPMENT TOTAL FIXED ASSETS Cost as of January 1, ,168, ,506 1,618,102 Additions 3,460, ,460,717 Disposals -293, , ,711 Cost as of December 31, ,335, ,731 4,656,109 Accumulated depreciation January 1, ,180 45, ,463 Depreciation 335, , ,730 Disposals -274, , ,251 Accumulated depreciation as of December 31, , , ,942 Net book value as of December 31, ,762, ,049 3,946,167 Economic life 3 year 5 year Depreciation plan Straight line Straight line Annual rental of non-financial assets ANNUAL RENT Office 526,878 Machines, furnitures, fixtures 161,544 Other 133,042 NOTE 6: EMPLOYEE BENEFIT EXPENSE Employee benefit expense Salaries and vacation pay 3,522,885 2,616,892 Employer's share of social security 1,622, ,934 Pension costs 459,939 2,051,132 Other salary related costs 3,085,486-6,663,269 Total employee benefit expense 8,690,432-1,612,310 At December 31, 2013, there are 35 employees in Sevan Drilling ASA. Included in Salary and vacation pay is 334,039 in bonuses for The bonus is related to Group recognition of the bonus program. In 2012 the bonuses was 288,625. The pension schemes meet the requirements of the law on compulsory occupational pension. There is an immaterial defined benefit pension plan for one employee in 2012, established in 2011 in Sevan Drilling Management AS and added to Sevan Drilling ASA s accounts as a result of the merger. The net retirement benefit obligation in the balance sheet is USD 100 thousand. No loans or guarantees have been granted to the CEO, the Chairman of the Board, or to any other related party. 56 OUR RESULTS Remuneration of Senior Management and the Board of Directors 2013 RETIREMENT OTHER SHARE OPTION NAME TITLE SALARIES BENEFITS BENEFITS GRANTED Scott McReaken CEO from 15 Nov ,203 2,025 5,210 - Scott Kerr CEO until 15 Nov ,611 21,574 1,290, Jon Wilmann CFO until 31 Dec ,679 22, , Erling Lind Chairman of the Board 85, Benedicte Fasmer Board member 61, Kitty Hall Board member 63, Kristian Kuvaas Johansen Board member 61, Per Winther Wullf Board member 61, Birgitte Ringstad Vartdal Board member 21, The Board members are not included in the collective retirement benefit plans RETIREMENT OTHER SHARE OPTION NAME TITLE SALARIES BENEFITS BENEFITS GRANTED Scott Kerr CEO 908,600 22,700 50, Jon Wilmann CFO 717,400 22,500 52, Erling Lind Chairman of the Board 62, Benedicte Fasmer Board member 36, Kitty Hall Board member 65, Kristian Kuvaas Johansen Board member 53, Per Winther Wullf Board member 53, The Board members are not included in the collective retirement benefit plans. Kitty Hall resigned from the Board, and was replaced by Birgitte Ringstad Vartdal on 23 July Auditor fees Statutory audit 295, ,885 Other assurance services 186,439 42,072 Tax consulting 46,141 80,907 Other assistance from auditor 266, ,198 Total audit fees 794, ,062 E 28

191 OUR RESULTS 57 NOTE 7: SHARE-BASED PAYMENTS Share options are granted to directors and to selected employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options shall vest with one third each year. Vesting of the options is conditional upon the Employee, on each of the vesting dates, remaining employed by the company. The options may, once vested, be exercised at any time up to and including the date falling three years after the relevant vesting dates. The group has no legal or constructive obligation to repurchase or settle the options in cash. Due to change of control in 2013, all options are vested as at 27 September Movements in the number of share options outstanding and their related weighted average exercise prices AVERAGE EXERCISE AVERAGE EXERCISE PRICE PER SHARE OPTIONS PRICE PER SHARE OPTIONS OPTION (THOUSANDS) OPTION (THOUSANDS) At 1 January NOK ,403.3 NOK Granted NOK ,376.7 NOK ,903.3 Forfeited NOK ,041.7 NOK Exercised NOK NOK Expired NOK NOK At 31 December NOK ,738.3 NOK ,403.3 Out of the 9,738,326 outstanding options (2012: 9,403,334 options), 9,738,326 options (2012: 3,153,344) were exercisable. No options were exercised in 2013 or 2012, and the options were excluded from the earnings per share calculation as they are antidilutive. The weighted average fair value of options granted during the period determined using the Black-Scholes valuation model was NOK 1.51 per option (2012: NOK 1.73). The significant inputs into the model were weighted average share price of NOK 5.75 (2012: NOK 5.75) at the grant date, exercise price shown above, volatility of 39.4 % (2012: 42.5%), dividend yield of 0% (2012: 0%), an expected option life of 2.8 years (2012: 3 years) and an annual risk-free interest rate of 1.38% (2012: 1.37%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices. See above for the total expense recognised in the income statement for share options granted to directors and employees. NOTE 8: RECEIVABLES AND LIABILITIES The company has no receivables or liabilities with a due date later than five years as at 31 December 2013 and NOTE 9: CASH AND BANK DEPOSITS Taxes withheld from employees deposited in a restricted bank account 1,772, ,028 Cash and other bank deposits 72,276,623 3,089,528 Total cash and bank deposits 74,049,297 3,263, OUR RESULTS NOTE 10: INTERCOMPANY TRANSACTIONS Remuneration to executives is disclosed in note 6 Statement of financial positions Long-term receivables from Group companies 463,379, ,558,444 Accounts receivables from Group companies 27,296,899 2,078,039 Total receivables from Group companies 490,676, ,636, Long-term payables to Group companies 408,173 0 Accounts payables to Group companies 20,999,976 42,233,311 Total liabilities to Group companies 21,408,149 42,233,311 Statement of Income Sales/(Purchases) of services to/from Group companies 0 1,955,244 Interest income from Group Companies 16,564,027 24,368,825 Interest cost to Group companies 0-72,074 Total income / (cost) from Group companies 16,564,027 26,251,995 NOTE 11: INVESTMENTS IN SUBSIDIARIES Statement of financial positions COMPANY NET RESULT OF (NUMBERS IN 000) ADDRESS OWNERSHIP BOOK VALUE EQUITY THE YEAR 2013 Sevan Drilling Rig II AS Oslo 100 % 25-41,253-1,663 Sevan Drilling AS Oslo 100 % Sevan Drilling Rig V AS Oslo 100 % 24-11,224-5,426 Sevan Drilling Rig VI AS Oslo 100 % 24-4,968-2,670 Sevan Drilling Rig VII AS Oslo 100 % Sevan Drilling Rig VIII AS Oslo 100 % Sevan Drilling Pte Ltd Singapore 100 % 305, ,445-14,862 Sevan Drilling Rig IX Pte Ltd Singapore 100 % 16,846 12,898-4,078 Total 322, ,882-28,725 Sevan Drilling Management AS, Sevan Drilling Invest AS, and Sevan Drilling Rig IX AS were merged into Sevan Drilling ASA in the current year. The merger was carried out using the continuity method for both accounting and tax as the merged companies were 100% owned subsidiaries. E 29

192 OUR RESULTS 59 COMPANIES OWNED BY SUBSIDIARIES ADDRESS OWNER OWNERSHIP Sevan Drilling Rig II Pte Ltd Singapore Sevan Drilling Rig II AS 100 % Sevan Drilling Rig IV Pte Ltd Singapore Sevan Drilling AS 100 % Sevan Drilling Rig V Pte Ltd Singapore Sevan Drilling Rig V AS 100 % Sevan Drilling Rig VI Pte Ltd Singapore Sevan Drilling Rig VI AS 100 % Sevan Drilling Rig VII Pte Ltd Singapore Sevan Drilling Rig VII AS 100 % Sevan Drilling Rig VIII Pte Ltd Singapore Sevan Drilling Rig VIII AS 100 % Sevan Drilling Ltd UK Sevan Drilling Pte Ltd 100 % Sevan Investimentos do Brasil Ltda Brazil Sevan Drilling Rig IX Pte Ltd 100 % Sevan Marine Servicos de Perfuracao Ltd Brazil Sevan Drilling Rig IX Pte Ltd % NOTE 12: EARNINGS PER SHARE Profit attributable to equity holders -28,753,187-21,653,291 Weighted avg. no. of ordinary shares 563, ,625 Earnings per share (basic and diluted) NOTE 13: FINANCIAL RISK MANAGEMENT Sevan Drilling ASA s activities are exposed to a variety of financial risks: market risk (foreign currency risk), credit risk, and liquidity risk. The overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company s financial performance. A) MARKET RISK (i) Foreign exchange risk Sevan Drilling ASA operates internationally and is exposed to foreign currency risk arising from various currency exposures, primarily with respect to the NOK, GBP and Euro. Foreign exchange risk arises when future commercial transactions or recognized assets and liabilities are denominated in a currency that is not an entity s functional currency. Sevan Drilling ASA aims to achieve a natural hedge between cash inflows and cash outflows by matching the currency of operating costs with the currency of revenue as well as the currency of financial assets with the currency of financial liabilities, and thus has minimal exposure of foreign currency risk on its trade receivables and payables. B) CREDIT RISK Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. No significant concentration of credit risk towards a single financial institutions exists and policies exist that limit the amount of credit exposure to any single financial institution. C) LIQUIDITY RISK Prudent liquidity risk management includes maintaining sufficient cash and marketable securities and the availability of funding from an adequate amount of committed credit facilities. The objective is to maintain flexibility of financing by providing sufficient withdrawal facilities and committed credit lines. 60 OUR RESULTS NOTE 14: FINANCIAL AND OPERATIONAL CURRENCY EFFECTS The Company split currency gains and losses in operating and financial elements in the Statement of Income. The currency effects presented in the operating result are related to currency effects in purchases, while the currency effects in the financial results is mainly related to revaluation of NOK bank deposits. Operation Realized foreign exchange gains 596, ,677 Realized foreign exchange loss -539, ,347 Unrealized gain/(loss) net 143,557-41,047 Net operational foreign exchange loss 200,809-72,717 Financial Realized foreign exchange gains 1,007,196 0 Realized foreign exchange loss -482,395-3,077 Unrealized gain/(loss) net 2,731,940-1,644,408 Net operational foreign exchange gain/loss 3,256,741-1,647,485 NOTE 15: LONG-TERM CONTRACT Due (to)/from customers under long-term contract Opening balance** -39,736,221 0 Billings -16,311,607 0 Contract revenue earned/expenses incurred 58,314,975 0 Ending balance*** 2,267,147 0 ** Opening balance is a result of the merger with Sevan Drilling Management AS who formerly held the contracts with Cosco *** Ending balance is included in Other receivables in the balance sheet E 30

193 OUR RESULTS OUR RESULTS AUDITOR S REPORT E 31

194 OUR RESULTS OUR RESULTS RESPONSIBILITY STATEMENT The Board of Directors and the Chief Executive Officer have today considered and approved the report and the financial statements for the Sevan Drilling Group and the parent company Sevan Drilling ASA for the year ending 31 December The consolidated financial statements of Sevan have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and addi-tional disclosure requirements as stated in the Norwegian Accounting Act that are applicable per 31 December The financial statements for the parent company Sevan Drilling ASA have been prepared in accordance with the Norwegian Accounting Act and Generally Accepted Accounting Principles in Norway that are applicable per 31 December The Director s report for the Sevan Drilling Group and Sevan Drilling ASA has been prepared in accordance with the Norwegian Accounting Act and the Norwegian Accounting Standard no. 16 applicable per 31 December We confirm that, to the best of our knowledge: and Sevan Drilling ASA for the year ending 31 December 2013 have been prepared in accordance with applicable accounting standards. fair view of the Sevan Drilling Group s and Sevan Drilling ASA s assets, liabilities, financial position and results of operations for the year ending 31 December December 2013 includes a fair view of: The development, results of operations and position for the Sevan Drilling Group and Sevan Drilling ASA. The principal risks and uncertainties for the Sevan Drilling Group and Sevan Drilling ASA. Oslo, 29 April 2014 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kristian Johansen Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Birgitte Ringstad Vartdal Board member Scott McReaken Managing Director E 32

195 OUR RESULTS 65 CORPORATE GOVERNANCE IN SEVAN DRILLING Sevan Drilling is committed to sound corporate governance principles contributing to optimal value creation over time. The objective of Sevan Drilling s corporate governance is to regulate the division of roles between shareholders, the Board and executive management more comprehensively than is required by legislation. 1. IMPLEMENTATION AND REPORTING ON CORPORATE GOVERNANCE Implementation and regulations Sevan Drilling ASA s ( Sevan ) Board of Directors (the Board ) has the ultimate responsibility for ensuring that the company practices good corporate governance and has prepared and approved the company s policy for corporate governance. Sevan, through its Board and executive management, carries out an annual review of its principles for corporate governance. Values, objectives and strategies Confidence in Sevan as a company and in its business activities as a whole is essential for continuing competitiveness. Sevan aims to maintain high ethical standards in its business concept and relations with customers, suppliers and employees. The Board has defined the values and has adopted ethical guidelines applicable to all employees. The values, as well as a statement on who we are, the company s vision, strategic themes as well as the ethical guidelines are available on the company s website. Sevan is a Norwegian public limited company listed on Oslo Børs. The Norwegian Accounting Act includes provisions on corporate governance at Section 3-3b which impose a duty on the company to issue an annual statement on its principles and practice for corporate governance. These provisions also stipulate minimum requirements for the content of this report. The Norwegian Corporate Governance Board (NCGB) has issued the Norwegian Code of Practice for Corporate Governance (the Code ). Adherence to the Code is based on the comply or explain principle, which means that a company must comply with the recommendations of the Code or explain why it has chosen an alternative approach to specific recommendations. Oslo Børs requires listed companies to publish an annual statement of their policy on corporate governance in accordance with the Code in force at the time. The Continuing Obligations of listed companies are available on Sevan complies with the above mentioned rules and regulations, and the current Code, issued on 23 October 2012, unless otherwise specifically stated. Sevan provides a statement on its principles for corporate governance in its annual report, and this information is also available on the company website, Sevan has not established separate guidelines for corporate social responsibility ( CSR ) as recommended by the Code. Sevan was established and listed on Oslo Børs in 2011 and and is continuously considering the need for developing further guidelines. 2. BUSINESS The business objective is set out in its articles of association section 3: to own and/or operate, directly or indirectly, drilling rigs and activities related thereto, as well as investing in other companies. The long term objective, following the clause above, is to become a premier drilling contractor owning units specialising in offshore ultra-deep water operations. Sevan will pursue the following main strategies to reach its overall objective: monetise its current design and technology by delivering safe, efficient and cost effective service and delivering newbuild units on time and within budget, and pursue technological advancements with our unique hull design to maximise its flexibility to expand into growth areas in offshore drilling. 66 OUR RESULTS Sevan has a set of Strategic Themes, available on its website, to further define its strategic priorities. Sevan s articles of association are available at the company s website, 3. EQUITY AND DIVIDEND Equity The Board aims to maintain a satisfactory equity ratio in the company in light of the goals, strategy and risk profile, thereby ensuring that there is an appropriate balance between equity and other sources of financing. The Board regularly assesses the company s capital requirements. Dividend Sevan s objective is to generate a return for its shareholders through dividends and increases in the share price that is at least in line with the return available on similar investment opportunities of comparable risk. Due to the ongoing newbuilding programme in the company, Sevan does not intend to pay dividend to shareholders in the short term. Sevan has no restrictions for making dividend payments in the bank loan agreements. Authorisations to the Board The Board will in the outset not propose that authorisation to increase the share capital and to buy own shares are granted for periods longer than until the next Annual General Meeting of the company. 4. EQUAL TREATMENT OF SHAREHOLDERS AND TRANSACTIONS WITH CLOSE ASSOCIATES Equal treatment Sevan has one class of shares with equal rights. In the event that the Board is granted authorisations to buy own shares and decides to use this authorisation, the transactions will be carried out through the stock exchange or at prevailing stock exchange prices if carried out in any other way. Transactions with close associates Any transactions, agreements or arrangements between Sevan and its shareholders, members of the Board, members of the executive management team or close associates of any such parties shall only be entered into as part of the ordinary course of business and on arm s length market terms. All such transactions shall comply with the procedures set out in the Norwegian Public Limited Liability Companies Act or similar provisions, as applicable. The Board shall arrange for a valuation to be obtained from an independent third party unless the transaction, agreement or arrangement in question must be considered to be immaterial. The Sevan s financial statements shall provide further information about transactions with related parties. 5. FREELY NEGOTIABLE SHARES The shares in Sevan are freely negotiable. The articles of association do not impose any restrictions on transfers of shares. 6. THE GENERAL MEETING The annual general meeting The annual general meeting ( AGM ) is Sevan s highest authority. The Board strives to ensure that the AGM is an effective forum for communication between the shareholders and the Board, and encourages shareholders to participate in the meeting. Preparations for the AGM The notice calling the AGM is made available on the Sevan s website, and sent to shareholders no later than 21 days prior to the meeting, as recommended by the Code. For extraordinary general meetings, the calling is available at least 14 days prior to the meeting. The financial calendar for the coming year is published no later than 31 December in the form of a stock exchange announcement and is also made available on Sevan s website. The deadline for shareholders to give notice of their intention to attend the meeting is set as close to the date of the meeting as possible. Section 7 of Sevan s articles of association stipulates that the supporting documents dealing with matters to be considered by the AGM can be made available on Sevan s website rather than being sent to shareholders by post. However, shareholders are still entitled to receive the documents by post upon request if they so wish. The supporting documentation provides all the necessary information for shareholders to form a view on the matters to be considered. E 33

196 Participation in the AGM Shareholders must give written notice of their intention to attend the AGM either by post, telefax, via their VPS securities account, or by . The notices calling the general meetings shall provide information on the procedures shareholders must observe in order to participate in and vote at the general meeting. The notice will also set out: The procedure for representation at the meeting through a proxy, including a form to appoint a proxy, to allow for shareholders who are unable to attend in person will be able to vote by proxy and The right for shareholders to propose resolutions in respect of matters to be dealt with by the general meeting. Agenda and conduct of the AGM The Board decides the agenda for the AGM. The main agenda items are determined by the requirements of the Public Limited Liability Companies Act and Article 7 of the articles of association of Sevan Drilling. The Board will seek to propose a person independent of Sevan and the Board to chair the general meetings, ensuring that the AGM has an independent chairperson in accordance with the recommendations of the Code. The Board and the person chairing the meeting will make appropriate arrangements for the general meeting to vote separately on each candidate nominated for election to the corporate bodies. Members of the Board and the nomination committee, as well as the company s auditor are present at the annual general meeting. The AGM minutes are published by issuing a stock exchange announcement, and are also made available on Sevan s website at 7. NOMINATION COMMITTEE Sevan has a nomination committee consisting of three members, according to section 6 of the articles of association. The members of the nomination committee are elected by the AGM after considering proposals made by the current nomination committee. The following three members were elected at Sevan s extraordinary general meeting at 9 January 2012: Harald Thorstein, chairman Jarle Sjo Geir Tjetland OUR RESULTS 67 The members were elected for a period of two years. At the same meeting, instructions to the committee were approved. Pursuant to section 6 of the articles of associations, the nomination committee shall propose board member candidates to the general meeting in connection with notices thereof. The nomination committee shall also make proposal for the remuneration of the Board. 8. BOARD OF DIRECTORS - COMPOSITION AND INDEPENDENCE Elections to the board The Board is appointed by the general meeting. According to section 5 of the articles of association, the Board shall consist of three to nine members. The Board The Board has the requisite competency to independently evaluate the cases presented by the management as well as Sevan s operations, and function well as a body of colleagues. The members of the Board represent varied and broad experience from relevant industries and areas of technical speciality, and the members bring experience from both Norwegian and international companies. More information about the board members expertise and background, as well as their holdings of shares in Sevan can be found on the company s website, Independence of the Board The Board does not include any members from Sevan s executive management team and all the members are considered independent of Sevan s material business contacts. Chairman of the Board, Erling Lind, is currently a partner at the Oslo based law firm Wiersholm, and i.a. act as external legal counsel to Seadrill Ltd, which is Sevan s main shareholder. Board member Per Wullf is currently the CEO and President of Seadrill. The three other members of the Board are considered independent of Sevan s main shareholder. 9. THE WORK OF THE BOARD OF DIRECTORS The Board`s duties and responsibility The Board prepares an annual plan for its work with special emphasis on goals, strategy and implementation. The Board s primary responsibility is: participating in the development and approval of Sevan s strategy, performing necessary monitoring functions and acting as an advisory body for the management team. 68 OUR RESULTS Sevan s strategy is regularly subject to review and evaluation by the Board. Its duties are not static, and the focus will depend on Sevan s ongoing needs. The Board is also responsible for ensuring that the operation of Sevan is in compliance with the values and ethical guidelines. The Chairman of the Board is responsible for ensuring that the Board s work is performed in an effective and correct manner. The Board is responsible for the appointment of the CEO. Mandate for the Board The Board shall ensure that Sevan has a good management with clear internal distribution of responsibilities and duties. Further details on the duties of the Board are included in the instructions to the Board. In accordance with the provisions of the Norwegian company law, the terms of reference for the Board are set out in a formal mandate that includes specific rules and guidelines on the work of the Board and decision making. Mandate for the CEO The CEO is responsible for the executive management and the day-to-day operations of Sevan. The Board issues a mandate for the work of the CEO. Financial reporting All members of the Board receive information about Sevan s operational and financial development on a monthly basis. Board meetings During 2013 the Board had 18 meetings, 7 physical meetings and 11 meetings by telephone conference, with a turnout of 84.4 percent. Extraordinary Board meetings are held as and when required, to consider matters that cannot wait until the next regular meeting. Remuneration committee Sevan shall have a remuneration committee appointed by the Board. The purpose of the committee is to: Evaluate and propose the compensation of the chief executive officer (CEO) and other senior executives of the company. Produce an annual report on the compensation of the executive management team, which shall be included in the annual accounts pursuant to applicable rules and regulations, including accounting standards, promulgated from time to time. Evaluate and propose incentive compensation plans and equity based plans for the company and any subsidiaries. Further details on the committee s duties and responsibilities are included in the instructions to the remuneration committee approved by the Board. The Board has appointed board members Birgitte Ringstad Vartdal and Per Wullf as members of the remuneration committee. Audit committee Sevan has an audit committee appointed by the Board as set out in the Norwegian Public Limited Liability Companies Act. The audit committee is appointed by the Board to assist the Board in fulfilling its obligations and responsibilities in respect to financial reporting, auditing and internal control in accordance with section 6-42 and 6-43 of the Norwegian Public Limited Liability Companies Act. The Board has appointed board members Kristian Johansen and Benedicte Schilbred Fasmer to represent the Board in the audit committee. The audit committee will not make any decisions on behalf of the Board, but will present its assessment and recommendations to the Board. The Board has approved instructions to the audit committee. The Board may also appoint other subcommittees, as deemed necessary or appropriate. The Board`s evaluation of its own work The Board carries out an annual evaluation of its own performance, working arrangements and competence. The Chairman of the Board prepares a report on this evaluation, which is made available to the nomination committee. 10. RISK MANAGEMENT AND INTERNAL CONTROL The Board shall seek to ensure that the company has sound internal control and systems for risk management that are appropriate in relation to the extent and nature of Sevan s activities. The Board shall ensure that the company s internal control comprises guidelines, processes, duties, conducts and other matters that: facilitate targeted and effective operational arrangements for the company and also make it possible to manage commercial risk, operational risk, financial risk, the risk of breaching applicable legislation and regulations as well as all other forms of risk that may be material for achieving Sevan s commercial objectives; contribute to ensuring the quality of internal and external reporting; and contribute to ensuring that Sevan operates in accordance with the relevant legislation and regulations as well as with its internal guidelines for its activities, including the company s ethical guidelines and corporate values. E 34

