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Into the Deep

By Elliott H. Gue on Dec. 22, 2012

SeaDrill Partners pays a minimum quarterly distribution of $0.3875 per unit, equivalent to $1.55 per year and a roughly 6 percent yield at current prices. If MLP’s quarterly payout falls short of this threshold, the firm must make investors whole with future payments.

The partnership agreement also includes a subordinated-unit structure to further protect unitholders against the risk of distributions dropping below the minimum. At the time of the IPO, Seadrill Partners sold about 22 percent of its total outstanding units to public shareholders, while its parent retained the remaining 78 percent ownership stake.

Half the partnership units owned by SeaDrill are subordinated and are only eligible to receive distributions when the full minimum distribution and any arrearages have been paid to common unitholders. In other words, the parent will forego a portion of its distributions if distributable cash flow is insufficient to meet the minimum quarterly payout.

Seadrill Partner’s primary growth avenue will be drop-down acquisitions from SeaDrill. The partnership has the right of first offer to purchase additional ownership interests in the four rigs in its fleet and the option to acquire any rig in its parent’s fleet that’s under charter for at least five years.  

The contract driller owns several rigs that meet these criteria:

  • The West Sirius, a deepwater semisubmersible rig, under contract to BP in the Gulf of Mexico at a rate of $535,000 per day through July 2019;
  • The West Auriga, a deepwater drillship, under contract to BP in the Gulf of Mexico through October 2020 at a rate of $565,000 per day;
  • The West Vela, a deepwater drillship, under contract to BP in the Gulf through January 2021 for $565,000 per day; and
  • The West Mira, a deepwater semisubmersible, under contract to Husky Energy (TSX: HSE) in Canada through June 2020 at a rate of $590,000 per day.

The parent has every incentive to grow SeaDrill Partners’ distributions. Not only does SeaDrill owns an 80 percent equity stake in the partnership and receive regular quarterly distributions, but the parent’s general partner interest in the MLP includes incentive distribution rights.

According to the partnership agreement, SeaDrill will receive an incentive distribution once SeaDrill Partners disburses a quarterly payout of more than $0.4456 per unit. These incentive distributions increase on a sliding scale as the partnership’s quarterly distributions rise. In effect, SeaDrill is paid to grow SeaDrill Partners’ distributions over time.

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