Investors looking for near-term upside in the contract-drilling space should consider SeaDrill Partners LLC (NYSE: SDLP), a publicly traded partnership formed by SeaDrill to monetize drilling rigs in its portfolio that have already secured long-term fixtures.
The partnership doesn’t face any re-contracting risk until October 2015, when the West Aquarius’ fixture with ExxonMobil Corp (NYSE: XOM) expires. However, as of November 2013, the energy giant had opted to extend this contract through April 2017; we expect SeaDrill Partners to disclose the details of this agreement when the driller reports fourth-quarter results.
More recently, SeaDrill dropped announced the sale of the West Sirius and West Leo rigs to SeaDrill Partners in a $527.8 million all-cash transaction. These sixth-generation semisubmersible rigs operate under fixtures through June 2018 and July 2019, providing a visible stream of cash flow and setting the stage for the partnership to announce another distribution increase.
The current pause in the drilling cycle could prompt SeaDrill to accelerate the pace at which it drops down assets to SeaDrill Partners, driving distribution growth and price appreciation at the master limited partnership.
In the third quarter, SeaDrill Partners generated enough distributable cash flow to cover its distribution by 113 percent–ample coverage for an MLP that generates a reliable stream of revenue from its multiyear contracts.
Although the publicly traded partnership has no exposure to the anticipated downdraft in offshore day-rates, the stock could pull back in sympathy with the rest of the group.
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Elliott and Roger on Jun. 29, 2017
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