197 When separate guidelines for CSR are established, these will also be included in the company s systems. One of the responsibilities of the audit committee is to assist the Board in fulfilling its obligations and responsibilities with regard to internal control. The Board shall form its own opinion on Sevan s internal controls, based on the information presented to the Board. Reporting by executive management to the Board shall be prepared in a format which gives a balanced presentation of all risks of material significance, and of how the internal control system handles these risks. The Board has approved routines for internal control and risk management. The objective for Sevan s risk management and internal control is to manage, rather than eliminate exposure to risks related to the successful conduct of business and to support the quality of its financial reporting. Effective risk management and good internal control contribute to securing shareholders investment in the company and it s assets. Financial risk Sevan uses forward contracts to some extent to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. Changes to the price level of goods and services acquired may affect Sevan; therefore price developments are carefully monitored. Sevan seeks to handle this risk through contract clauses with its customers. Credit risk related to counterparties on trading in derivative financial instruments is handled by restricting to banks and financial institutions with a high rating. The objective is to maintain flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Annual review of internal control by the Board The Board shall carry out an annual review of the most important areas of exposure to risk and its internal control arrangements, and provide an account in the annual report of the main features of Sevan s internal control and risk management systems as they relate to financial reporting. OUR RESULTS 69 Sevan has an audit committee. Within risk management and internal control, the committee s duties and responsibilities include; Monitoring the financial reporting process, focusing on the following main areas: Changes in accounting principles Critical accounting estimates or judgments Material adjustments to the accounts requested or suggested by the statutory auditor Areas where there is a difference of opinion between the management and the statutory auditor Monitoring the effectiveness of the financial reporting processes, internal control, and internal audit where applicable, and risk management systems. Monitoring the statutory audit of the annual accounts. Establishing and evaluating procedures for the correct handling and registering of complaints relating to financial reporting, accounting, internal control and statutory audit. 11. REMUNERATION OF THE BOARD OF DIRECTORS The general meeting annually determines the Board s remuneration, based on proposal by the nomination committee. Remuneration of board members shall be reasonable and based on the Board s responsibilities, work, time invested and the complexity of the enterprise. The compensation shall be a fixed annual amount. The Chairman of the Board may receive a higher compensation than the other members. The Board shall be informed if individual board members perform other tasks for Sevan than exercising their role as board members. Work in sub-committees may be compensated in addition to the remuneration received for board membership. Sevan s annual accounts provide information about the Board s compensation. 12. REMUNERATION OF EXECUTIVE PERSONNEL The Board has approved a policy for the remuneration of the CEO and other executive personnel. The Board decides the salary and other compensation to the CEO, however so that any compensation linked to the value of the company s shares shall be approved by the general meeting in accordance with the Norwegian Public Limited Companies Act. The CEO s salary and bonus shall be determined on the basis of an evaluation with emphasis on the following factors: financial results, business development, employee and customer satisfaction. Any fringe benefits shall be in line with market practice, and should not be substantial in relation to the CEO s basic salary. The performance related remuneration is subject to an absolute limit. This is further described in Sevan s compensation policy. 70 OUR RESULTS Share option scheme The management incentive program includes a share option scheme, where granted options will have a 3 year vesting period and 10 year duration. The strike price has been set at the average closing price over the 3 days preceding the granting of the options. The value of the options will be dependent solely on the share price. The Board annually carries out an assessment of the salary and other remuneration to the CEO. Reporting Sevan s annual accounts provide information about salary and other compensation to the CEO and the executive management team. The CEO determines the remuneration of executive employees based on guidelines for the remuneration prepared by the Board through the remuneration committee. The guidelines lay down the main principles for the company s management remuneration policy. The salary levels should not be of a size that could harm the company s reputation, or above the norm in comparable companies. The salary levels should, however, ensure that Sevan can attract and retain executive employees with the desired expertise and experience. 13. INFORMATION AND COMMUNICATIONS Sevan maintains a proactive dialogue with analysts, investors and other stakeholders of the company. Sevan strives to continuously publish relevant information to the market in a timely, effective and non-discriminatory manner, and has a clear goal to attract both Norwegian and foreign investors and to promote higher stock liquidity. All stock exchange announcements are made available on the Oslo Børs website, as well as on the Sevan s website, The announcements are also distributed to news agencies and other online services through Thomson Reuters. Financial reports Sevan publishes its preliminary annual accounts by the end of February and the complete annual report, including approved and final annual accounts and the Board of Directors report, is available no later than 30 April each year as required by the Securities Trading Act. Sevan s financial calendar for the coming year is published as a stock exchange announcement and made available on the website no later than 31 December each year, in accordance with the continuing obligations for companies listed on Oslo Børs. Other market information Sevan held open presentations in connection with the publication of the quarterly results. The presentations are webcasted for the benefit of investors who are not able to attend the presentations. Following the management agreements with Seadrill., the quarterly presentations are aligned with the quarterly presentations of Seadrill, starting with the presentation of fourth quarter At the presentations, the executive management reviews and comments on the published results, market conditions and future prospects. Dialogue with shareholders Sevan s management gives high priority to communication with the investor market. Individual meetings are organised for major investors, investment managers and analysts. Sevan also attends investor conferences. The Board has issued guidelines for the investor relations function, including authorised spokespersons. 14. TAKE-OVERS The Board has established guiding principles for how it will act in event of a take-over bid. It sets out that the Board will seek to follow a general principle of equal treatment and help to ensure equal treatment of all shareholders; seek to ensure that business activities are not disrupted unnecessarily; seek to ensure that shareholders are given sufficient information and time to form a view of any take-over bid; not unjustly seek to prevent any take-over bid, unless this is believed to be in the interests of Sevan and the shareholders; in due course issue a statement on the take-over bid in accordance with statutory requirements and applicable Norwegian corporate governance recommendations; and consider and, if deemed necessary or purposeful, arrange for a valuation of the take-over bid by an independent expert, the conclusion of which will be made available to shareholders. Any transaction that is in effect a disposal of Sevan s activities will be sought submitted to the general meeting for approval. E 35

198 15. AUDITOR Sevan is audited by PricewaterhouseCoopers in Stavanger, Norway. Each year the auditor presents a plan to the Board for the audit work and confirms that the auditor satisfies established requirements as to independence and objectivity. The auditor can be present at Board meetings where the annual accounts are on the agenda. Whenever necessary, the Board shall meet with the auditor to review the auditor s view on the accounting principles, risk areas, internal control routines etc. The use of the auditor as a financial advisor should be sought limited to cases where such use of the auditor does not have the ability to affect or question the auditors independence and OUR RESULTS 71 objectiveness as auditor for Sevan. Only the company s CEO shall have the authority to enter into agreements in respect of such counselling assignments. At the annual general meeting, the Board shall present a review of the auditor s compensation as paid for auditory work required by law and remuneration associated with other assignments. In connection with the auditor s presentation to the Board of the annual work plan, the Board should specifically consider if the auditor to a satisfactory degree also carries out a control function. The Board shall arrange for the auditor to attend general meetings as and where appropriate. 72 OUR RESULTS CORPORATE SOCIAL RESPONSIBILITY Confidence in Sevan is essential for continuing competitiveness, and Sevan aims to maintain high ethical standards in its operations and in relation to its stakeholders. Being socially responsible is part of Sevan s business. The Board has defined Sevan s values and adopted ethical guidelines applicable to all employees. However, the Board has not established separate guidelines for corporate social responsibility. HEALTH, SAFETY AND ENVIRONMENT Sevan s core business principles involve ensuring the health and safety of employees and taking care of the environment. Sevan strives for a working environment which provides job satisfaction and good health conditions, by aiming for a safe and inspiring working environment characterized by mutual respect and cooperation. Sevan s operations are subject to numerous laws and regulations in the form of international treaties and maritime regimes, flag state requirements, and national environmental laws and regulations in force in the jurisdictions in which our drilling units operate or are registered. Sevan has conformed its policies for compliance with these laws and regulations with the Seadrill policies and procedures for health, safety and the environment. The basic fundamentals of safety performance at Seadrill are based on continuous improvement through proactive initiatives in four key areas: safety leadership, risk assessment and hazard recognition, management system and auditing and control. Seadrill has laid down a series of procedures in its management system to contribute to keeping the environment as clean as possible. Emergency response plans have been established to limit harm to the environment in the case of accidental emissions. Sevan reviews the performance of the management system daily and at regular intervals as defined in the management agreements with Seadrill. Sevan strives for a working environment that provides job satisfaction and good health conditions, by aiming for a safe and inspiring working environment characterized by mutual respect and cooperation. Sevan Drilling had 27 incidents in 2013, of which 1 loss time incidents occurred onboard our operating units. Total Recordable Injury Rate (TRIR) amounted to 0.23 for 2013, which is under the South American average of Sevan rigs have an environmentally friendly profile and works continuously to minimize and reduce the environmental impacts of its operations. However, its operations involve activities that entail potential risks to the external environment. EMPLOYMENT AND LABOUR PRACTICES Sevan makes efforts to ensure all employees are given equal opportunities for personal and professional development, and that everyone is treated equally regardless of gender, age, ethnic origin and functional ability. Sevan does not tolerate harassment or victimization of another employee or colleague, whether sexual, racial or otherwise. The Board and Management continue to focus on equal opportunities for men and women among its employees and board members. 10 percent of the employees in the Group are women. Two of five board members are women. Currently, Sevan has not implemented any specific measures in order to meet the objectives of the Discrimination Act and of the Anti-discrimination and Accessibility Act. The need for specific measures in this respect is continuously considered by the Board and Management. HUMAN RIGHTS Sevan will carry out its business without any violation of basic human rights. Operations are carried out in accordance with internationally recognized human rights standards. Sevan supports the UN s Universal Declaration of Human Rights and its work to end forced labour, discrimination and child labour. ANTI-CORRUPTION Sevan rejects all forms of corruption, and will maintain high standards of integrity and seek to identify and eliminate all facilitation payments, enhancing transparency in all business transactions. If anyone is in doubt, it is all employees obligation to elevate the ethical dilemma to their supervisor or manager. In November 2013, the Board aligned its anti-bribery and corruption compliance manual with Seadrill, which further expanded Sevan s governance. At least once a year a risk assessment shall be conducted and the results shall be communicated to the Board of Sevan. As the manual was updated in November 2013, the first time this will be conducted is in E 36

199 OUR RESULTS 73 REMUNERATION AND BENEFITS REMUNERATION AND BENEFITS OF THE BOARD OF DIRECTORS Approval of Director remuneration will be subject to approval on the 2013 annual general meeting of Sevan. No members of the Board are entitled to severance pay or other benefits upon termination of their terms. REMUNERATION AND BENEFITS OF THE MEMBERS OF THE SENIOR MANAGEMENT The current CEO and senior management currently receive a fixed base salary. Members of senior management, except the CEO, have resigned effective 31 March 2014 and accepted the severance per contract terms. The Group 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 in the extraordinary general meeting on 9 January 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 this date an option program comprising a total of 9,738,326 options has been issued. Each of the options entitles the holder to subscribe for one new ordinary share of the company or cash settlement, at an exercise price per share of NOK 5.75 (market price at the time of grant). The grant levels as of 31 December 2012 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 6 Management Group 500,000 2,249, Line Management 170,000 4,788,327 Total 45 9,783,326 As of 31 December 2013, the last balance sheet date, the company or its subsidiaries had not set aside or accrued any amounts for pensions, retirement or similar benefits, except from what is specified in note 13. Oslo, 29 April 2014 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kristian Johansen Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Birgitte Ringstad Vartdal Board member Scott McReaken Managing Director 74 OUR RESULTS E 37

200 The pure-play ultra deepwater drilling company. sevandrilling.com Design and production: Artbox AS Print: Printbox AS CONTACT Sevan Drilling - Oslo Tordenskioldsgate Oslo Norway post@sevandrilling.com IR and media contact Scott McReaken, CEO Mobile: smc@sevandrilling.com E 38

201 Appendix F - SEVAN DRILLING ASA FINANCIAL STATEMENTS FOR SEVAN DRILLER 2 OVERVIEW Content OVERVIEW 04 Year in brief 06 This is Sevan Drilling 08 Letter from the CEO OUR BUSINESS 10 Business and market description 12 Products and technology 14 QHSE and operational excellence 16 Cosco shipyard and Sevan Drilling ORGANISATION 18 The Board of Directors 20 The Management Team OUR RESULTS 22 Board of Directors report Responsibility statement 32 Financial statement 36 Notes to the financial statement 63 Financial statement Sevan Drilling ASA 67 Notes to Sevan Drilling ASA 76 Auditor s report 78 Corporate governance 85 Remuneration and benefits 86 Terms and definitions 87 Office locations F 1

202 Sevan Drilling is an international offshore drilling contractor specialising in the ultra deepwater segment. Sevan Drilling owns rigs of a unique and proprietary cylindrical design which are among the world s most advanced, robust and state-of-the-art ultra deepwater drilling units. Sevan Drilling has since June 2010 had the ultra deepwater unit Sevan Driller in drilling operations for Petrobras off the coast of Brazil. Sevan Drilling has since July 2012 had an additional unit Sevan Brasil in operation for Petrobras off the coast of Brazil. Sevan Drilling has currently two more ultra deepwater rigs under construction for delivery in fourth quarter 2013 and second quarter 2014, respectively. Sevan Drilling also has options for two additional rigs, Sevan Drilling Rig 5 and Sevan Drilling Rig 6. The due date for exercise of the options has been extended to end of June Sevan Drilling s vision is to take advantage of the unique design to capture a significant share of global deepwater market. OVERVIEW 3 4 OVERVIEW Important events in 2012 An extraordinary general meeting in January appointed three new Board members, Erling Lind (chairman), Per Wullf and Kristian Johansen. Later in January, an incident occurred on Sevan Driller when replacing the wash pipe during routine maintenance. There were no injuries or environ mental damages related to the incident. The rig was out of operations approximately 17 days. On 13 February Sevan Drilling transferred its listing from Oslo Axess to Oslo Børs. On 6 March Sevan Brasil departed China on the heavy lift vessel Mighty Servant I. In April, a leak was found in the control line during a pressure test of the blowout preventer on Sevan Driller, resulting in downtime of approximately seven days. At the annual general meeting in May, Benedicte Schilbred Fasmer was appointed as a new member of the Board of Directors, replacing Anne Breive. Sevan Drilling held in June an investor update (capital markets day) in Oslo. The agenda covered a strategic, market and financial update in addition to in depth presentations of Sevan Drilling s ultra deepwater operations. On 24 July Sevan Brasil completed the acceptance testing and commenced work under its six year contract with Petrobras in Brazil. At the end of the second quarter Sevan Drilling experienced a temporary breach with one of the covenants in a bank loan agreement due to costs associated with mobilisation of Sevan Brasil. In September Sevan Drilling received USD 45 million from Petrobras which referred to reimbursement of mobilisation fee and importation tax, which brought the company out of breach with the above mentioned covenant. Sevan Brasil experienced problems in connection with testing of the blowout preventer in late September. The rig received a day rate corresponding to 80 percent of the contract value until testing was completed 16 November. On 29 December Sevan Driller commenced maintenance and completed the threeyear compulsory marine hull survey. The work took in total 25 days and Sevan Drilling received 90 percent of the day rate for 20 days. F 2

203 OVERVIEW 5 Key figures 7,500 All Sevan Drilling units are classified for drilling in ultra deepwater, specifying water depths greater than 7,500 feet Sevan Driller and Sevan Brasil are in operation. Sevan Drilling Rig 3 and Sevan Drilling Rig 4 are under construction, and the company has options for construction of another two ultra deepwater drilling rigs. 87.3% Average technical uptime for Sevan Driller and Sevan Brasil in second half of FIGURES IN USD MILLION Operating income Operating expenses EBITDA Depreciation, amortisation and impairment Operating profit / (loss) Financial income/(expense) Foreign exchange gain /(loss) Net financial items Profit/(loss) before tax Tax income/(expense) Net profit/(loss) EBITDA margin 31.4% 28.9% Operating margin 6.6% 7.3% Equity share 38.5% 42.0% Earnings per share UNIT BUILT REGION CLIENT Sevan Driller 2009 Brazil Petrobas Sevan Brasil 2012 Brazil Petrobas Sevan Louisiana 2013 Gulf of Mexico LLOG Sevan Drilling Rig Firm contract period Construction period 6 OVERVIEW Sevan Drilling is an international drilling contractor specialising in the ultra deepwater (UDW) segment. The company owns and operates two rigs of the Sevan Cylindrical Drilling Unit Design. Both rigs have long term charter contracts in Brazil. Sevan Drilling owns and operates Sevan Driller, which is one of the world s most advanced, robust and state-of-the-art ultra deepwater drilling units. Sevan Driller is of the Sevan Cylindrical Drilling Unit Design, and built for safe and efficient year-round operations in ultra deepwaters worldwide. Sevan Driller has since June 2010 been operating off the coast of Brazil under a six-year charter contract with Brazilian oil company Petrobras. The second unit - Sevan Brasil - left the Cosco shipyard on 10 January 2012 to commence thruster installation and sea trials. On 6 March 2012 the rig departed China, and arrived in Rio De Janeiro in Brazil on 29 April On 24 July 2012 the rig commenced its six-year contract with Petrobras. Sevan Brasil is also an ultra deepwater drilling unit of the Sevan Cylindrical Drilling Unit Design Sevan Drilling has also ordered two additional newbuilds expected for delivery in fourth quarter 2013 and second quarter 2014, and has options for additional two rigs for delivery in 2014 and Sevan Drilling has an experienced management team and operating organisation which is well positioned for further growth. The company has robust financing in 2013, at attractive terms, and solid contract coverage and cash flows. The four high-end UDW rigs have a unique and cost effective design, and are built for safe and efficient operations in ultra deepwater worldwide including Brazil, West Africa and the US Gulf of Mexico. Sevan Drilling has a perpetual license with Sevan Marine for use of the Sevan design for drilling purposes. Long experience and strong focus on operating excellence and quality, health, safety and environment (QHSE) characterise both the management and the operating organisation, which comprises 463 employees based in Brazil, Singapore, Norway and China. Sevan Drilling has identified the following key strategic objectives in order to fulfil its ambition of being recognised as a world class and fully integrated drilling contractor, owning and operating drilling units: F 3

204 to deliver premium quality services throughout our organisation. capabilities of our rigs to meet expected market demand. and construction yards and continuously improve project execution to capture cost benefits of building and operating our rigs. company culture where we take responsibility for each other s wellbeing, the operation of our equipment and our impact on the environment. on providing efficient and cost effective solutions to client needs. a valuable service to our customers and the communities where we operate. OVERVIEW 7 8 OVERVIEW Letter from the CEO Despite a challenging year where a serious rig incident weighed on our business, I am confident that Sevan Drilling has a more solid foundation for growth than one year ago. The year 2012 turned out to be more challenging than we anticipated. However, after the start-up phase of our second drilling rig and intense refinancing activity throughout the fall, finalised in 2013, Sevan Drilling has today a stronger balance sheet and much more flexibility in our loan agreements. This allows us to focus on operational excellence in Brazil and marketing of the remaining newbuild in challenges. We put in all our effort to control the damage to the company and through a very positive dialogue with Petrobras we succeeded in getting the rig into alternative operations while waiting for the repaired BOP. In addition, the incident kick started one important process; the strengthening of our Brazil operations. DOUBLING OF FLEET BASE Sevan Brasil left the Cosco shipyard in China in January and arrived in Rio de Janeiro in Brazil at the end of April. The rig was accepted by Petrobras on 24 July, and moved to its location. By the beginning of the second half of 2012, Sevan Drilling had doubled the fleet base and we were set for a substantial increase in operational cash flow. During testing of the blowout preventer (BOP) on Sevan Brasil in September a human error unfortunately caused problems with the BOP control system. Consequently, the BOP had to be pulled to the surface and sent ashore for repair, causing several weeks of off-hire for our new rig. This placed substantial financial strain on the company. I am obviously not pleased with the position that Sevan Drilling was put in. But I am satisfied with the way we handled the A FRESH START IN BRAZIL Coming together is a beginning, staying together is progress, and working together is success, a wise man once said. Sevan Drilling is putting a lot of effort in improving the way we work together. On 1 February 2013 we put a new and experienced country manager in place in Brazil. The mandate is to gain much tighter control on day-to-day operations and improve work processes. The first step in Brazil will be to simplify, remove split responsibilities and improve processes and procedures. In the next step we will build a more cohesive operational group by bringing in more local content. We will also need to work with training and issues related to spare parts. Eventually, we will need to use this step-by-step approach to drive efficiency. F 4

