My colleague Elliott Gue first highlighted SeaDrill’s (NYSE: SDRL) merits in 2007 and pounded the table for the stock when investors sold shares of offshore contract drillers indiscriminately after the Macondo oil spill.
Investors who followed his lead have booked huge gains on this big winner. When we sold the stock in fall 2013, SeaDrill’s shares were near their all-time high of about $48; at the time, we thought that day-rates on deepwater rigs didn’t have much more upside—the primary catalyst for the stock’s five-year rally.
When conditions deteriorated in the market for offshore drillers and concerns that a potential oversupply would weigh on day-rates in the deepwater and jack-up segments, we highlighted SeaDrill Partners LLC (NYSE: SDLP) as a play on the challenges faced by its sponsor.
Thus far, our bet has panned out. Whereas SeaDrill’s stock has tumbled by 15.2 percent over the past year, SeaDrill Partners’ units have delivered a total return of 15.6 percent.
We expect this divergent performance to continue over the next 12 months.
SeaDrill created SeaDrill Partners as a vehicle to monetize rigs that operate under long-term contracts, providing the sponsor with a source of low-cost capital for further fleet expansion or to shore up a dividend that management now says will be sustainable through 2015.
As conditions in the market for jack-up and deepwater rigs become more challenging, expect SeaDrill to accelerate its plan to drop down its under-contract assets to SeaDrill Partners, driving distribution growth.
Elliott and Roger on Feb. 27, 2018
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