205 We are building a foundation for a good operational environment in Brazil. The fact is that Sevan Driller today is a strong and steady performer and has been for most of 2012, while Sevan Brasil has experienced a technical uptime of 97 percent since the rig came back into operations. Maintaining high operational uptime for both Sevan Driller and Sevan Brasil is job number 1 for us going forward. A STRONGER OUTLOOK Throughout the fall of 2012 we worked continuously with the banks and lending institutions on the financial structure of the company, and the process culminated with the announcement at the start of the year of a successful private placement of NOK million and a set of renegotiated loan agreements. ents. Our outlook has improved quite a bit over the past few months. We have a much more solid foundation for growth. We have a series of loans that are more closely linked to our actual operation. And we are through the startup phase of our first two rigs. With the new management in Brazil in place this allows us to focus on operational excellence there. We have signed a threeyear charter contract for our third rig which will initiate operations in the Gulf of Mexico. We need to market our fourth rig, knowing that the completion of the construction of both our newbuilds at Cosco is well underway at cost and on time. On the back of that we will be looking at the financing structure ure and how to fund the growth of the company going forward. d. There are challenges ahead of us. I think we have delivered significant progress, but we have more to go. I am really looking forward to the next milestones in 2013 and beyond. d Scott Kerr, CEO Sevan Drilling OVERVIEW 9 10 OUR BUSINESS F 5

206 OUR BUSINESS 11 Sevan Drilling is a fully integrated ultra deepwater drilling contractor, owning two of the world s most advanced drilling units; Sevan Driller and Sevan Brasil. In addition, the company has two identical units under construction, scheduled for delivery in fourth quarter 2013 and second quarter Another two units can be added to the portfolio during 2013 if Sevan Drilling decides to execute options before end of June All existing and potential semisubmersible drilling rigs are of Sevan Cylindrical Drilling Unit design, built for safe and efficient operations in ultra deepwaters worldwide including Brazil, West Africa and the US Gulf of Mexico. The design 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 has been in operation since June 2010, whereas Sevan Brasil commenced operations in July 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 1,800 meters water depth in the Campos Basin and approximately 2,200 meters water depth in the Santos Basin. Africa and Gulf of Mexico are driving the development, but the Norwegian Continental Shelf and Asia Pacific are also providing good deepwater opportunities. 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 122 units, according to data extracted from ODS Petrodata s Rig Base. An additional 57 ultra deepwater units are reported to be under construction or on order with delivery scheduled prior to end of 2016, which would bring the expected total fleet to 179 units by expiry of The strong growth in ultra deepwater units is due to the increased focus from 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 operations. The deep and ultra deepwater energy sector, measured as water depths of greater than 1,500 metres, represents one of the major growth areas of the oil and gas industry today. High oil prices and the need for major operators to find additional reserves are driving the development of offshore oil and gas reserves. Well known deepwater markets like Brazil, West Based on our strong relationship with Petrobras and thereby a good foothold in the Brazilian market, combined with our strong asset base, we believe that Sevan Drilling has a solid platform for growth in the ultra deepwater market. This is evident by our contract for Sevan Louisiana in the US Gulf of Mexico. 12 OUR BUSINESS The cylindrically shaped Sevan units introduce a new concept to the offshore drilling industry compared with traditional semi-submersibles and drill ships. The rig concept is based on Sevan Marine s unique, proven and patented cylindrical hull design utilised for floating production, storage and offloading (FPSO) vessels. The design provides for the following advantages compared to traditional drilling units: RIG DESIGN The cylindrical hull shape enables the vessels to respond accurately regardless of wind, waves and currents, thus allowing for optimised operations. Wind conditions and waves will therefore not affect operations due to the low pitch and roll motions of the vessel. Weather conditions with bi-directional waves and currents challenges the free range of movement in traditional drilling operations. The Sevan design enables drilling operations with minimum power consumption regardless of weather conditions. HIGH VARIABLE DECK LOAD CAPACITY With the large displacement and stability reserves of the cylindrical hull, the variable deck load capacity is above 15,000 tons. Paired with generous tank capacities this significantly reduces the need for resupply and thus also the logistic cost. SIMPLIFIED CONSTRUCTION The cylindrical hull is built by using traditional section building method based on prefabrication of large modules. The lower hull may be assembled on a slip way, in a dry dock or on a floating barge with final installment quayside. The main hull structure is constructed by using normal shipbuilding steel, and no special welding procedures are required. STORAGE The lower hull of the vessel can be used for storage of consumable fluids i.e. fuel oil, drilling fluids, dry bulk materials, ballast water in addition to utility systems. Oil storage from extended well tests / early production is an alternative storage solution. UPPER LEVEL The upper section of the hull carries power generation, mud system, cementing system, riser, drilling tubulars, derrick, and temporary equipment such as equipment for well testing. PROTECTED MOON POOL The drilling operation is executed through the center moon pool which provides for a protected environment for launch and recovery of the BOP and riser. The completely enclosed moon pool also protects the riser and allows the vessel to safely operate even in ice-infested areas. F 6

207 SEVAN DRILLER STATION KEEPING The Sevan UDW rigs are equipped with dynamic positioning system in accordance with class 3 requirements. This system keeps their accurate position by controlling eight azimuth thrusters. For operations in shallow waters or in areas with ice, a conventional mooring system may be installed in combination with the dynamic positioning system. The design is ideally suited for operations in deepwater drilling markets such as Brazil, Gulf of Mexico, West Africa and South East Asia. Simple and robust vessel construction enables a relatively lower building cost than traditional rig design. In addition to the mentioned advantages from the concept, this provides Sevan Drilling with a competitive edge. Drilling packages and other marine equipment are provided by leading offshore rig suppliers. Thus, with the exception of the thrusters and risers on Sevan Drilling Rig 3 and Sevan Drilling Rig 4, the equipment specification is the same for all the rigs in Sevan Drilling s fleet. This allows Sevan Drilling to simplify training requirements and optimise spare parts for the fleet. OUR BUSINESS 13 The design is not optimised for operations in harsh environments such as the North Sea. The rig design may be further developed for special operations in the future. Requirements for development drilling with large available deck space may be further improved by increasing the utilised areas in lower hulls for riser storage and marine equipment. For long term infield operations the vessel may be arranged with permanent mooring system, reducing fuel consumption and emissions. The design may also be easily modified for operations in Arctic areas. The enclosed moon pool which protects the riser, and the fact that the vessels do not need to change heading as the ice flow direction changes, makes the concept ideally suited for Arctic operations. Ice strengthening of hull and general platform winterisation may easily be implemented. Sevan Drilling has the right to utilise the Sevan design for drilling rigs in perpetuity, against a royalty payment to Sevan Marine ASA. 14 OUR BUSINESS The long-term business success of Sevan Drilling depends on our ability to continually improve the quality of our services and products while protecting people and the environment. Our ambition is to 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. Sevan Drilling believes that all incidents and accidents that cause personal injury or environmental damages can be prevented. We strive to achieve zero incidents and zero accidents by developing a culture where all employees take responsibility for their own safety, for the safety of their co-workers, for the process safety and to protect the environment. We endeavour to ensure that all employees report all unsafe activity or conditions and stop activities until appropriate risk measures are in place. Safety: Sevan Drilling shall manage activities based on the company s own, the regulators and the clients standards. The company shall focus on the communication and implementation of these standards. Environment: Sevan Drilling shall protect the environment and minimise the amount and effect of discharges, emissions and waste disposals from the company s operating facilities. Sevan Drilling has established a QHSE management system with participation from the employees, ensuring acknowledgement and commitment. Quality Management: Sevan Drilling shall fulfil the customers needs and expectations and make commitments that the company fully understands. The following key QHSE principles apply: Health: Sevan Drilling shall evaluate and mitigate the risks to reduce the hazards at work places to an acceptable level. Occupational health for our employees shall be monitored. Continuous improvement: Sevan Drilling shall verify that the operations meet agreed requirements: monitor and continuously improve these operations and the organisation s performance. F 7

208 Risk Management: Risk assessments are carried out using competent personnel, recognised tools and methodology. Focus is given by a correct approach to the different assessments performed. Compliance: Sevan Drilling shall comply with HSE legal requirements and other requirements applicable to the company s operations. In a very competitive ultra deepwater drilling industry, operational excellence is not an option; it is essential to the Sevan Drilling business success. Our system for obtaining operational excellence provides Sevan Drilling with the benefits of lower costs, increased efficiencies, fewer injuries, maximum sustainable returns on operating assets, and an enhanced competitive position. The Brazilian continental shelf is one of the fastest growing ultra deepwater markets in the world. This market requires OUR BUSINESS 15 high standards with respect to personnel, equipment, QHSE and operational procedures, and Sevan Drilling has successfully proven its drilling concept and operations setup to Petrobras. Since the start-up of Sevan Drilling s first producing asset the Sevan Driller for Petrobras in June 2010, the rig has been subject to Petrobras rating system called B.A.D. Sonda. This is a monthly review of all third party rigs. Based on a number of criteria such as safety, technical performance, competence of the crew etc. the contractor is awarded a rating on a scale from 0 to 10 where 10 is top score. Average is around 8. Sevan Driller has consistently received a score well above the average in the B.A.D. Sonda rating system, and accomplished an average rating of 9.5 in fourth quarter Sevan Brasil has been subject to Petrobras rating system since the rig was accepted by Petrobras in July Sevan Brasil has received high score well above the average and accomplished an average rating of 9 in fourth quarter OUR BUSINESS Partnership for growth F 8

209 OUR BUSINESS 17 The Sevan Cylindrical Drilling Unit Design represents one of the world s most advanced, robust and state-of-the-art ultra deepwater drilling units. Selecting the right shipyard for construction has thus been of high importance with a view to develop a relationship to establish Sevan Drilling as the preferred partner and to minimise execution risk for new builds through selecting well-recognised yards. On these criteria the cooperation with Cosco has been very successful. Cosco Shipyard, founded in 2001, is a subsidiary of China Ocean Shipping Company (Cosco), a group with a total dock capacity of 1.85 million tonnes spread across several shipyards in China. Cosco is a well-established shipyard with a solid track record in the construction of a wide range of offshore drilling vessels for domestic and international markets. Significant improvements in the construction process have been made in the construction of the Sevan Brasil compared to the Sevan Driller, and the trend continues with the construction of the current rigs. This joint learning enables an efficient construction, continuous technical improvements, and rigs that are delivered on time and on budget. The two rigs delivered so far have both been built at the Cosco (Qidong) Nantong Shipyard in the Yangtze River Delta region. Sevan Driller was delivered in November 2009 and Sevan Brasil in January Two additional rigs, Sevan Drilling Rig 3 and Sevan Drilling Rig 4 are both under construction at the same yard for delivery in fourth quarter 2013 and second quarter 2014, respectively. Sevan Drilling has also options for building Sevan Drilling Rig 5 and Sevan Drilling Rig 6. There are significant advantages in using the same design with the same shipyard. Sevan Drilling has through the construction periods built a strong collaborative relationship with Cosco. In addition, the long-term commitment with Cosco has enabled Sevan Drilling to be allocated sufficient shipyard capacity. Sevan Drilling has options on the construction of Sevan Drilling Rig 5 and Sevan Drilling Rig 6 for delivery in fourth quarter 2014 and second quarter 2015, respectively. During 2012 the maturity dates of these options was moved from 10 December 2012 to end of June 2013 for both rigs. Sevan Drilling remains very satisfied with Cosco. The shipyard has displayed its technical competence, its ability to deliver quality rigs on time and on budget, and willingness to invest time and resources with the client. 18 ORGANISATION THE BOARD OF DIRECTORS ERLING LIND Chairman Erling Lind is a Norwegian citizen and he has a law degree from the University of Oslo. Mr. Lind is a partner at Wiersholm, an Oslo based leading law firm. Mr. Lind acts as external legal counsel to Seadrill Ltd. Mr. Lind is ranked amongst Norway s most prominent lawyers in his fields of expertise. Mr. Lind has served as a member of the board since January Mr. Lind does not hold any shares in Sevan Drilling. KITTY HALL Deputy chairman Kitty Hall is a British citizen and she has a BSc in Geology from University of Leeds and an MSc in Stratigraphy from the University of London. Ms. Hall has over 30 years experience in the exploration industry. She has been a board member of Sevan Drilling since May 2011, of Seabird Exploration since May 2012, and was previously a board member of Polarcus Ms. Hall holds 62,900 shares in Sevan Drilling. BENEDICTE SCHILBRED FASMER Board member Benedicte Schilbred Fasmer is a Norwegian citizen and has a MSc in Economics and Business Administration from the Norwegian School of Economics. She is currently Head of Business Development and Capital Markets in Argentum. She has previously been Head of the Capital Markets Division in Sparebanken Vest, Finance Director at Rieber & Søn and has more than 20 years experience from the financial sector in companies such as Citibank International, Paal Wilson Management and Pareto Securities. Ms. Fasmer has served as a member of the board since May She has had several board positions, and currently serves on Oslo Børs VPS Holding / Oslo Børs and Frydenbø Industri. Previous positions include e.g. Eksportkreditt, Vesta Forsikring and Verdipapirforetakenes Sikringsfond. Ms. Fasmer does not hold any shares in Sevan Drilling. F 9

210 ORGANISATION 19 KRISTIAN JOHANSEN Board member Kristian Johansen is a Norwegian citizen and he is CFO of TGS NOPEC Geophysical ASA, a geophysical company listed on Oslo Børs. Mr. Johansen has experience from various positions in the construction, banking and oil industries. Mr. Johansen has served as a member of the board since January Mr. Johansen holds 17,000 shares in Sevan Drilling. PER WULLF Board member Per Wullf is a Danish citizen and he is COO of Seadrill Ltd. He has some 30 years of experience from the drilling industry. Mr. Wullf s extensive experience includes 11 years of international offshore operations and 17 years onshore. Mr. Wullf has served as a member of the board since January Mr. Wullf does not hold any shares in Sevan Drilling. 20 ORGANISATION THE MANAGEMENT TEAM SCOTT I. KERR (1957), CEO Scott Kerr has been the CEO of Sevan Drilling since June Mr. Kerr is a US citizen, and he holds a BSc in Petroleum Engineering from University of Wyoming and has previous experience from Noreco, BP and ARCO. He has been in the oil business for about 30 years. Mr. Kerr currently holds 873,300 shares in Sevan Drilling and has options to subscribe for additional 1,600,000 new shares.* JON H. WILMANN (1961), CFO Jon H. Wilmann has been the CFO since the incorporation of Sevan Drilling. He is a Norwegian citizen and holds an MBA from Norwegian School of Economics and Administration (NHH) in Bergen from Mr. Wilmann has previous experience from various positions in oil and finance. Mr. Wilmann currently holds 311,988 shares in Sevan Drilling and has options to subscribe for additional 1,100,000 new shares.* BJØRN EGIL GUSTAVSEN (1968), VP Projects Bjørn Egil Gustavsen holds a BSc Electronics from Agder University. He is a Norwegian citizen and has experience from various management positions within project engineering. Mr. Gustavsen currently holds 26,388 shares in Sevan Drilling and has options to subscribe for additional 500,000 new shares.* PASCAL BUSCH (1961), VP QHSE Pascal Busch holds a Nautical Science License from the Nautical College in Antwerpen. He is a Belgian citizen and has 29 years of experience from the shipping and offshore industry in various operational and management positions. Mr. Busch currently holds 40,388 shares in Sevan Drilling and has options to subscribe for additional 500,000 new shares.* F 10

211 ORGANISATION 21 PAUL GRIMEN (1953), Operational Advisor Paul Grimen is a Norwegian citizen, he is electrically certified from the Bergen Technical School and certified from the Arendal Maritime School for work on all electrical equipment for offshore and maritime shipping. Mr. Grimen has more than 30 years of experience from the offshore industry in various operational and management positions worldwide. Mr. Grimen currently holds 51,388 shares in Sevan Drilling, and has options to subscribe for additional 500,000 new shares.* GILBERTO G. CARDARELLI (1956), VP operations/brazil Country Manager Gilberto G. Cardarelli joined Sevan Drilling in Mr. Cardarelli is a Brazilian citizen. He has 28 years of experience from the offshore industry in various operational and commercial management positions with Transocean and Odebrecht, and 3 years of experience from the onshore drilling operations with Enterpa Drilling. Mr. Cardarelli holds a BA in Metallurgical Engineering from UMC University, a MA in Drilling Engineering from IPT and a MBA in Oil Industry from COPPE-UFRJ. Mr. Cardarelli currently holds no shares in Sevan Drilling. EILEEN ASPEHAUG (1970), VP HR Ms. Aspehaug is an Irish citizen, and holds a BA in Economics from University College Cork, Ireland and in 2005 completed a Master of Management program in Human Resource Management from BI, Oslo. She has many years of HR experience from both Norske Skog and REC. Ms. Aspehaug currently holds 12,700 shares in Sevan Drilling, and has options to subscribe for 500,000 new shares.* * Subject to certain terms and conditions (including vesting periods). See note OUR RESULTS BOARD OF DIRECTORS REPORT 2012 Highlights of fleet base after the BOP incident, while 96.5 percent in second half of 2012 for Sevan Driller an equity issue and debt restructuring in January 2013 leaving the company fully funded until delivery of Sevan Drilling Rig 3 both remain on track for delivery in the fourth quarter 2013 and second quarter 2014, respectively with LLOG Bluewater Holdings LLC for Sevan Drilling Rig 3 ( Sevan Louisiana ), for operation in the US Gulf of Mexico Per Wullf, Kristian Johansen and Benedicte Schilbred Fasmer. KEY EVENTS IN 2012 Sevan Drilling reached several milestones in On 24 July Sevan Brasil commenced work under its six-year drilling contract with Petrobras offshore Brazil. The rig will receive a base day rate of USD 393,000 based on current exchange rates and indexations levels, in addition to a bonus potential of up to 10 percent of the base day rate. Sevan Drilling experienced a temporary breach with one of the covenants in the bank loan agreement at the end of the second quarter due to costs associated with mobilisation of Sevan Brasil. In September, Sevan Drilling received USD 45 million from Petrobras which referred to reimbursement of mobilisation fee and importation tax, which consequently brought the company out of breach with covenants and re-classified the interest bearing bank debt from short term debt to long term debt. In January Oslo Børs approved transfer of the company from Oslo Axess to Oslo Børs proving its position in the drilling industry. Sevan Drilling experienced some smaller incidents with Sevan Driller last year. In January an incident occurred during routine maintenance when replacing the wash pipe. There were no injuries or environmental damages related to the incident. The rig was out of operations from 19 January to 4 February. In April, a leak was found in the control line during a routine pressure test of the BOP. The control line was replaced and the total downtime related to the incident was approximately seven days. Late September, Sevan Brasil experienced problems in connection with testing of the blowout preventer (BOP). The damage was such that it had to be pulled to surface and sent to the manufacturer for repair. As an alternative solution, the rig was used to drill the top hole section on a new well location at a day rate corresponding to 80 percent of the contract value. Testing of the BOP was completed and accepted by Petrobras 16 November, allowing the rig to be eligible for full day rate again. F 11

212 Sevan Driller experienced increasing performance in the ultra deepwater market offshore Brazil throughout On 29 December, Sevan Driller successfully completed the well it was drilling in the Santos Basin and moved to Guanabara Bay offshore Rio de Janeiro for maintenance on the dynamic positioning and electrical systems on the rig, and to complete the three-year compulsory marine hull survey. The maintenance and the marine hull survey took in total 25 days and Sevan Drilling received 90 percent of the contract day rate during 20 days of this period. ACTIVITIES The Sevan Drilling Group Sevan Drilling is a Norwegian public limited liability company. The company s head office is located in Oslo, Norway. Sevan Drilling also has offices in Arendal, Norway, in addition to operational subsidiaries in Rio de Janeiro, Brazil and Singapore, and a company in the UK. Several of Sevan Drilling s subsidiaries are Singaporean private companies with registered offices in Singapore. The Sevan Drilling Group comprises a parent company with certain management employees and the ownership of the rigs and operations of the group is carried out by a number of operating subsidiaries. All subsidiaries are wholly owned, directly or indirectly, by Sevan Drilling ASA. Operations Sevan Drilling is an international offshore drilling contractor specialising in the ultra deepwater segment. The company s vision is to take advantage of its unique cylindrical rig design to capture a significant share of the global deepwater market. Sevan Drilling is a fully integrated drilling contractor. The company owns two of the world s most advanced ultra deepwater drilling units Sevan Driller and Sevan Brasil each with a six-year charter contract with Petrobras in Brazil. Sevan Drilling has also two additional rigs under construction and options for two more units. All units are Sevan Cylindrical Unit Design, built for safe and efficient operations in ultra deepwater worldwide. The Sevan Driller has since June 2010 been in operation for Petrobras under a contract that will expire in June The rig receives a day rate of USD 413,000 based on current exchange rates and indexations levels. The charter contract also contains a bonus potential of up to 10 percent of the base day rate which is linked to the operational performance on a monthly basis. OUR RESULTS 23 Part of the day rate is subject to annual escalation based on certain price indexes, as from the date of contract signature. As of February 2013, Sevan Drilling has estimated the remaining value of the charter contracts with Petrobras for Sevan Driller for the fixed term until June 2016 to approximately USD 545 million, including the bonus potential. Sevan Driller has demonstrated rapidly increasing performance during 2012 and the company has received good client feedback. Sevan Brasil departed China on the heavy lift vessel Mighty Servant I, 6 March In July, Sevan Brasil completed the acceptance testing and was accepted by Petrobras. The rig commenced work 24 July 2012 under its six-year drilling contract with Petrobras offshore Brazil. The rig will receive a base day rate of USD 393,000 based on current exchange rates and indexations levels. The charter contract also contains a bonus potential of up to 10 percent of the base day rate, which is linked to the operational performance on a monthly basis. Sevan Drilling has, as of February 2013, estimated the remaining value of the charter contracts with Petrobras for Sevan Brasil for the fixed term until July 2018 to approximately USD million including the bonus potential. The construction of Sevan Drilling Rig 3 is progressing according to plan and the rig remains on schedule for delivery in fourth quarter Overall progress per February 2013 was 70 percent completed towards delivery from Cosco. The drillfloor, derrick and living quarters were lifted and integrated to the main hull in November, and commissioning of the first systems started in first quarter All main equipment deliveries are on schedule. The construction of Sevan Drilling Rig 4 is also progressing according to plan and the rig remains on schedule for delivery in second quarter Overall progress per February 2013 was 56 percent completed towards delivery from Cosco. The main deck is lifted and integrated to the hull. Lifting of modules up to upper deck was completed in January Sevan Drilling has entered into all-in turn-key construction contracts with Cosco Shipyard, with a total contract value of USD 526 million per unit. A total of USD 55 million per rig will be paid to Sevan Drilling for project management and preoperational activities, whereas USD 27.5 million already has been paid. Furthermore, a USD 6 million in license fee paid to Sevan Marine per rig has been reimbursed by Cosco Shipyard. 24 OUR RESULTS For Sevan Drilling Rig 3 a USD million (20 percent of the total all-in turn-key contract price) has been paid to Cosco upon execution of the construction contract. The last payment milestones have been split into two parts, USD 394 million payable upon delivery in fourth quarter 2013 and USD 26.7 million has been deferred until second quarter 2014, at interest cost of 9 percent p.a. as from fourth quarter For Sevan Drilling Rig 4, a USD 52.6 million (10 percent of the total all-in turn-key contract price) has been paid to Cosco, while the same amount has been deferred until delivery of the rig, at interest costs of 9.5 percent p.a. The remaining 80 percent of the all-in turn-key contract price is due upon delivery of the unit in second quarter Sevan Drilling also has options for Sevan Drilling Rig 5 and Sevan Drilling Rig 6 with Cosco Shipyard. The contract value is USD 526 million per rig, with 20 percent of the total all-in turn-key contract price due for payment at execution of the option, and the remaining 80 percent due upon delivery. The rigs will be delivered 28 months after the options are exercised. THE FINANCIAL STATEMENTS Pursuant to Section 3-3a of the Norwegian Accounting Act, the Board of Directors confirm that the financial statements have been prepared under the assumption that the enterprise is a going concern and that this assumption was realistic at the date of the accounts. Sevan Drilling is in dialog with different lending institutions to establish post delivery financing for Sevan Drilling Rig 3 and Sevan Drilling Rig percent of the total turnkey contract price for Sevan Louisiana is due on delivery of the rig in fourth quarter 2013 and 90 percent of the total turnkey contract price for Sevan Drilling Rig 4 is due on delivery of the rig in second quarter The company is confident that good post delivery financing will be obtained for Sevan Louisiana and Sevan Drilling Rig 4. However, no guarantees can be given in this respect. The consolidated financial statements have been prepared in accordance with the Norwegian Accounting Act and International Financial Reporting Standards (IFRS) as adopted by EU and interpretations adopted by the International Accounting Standards Board (IASB). The accounts for the parent company have been prepared in accordance with the Norwegian Accounting Act. Income statement Consolidated revenue for the year was USD million (USD million in 2011). Operating profit was USD 11.4 million (USD 8.4 million). Net financial items were minus USD 42.4 million (minus USD 55.5 million). Loss before tax was USD 31.0 million (loss of USD 47.1 million). The net loss for the year was USD 11.7 million (loss of USD 48.9 million). The changes in the values from 2011 to 2012 are mainly related to increased activity, when Sevan Brasil started to generate revenues in the Sevan Drilling Group account from July Cash flow and liquidity Cash generated from operations was USD 52.1 million (USD 25.0 million). The difference between cash generated from operations and operating result is USD 40.7 million. The difference is mainly due to depreciations. The net cash flow from operating activities was USD 6.1 million (minus USD 3.6 million). The net cash flow from investing activities was minus 105 million (minus USD million). The net cash flow from financing activities amounted to minus USD 12.8 million (USD million). Cash and cash equivalents was USD 76.8 million at 31 December (USD million). See note 8 for further information. Balance sheet At 31 December 2012 total consolidated assets amounted to USD 1,719.7 million (USD 1,599.8 million per end 2011). The book value of the equity was USD million (USD million). Total liabilities were USD 1,057.3 million (USD million). Capital and financing In December 2010 commitment was secured for a USD 525 million senior debt project finance facility for Sevan Brasil with ING Bank N.V. ( ING ) as mandated lead arranger. The facility is structured as a limited recourse construction financing and is fully underwritten by ING, GIEK/Eksportfinans, PGGM (Dutch pension fund) and Sinosure. The facility completes the construction financing of Sevan Brasil and the first drawdown under the credit facility was made in February As per end 2012, USD million is drawn on the loan. In March 2011 commitment was secured for a USD 480 million senior debt project finance facility for Sevan Driller with ING Bank N.V. ( ING ) as mandated lead arranger. The facility is structured as a limited recourse construction financing and is fully underwritten by ING, DvB, NIBC, GIEK/Eksportfinans, China Development Bank, Natexis, Bank Itau and Deka Bank. RISK FACTORS Sevan Drilling s activities expose the company to a variety of risks in its operations. These include financial risks, operational F 12

213 risks, equipment risks, project delivery and cost, plus volatility in demand for services. The Group has a risk management program covering these factors (among others) and seeks to minimise overall exposure to risk and the impact of external factors on performance. Market and operational risk factors The worldwide fleet of ultra deepwater and harsh environment drilling units is currently estimated to consist of 122 units, according to data extracted from ODS Petrodata s Rig Base. An additional 57 ultra deepwater units are reported to be under construction or on order with delivery scheduled prior to end of 2016, which would bring the expected total fleet to 179 units by expiry of 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. Historically, demand for offshore exploration, development and production has been volatile and closely linked to the price of hydrocarbons. The demand for Sevan Drilling s services in connection with exploration in the offshore oil and gas sector is particularly sensitive to price fluctuations, changes in production levels and disappointing exploration results. Contracts in the offshore sector require high standards of performance and safety, entailing considerable risks and responsibilities. These include technical, operational, commercial and political risks. Changes in the legislative and fiscal framework, including tax rules, governing the activities of the oil companies, could have material impact on exploration, production and development activity or affect Sevan Drilling s operations directly. In connection with the construction of the drilling rigs, Sevan Drilling has used its best efforts to prepare proper specifications, including the supply and installation of equipment. Despite these efforts, there can be no assurances that delays and cost overruns will not occur and such events, if occurring, could have an adverse impact on the Group s financial position. The experience gained to date by the Group, the shipyard and main suppliers, is expected to benefit the construction of future rigs. However, Sevan Drilling cannot guarantee that cost increases and delays in delivery of future units will not occur. Financial risk factors and risk management See the consolidated financial statements for more information, especially note 3. OUR RESULTS 25 The Group is exposed to a variety of financial risks, currency risk, price risk, interest rate risk, credit risk, liquidity risk, and funding and covenants. Sevan Drilling s risk management program includes focusing on the unpredictability of financial markets and seeks to minimise potential adverse effects of such risks on its financial performance. The Group will therefore continue to manage its currency and interest exposures through certain derivative financial instruments in accordance with market practice and to maintain flexibility in the liquidity by keeping committed credit lines available. The Group s assets are nominated in US Dollar and most of the Group s revenues are also nominated in US Dollar. Part of the contract amount on both Sevan Driller and Sevan Brasil with Petrobras is nominated in Brazilian Reais. However, the revenues in Reais correspond to the Group s costs in Reais and represent a natural hedge. Sevan Drilling uses forward contracts to some extent to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. Changes to the price level of goods and services acquired may affect Sevan Drilling, therefore price developments are carefully monitored. Sevan Drilling seeks to handle the risk through contract clauses with its customers. Furthermore, opex cost inflation is mitigated through annual dayrate adjustments with Petrobras in Brazil for Sevan Driller and Sevan Brasil. A limited part (25 percent) of Sevan Drilling s debt financing carries floating interest rates which fluctuate with the market. The Group may therefore to a limited extent be exposed to risks due to changes in interest rates. Sevan Drilling considers customers on a continuous basis, and in some cases, particularly in relation to customers abroad, letter of credit or prepayment is used. Credit risk related to counter parties on trading in derivative financial instruments is handled by restricting to banks and financial institutions with a high rating. Petrobras is Sevan Drilling s client on both Sevan Driller and Sevan Brasil. With Petrobras BBB rating, (Standard & Poor s affirmed Petrobras rating December 2012) the risk is acceptable. 26 OUR RESULTS It is Sevan Drilling s objective to maintain a flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Sevan Drilling has an acceptable cash position, however, the company s liquidity situation is to a certain extent sensitive to operational uptime on the rigs. The Group is not in breach with covenants. Sevan Drilling will require additional capital in the future to finance the installments due on delivery of the two new build vessels (80 percent on Sevan Drilling Rig 3 and 90 percent on Sevan Drilling Rig 4). Sevan Drilling will, on the back of a charter contract, target to finance the remaining payments with bank debt, bond or a combination of bank debt and bond. Obtaining such financing may be subject to market risks and other risks that may influence the availability, structure and terms of such financing. Further, Sevan Drilling may require additional capital in the future due to unforeseen operational issues, unforeseen liabilities or potential acquisitions, joint ventures or other business opportunities that may be presented to it. There can be no assurance that the Group will be able to obtain necessary financing in a timely manner on acceptable terms. ORGANISATION Health, safety and environment Operating sound health, safety and environment (HSE) principles is a critical success factor for Sevan Drilling. Four loss time incidents occurred in 2012 on board our operating units. Total Recordable Injury Rate (TRIR) amounted to 1.02 for 2012 which is slightly above the South American average of Sick leave came to 2.48 percent for the Group for the year. Sevan Drilling is certified according to ISM (international safety code) and ISPS (international ship and port facility security code). The Group has an environmentally friendly profile and continually seeks new ways to reduce the environmental impacts of its operations. However, Sevan Drilling s operations involve activities that entail potential risks to the external environment. The Group is careful in its approach to the environment and continuously strives to reduce the use of hazardous chemicals and materials to minimise negative effects and seeks alternative products to safeguard the environment. The parent company acts as a holding company to the group and has no activities that entail potential significant risks to the external environment. Employment and labor practices The number of employees increased from 350 to 463 at the end of The Board and the management continue to focus on equal positions and opportunities for men and women among its employees and board members. 10 percent of the employees in the Group are women. Two of five board members are women. Currently, the Group has not implemented any specific measures in order to meet the objectives of the Discrimination Act and of the Anti-discrimination and Accessibility Act. The need for specific measures in this respect is continuously considered by the Board of Directors, the management and the HR function. CORPORATE GOVERNANCE The Board of Directors seeks to provide effective governance of business and affairs to ensure long-term benefit to Sevan Drilling s shareholders, and puts emphasis on transparency and equal treatment of its shareholders. The Group emphasises the importance of maintaining and further developing its corporate governance policy and supports the principles set out in the Norwegian Code of Practice for Corporate Governance. A description of Sevan Drilling s compliance with the above recommended corporate governance principles is presented on pages The Group aims at maintaining sound corporate governance routines that provide the basis for long-term value creation, to the benefit of shareholders, employees, other interested parties and the society at large. ANNUAL RESULTS AND YEAR-END APPROPRIATIONS The Board proposes the following appropriation of the annual profit of USD 22,346,546 in the parent company Sevan Drilling ASA: Profit transferred to other equity: USD 22,346,546 The company has unrestricted equity of USD million as of 31 December EVENTS AFTER THE BALANCE SHEET DATE Sevan Driller achieved a technical uptime of 76 percent in the first quarter of 2013, while Sevan Brasil had a technical uptime of 98 percent in the first quarter of F 13

214 On 14 January 2013 Sevan Drilling announced amendments to existing loan agreements with its lending banks and proposed a private placement of NOK 987 million (equivalent to approximately USD 175 million) through an issue of new shares in the company directed towards Norwegian and international investors. The private placement took place as an accelerated book building process. The private placement was oversubscribed at the subscription price on NOK 3.95 per share and was supported by existing shareholders, as well as new institutional investors. The net proceeds to the company from the private placement will be used as follows: (i) USD 40 million in payment of deferred liabilities and CAPEX, (ii) USD 35 million in pre-payment of bank debt and, and (iii) USD 100 million for general corporate purposes including contingency and transaction cost. An extraordinary general meeting of the shareholders of Sevan Drilling ASA was held 6 February. The extraordinary general meeting approved all proposals made by the company s board of directors, including the issue of shares in the private placement and the authorisation of the Board of Directors to issue shares in the subsequent offering following the private placement. The subsequent offering was directed towards existing shareholders of the company holding less than 300,000 shares in the company as of 14 January The final amendment agreements, documenting revised financing terms, was executed on 7 February, following which the conditions for completion of the USD 175 million private placement was fulfilled. The private placement shares were issued on 13 February, following approval and publication of the prospectus. The subsequent offering was directed towards existing shareholders of the company holding less than 300,000 shares in the company as of 14 January 2013, as registered in the Norwegian Central Securities Depository (the VPS ), who were not allocated new shares in the private placement, and who are not resident in a jurisdiction where such offering would be unlawful, or would (in jurisdictions other than Norway) require any prospectus filing, registration or similar action (the Eligible Shareholders ). 7,998,436 new shares were issued from the subsequent offering, with additional NOK 31.6 million received from the subsequent offering. In April Sevan Drilling signed a three-year charter contract for operation in the US Gulf of Mexico between one of its wholly owned subsidiaries and LLOG Bluewater Holdings LLC. Sevan Drilling Rig 3 which is currently under construction at Cosco Quidong shipyard, will be named Sevan Louisiana and used for OUR RESULTS 27 the charter contract. The rig will be capable of drilling in water depths up to 10,000 feet and will employ an innovative, proven cylindrical hull design that makes the rig less sensitive to weather conditions. The Sevan Louisiana is scheduled for delivery in fourth quarter 2013, and the start of operations under the charter contract is expected to be in January The total value of the charter contract is in excess of USD 550 million. Sevan Drilling intends to establish a Houston office to support US GoM operations. OUTLOOK Sevan Drilling has through 2012 advanced from being a company relying on a single rig generating revenues, to an organisation operating two units. Both rigs are operating on long term contracts at attractive terms for Petrobras in Brazil. Following downtime for Sevan Driller early in 2012, the rig has been operating well and recorded high uptime in the third and fourth quarter Sevan Brasil has recorded record high uptime levels since commencing work 24 July 2012, except for the incident with the BOP causing some downtime in September and October. Sevan Drilling has initiated measures in order to maintain stable performance in Brazil by hiring a Country Manager/VP Operations, Gilberto Cardarelli who was in place 1 February Mr. Cardarelli brings a wealth of Brazilian and international experience to the company. Sevan Drilling will strive to keep the current high uptime levels in Brazil, where tighter control of operations and optimisation of processes and procedures will be Mr. Cardarelli s key focus going forward. Sevan Drilling is currently in dialog with oil companies for marketing of the Sevan Drilling Rig 4, and the company signed in April a three-year charter contract with LLOG Bluewater Holdings LLC for Sevan Drilling Rig 3 ( Sevan Louisiana ), for operation in the US Gulf of Mexico. Following the strategy from Brazil by hiring a manager in charge of operations, the company intends to establish a Houston office to support US GoM operations. Sevan Drilling expects a charter contract for Sevan Drilling Rig 4 in due course before delivery. The contract outlook for newbuilds is strong, and Sevan Drilling s rigs fit well into the market. The option for a potential redesign, to prepare for new markets, enables this unit to provide a higher level of customisation than other established rigs. In parallel, Sevan Drilling is in the process of arranging financing for Sevan Drilling Rig 3 and 4 for the remaining payments to Cosco, payable upon delivery. 28 OUR RESULTS The financial position has improved following the equity issue and debt restructuring at the start of The deepwater drilling market continues to be strong and Sevan Drilling Rig 4 will be among the first available deepwater rigs in the market. ANNUAL GENERAL MEETING The date of the Annual General Meeting is scheduled for 13 May Oslo, 17 April 2013 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kitty Hall Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Kristian Johansen Board member Scott Kerr CEO F 14

215 OUR RESULTS 29 RESPONSIBILITY STATEMENT The Board of Directors and the Chief Executive Officer have today considered and approved the report and the financial statements for the Sevan Drilling Group and the parent company Sevan Drilling ASA for the year ending 31 December The consolidated financial statements of Sevan Drilling have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU and additional disclosure requirements as stated in the Norwegian Accounting Act that are applicable per 31 December The financial statements for the parent company Sevan Drilling ASA have been prepared in accordance with the Norwegian Accounting Act and Generally Accepted Accounting Principles in Norway that are applicable per 31 December The Director s report for the Sevan Drilling group and Sevan Drilling ASA has been prepared in accordance with the Norwegian Accounting Act and the Norwegian Accounting Standard no. 16 applicable per 31 December We confirm that, to the best of our knowledge: and Sevan Drilling ASA for the year ending 31 December 2012 have been prepared in accordance with applicable accounting standards. fair view of the Sevan Drilling Group s and Sevan Drilling ASA s assets, liabilities, financial position and results of operations for the year ending 31 December ending 31 December 2012 includes a fair view of: The development, results of operations and position for the Sevan Drilling Group and Sevan Drilling ASA. The principal risks and uncertainties for the Sevan Drilling Group and Sevan Drilling ASA. Oslo, 17 April 2013 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kitty Hall Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Kristian Johansen Board member Scott Kerr CEO 30 OUR RESULTS 29/04/2012 Sevan Brasil arrived in Rio De Janeiro in Brazil F 15

216 SEVAN BRASIL OUR RESULTS OUR RESULTS CONSOLIDATED INCOME STATEMENT FIGURES IN USD MILLION NOTE Operating revenue Operating expense Depreciation, amortisation and impairment Employee benefit expense Other operating expense Foreign exchange gain/(loss) related to operation Total operating expense Operating profit/(loss) Financial income Financial expense Foreign exchange gain/(loss) related to financing Net financial items Profit/(loss) before tax Tax income/(expense) Net profit/(loss) Attributable to: Equity holders of the Company Earnings per share for profit/(loss) attributable to the equity holders of the Company during the year (USD per share): - Basic Diluted COMPREHENSIVE INCOME FIGURES IN USD MILLION NOTE Net profit/(loss) Foreign currency translation Comprehensive income Attributable to: Equity holders of the Company Left the Cosco shipyard on 10 January 2012 to commence thruster installation and sea trials. On 6 March 2012 the rig departed China, and arrived in Rio De Janeiro in Brazil 29 April On 24 July 2012 the rig commenced its six-year contract with Petrobras. Sevan Brasil is an ultra deepwater drilling unit of the Sevan Cylindrical Drilling Unit Design F 16

217 OUR RESULTS 33 CONSOLIDATED BALANCE SHEET FIGURES IN USD MILLION NOTE ASSETS Non-current assets Sevan capital assets 6 1, ,319.3 Other fixed assets Intangible assets Deferred income tax assets Other non-current assets Total non-current assets 1, ,375.6 Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets 1, ,599.8 EQUITY Capital and reserves attributable to equity holders of the Company Share capital Share premium Other equity Total equity LIABILITIES Non-current liabilities Other non-current liabilities Derivative financial instruments, Long term Deferred tax liabilities Total non-current liabilities Current liabilities Trade payables Short term bank borrowings Other current liabilities Total current liabilities Total liabilities 1, Total equity and liabilities 1, ,599.8 Oslo, 17 April 2013 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kitty Hall Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Kristian Johansen Board member Scott Kerr CEO 34 OUR RESULTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY OTHER EQUITY FIGURES IN USD MILLION NOTE SHARE CAPITAL SHARE PREMIUM OTHER RESERVES RETAINED EARNINGS reserves January 1, TOTAL EQUITY Net profit/(loss) Transferred from paid in equity to other equity Foreign currency translation Comprehensive income for the year Fair value of share options Accumulated translation differences December 31, January 1, Contribution in kind March 21, Contribution in kind March 21, Issue of shares (IPO) April 29, Cost related to the IPO net of tax Net profit/(loss) Foreign currency translation -0.7 Comprehensive income for the year December 31, F 17

218 OUR RESULTS 35 CONSOLIDATED CASH FLOW STATEMENT FIGURES IN USD MILLION NOTE Cash flows from operation activities Cash from operations Interest paid Net cash generated from operating activities Cash flows from investment activities Purchases of property, plant and equipment (PPE) Purchases of intangible assets Net cash flow from investment activities Cash flows from financing activities Net proceeds from capital increase Proceeds from interest-bearing debt Repayment interest-bearing debt Net cash flow from financing activities Net cash flow for the period Cash balance at beginning of period Cash balance included in contribution in kind Cash balance at end of period* * Restricted cash USD 71.6 million 36 OUR RESULTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT NOTE 1: CORPORATE INFORMATION Sevan Drilling ASA (the Company ) is an international offshore drilling contractor specialising in the ultra deepwater segment. The company owns rigs of the cylindrical Sevan design. The Company is a public limited liability company incorporated and domiciled in Norway. The address of its registered office is Tordenskioldsgate 6, 0160 Oslo. These consolidated financial statements were approved by the Board of Directors on 17 April Overview of the Group structure as of 31 December 2012: REGISTERED INTEREST FUNCTIONAL SUBSIDIARIES OFFICE HELD CURRENCY Sevan Drilling Management AS Norway 100 % USD Sevan Drilling Invest AS Norway 100 % USD Sevan Drilling Rig II AS Norway 100 % USD Sevan Drilling AS Norway 100 % USD Sevan Drilling Rig V AS Norway 100 % USD Sevan Drilling Rig VI AS Norway 100 % USD Sevan Drilling Rig VII AS Norway 100 % USD Sevan Drilling Rig VIII AS Norway 100 % USD Sevan Drilling Rig IX AS Norway 100 % USD Sevan Drilling Pte Ltd Singapore 100 % USD Sevan Drilling Rig II Pte Ltd Singapore 100 % USD Sevan Drilling Rig IV Pte Ltd Singapore 100 % USD Sevan Drilling Rig V Pte Ltd Singapore 100 % USD Sevan Drilling Rig VI Pte Ltd Singapore 100 % USD Sevan Drilling Rig VII Pte Ltd Singapore 100 % USD Sevan Drilling Rig VIII Pte Ltd Singapore 100 % USD Sevan Drilling Rig IX Pte Ltd Singapore 100 % USD Sevan Drilling Limited UK 100 % USD Sevan Marine Servicos de Perfuracao Ltda Brazil 99,99 % BRL Sevan Investimentos do Brasil Ltda Brazil 100 % BRL NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all financial years presented. The presentation currency of the Group is USD which corresponds to the functional currency of the majority of the entities in the Group. All figures are in USD million unless otherwise stated. 2.1 BASIS OF PREPARATION The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as adopted by the European Union (EU) and valid as of 31 December The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. F 18

219 OUR RESULTS CHANGES IN ACCOUNTING POLICY AND DISCLOSURES a) New and amended standards adopted by the Group There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after 1 January 2012 that would be expected to have a material impact on the group. b) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the group, except the following set out below: Amendment to IAS 1, Financial statement presentation regarding other comprehensive income. The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income (OCI) on the basis of whether they are potentially re-classifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. IFRS 13, Fair value measurement, aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP. IAS 19, Employee benefits, was amended in June The impact on the group will be as follows: to immediately recognise all past service costs; and to replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset).the group s assessment is that this implementation will have immaterial effect on the accounts. IFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 was issued in November 2009 and October It replaces the parts of IAS 39 that relate to the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortised cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The group is yet to assess IFRS 9 s full impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after 1 January The group will also consider the impact of the remaining phases of IFRS 9 when completed by the Board. IFRS 10, Consolidated financial statements, builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The group s assessment is that this implementation will have immaterial effect on the accounts. IFRS 12, Disclosures of interests in other entities, includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. The group is yet to assess IFRS 12 s full impact and intends to adopt IFRS 12 no later than the accounting period beginning on or after 1 January There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the group. 2.2 CONSOLIDATION Subsidiaries Subsidiaries comprise all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and are de-consolidated from the date that control ceases. The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred assumed at the date of exchange. Acquisition-related costs are expenses as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially 38 OUR RESULTS at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of the acquisition over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the income statement immediately. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group. 2.3 SEGMENT REPORTING Since 31 December 2011, reporting has been divided by two segments. The reporting is based on a split between operation and operation in connection with construction. Operating segments are reported in manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Board of Directors. 2.4 FOREIGN CURRENCY TRANSLATION Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using the currency of the primary economic environment in which each entity operates ( the functional currency ). The consolidated financial statements are presented in USD, which is the Group s presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from settlement of such transactions (realised items) and from translation at exchange rates prevailing at balance sheet date of monetary assets and liabilities denominated in foreign currencies (unrealised items) are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges. This will be the case only from the point in time when hedge accounting is implemented. Foreign exchange gains and losses that relates to interest-bearing debt and cash and cash equivalents are presented (net) as a separate line item in the income statement within net financial items. Foreign exchange gains and losses that relates to operation are presented (net) as a separate line item in the income statement within operating expenses. Group companies The results and financial position of all Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency, are translated into the presentation currency as follows: Assets and liabilities are translated at exchange rates prevailing at balance sheet date. Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at exchange rates prevailing at the dates of the transactions). Upon consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to other comprehensive income if relevant. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 PROPERTY, PLANT AND EQUIPMENT Fixed assets are stated at historic cost less accumulated depreciation. The Group has not used, and has no plans of utilising the revaluation option in IAS 16. Depreciation is calculated using the straight-line method. Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to estimated discounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated discounted future cash flows, an impairment charge is recognised. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Received and approved invoices are the basis of capitalisation. All other repairs and maintenance are charged to the income statement as incurred. General and specific borrowing cost directly attributable to the acquisition, construction or producing a qualifying asset, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Each major component of the Drilling rigs is depreciated separately when the units are available for intended use. A major component is defined as a part with a cost that is significant in relation to the total cost of the asset. An estimation of useful lives indicates an average depreciation period of years. Other fixed assets consist of furniture, fixtures and equipment that are depreciated using the straight-line method over their estimated useful lives ranging from three to ten years. F 19

220 OUR RESULTS 39 Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement. 2.6 CONSTRUCTION IN PROGRESS Construction contracts are capitalised as construction in progress based on instalments payable to the yard and other suppliers. Received and approved invoices are the basis of capitalisation. Insurance and net financial expenses during the construction period are capitalised as construction in progress. Cost of labour directly attributable to the construction of the Sevan units is also capitalised. Cost of training, manning and other pre-operational activities are expensed as incurred. 2.7 INTANGIBLE ASSETS Computer software Acquired computer software is capitalised on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives, ranging from three to five years. Cost associated with developing or maintaining computer software programs are recognised in the income statement as incurred. Research and Development Cost associated with research is expensed as incurred. Development costs are expensed when the criteria for recognition are not met. 2.8 IMPAIRMENT OF NON-FINANCIAL ASSETS Assets that have an indefinite useful life are not subject to amortisation but are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less cost to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels at which separate cash flows are identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that has suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 2.9 FINANCIAL ASSETS The Group classifies its financial assets as fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired: Management determines the classification of its financial assets at initial recognition. Loans and receivables are measured at fair value at transaction date, subsequently re-measured at amortised cost. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets are included in current assets, except for those with maturities greater than 12 months after balance sheet date, in which case they are classified as non-current assets. Derivative financial instruments are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured at fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge). Hedge accounting has not been applied in 2012 or SHARE-BASED PAYMENTS The group has an equity-settled, share-based compensation plan, under which the entity receives services from employees as consideration for equity instruments (options) of the group. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: and remaining an employee of the entity over a specified time period); and Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium. The grant by the company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts. 40 OUR RESULTS The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge will be treated as a cash-settled transaction INVENTORIES Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost is determined using the average cost method TRADE RECEIVABLES Trade receivables are amounts due from customers for services performed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as noncurrent assets. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The provision is recognised in the income statement as other operating expense CASH AND CASH EQUIVALENTS In the consolidated statement of cash flow, cash and cash equivalents includes cash in hand, bank deposits, other short-term highly liquid investments SHARE CAPITAL Ordinary shares are classified as equity. Incremental cost directly attributable to the issue of new shares is shown in equity as a deduction, net of tax, from the proceeds. Where any Group company acquires the Company s equity share capital (treasury shares), the consideration paid, including any directly attributable cost (net of income taxes) is deducted from equity attributable to the Company s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable transaction cost and income tax, is included in equity attributable to the Company s equity holders INTEREST-BEARING DEBT Interest-bearing debt is initially recognised at fair value, net of transaction cost incurred and including the value of any embedded call options. Interest-bearing debt is subsequently stated at amortised cost; any difference between the proceeds (net of transaction cost and embedded value of call options) and the redemption value is recognised in the income statement over the period of the interest-bearing debt using the effective interest method. Interest-bearing debt is presented net of the separated financial asset and is classified as current liabilities unless the Group has an unconditional right to defer settlement for more than 12 months after the balance sheet date CURRENT AND DEFERRED INCOME TAX The tax expense for the period comprises current and change in deferred tax. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rates (and legislation) that have been enacted or substantially enacted by balance sheet date and are expected to apply when the deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. The tax base included in the calculation of deferred income tax is calculated in local currency and translated into USD at foreign exchange rates prevailing at balance sheet date. Deferred income tax asset and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities related to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis PROVISIONS A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. F 20

221 OUR RESULTS 41 Provisions are measured as the present value of the expected expenditures required to settle the obligation using a pre-tax discount rate that accounts for time value of money and risks specific to the obligation. The increase in the provision due to passage of time is recognised as interest expense TRADE PAYABLES Trade Payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method REVENUE RECOGNITION Revenue comprises the fair value of the consideration receivable for the sale of services and charter in the ordinary course of the Group s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts and after eliminated sales within the Group. The group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the group s activities as described below. The group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Revenue is recognised as follows: Charter revenues are recognised on a straight-line basis over the contract period during which the services are rendered, and at the rates established in the underlying contracts. Penalties imposed as compensation to client for delivery of a unit later than contractually agreed shall be accrued for on a separate account in the balance sheet at the date the charter contract commences. If any part of the penalties is recoverable from vendors due to directly correlated delays caused by them, the penalty recoverable from the vendor shall offset the accrual of penalties payable to the client. Net accrued amount shall subsequently be amortised as a reduction of income over the fixed term of the charter contract. Lease income is recognised in accordance with the underlying contract. Mobilisation expenses are offset by mobilisation revenues and recognised using the straight line method over the full fixed term of the underlying charter contract. Interest income is recognised on a time-proportion basis using the effective interest method. Dividend income is recognised when the right to receive payment is established LEASES Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straightline basis over the period of the lease. When assets owned by the Group are leased to clients under an operating lease, the asset is included in the balance sheet based on the nature of the asset DIVIDEND DISTRIBUTION Dividend distribution to the Company s shareholders is recognised as a liability in the Group s financial statements in the period in which the dividend is approved by the Company s shareholders. NOTE 3: FINANCIAL RISK MANAGEMENT 3.1 FINANCIAL RISK FACTORS The Group s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. Risk management for the Group is carried out by Treasury. Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units within the Group. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity. The Group has entered into several economical hedge, but do not apply hedge accounting. 42 OUR RESULTS MARKET RISK Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the NOK, USD, EURO and Reais. Foreign exchange risk arises from future commercial transactions, recognised assets or liabilities, and net investments in foreign operations. The consequence of change in exchange rates +/- 5% for USD / NOK is USD 0.1 million, for USD / Euro is USD 0.1 million and for USD / BRL is USD 0.1 million. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not an entity s functional currency. The Group aims at achieving a natural hedge between cash inflows and cash outflows and manages remaining foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, by forward contracts and similar instruments as appropriate. Hedging of foreign exchange exposures are executed on a gross basis and foreign exchange contracts with third parties generally designated at Group level. The Group s risk management policy is to hedge anticipated transactions in each major currency Price risk The Group is exposed to commodity price risk at two main levels; The demand for drilling units is sensitive to oil price developments, fluctuations in production levels, exploration results and general activity within the oil industry. The cost of construction of future units is sensitive to changes in market prices of the input factors CREDIT RISK Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Group has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. Credit exposures to customers are mainly concentrated around the charter contracts. The Company has as per today one customer LIQUIDITY RISK Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. The Group aims to maintain flexibility in its liquidity by keeping committed credit lines available. The Group is subjected to bank covenant as described below. A breach had occurred during this period but extended waivers have been granted by the lenders as at 31 December 2012, which are in effect through the end of February Separate amendment deeds have been entered into between the Group with the respective syndicated facilities lenders and the bank covenant has been amended to a minimum free cash balance of (i) USD 60 million from 15 February 2013 to and including 31 March 2013; (ii) USD 35 million from 1 April 2013 to and including 30 June 2013; (iii) USD 25 million from 1 July 2013 to and including 30 September 2013; (iv) USD 15 million from 1 October 2013 until the end of Security Period; and (v) unless, in each case, any member of the Group has taken delivery of a new drilling rig currently under construction, USD 40 million from the date of delivery acceptance onwards. The Group has implemented routines to continuously update its cash flow forecast when changes to main assumptions relating to repayment schedules, interest rates changes etc. to be able to foresee the necessary actions taken to rectify any potential adverse effects on its future liquidity position. Reference is made to Note 11 for a maturity analysis of the Group s financial liabilities CASH FLOW AND FAIR VALUE INTEREST RATE RISK The Group s interest rate risk arises from non-current debt. Debt subject to floating interest rates exposes the Group to cash flow interest rate risk. A change in interest rate of +/- 1% would affect the Group interest cost with +/- USD 4.6 million. Similar a change in interest rate of +/- 0.5% would affect the Group interest cost with +/- USD 2.3 million. Debt subject to fixed interest rates exposes the Group to fair value interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group s policy is to maintain part of its debt at fixed rates. The Group simulates various scenarios taking into consideration refinancing and renewal of current positions, alternative financing and hedging. Based on the different scenarios, the Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of conversion from floating interest rates to fixed interest rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals the difference between fixed interest rates and floating interest rates calculated by reference to the agreed notional amounts. F 21

222 OUR RESULTS 43 NOTE 4: ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are assumed to be reasonable under current circumstances. 4.1 CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The 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 rigs The 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. See also 4.2. 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 recognises 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 recognised, 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 tax asset relies upon management s judgment of the Group s ability to generate future positive taxable income in each respective jurisdiction. Commitments The Group uses estimates regarding assessment of remaining commitments regarding outstanding open PO s. Depreciation of units in operation The Group uses estimates when assessing a Sevan capital 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 future cash flows is based on several assumptions, including forecasted operational expense, utilisation and day rates which are based on actual contracts as well as forecasts beyond the contracted periods. 4.2 IMPAIRMENT TESTING Assumptions applied for the purpose of impairment testing of rig in operation 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% which is differentiated for specific assets if the underlying asset risk is viewed as being different to that of an average rig in operation. Estimated WACC applied for the operation segment is 10% for both rigs. Estimation of future cash flows is based on several assumptions, including forecasted operational expense, utilisation and day rates which are based on actual contracts as well as forecasts beyond the contracted periods. A change in estimated WACC of 1% could result in an impairment of USD 23 million. 44 OUR RESULTS NOTE 5: SEGMENT INFORMATION The segment results as per 31 December 2012 CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Total segment revenue Inter-segment revenue Revenue from external customers Operating profit/segment result Finance costs net Profit before income tax Income tax expense Profit as per 31 December Other segment items included in the income statement are as follows; Depreciation of PP&E Amortisation of intangible assets All revenue is from one customer regarding Sevan Driller and Sevan Brasil in Brazil. The segment assets and liabilities at 31 December 2012 and capital expenditure ended as follows: CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Assets 1, ,719.7 Liabilities 1, ,057.3 Capital expenditure accumulated 1, ,500.4 All segment assets and liabilities are allocated. The segment results for 2011 CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Total segment revenue Inter-segment revenue Revenue Operating profit/segment result Finance costs net Profit before income tax Income tax expense Profit for the year Other segment items included in the income statement are as follows; Depreciation of PP&E Amortisation of intangible assets All revenue is from one customer regarding Sevan Driller in Brazil. F 22

223 OUR RESULTS 45 The segment assets and liabilities at 31 December 2011 and capital expenditure for the year ended as follows: CONSTRUCTION IN OTHER/NOT FIGURES IN USD MILLION OPERATION PROGRESS (CIP) ALLOCATED GROUP Assets ,599.8 Total assets ,599.8 Liabilities Capital expenditure ,319.3 Based on the company structure, activity and internal reporting the segment reporting is devided in three different segments. 1. Operation. This segment includes our rigs in operation. 2. Contruction in progress. This segment includes our rigs which are under construction. 3. Other/not allocated. This segment includes all administrative items and items not included in operation or construction in progress. NOTE 6: PROPERTY, PLANT AND EQUIPMENT UNIT IN OTHER TOTAL CONSTRUCTION IN OPERATION DRILLING FIXED FIXED FIGURES IN USD MILLION PROGRESS (CIP) (UIO) RIGS ASSETS ASSETS Year ended December 31, 2012 Book value January , ,327.9 Additions Transfer to UIO Impairment Depreciation Book value December , , ,512.9 At December 31, 2012 Cost , ,589.6 Transfer to UIO Accumulated impairment Accumulated depreciation Book value December , , ,512.9 Year ended December 31, 2011 Book value January Additions , ,025.3 Impairment Depreciation Book value December , ,327.9 At December 31, 2011 Cost , ,361.5 Accumulated impairment Accumulated depreciation Book value December , ,327.9 An interest rate of 5% is used for capitalisation. Capitalised borrowing cost in 2012 was USD 28,5 million (2011: 21,4). Security arrangements relating to drilling rigs are described in Note 19 and commitments relating to capital expenditure are described in Note OUR RESULTS NOTE 7A: FINANCIAL INSTRUMENTS BY CATEGORY Accounting principles for financial instruments were applied to the line items below as indicated: 31 December 2012 ASSETS AT FAIR LOANS AND VALUE THROUGH FIGURES IN USD MILLION RECEIVABLES PROFIT AND LOSS TOTAL Financial assets Trade and other receivables Currency forwards Cash and cash equivalents Total financial assets December 2011 ASSETS AT FAIR LOANS AND VALUE THROUGH FIGURES IN USD MILLION RECEIVABLES PROFIT AND LOSS TOTAL Financial assets Trade and other receivables Currency forwards Cash and cash equivalents Total financial assets December 2012 LIABILITIES AT FAIR OTHER FINANCIAL VALUE THROUGH THE FIGURES IN USD MILLION LIABILITIES PROFIT AND LOSS TOTAL Financial liabilities Bank loans Trade payables Non-current liabilities Interest rate swaps Total financial liabilities , December 2011 LIABILITIES AT FAIR OTHER FINANCIAL VALUE THROUGH THE FIGURES IN USD MILLION LIABILITIES PROFIT AND LOSS TOTAL Financial liabilities Bank loans Trade payables Non-current liabilities Interest rate swaps Total financial liabilities F 23

224 OUR RESULTS 47 The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1 : Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 : Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) Level 3 : Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) 2012 FIGURES IN USD MILLION LEVEL 1 LEVEL 2 LEVEL 3 SUM Assets Financial derivates Liabilities Financial derivates FIGURES IN USD MILLION LEVEL 1 LEVEL 2 LEVEL 3 SUM Assets Financial derivates Liabilities Financial derivates Interest and currency swaps 2012 INTEREST RATE SWAPS FAIR VALUE MUSD fixed at 2.21% -4.8 MUSD fixed at 2.15% -4.3 MUSD 71.9 fixed at % -0.8 MUSD fixed at 2.975% CURRENCY SWAPS FAIR VALUE Nil Interest and currency swaps 2011 INTEREST RATE SWAPS FAIR VALUE MUSD fixed at 2.21% -1.4 MUSD fixed at 2.15% -4.2 MUSD fixed at 2.975% CURRENCY SWAPS FAIR VALUE MEUR 1.1 (equivalent to MUSD 1.4) against USD 0.0 MNOK 5.0 (equivalent to MUSD 0.8) against USD 0.0 MUSD 87.9 against RMB OUR RESULTS NOTE 7B: CREDIT QUALITY OF FINANCIAL ASSETS The credit quality of financial assets that were neither past due nor impaired was assessed by reference to external credit ratings (where available) and by analysis of historical information about counterparty default rates: Trade receivables - Counterparty with external credit rating FIGURES IN USD MILLION BBB BBB Total Trade receivables - Counterparty without external credit rating FIGURES IN USD MILLION Group Group Group Total Total trade receivables Group 1 - New customers (less than 6 months) Group 2 - Existing customers (more than 6 months) with no defaults in the past Group 3 - Existing customers (more than 6 months) with some defaults in the past Cash at bank and short-term bank deposits FIGURES IN USD MILLION AA AA A A A BBB No rating available Total cash and cash equivalents NOTE 8: CASH AND CASH EQUIVALENTS FIGURES IN USD MILLION Cash at bank and in hand Restricted employees' tax deduction fund Restricted short-term bank deposits Total cash and cash equivalents USD 19,4 million and USD 21,5 million was reserved as Debt Service repayment at maturity in relation to the bank facility for Sevan Drilling Pte Ltd. and Sevan Drilling Rig II Pte Ltd. respectively. The remaining amounts are reserved for short-term Debt Service repayment and operating costs in relation to the projects. USD 0,5 million relates to customary income taxes withheld from employees. F 24

225 OUR RESULTS 49 NOTE 9: SHARE CAPITAL The total authorised number of ordinary shares was 336,625 million (2011: 336,625 million) with a par value of NOK 1 per share. All issued shares were fully paid in at balance sheet date. NUMBER OF SHARES SHARE CAPITAL SHARE PREMIUM TOTAL January 1, ,625, Proceeds from shares issued December 31, ,625, NUMBER OF SHARES SHARE CAPITAL SHARE PREMIUM TOTAL January 1, ,000, Proceeds from shares issued 333,625, December 31, ,625, The 20 largest shareholder accounts as at 7 January 2013 SHAREHOLDER ACCOUNTS NO. OF SHARES %-SHARE SEADRILL LTD 96,000, SKAGEN VEKST 17,599, THE BANK OF NEW YORK MELLON 16,660, ODIN OFFSHORE 13,232, VARMA MUTUAL PENSION 12,497, JPMORGAN CHASE BANK 8,684, VERDIPAPIRFONDET DNB NORGE (IV) 8,001, SKANDINAVISKE ENSKILDA BANKEN A/C SEC FIN 6,132, SKANDINAVISKA ENSKILDA A/C CLIENTS ACCOUNT 5,937, DNB LIVSFORSIKRING A 5,824, CITIBANK N.A. (LONDON BRANCH) 5,000, WENAASGRUPPEN AS 4,000, BNYBE - US BK EVERMORE GLO VAL 3,802, VERDIPAPIRFONDET DNB SMB 3,350, VERDIPAPIRFONDET DNB NORGE (AVANSE) 3,128, SKANDINAVISKA ENSKILDA BANKEN S.A. 2,532, CREDIT SUISSE SECURITIES (USA) 2,511, ODIN MARITIM 2,250, DEUTSCHE BANK AG LONDON BRANCH 2,216, SKANDINAVISKA ENSKILDA BANKEN A/C FINNISH 2,025, Total, 20 largest shareholder accounts 221,386, Total no. of shares 336,625,000 Foreign ownership 195,015, OUR RESULTS NOTE 10: CURRENT LIABILITIES FIGURES IN USD MILLION Trade payables Accrued expenses relating to trade payables Total trade payables Income tax payable Other payables Total other current liabilities Total current liabilities NOTE 11: INTEREST-BEARING DEBTS FIGURES IN USD MILLION Non-current liabilities Bank borrowings Derivative financial instruments Other non-current liabilities* Total non-current liabilities * including non-current trade payable of USD 43 million. Total borrowings FIGURES IN USD MILLION Bank Loans Non-Current Sevan Driller USD 480M Loan Sevan Brasil USD 525M Loan Current Sevan Driller USD 480M Loan Sevan Brasil USD 525M Loan Total Total borrowings include secured liabilities (bank and collateralised borrowings) of USD 858,7 million (2011: USD 861,2 million) Loan Sevan Driller - USD 480 million. As at December 2012 the weighted interest rate is 4.16% (2011: 4.96%) Basic terms is libor % Loan Sevan Brasil - USD 525 million. As at December 2012 the weighted interest rate is 4.84% (2011: 6.11%) Basic terms is devided between libor % and libor % F 25

226 OUR RESULTS 51 The carrying amounts and fair value of the non-current borrowings are as follows: CARRYING AMOUNT FAIR VALUE Bank borrowings Total The group has the following undrawn borrowing facilities: FIGURES IN USD MILLION Floating rate Expiring within one year Expiring beyond one year Fixed rate Expiring within one year Expiring beyond one year Total un-drawn debt facilities Payment schedule 2012 FIGURES IN USD MILLION 0-3 MONTH 3-12 MONTH 1-3 YEARS LATER Borrowings (including interest) Trade payable Other payables Swaps Total The debt repayments are not fixed but on a variable basis depending on rig s performance in 2013 Payment schedule 2011 FIGURES IN USD MILLION 0-3 MONTH 3-12 MONTH 1-3 YEARS LATER Borrowings (including interest) Trade payable Other payables Total OUR RESULTS NOTE 12: DEFERRED INCOME TAX Deferred income tax assets and liabilities are offset when a legally enforceable right to offset current tax assets against current tax liabilities exists. Offsetting amounts were as follows: Deferred tax assets FIGURES IN USD MILLION Deferred tax asset to be recovered after more than 12 months Deferred tax asset to be recovered within 12 months Total deferred tax assets Deferred tax liabilities FIGURES IN USD MILLION Deferred tax liability to be recovered after more than 12 months Deferred tax liability to be recovered within 12 months Total deferred tax liabilities Net deferred tax assets/(liabilities) FIGURES IN USD MILLION Deferred tax asset to be recovered after more than 12 months Deferred tax asset to be recovered within 12 months Net deferred tax assets/(liabilities) Gross movement on the deferred income tax account was as follows: FIGURES IN USD MILLION Book value January Received in connection with contribution in kind Income statement charge relating to deferred tax assets Book value December Specification of deferred tax assets/deferred tax liabilities: FIGURES IN USD MILLION Deferred tax asset Deferred tax liability Net deferred tax assets/(liabilities) FIGURES IN USD MILLION Unrealised currency gain/(loss) -7.1 Total deferred tax liabilities Unrealised currency gain/(loss) Losses carry forward Total deferred tax assets F 26

227 OUR RESULTS 53 Group entities incorporated in Singapore have been accepted under the local tax exemption regime. As a consequence, no deferred tax asset resulting from losses carried forward from entities incorporated in Singapore were recognised in the financial statements. An assessment of the recognised deferred tax assets has been made, the supporting cash flows and budget support a further capitalisation of the loss carried forward. NOTE 13: EMPLOYEE BENEFIT EXPENSE FIGURES IN USD MILLION Wages and salaries Bonuses Employer's contribution tax Pension costs Share based payment - option cost Other employee benefit expense Total employee expense Average no. of man-years No loans were granted to the CEO, the Chairman of the Board, or to any other related party. Remuneration of Senior Management and Board of Directors 2012 SHARE OPTIONS RETIREMENT OTHER GRANTED START END NUMBERS IN USD THOUSAND SALARIES BENEFITS BENEFITS (THOUSAND) DATE DATE Scott Kerr CEO ,600 Jon Willmann CFO ,100 Bjørn Egil Gustavsen VP Projects Heitor Gioppo VP Brazil July 2012 Paul Grimen VP Operations Pascal Busch VP QHSE Eileen Aspehaug VP HR Erling Lind * Chairman Jan 2012 Anne Breive Board member May 2012 Kitty Hall Board member Benedicte Schilbred Fasmer Board member May 2012 Per Wulff Board member Kristian Johansen Board member Jan 2012 Total remuneration paid 4, * Invoiced from Advokatfirmaet Wiersholm AS 2011 RETIREMENT OTHER START NUMBERS IN USD THOUSAND SALARIES BENEFITS BENEFITS DATE Scott Kerr CEO May 2011 Jon Willmann CFO May 2011 Bjørn Egil Gustavsen VP Projects May 2011 Heitor Gioppo VP Brazil May 2011 Paul Grimen VP Operations Jun 2011 Pascal Busch VP QHSE Jun 2011 Eileen Aspehaug VP HR Nov 2011 Anne Breive Board member May 2011 Arne Smedal Board member May 2011 Jon C. Cole Chairman May 2011 Kitty Hall Board member May 2011 Total remuneration paid 2, OUR RESULTS Salaries and other benefits included in 2011 were based on actual period of employment and translated at average exchange rate for each year. Until May 2012 Anne Breive was the leader of the audit committee with Kristian Johansen member of the audit committee. From May 2012 Kristian Johansen has been the leader of the audit committee with Benedicte Schilbred Fasmer as a member of the audit committee. The Group has an immaterial defined benefit pension plan for one employee, established in The net retirement benefit obligation in the balance sheet is USD 110,2 thousand. All other employees are on contribution based pension plans. Share options are granted to executives and to selected employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options shall vest with one third each year. Vesting of the options is conditional upon the Employee, on each of the vesting dates, remaining employed by the company. The options may, once vested, be exercised at any time up to and including the date falling three years after the relevant vesting dates. The group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: AVERAGE EXERCISE AVERAGE EXERCISE PRICE PER SHARE OPTIONS PRICE PER SHARE OPTIONS OPTION (THOUSANDS) OPTION (THOUSANDS) At 1 January Granted NOK , Forfeited Exercised Expired At 31 December NOK ,403.3 Out of the 9,403,334 outstanding options (2011: 0 options), 3,153.3 options (2011: 0) were exercisable. There is no exercised option in 2012 or The weighted average fair value of options granted during the period determined using the Black-Scholes valuation model was NOK 1.73 per option (2011: 0). The significant inputs into the model were weighted average share price of NOK 5.75 (2011: 0) at the grant date, exercise price shown above, volatility of 42.5 % (2011: 0%), dividend yield of 0% (2011: 0%), an expected option life of three years (2011: 0 years) and an annual risk-free interest rate of 1.37% (2011: 0%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices. See above for the total expense recognised in the income statement for share options granted to directors and employees. NOTE 14: FINANCIAL INCOME AND FINANCIAL EXPENSE Currency gains and losses relating to operational activities were classified as a separate line item as an operational expense in the Income Statement and are not included in the tables below. Currency gains and losses relating to financing activities were presented as separate line item as a financial income/(expense) in the Income Statement and are specified in Note 23. Financial income: FIGURES IN USD MILLION Interest income Other financial income Total financial income F 27

228 OUR RESULTS 55 Financial expense: FIGURES IN USD MILLION Interest expense Swap Call premium bond loan Other financial expenses Total financial expense NOTE 15: INCOME TAX EXPENSE FIGURES IN USD MILLION Current tax Change deferred tax Net tax income/(expense) FIGURES IN USD MILLION Gross revenue tax Withholding tax Current tax FIGURES IN USD MILLION Profit/(loss) before tax Tax calculated at domestic tax rates applicable to profits in holding company Profit not subject to payable tax in shipping regime Currency translation adjustment Expenses not deductible Tax income/(expense) NOTE 16: EARNINGS PER SHARE Profit attributable to equity holders of the Company (1,000 USD) -11,676-48,917 Weighted average number of ordinary shares on issue (thousands) 336, ,024 Basic and diluted earnings per share (USD per share) Basic earnings per share Basic earnings per share were calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year. Options are not in money at 31 December 2012 and are not included in calculating diluted earnings per share. NOTE 17: DIVIDEND PER SHARE No dividend was paid in 2012 or No dividend is to be proposed at the Annual General Meeting on 13 May OUR RESULTS NOTE 18: CASH GENERATED FROM OPERATIONS FIGURES IN USD MILLION Profit/(loss) before tax Adjustments for: Depreciation, amortisation and impairment Paid taxes Changes in working capital: Inventory Trade and other receivables Trade and other payables Other current liabilities, provisions and charges Cash generated from operations NOTE 19: SECURITIES FOR DEBT The Group has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business. AT BALANCE SHEET DATE, THE GROUP IS PARTY TO THE FOLLOWING SECURITY ARRANGEMENTS: Security arrangements relating to financing: The USD 525,000,000 credit facility is secured by a first priority mortgage over Sevan Brasil, a guarantee from Sevan Drilling ASA and Sevan Marine ASA, a pledge over the shares of Sevan Drilling Rig II Pte Ltd and of its immediate holding corporation, assignment of contract and insurance proceeds, first ranking assignment of the interest rate hedging arrangements to be entered into in accordance with provisions of the loan facility, and a charge over revenues and bank accounts to be maintained in respect of Sevan Brasil. The USD 480,000,000 credit facility is secured by a first priority mortgage over Sevan Driller, a guarantee from Sevan Drilling ASA, first ranking assignment of contract and insurance proceeds, first ranking assignment of the interest rate hedging arrangements which has been entered into in accordance with provisions of the credit facility, and a charge over revenues and bank accounts in respect of Sevan Driller. NOTE 20: COMMITMENTS FIGURES IN USD MILLION Drilling Rig II Drilling Rig III Drilling Rig IV Total capital commitments ,036.3 Payment schedule for Rig 3 and MILESTONE RIG 3 STATUS RIG 4 STATUS Paid in Paid in a 78.9 Paid in To be paid in Q at delivery 2b To be paid in Q at delivery To be paid in Q at delivery To be paid in Q at delivery Total commitments F 28

229 OUR RESULTS 57 Payment schedule for Rig 3 and MILESTONE RIG 3 STATUS RIG 4 STATUS Paid in Paid in a 78.9 Paid in Paid in Q b To be paid in Q at delivery To be paid in Q at delivery To be paid in Q at delivery Total commitments NOTE 21: RELATED PARTY TRANSACTIONS Related-party transactions were made on an arm s-length basis, and include the following: Purchases from related parties FIGURES IN USD MILLION Purchase of services from the Sevan Marine ASA Design fee paid to Sevan Marine ASA Guarantee fee Financial expenses from the Sevan Marine ASA Financial income from the Sevan Drilling Invest AS Total purchases and financial items Year-end balances arising from loans, sales/purchases of goods/services: FIGURES IN USD MILLION Receivables from the Sevan Marine ASA Receivables from the Sevan Drilling Invest AS Total receivables Sevan Marine ASA is no longer a related party for Sevan Drilling ASA. Sevan Marine ASA sold all their shares in Sevan Drilling ASA December NOTE 22: OPERATING LEASES At balance sheet date, the Group has entered into lease- and rental-obligations: Lease- and rental obligations FIGURES IN USD MILLION No later than 1 year Between 1-5 years Later than 5 years Total lease and rental-obligations OUR RESULTS Future lease payments receivable under charter contracts: FIGURES IN USD MILLION No later than 1 year Between 1-5 years Later than 5 years Total minimum future charter revenues 1, ,199.9 Order back-log for charter revenue: FIXED TERM OPTION PERIODS UNIT CLIENT (YEARS) (YEARS) COMMENCEMENT Sevan Driller I (Sevan Driller) Petrobras S.A. 6 N/A 12 June 2010 Sevan Driller II (Sevan Brasil) Petrobras S.A. 6 N/A 24 July 2012 NOTE 23: FOREIGN EXCHANGE GAIN/(LOSS) RELATED TO FINANCING Foreign exchange gain/(loss) related to operation FIGURES IN USD MILLION Unrealised gain/(loss) Realised gain/(loss) Total foreign exchange gain/(loss) related to operation Foreign exchange gain/(loss) related to financing FIGURES IN USD MILLION Unrealised gain/(loss) Realised gain/(loss) Total foreign exchange gain/(loss) related to financing Total foreign exchange gain/(loss) relates mainly to cash and cash equivalents nominated in other currencies than USD. NOTE 24: OTHER OPERATING EXPENSES Other operating expense FIGURES IN USD MILLION Office cost (IT, rental etc) Consultancy (audit, tax and legal) * Marketing Other Total other operating expense F 29

230 OUR RESULTS 59 Specification of auditor s fee (excl. VAT) FIGURES IN USD MILLION Statutory audit (incl. technical assistance with financial statements) Other assistance* Total audit fees *Included in other assistance 2011 are work performed in connection with IPO 0.25 NOTE 25: INVENTORIES FIGURES IN USD MILLION Diesel Stock on-board Spares on-board Sevan Driller Consumables Sevan Brasil Spares Sevan Brasil Provision for stock obsoleteness Inventories - net NOTE 26: OTHER NON-CURRENT ASSETS FIGURES IN USD MILLION Net late delivery penalties Net mobilisation expense Others Total other non-current assets Net late delivery penalties include penalties incurred for the late delivery of the service element of the charter contract for Sevan Driller and Sevan Brasil. Net late delivery penalties will amortise over the fixed contract period as a reduction in operating revenue. NOTE 27: COMBINED NUMBERS PROFORMA COMBINED INCOME STATEMENT FIGURES IN USD MILLION NOTE 2012 Operating revenue Total operating expense Operating profit/(loss) 14.7 Net financial items Profit/(loss) before tax Tax income/(expense) Net profit/(loss) The combined income statement for 2011 is made on basis of Sevan Driller being part of Sevan Driller Group the whole year The combined income statement comprise the consolidated accounts for Sevan Drilling ASA and the financial accounts for Sevan Drilling Invest AS and Sevan Drilling Limited, both entities being wholly owned subsidiaries of Sevan Marine ASA up to the date of the IPO of Sevan Drilling Group in March OUR RESULTS NOTE 28: TRADE AND OTHER RECEIVABLES FIGURES IN USD MILLION Trade receivables Provision for impairment of receivables Trade receivables net Prepayments Other receivables Derivative and financial instruments, current Trade and other receivables The Group did not make any losses on receivables during 2012 and The Group did not make any provisions relating to receivables during 2012 and Fair value of trade and other receivables were as follows: FIGURES IN USD MILLION Trade receivables Prepayments Other receivables Derivative and financial instruments, current Total trade and other receivables Trade receivables that are less than three months past due are generally not considered for impairment. Ageing of trade receivables was as follows: FIGURES IN USD MILLION Before due date Up to 3 months after due date Total trade receivables - net Carrying amounts of trade receivables were denominated in the following currencies: FIGURES IN USD MILLION USD BRL Total trade receivables - net F 30

231 OUR RESULTS 61 NOTE 29: EVENTS AFTER BALANCE SHEET DATE Sevan Driller achieved a technical uptime of 76% in the first quarter of 2013, while Sevan Brasil had a technical uptime of 98 percent in the first quarter of On 14 January 2013 Sevan Drilling announced amendments to existing loan agreements with its lending banks and proposed a private placement of NOK 987 million (equivalent to approximately USD 175 million) through an issue of new shares in the company directed towards Norwegian and international investors. The private placement took place as an accelerated bookbuilding process. The private placement was oversubscribed at the subscription price of NOK 3.95 per share and was supported by existing shareholders, as well as new institutional investors. The net proceeds to the Company from the private placement will be used as follows: (i) USD 40 million in payment of deferred liabilities and CAPEX, (ii) USD 35 million in pre-payment of bank debt and, and (iii) USD 100 million for general corporate purposes including contingency and transaction cost. An extraordinary general meeting of the shareholders of Sevan Drilling ASA was held 6 February. The extraordinary general meeting approved all proposals made by the Company s board of directors, including the issue of shares in the private placement and the authorisation of the board of directors to issue shares in the subsequent offering following the private placement. The subsequent offering was directed towards existing shareholders of the Company holding less than 300,000 shares in the Company as of 14 January The final amendment agreements, documenting revised financing terms, was executed on 7 February, following which the conditions for completion of the USD 175 million private placement was fulfilled. The private placement shares were issued on 13 February, following approval and publication of the prospectus. The subsequent offering started on 14 February. The subsequent offering was directed towards existing shareholders of the Company holding less than 300,000 shares in the Company as of 14 January 2013, as registered in the Norwegian Central Securities Depository (the VPS ) on 17 January 2013 (the Record Date ), who were not allocated new shares in the private placement, and who are not resident in a jurisdiction where such offering would be unlawful, or would (in jurisdictions other than Norway) require any prospectus filing, registration or similar action (the Eligible Shareholders ). 7,998,436 new shares were issued from the subsequent offering, with additional NOK 31.6 million received from the subsequent offering. In April Sevan Drilling signed a three-year charter contract for operation in the US Gulf of Mexico between one of its wholly owned subsidiaries and LLOG Bluewater Holdings LLC. Sevan Drilling Rig 3 which will be named Sevan Louisiana, which is currently under construction at Cosco Quidong shipyard in China, will be used for the charter contract. The rig will be capable of drilling in water depths up to 10,000 feet and will employ an innovative, proven cylindrical hull design that makes the rig less sensitive to weather conditions. The Sevan Louisiana is scheduled for delivery in Q4 2013, and the start of operations under the charter contract is expected to be in January The total value of the charter contract is in excess of USD 550 million. Sevan Drilling intends to establish a Houston office to support US GoM operations. 62 OUR RESULTS F 31

232 OUR RESULTS 63 STATEMENT OF INCOME SEVAN DRILLING ASA NOTE Operating income and operating expenses Payroll expenses 6, 7-1,612,310 4,804,749 Depreciation and amortisation expense 5 485,571 86,126 Write down on tangible and intangible assets 0 40,878 Other operating expenses 6 8,316,549 3,508,383 Operating currency loss / (gain) 14 72,717-30,490 Operating expenses 7,262,528 8,409,645 Operating profit / (loss) -7,262,528-8,409,645 Financial income and expenses Interest income 10 25,387,489 16,066,612 Impairment of financial assets 10, ,000,000 Interest expenses 10 83,717 1,752,251 Other financial expenses ,254 Financial currency (gain/loss) 14 1,647, ,578 Net financial income and expenses 23,656, ,188,471 Profit / (loss) before tax 16,393, ,598,116 Tax cost / (income) 4-5,952,986 17,369,007 Operating result after tax 22,346, ,967,123 Annual net profit 22,346, ,967,123 Brought forward To other equity 22,346, ,967,123 Net brought forward 22,346, ,967, OUR RESULTS STATEMENT OF FINANCIAL POSITIONS SEVAN DRILLING ASA NOTE ASSETS Non-current assets Intangible fixed assets Deferred tax asset 3,154,052 0 Total intangible assets 3,154,052 0 Tangible fixed assets Equipment and other movables 5 1,060,637 1,350,660 Total tangible fixed assets 1,060,637 1,350,660 Financial assets Investments in subsidiaries ,566, ,561,846 Loans to group companies ,358, ,798,485 Total financial assets 773,925, ,360,331 Total non-current 778,140, ,710,992 Current assets Receivables Accounts receivables 10 2,480, ,150 Other receivables 8, 10 1,251,531 3,080,101 Total receivables 3,731,679 3,593,251 Cash and bank deposits 9 3,263,556 52,289,359 Total current assets 6,995,235 55,882,610 Total assets 785,135, ,593,602 F 32

233 OUR RESULTS 65 STATEMENT OF FINANCIAL POSITIONS SEVAN DRILLING ASA NOTE Equity and liabilities Restricted equity Share capital 2, 3, 12 61,854,554 61,854,554 Share premium 2 533,818, ,456,181 Total restricted equity 595,672, ,310,735 Retained earnings Other equity 2 144,483,596-8,897,803 Total retained earnings 144,483,596-8,897,803 Total equity 740,156, ,412,931 Liabilities Provisions Deferred tax 4 0 7,078,705 Other long-term liabilities Trade creditors 10 2,610,182 1,355,214 Tax payable Public duties payable 298, ,503 Other short term liabilities 8, 10 42,070,415 28,568,249 Total short term liabilities 44,979,036 30,101,965 Total liabilities 44,979,036 37,180,670 Total equity and liabilities 785,135, ,593,602 Oslo, 17 April 2013 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kitty Hall Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Kristian Johansen Board member Scott Kerr CEO 66 OUR RESULTS STATEMENT OF CASH FLOWS SEVAN DRILLING ASA NOTE Cash flows from operating activities Profit/loss before tax 16,393, ,598,116 Tax paid during the period 0 0 Depreciation and write downs 485, ,127,004 Currency effects 217, ,663 Change in trade and other receivables -138,428-3,431,458 Change in trade creditors 1,254, ,494 Change in other accruals -4,190,370 6,714,622 Net cash flow from operating activities 14,022,956 10,233,209 Cash flows from investment activities Purchases of tangible assets -195,548-1,422,553 Investment in subsidiaries -24,643,795 0 net cash flow from investment activities -24,839,343-1,422,553 Cash flow from financing activities Change in long term intercompany balances -38,297, ,097,212 Increase of equity (IPO) net of emission cost 0 347,637,444 Net cash flow from financing activities -38,297,105 43,540,232 Net cash flows for the period -49,113,492 52,350,888 Cash and cash equivalents at the beginning of the year 52,289, ,049 Currency effect bank deposits 87, ,578 Cash and cash equivalents at the end of the year 3,263,556 52,289,359 Cash and bank deposits actual 3,263,556 52,289,359 Difference 0 0 F 33

234 OUR RESULTS 67 NOTES TO SEVAN DRILLING ASA NOTE 1: ACCOUNTING POLICIES Sevan Drilling s financial statements have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting principles. The functional currency for the company is USD as this is the currency for which the Company is financed. The functinal currency in the subsiditaries are USD and future dividends will be nominated in USD. All numbers are in USD 1 unless otherwise stated. REVENUE RECOGNITION Revenues related to sales of goods and sales of services are recognised when delivered. MAIN PRINCIPLE FOR EVALUATION AND CLASSIFICATION OF ASSETS AND LIABILITIES Current assets and current liabilities includes items with due date within one year after transaction date, as well items relating to the operating cycle. Other items have been classified as non-current assets/non-current liabilities. Current assets are measured at the lower of purchase cost and fair value. Short-term liabilities are recognised in the balance sheet at nominal value at the establishment date. Fixed assets are measured at purchase cost. The fixed assets are written down to net realisable value if a value reduction occurs that is expected to be permanent. Borrowings are recognised in the balance sheet at amortised value on the establishment date, equal to nominal value deducted for transaction costs. Other non-current liabilities are recognised at nominal value. RECEIVABLES Trade receivables and other receivables are recognised in the balance sheet at nominal value after deduction of provision for bad debt. Bad debt is provided for on the basis of an individual assessment of each receivable. FIXED ASSETS Fixed assets are recognised in the balance sheet and depreciated over the asset s expected useful life on a straight-line basis. Maintenance of an asset is expensed under operating expenses as incurred. Additions or improvements are added to the asset s cost price and depreciated together with the asset. When the recoverable amount of the asset is exceeded by the carrying amount of the asset an impairment charge is recognised, and the asset is written down to recoverable amount. Recoverable amount is the highest of net sales value and value in use. Value in use is the net present value of future cash flows, which are expected to be generated from the asset. Leased assets are reflected in the balances sheet as assets if the leasing contract is considered a financial lease. RESEARCH AND DEVELOPMENT Cost associated with research activities are expensed as incurred. Qualifying expense associated with development activities are capitalised and depreciated over expected usedul life. CASH AND BANK DEPOSITS Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. CURRENCY Cash and bank deposits, current assets, and short-term liabilities nominated in other than functional currencies are converted to exchange rates that prevail on the balance sheet date. Realised and unrealised exchange gains and losses on assets and liabilities in other than functional currencies are expensed unless defined as hedging. TAXES Deferred income tax liability/deferred tax asset is provided using the liability method on temporary difference at the balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. SHARES IN SUBSIDIARIES Investments in subsidiaries are measured under the cost method. 68 OUR RESULTS GROUP The company will be consolidated into the Sevan Drilling Group accounts, with business address in Oslo. CASH FLOW STATEMENT The cash flow statement is prepared in accordance with the indirect method. NOTE 2: EQUITY SHARE- SHARE OTHER UNIT CAPITAL PREMIUM EQUITY TOTAL Equity January 1, ,854, ,462, ,903, ,412,932 Capital deduction -280,644, ,644,109 0 Value of options, cost directly to equity 396, ,825 Net result for the year 22,346,546 22,346,546 Equity December 31, ,854, ,818, ,483, ,156,303 NOTE 3: SHARE CAPITAL AND SHAREHOLDER INFORMATION Share capital: NUMBER NOMINAL VALUE (NOK) REGISTERED Ordinary shares 336,625,000 1,00 336,625,000 Total 336,625, ,625,000 List of 20 major shareholders at 31 December 2012 SHAREHOLDER ACCOUNTS NO. OF SHARES %-SHARE SEADRILL LTD 96,000, % SKAGEN VEKST 17,599, % THE BANK OF NEW YORK MELLON 16,660, % ODIN OFFSHORE 13,232, % VARMA MUTUAL PENSION 12,497, % JPMORGAN CHASE BANK 8,684, % VERDIPAPIRFONDET DNB NORGE (IV) 8,001, % SKANDINAVISKE ENSKILDA BANKEN A/C SEC FIN 6,132, % SKANDINAVISKA ENSKILDA A/C CLIENTS ACCOUNT 5,937, % DNB LIVSFORSIKRING A 5,824, % CITIBANK N.A. (LONDON BRANCH) 5,000, % WENAASGRUPPEN AS 4,000, % BNYBE - US BK EVERMORE GLO VAL 3,802, % VERDIPAPIRFONDET DNB SMB 3,350, % VERDIPAPIRFONDET DNB NORGE (AVANSE) 3,128, % SKANDINAVISKA ENSKILDA BANKEN S.A. 2,532, % CREDIT SUISSE SECURITIES (USA) 2,511, % ODIN MARITIM 2,250, % DEUTSCHE BANK AG LONDON BRANCH 2,216, % SKANDINAVISKA ENSKILDA BANKEN A/C FINNISH 2,025, % Total 221,386, % Other owners 115,238, % Total 336,625, % F 34

235 OUR RESULTS 69 Shares and options owned or controlled by the Board of Directors: NUMBER OF SHARES Scott Kerr, CEO (directly and through his wholly owned company Kerr Energy AS) 620,100 Jon Helge Wilmann, CFO 126,388 Erling Lind, Chaiman Benedichte Elisabeth Schilbred Fasmer, member of board Kathrine Jessie Martin, member of board 30,000 Kristian Kuvaas Johansen, member of board 17,000 Per Winther Wullf, member of board NOTE 4: TAXES Basis for taxes payable: Profit before tax 16,393, ,598,116 Permanent differences 30, ,702,529 Permanent currency differences -37,684,840 54,622,342 Tax basis -21,260,661 45,726,755 Changes in temporary differences 36,545,560-21,082,960 Used losses carry forward 0 0 Basis for deferred tax 15,284,899 24,643,795 - Group contribution -15,284,899-24,643,795 Tax income 0 0 Temporary differences: Net temporary differences -11,264,470 25,281,090 Losses carry forward relating to income statement 0 0 Basis for deferred tax assets -11,264,470 25,281,090 28% deferred tax -3,154,052 7,078,705 Deferred tax liabilities/assets -3,154,052 7,078,705 Basis for taxes payable: Tax payable relating income statement 4,279,772 10,906,115 Change in deferred tax liabilities/assets -10,232,757 6,462,892 Change in deferred tax assets -5,952,896 17,369,007 Tax payable in the balance: Tax payable from income statement 4,279,772 10,906,115 Tax effect of IPO cost directly in equity 0 4,005,853 Tax on group contribution -4,279,772-14,911,968 Tax payable in the statement of financial positions OUR RESULTS NOTE 5: FIXED ASSETS IT EQUIPMENT IT EQUIPMENT IT EQUIPMENT Cost as of January 1, ,168, ,958 1,422,554 Additions 0 195, ,548 Disposals 0 0 Cost as of December 31, ,168, ,506 1,618,102 Accumulated depreciation December 31, ,180 45, ,463 Net book value ,680, ,789 2,175,565 Depreciation in ,657 37, ,571 Economic life 3 year 5 year Depreciation plan Straight line Straight line Annual rental of non-financial assets RENTAL PERIOD ANNUAL RENT Machines 5.5 years 21,893 Buildings NOTE 6: EMPLOYEE BENEFIT EXPENSE Employee benefit expense Salaries and vacation pay 2,616,892 4,504,219 Employer's share of social security 382, ,467 Pension costs 45,200 34,000 Other salary related costs -4,657, ,062 Total employee benefit expense -1,612,310 4,804,748 At December 31, 2012, there are five employees in Sevan Drilling ASA. Included in Salary and vacation pay is in bonuses for The bonus is related to Group recongnisation of the bonus program. In 2011 the bonuses was This is reversed in 2012 and included in other salary costs. The company s pension schemes meet the requirements of the law on compulsory occupational pension. No loans or guarantees have been granted to the CEO, the Chairman of the Board, or to any other related party. F 35

236 OUR RESULTS 71 Remuneration of Senior Management and Board of Directors 2012 RETIREMENT OTHER SHARE OPTION NAME TITLE SALARIES BENEFITS BENEFITS GRANTED Scott Kerr CEO 908,600 22,700 50,400 1,600 Jon Wilmann CFO 717,400 22,500 52,700 1,100 Erling Lind Chairman of the Board 62, Benedichte Fasmer Board member 36, Kitty Hall Board member 65, Kristian Kuvaas Johansen Board member 53, Per Winther Wullf Board member 53, The Board members are not included in the Group s collective retirement benefit plans RETIREMENT OTHER SHARE OPTION NAME TITLE SALARIES BENEFITS BENEFITS GRANTED Scott Kerr CEO 393,000 17,000 29,000 1,600 Jon Wilmann CFO 306,000 17,000 30,000 1,100 Anne Breive Board member 36, Fred Egil Hansen Board member 18, Arne Smedal Board member 36, Jon C. Cole Chairman of the Board 49, Kitty Hall Board member 36, Auditor fees Statutory audit 376, ,645 Tax services 42,072 3,012 Other audit attestation services 80,907 6,025 Other assistance 105, ,000 Total audit fees 605, ,682 Assistance in 2011 is related to the contributions in kind, and issue of shares (IPO). 72 OUR RESULTS NOTE 7: SHARE-BASED PAYMENTS Share options are granted to directors and to selected employees. The exercise price of the granted options is equal to the market price of the shares on the date of the grant. The options shall vest with one third each year. Vesting of the options is conditional upon the Employee, on each of the vesting dates, remaining employed by the company. The options may, once vested, be exercised at any time up to and including the date falling three years after the relevant vesting dates. The group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: AVERAGE EXERCISE AVERAGE EXERCISE PRICE PER SHARE OPTIONS PRICE PER SHARE OPTIONS OPTION (THOUSANDS) OPTION (THOUSANDS) At 1 January Granted NOK , Forfeited Exercised Expired At 31 December NOK ,403.3 Out of the 9,403,334 outstanding options (2011: 0 options), 3,153.3 options (2011: 0) were exercisable. There is no exercised option in 2012 or The weighted average fair value of options granted during the period determined using the Black-Scholes valuation model was NOK 1.73 per option (2011: 0). The significant inputs into the model were weighted average share price of NOK 5.75 (2011: 0) at the grant date, exercise price shown above, volatility of 42.5 % (2011: 0%), dividend yield of 0% (2011: 0%), an expected option life of three years (2011: 0 years) and an annual risk-free interest rate of 1.37% (2011: 0%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical analysis of daily share prices over the last three years. See above for the total expense recognised in the income statement for share options granted to directors and employees. NOTE 8: RECEIVABLES AND LIABILITIES The company has no receivables or liabilities with due date later than five years. See note 11. NOTE 9: CASH AND BANK DEPOSITS Taxes witheld from eomployees deposited in a restricted bank account 174, ,053 Cash and other bank deposits 3,089,528 52,169,306 Total cash and bank deposits 3,263,556 52,289,359 F 36

237 OUR RESULTS 73 NOTE 10: INTERCOMPANY TRANSACTIONS Remuneration to executives is disclosed in note 6. Statement of financial positions Long-term receivables to Group companies 530,558, ,798,485 Accounts receivables to Group companies 2,078, ,631 Other receivables to Group companies 2,797,654 Total receivables to Group companies 532,636, ,108, Long-term payables to Group companies 0 0 Accounts payables to Group companies -224, Other short-term liabilities to Group companies -42,008,873-24,836,643 Total liabilities to Group companies -42,233,311-24,836,920 Statement of Income Purchase sales of services to Group companies 1,955, ,720 Interest income from Group Companies 24,368,825 16,044,301 Interest cost to Group companies -72,074-1,748,631 Total income / (cost) from Group comapnies 26,251,995 14,797,390 NOTE 11: INVESTMENTS IN SUBSIDIARIES Statement of financial positions COMPANY NET RESULT OF (NUMBERS IN 000) ADDRESS OWNERSHIP BOOK VALUE EQUITY THE YEAR 2012 Sevan Drilling Management AS Oslo 100 % 24-14,733-11,195 Sevan Drilling Invest AS Oslo 100 % 243, ,503-3,945 Sevan Drilling Rig II AS Oslo 100 % 25-46,708-39,037 Sevan Drilling AS Oslo 100 % Sevan Drilling Rig V AS Oslo 100 % 24-5,101-5,357 Sevan Drilling Rig VI AS Oslo 100 % 24-2,337-2,407 Sevan Drilling Rig VII AS Oslo 100 % Sevan Drilling Rig VIII AS Oslo 100 % Sevan Drilling Rig IX AS Oslo 100 % Total 243, ,917-62, OUR RESULTS NOTE 12: EARNINGS PER SHARE Profit attributable to equity holders -21,653, ,967,123 Average no. of outstanding shares 336, ,625 Weighted avg. no. of ordinary shares for diluted earnings per share 233,024 Earnings per share Earnings per share diluted NOTE 13: FINANCIAL RISK MANAGEMENT The Company s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. The companies identifies, evaluates and hedges financial risk attached to their activities. For the companies the main risk is related to currency. The parent Company s maintains risk management for the Company as a whole when it relates to interest rate risk. A) MARKET RISK (i) Foreign exchange risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the NOK, GBP and Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities. To manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities, the Company use forward contracts to some extent. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominated in a currency that is not the entity s functional currency. External foreign exchange contracts are designated at fair value through the result. (ii) Price risk The Company may be affected by changes to the price level of goods and services acquired. The Company follows price developments carefully, and seeks to handle this risk through contract clauses with its customers. B) CREDIT RISK The Company does not have any material concentrations of credit risk. The bulk of Company customers are major, recognised oil companies and contractors with a high creditworthiness. The companies consider customers on a continuous basis, and in some cases, particularly in relation to customers abroad, letter of credit or prepayment is used. Counter parties on trading in derivative financial instruments are restricted to banks and financial institutions with a high rating. C) LIQUIDITY RISK Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. It is the Company s objective to maintain flexibility of financing, by providing sufficient withdrawal facilities. D) FLOATING INTEREST RISK The Company s interest risk is mainly connected to long-term loans and cash. Company debts and cash are subject to floating interest rates. Loans and cash at a floating interest represent a risk to the Company s cash flow. F 37

238 OUR RESULTS 75 NOTE 14: FINANCIAL AND OPERATIONAL CURRENCY EFFECTS The Company split currency gains and losses in operating and financial elements in the Statement of Income. The currency effects presented in the operating result are related to currecny effects in purchases, while the currency effects in the financial results is mainly related to revaluation of NOK bank deposits. Operation Realised foreign exchange gains 105, ,651 Realised foreign exchange loss -137,347-86,475 Unrealised gain/(loss) net -41,047-14,687 Net operational foreign exchange loss -72,717 30,490 Financial Realised foreign exchange gains 0 0 Realised foreign exchange loss -3,077-4,556 Unrealised gain/(loss) net -1,644, ,022 Net operational foreign exchange gain/-loss -1,647, , OUR RESULTS AUDITOR S REPORT To the Annual Shareholders' Meeting of Sevan Drilling ASA Independent auditor s report Report on the Financial Statements We have audited the accompanying financial statements of Sevan Drilling ASA, which comprise the financial statements of the parent company and the financial statements of the group. The financial statements of the parent company comprise the balance sheet as at 31 December 2012, and the income statement, statement of changes in equity and cash flow statement, for the year then ended, and a summary of significant accounting policies and other explanatory information. The financial statements of the group comprise the balance sheet at 31 December 2012, income statement, changes in equity and cash flow for the year then ended, and a summary of significant accounting policies and other explanatory information. The Board of Directors and the Managing Director s Responsibility for the Financial Statements The Board of Directors and the Managing Director are responsible for the preparation and fair presentation of the financial statements of the parent company in accordance with Norwegian Accounting Act and accounting standards and practices generally accepted in Norway, and for the preparation and fair presentation of the financial statements of the group in accordance with International Financial Reporting Standards as adopted by EU and for such internal control as the Board of Directors and the Managing Director determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers AS, Kanalsletta 8, Postboks 8017, NO-4068 Stavanger T: 02316, org. no.: MVA, Statsautoriserte revisorer, medlemmer av Den norske Revisorforening og autorisert regnskapsførerselskap F 38

239 Independent auditor's report Sevan Drilling ASA, page 2 Opinion on the financial statements of the parent company In our opinion, the financial statements of the parent company are prepared in accordance with the law and regulations and present fairly, in all material respects, the financial position for Sevan Drilling ASA as at 31 December 2012, and its financial performance and its cash flows for the year then ended in accordance with the Norwegian Accounting Act and accounting standards and practices generally accepted in Norway. Opinion on the financial statements of the group In our opinion, the financial statements of the group present fairly, in all material respects, the financial position of the group Sevan Drilling ASA as at 31 December 2012, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by EU. Report on Other Legal and Regulatory Requirements Opinion on the Board of Directors report and statement of corporate governance principles and practices Based on our audit of the financial statements as described above, it is our opinion that the information presented in the Board of Directors report and statement of corporate governance principles and practices concerning the financial statements and the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations. Opinion on Registration and Documentation Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements ISAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the company s accounting information in accordance with the law and bookkeeping standards and practices generally accepted in Norway. Stavanger, 17 April 2013 PricewaterhouseCoopers AS Henrik Zetlitz Nessler State Authorised Public Accountant (Norway) (2) OUR RESULTS OUR RESULTS CORPORATE GOVERNANCE IN SEVAN DRILLING Sevan Drilling is committed to sound corporate governance principles and thereby contribute to optimal value creation over time. The objective of corporate governance is to regulate the division of roles between shareholders, the Board and executive management more comprehensively than is required by legislation. 1. IMPLEMENTATION AND REPORTING ON CORPORATE GOVERNANCE Implementation and regulations Sevan Drilling ASA s ( Sevan Drilling or the company ) Board of Directors (the Board ) has the ultimate responsibility for ensuring that the company practices good corporate governance and has prepared and approved the company s policy for corporate governance. The company, through its Board and executive management, carries out an annual review of its principles for corporate governance. Sevan Drilling is a Norwegian public limited company listed on Oslo Børs. The Norwegian Accounting Act includes provisions on corporate governance at Section 3-3b which impose a duty on the company to issue an annual statement on its principles and practice for corporate governance. These provisions also stipulate minimum requirements for the content of this report. The Norwegian Corporate Governance Board (NCGB) has issued the Norwegian Code of Practice for Corporate Governance (the Code ). Adherence to the Code is based on the comply or explain principle, which means that a company must comply with the recommendations of the Code or explain why it has chosen an alternative approach to specific recommendations. Oslo Børs requires listed companies to publish an annual statement of their policy on corporate governance in accordance with the Code in force at the time. The Continuing Obligations of listed companies are available on Sevan Drilling complies with the above mentioned rules and regulations, and the current Code, issued on 23 October 2012, unless otherwise specifically stated. The company provides a statement on its principles for corporate governance in its annual report, and this information is also available on the company website, Values, objectives and strategies Confidence in Sevan Drilling as a company and in its business activities as a whole is essential for the company s continuing competitiveness. The company aims to maintain high ethical standards in its business concept and relations with customers, suppliers and employees. The Board has defined the company s values and has adopted ethical guidelines applicable to all employees. The values, as well as a statement on who we are, the company s vision, strategic themes as well as the ethical guidelines are available on the company s website. The company has not established separate guidelines for corporate social responsibility ( CSR ) as recommended by the Code. The company was established and listed on Oslo Børs in 2011 and and is continuously considering the need for developing further guidelines. 2. BUSINESS The company s business objective is set out in its articles of association section 3: to own and/or operate, directly or indirectly, drilling rigs and activities related thereto, as well as investing in other companies. The company s long term objective, following the clause above, is to become a premier drilling contractor owning and operating units specialising in offshore ultra-deep water operations. The company will pursue the following main strategies to reach its overall objective: safe, efficient and cost effective service and delivering newbuild units on time and within budget, design to maximise its flexibility to expand into growth areas in offshore drilling; and outstanding service and results. The company has a set of Strategic Themes, available on its website, to further define its strategic priorities. Sevan Drilling s articles of association are available at the company s website, F 39

240 3. EQUITY AND DIVIDEND Equity The Board aims to maintain a satisfactory equity ratio in the company in light of the company s goals, strategy and risk profile, thereby ensuring that there is an appropriate balance between equity and other sources of financing. The Board regularly assesses the company s capital requirements. As per 31 December 2012, Sevan Drilling had equity of USD million, representing an equity ratio of 38.5 percent. The company requires additional capital in the future to finance the instalments due on delivery of the two new vessels under construction, which equals 80 percent and 90 percent on Sevan Drilling Rig 3 and Sevan Drilling Rig 4 respectively as per 31 December 2012, corresponding to a total commitment of USD 900 million. For Sevan Drilling Rig 3, the last payment milestone has been split in two parts, USD 394 million payable upon delivery in fourth quarter 2013 and USD 26.7 million has been deferred until second quarter 2014, at interest costs of 9 percent p.a. as from fourth quarter For Sevan Drilling Rig 4, USD 52.6 million (10 percent of the total all-in turn-key contract price) has been deferred until delivery of the rig, at interest costs of 9.5 percent p.a. The remainder of the all-in turn-key contract price is due upon delivery of the unit in second quarter Dividend The company s objective is to generate a return for its shareholders through dividends and increases in the share price that is at least in line with the return available on similar investment opportunities of comparable risk. Due to the ongoing newbuilding programme in the company, Sevan Drilling does not intend to pay dividend to shareholders in the short term. Sevan Drilling is also restricted from making dividend payments in the bank loan agreements. Authorisations to the Board The Board will in the outset not propose that authorisation to increase the share capital and to buy own shares are granted for periods longer than until the next Annual General Meeting of the company. At the extraordinary general meeting held on 9 January 2012, the Board was given authorisation to increase the company s share capital by up to NOK 10 million. The authorisation may only be used for the issuance of shares pursuant to and for fulfilment of the company s management and employee incentive program. The mandate is valid until the annual general meeting of The company proposed a private placement of NOK 987 million (equivalent of ~USD 175 million) on 14 January 2013, subject to approval by an extraordinary general meeting. The extraordinary OUR RESULTS 79 general meeting was held on 6 February 2013, and approved the issues of shares in the private placement and the authorisation of the Board to issues shares in the subsequent offering following the private placement. As per 31 December 2012, the Board did not hold any authorisations to buy own shares. 4. EQUAL TREATMENT OF SHAREHOLDERS AND TRANSACTIONS WITH CLOSE ASSOCIATES Equal treatment The company has one class of shares with equal rights. In the event that the Board is granted authorisations to buy own shares and decides to use this authorisation, the transactions will be carried out through the stock exchange or at prevailing stock exchange prices if carried out in any other way. Transactions with close associates Any transactions, agreements or arrangements between the company and its shareholders, members of the Board, members of the executive management team or close associates of any such parties shall only be entered into as part of the ordinary course of business and on arm s length market terms. All such transactions shall comply with the procedures set out in the Norwegian Public Limited Liability Companies Act or similar provisions, as applicable. The Board shall arrange for a valuation to be obtained from an independent third party unless the transaction, agreement or arrangement in question must be considered to be immaterial. The company s financial statements shall provide further information about transactions with related parties. There were no transactions conducted with close associates in FREELY NEGOTIABLE SHARES The shares in the company are freely negotiable. The articles of association do not impose any restrictions on transfers of shares. 6. THE GENERAL MEETING The annual general meeting The annual general meeting ( AGM ) is the company s highest authority. The Board strives to ensure that the AGM is an effective forum for communication between the shareholders and the Board, and encourages shareholders to participate in the meeting. Preparations for the AGM The AGM is held before 30 June, which is the latest date permitted by company law. In 2013, the AGM will be held on 13 May. 80 OUR RESULTS The notice calling the AGM is made available on the company s website, and sent to shareholders no later than 21 days prior to the meeting, as recommended by the Code. For extraordinary general meetings, the calling is available at least 14 days prior to the meeting. The date of the next AGM is included in the company s financial calendar. The financial calendar for the coming year is published no later than 31 December in the form of a stock exchange announcement and is also made available on the company s website. The deadline for shareholders to give notice of their intention to attend the meeting is set as close to the date of the meeting as possible. Section 7 of the company s articles of association stipulates that the supporting documents dealing with matters to be considered by the AGM can be made available on the company s website rather than being sent to shareholders by post. However, shareholders are still entitled to receive the documents by post upon request if they so wish. The supporting documentation provides all the necessary information for shareholders to form a view on the matters to be considered. Participation in the AGM Shareholders must give written notice of their intention to attend the AGM either by post, telefax, via their VPS securities account, or by . The notices calling the general meetings shall provide information on the procedures shareholders must observe in order to participate in and vote at the general meeting. The notice will also set out: a proxy, including a form to appoint a proxy, to allow for shareholders who are unable to attend in person will be able to vote by proxy and of matters to be dealt with by the general meeting. Agenda and conduct of the AGM The Board decides the agenda for the AGM. The main agenda items are determined by the requirements of the Public Limited Liability Companies Act and Article 7 of the articles of association of Sevan Drilling. The Board will seek to propose a person independent of the company and the Board to chair the general meetings, ensuring that the AGM has an independent chairperson in accordance with the recommendations of the Code. The Board and the person chairing the meeting will make appropriate arrangements for the general meeting to vote separately on each candidate nominated for election to the company`s corporate bodies. Members of the Board and the nomination committee, as well as the company s auditor are present at the annual general meeting. The AGM minutes are published by issuing a stock exchange announcement, and are also made available on the company s website at 7. NOMINATION COMMITTEE Sevan Drilling has a nomination committee consisting of three members, according to section 6 of the company s articles of association. The members of the nomination committee are elected by the AGM after considering proposals made by the current nomination committee. The following three members were elected at the company s extraordinary general meeting at 9 January 2012: The members were elected for a period of two years. At the same meeting, instructions to the committee were approved. Pursuant to section 6 of the articles of associations, the nomination committee shall propose board member candidates to the general meeting in connection with notices thereof. The nomination committee shall also make proposal for the remuneration of the Board. 8. BOARD OF DIRECTORS - COMPOSITION AND INDEPENDENCE Elections to the board The Board of Sevan Drilling is appointed by the general meeting. According to section 5 of the company s articles of association, the Board shall consist of three to nine members. The composition of the Board As per 31 December 2012, the Board of Sevan Drilling consists of five members, of which three men and two women. In addition the employees have an observer on the board The Board has the requisite competency to independently evaluate the cases presented by the management as well as the company s operations, and function well as a body of colleagues. The members of the Board represent varied and broad experience from relevant industries and areas of technical speciality, and the members bring experience from both F 40

241 Norwegian and international companies. More information about the board members expertise and background, as well as their holdings of shares in the company can be found on the company s website, Independence of the Board The Board does not include any members from the company s executive management team and all the members are considered independent of the company s material business contacts. Chairman of the Board, Erling Lind, is also chairman of the Board of Seadrill Management AS, 100 percent owned by Seadrill Ltd, while board member Per Wullf is the COO of Seadrill Ltd, which is the company s main shareholder. All other members of the Board are considered independent of the company s main shareholders. 9. THE WORK OF THE BOARD OF DIRECTORS The Board`s duties and responsibility The Board prepares an annual plan for its work with special emphasis on goals, strategy and implementation. The Board s primary responsibility is: company s strategy, The company s strategy is regularly subject to review and evaluation by the Board. The Board conducts an annual strategy meeting. The strategy meeting in 2012 was held in June. Its duties are not static, and the focus will depend on the company s ongoing needs. The Board is also responsible for ensuring that the operation of the company is in compliance with the company s values and ethical guidelines. The Chairman of the Board is responsible for ensuring that the Board s work is performed in an effective and correct manner. The Board is responsible for the appointment of the CEO. Mandate for the Board The Board shall ensure that the company has a good management with clear internal distribution of responsibilities and duties. Further details on the duties of the Board are included in the instructions to the Board. In accordance with the provisions of the Norwegian company law, the terms of reference for the Board are set out in a formal mandate that includes specific rules and guidelines on the work of the Board and decision making. OUR RESULTS 81 Mandate for the CEO The CEO is responsible for the executive management and the day-to-day operations of the company. The Board issues a mandate for the work of the CEO. Financial reporting All members of the Board receive information about the company s operational and financial development on a monthly basis. Board meetings During 2012 the Board had 14 meetings, 5 physical meetings and 9 meetings by telephone conference, with a turnout of 91.4 percent. Extraordinary Board meetings are held as and when required, to consider matters that cannot wait until the next regular meeting. Remuneration committee The company shall have a remuneration committee appointed by the Board. The purpose of the committee is to: chief executive officer (CEO) and other senior executives of the company. executive management team, which shall be included in the company s annual accounts pursuant to applicable rules and regulations, including accounting standards, promulgated from time to time. equity based plans for the company and any subsidiaries. Further details on the committee s duties and responsibilities are included in the instructions to the remuneration committee approved by the Board. The Board has appointed board members Kitty Hall and Per Wullf as members of the remuneration committee. Audit committee The company has an audit committee appointed by the Board as set out in the Norwegian Public Limited Liability Companies Act. The audit committee is appointed by the Board to assist the Board in fulfilling its obligations and responsibilities in respect to financial reporting, auditing and internal control in accordance with section 6-42 and 6-43 of the Norwegian Public Limited Liability Companies Act. The Board has appointed board members Kristian Johansen and Benedicte Schilbred Fasmer to represent the Board in the audit committee. The audit committee will not make any decisions on behalf of the Board, but will present its assessment and recommendations to the Board. The Board has approved instructions to the audit committee. 82 OUR RESULTS The Board may also appoint other sub-committees, as deemed necessary or appropriate. The Board`s evaluation of its own work The Board carries out an annual evaluation of its own performance, working arrangements and competence. The Chairman of the Board prepares a report on this evaluation, which is made available to the nomination committee. The Board did not perform this evaluation in 2012 but will do so in RISK MANAGEMENT AND INTERNAL CONTROL The Board shall seek to ensure that the company has sound internal control and systems for risk management that are appropriate in relation to the extent and nature of the company s activities. The Board shall ensure that the company s internal control comprises guidelines, processes, duties, conducts and other matters that: for the company and also make it possible to manage commercial risk, operational risk, financial risk, the risk of breaching applicable legislation and regulations as well as all other forms of risk that may be material for achieving the company s commercial objectives; reporting; and accordance with the relevant legislation and regulations as well as with its internal guidelines for its activities, including the company s ethical guidelines and corporate values. When separate guidelines for CSR are established, these will also be included in the company s systems. One of the responsibilities of the audit committee is to assist the Board in fulfilling its obligations and responsibilities with regard to internal control. The Board shall form its own opinion on the company s internal controls, based on the information presented to the Board. Reporting by executive management to the Board shall be prepared in a format which gives a balanced presentation of all risks of material significance, and of how the internal control system handles these risks. The Board has approved routines for internal control and risk management. The objective for the company s risk management and internal control is to manage, rather than eliminate exposure to risks related to the successful conduct of the company s business and to support the quality of its financial reporting. Effective risk management and good internal control contribute to securing shareholders investment in the company and the company s assets. Financial risk The company uses forward contracts to some extent to manage the foreign exchange risk arising from future commercial transactions and recognised assets and liabilities. Changes to the price level of goods and services acquired may affect the company; therefore price developments are carefully monitored. The company seeks to handle this risk through contract clauses with its customers. Credit risk related to counterparties on trading in derivative financial instruments is handled by restricting to banks and financial institutions with a high rating. It is the company s objective to maintain flexibility of financing, by providing sufficient withdrawal facilities when managing liquidity. This includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Annual review of internal control by the Board The Board shall carry out an annual review of the company s most important areas of exposure to risk and its internal control arrangements, and provide an account in the annual report of the main features of the company s internal control and risk management systems as they relate to the company s financial reporting. Sevan Drilling has an audit committee. Within risk management and internal control, the committee s duties and responsibilities include; following main areas: Changes in accounting principles Critical accounting estimates or judgments Material adjustments to the accounts requested or suggested by the statutory auditor Areas where there is a difference of opinion between the management and the statutory auditor reporting processes, internal control, and internal audit where applicable, and risk management systems. handling and registering of complaints relating to financial reporting, accounting, internal control and statutory audit. F 41

242 11. REMUNERATION OF THE BOARD OF DIRECTORS The general meeting annually determines the Board s remuneration, based on proposal by the nomination committee. Remuneration of board members shall be reasonable and based on the Board s responsibilities, work, time invested and the complexity of the enterprise. The compensation shall be a fixed annual amount. The Chairman of the Board may receive a higher compensation than the other members. The Board shall be informed if individual board members perform other tasks for the company than exercising their role as board members. Work in sub-committees may be compensated in addition to the remuneration received for board membership. The company s annual accounts provide information about the Board s compensation. 12. REMUNERATION OF EXECUTIVE PERSONNEL The Board has approved a policy for the remuneration of the CEO and other executive personnel. The Board decides the salary and other compensation to the CEO, however so that any compensation linked to the value of the company s shares shall be approved by the general meeting in accordance with the Norwegian Public Limited Companies Act. The CEO s salary and bonus shall be determined on the basis of an evaluation with emphasis on the following factors: financial results, business development, employee and customer satisfaction. Any fringe benefits shall be in line with market practice, and should not be substantial in relation to the CEO s basic salary. The performance related remuneration is subject to an absolute limit. This is further described in the company s compensation policy. Share option scheme The management incentive program includes a share option scheme, where granted options will have a 3 year vesting period and a 10 year duration. The strike price has been set at the average closing price over the 3 days preceding the granting of the options. The value of the options will be dependent solely on the share price. The Board annually carries out an assessment of the salary and other remuneration to the CEO. Reporting The company s annual accounts provide information about salary and other compensation to the CEO and the executive management team. The CEO determines the remuneration of executive employees based on guidelines for the remuneration prepared by the Board through the remuneration committee. The guidelines OUR RESULTS 83 lay down the main principles for the company s management remuneration policy. The salary levels should not be of a size that could harm the company s reputation, or above the norm in comparable companies. The salary levels should, however, ensure that the company can attract and retain executive employees with the desired expertise and experience. 13. INFORMATION AND COMMUNICATIONS Sevan Drilling maintains a proactive dialogue with analysts, investors and other stakeholders of the company. The company strives to continuously publish relevant information to the market in a timely, effective and non-discriminatory manner, and has a clear goal to attract both Norwegian and foreign investors and to promote higher stock liquidity. All stock exchange announcements are made available on the Oslo Børs website, as well as on the company s website, The announcements are also distributed to news agencies and other online services through Thomson Reuters. Financial reports Sevan Drilling publishes its preliminary annual accounts by the end of February and the complete annual report, including approved and final annual accounts and the Board of Directors report, is available no later than 30 April each year as required by the Securities Trading Act. The company s financial calendar for the coming year is published as a stock exchange announcement and made available on the company s website no later than 31 December each year, in accordance with the continuing obligations for companies listed on Oslo Børs. Other market information Sevan Drilling holds open presentations in connection with the publication of the company s quarterly results. The presentations are webcasted for the benefit of investors who are not able to attend the presentations. At the presentations, the executive management review and comment on the published results, market conditions and the company s future prospects. Dialogue with shareholders The company s management gives high priority to communication with the investor market. Individual meetings are organised for major investors, investment managers and analysts. The company also attends investor conferences. The Board has issued guidelines for the investor relations function of the company, including authorised spokespersons of the company. 84 OUR RESULTS 14. TAKE-OVERS The Board has established guiding principles for how it will act in event of a take-over bid for the company. It sets out that the Board will help to ensure equal treatment of all shareholders; disrupted unnecessarily; information and time to form a view of any take-over bid; is believed to be in the interests of the company and the shareholders; accordance with statutory requirements and applicable Norwegian corporate governance recommendations; and for a valuation of the take-over bid by an independent expert, the conclusion of which will be made available to shareholders. Any transaction that is in effect a disposal of the company s activities will be sought submitted to the general meeting for approval. 15. AUDITOR Sevan Drilling is audited by PricewaterhouseCoopers in Stavanger, Norway. Each year the auditor presents a plan to the Board for the audit work and confirms that the auditor satisfies established requirements as to independence and objectivity. The auditor shall be present at Board meetings where the annual accounts are on the agenda. Whenever necessary, the Board shall meet with the auditor to review the auditor s view on the company s accounting principles, risk areas, internal control routines etc. The use of the auditor as a financial advisor to the company should be sought limited to cases where such use of the auditor does not have the ability to affect or question the auditors independence and objectiveness as auditor for the company. Only the company s CEO and/or CFO shall have the authority to enter into agreements in respect of such counselling assignments. At the annual general meeting, the Board shall present a review of the auditor s compensation as paid for auditory work required by law and remuneration associated with other assignments. In connection with the auditor s presentation to the Board of the annual work plan, the Board should specifically consider if the auditor to a satisfactory degree also carries out a control function. The Board shall arrange for the auditor to attend general meetings as and where appropriate. F 42

243 OUR RESULTS 85 REMUNERATION AND BENEFITS REMUNERATION AND BENEFITS OF THE BOARD OF DIRECTORS Approval of director remuneration will be subject to approval on the 2013 annual general meeting of the company. No members of the Board are entitled to severance pay or other benefits upon termination of their terms. REMUNERATION AND BENEFITS OF THE MEMBERS OF THE SENIOR MANAGEMENT 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 to 24 months severance pay. The Group 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 in the extraordinary general meeting on 9 January 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 this date an option program comprising a total of 9,403,334 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 as of 31 December 2012 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 4 Management Group 500,000 2,000, Line Management 170,000 4,703,334 Total 34 9,790,000 As of 31 December 2012, the last balance sheet date, the company or its subsidiaries had not set aside or accrued any amounts for pensions, retirement or similar benefits, except from what is specified in note 13. Oslo, 17 April 2013 The Board of Directors of Sevan Drilling ASA Erling Lind Chairman Kitty Hall Board member Benedicte Schilbred Fasmer Board member Per Wulff Board member Kristian Johansen Board member Scott Kerr CEO 86 OUR RESULTS TERMS AND DEFINITIONS Sevan Drilling Sevan Drilling ASA. Sevan Drilling Group Sevan Drilling ASA and its subsidiaries. Anti-Money Laundering Legislation The Norwegian Money Laundering Act no. 11 of 6 March 2009 and the Norwegian Money Laundering Regulations no. 302 of 13 March 2009 taken together. Articles of Association The Company s articles of association. Board The Board of Directors of the Company. Board of Directors The Board of Directors of the Company. BOEMRE Bureau of Ocean Energy Management, Regulation and Enforcement. BOP Blow out preventer. Capex Capital expenditures. Combined Financial Statement The Company s audited consolidated and combined financial statement 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 23 October Deepwater Water depths greater than 3,000 feet. Directors The Board of Directors of the Company. EIA The US Energy Information Administration. E&P Exploration and production. EBITDA Earnings before interest, tax, depreciation and amortisation. FSMA Financial Services and Markets Act 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. 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 The Norwegian Public Limited Companies Act of 13 June 1997, no. 45 Companies Act (Nw. allmennaksjeloven). Norwegian Securities Trading Act 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 stock exchange operated by Oslo Børs ASA. (Eng. The Oslo Stock Exchange). QHSE Quality, Health, Safety and Environment. 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. F 43

244 The pure-play ultra deepwater drilling company. sevandrilling.com Design and production: Artbox AS OFFICE LOCATIONS Sevan Drilling - Oslo Tordenskioldsgate Oslo Norway Phone: post@sevandrilling.com Sevan Drilling - Arendal Tromøyveien Arendal Norway Postal address: Post box Arendal Norway Phone: post@sevandrilling.com Sevan Drilling - Rio de Janeiro Palácio Austregésilo de Athayde building Avenida Presidente Wilson No 231 salas 1003/1004 Centro - Rio de Janeiro - RJ ZIP CODE Brazil Phone: Fax: post@sevandrilling.com Sevan Drilling - Singapore 350 Orchard Road Shaw House #15-10 Singapore Phone: Fax: post@sevandrilling.com F 44

245 Appendix G - SEVAN DRILLING ASA INTERIM BALANCE SHEET AS OF 17 APRIL 2015 Sevan Drilling ASA Interim Balance Sheet As at 17 April 2015 Sevan Drilling ASA Sevan Drilling ASA Interim Balance Sheet 17 April NOK 2015 Assets Financial assets Investments in subsidiaries 3 386,505,233 Total financial assets 386,505,233 Total non-current assets 386,505,233 Current assets Receivables Receivable from group companies 15,073,807 Total receivables 15,073,807 Cash and bank deposits 27,582,040 Total current assets 42,655,847 Total assets 429,161,080 Equity and liabilities Restricted equity Share capital 594,623,436 Share premium - Total restricted equity 594,623,436 Retained earnings Other equity -179,288,547 Total retained earnings -179,288,547 Total equity 415,334,889 Current liabilities Payable to group companies 13,826,191 Total short term liabilities 13,826,191 Total liabilities 13,826,191 Total equity and liabilities 429,161,080 Oslo, 23 April 2015 The Board of Directors Sevan Drilling ASA Erling Lind Kristian Johansen Ragnhild Wiborg Chairman Vice chairman Board member Per Wullf Birgitte Ringstad Vartdal Scott McReaken Board member Board member Managing Director G 1

246 Sevan Drilling ASA Notes to Sevan Drilling ASA Interim Balance Sheet Note 1- Purpose of the interim balance sheet Sevan Drilling ASA s special purpose interim balance have been prepared in accordance with the principle described in the Norwegian Accounting Act and generally accepted accounting principles. Due to this, the interim balance sheet is in accordance with the Norwegian Public Limited Liability Act 12-2 and forms the foundation for the non-cash distribution of shares in Sevan Drilling Limited. Note 2 Accounting principles The interim balance sheet has been prepared in accordance with the principle described in the Norwegian Accounting Act and generally accepted accounting principles. Effective 1 January 2015, the functional currency for the company has changed from USD to NOK. All numbers are in NOK 1 unless otherwise stated. Main principle for evaluation and classification of assets and liabilities Current assets and current liabilities include items with a due date within one year after the transaction date, as well as items relating to the operating cycle. Other items have been classified as non-current assets and non-current liabilities. Current assets are measured at the lower of purchase cost and fair value. Short-term liabilities are recognized in the balance sheet at nominal value at the establishment date. Fixed assets are measured at purchase cost. The fixed assets are written down to net realizable value if a value reduction occurs that is expected to be permanent. Borrowings are recognized in the balance sheet at amortized value on the establishment date, equal to nominal value deducted for transaction costs. Other non-current liabilities are recognized at nominal value. Receivables Trade receivables and other receivables are recognized in the balance sheet at nominal value after deduction of provision for bad debt. Bad debt is provided for on the basis of an individual assessment of each receivable. Cash and bank deposits Cash and bank deposits include cash, bank deposits and other means of payment with an original due date of three months or less from the date of purchase. Currency Cash and bank deposits, current assets, and short-term liabilities nominated in other than functional currencies are converted using exchange rates that prevail on the balance sheet date. Taxes Deferred income tax liability/deferred tax asset is provided using the liability method on temporary difference at the balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carried forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income), and change in net deferred taxes. Shares in subsidiaries The cost method is applied to investments in other companies. Sevan Drilling ASA Note 3- Investment in Sevan Drilling Limited 17 April 2015 Balance as at 1 January ,233,939 Additional contribution 51,503,342 Impairment value -493,232,048 Balance as at 17 April ,505,233 At period-end, the recoverable value of the Company s investment in Sevan Drilling Limited was assessed by the Board of Directors of the Company not to be recoverable at the level of the Company and the value is equal to the amount proposed in the Annual General meeting that will be distributed to the shareholders of Sevan Drilling ASA. The investment in Sevan Drilling Limited was impaired to NOK 386,505,233, which is the market value of Sevan Drilling ASA based on the closing share price at the balance sheet date (NOK 0.65). G 2

247 Sevan Drilling ASA G 3