Understanding Seadrill Partners' Confusing Structure

Seadrill Partners has one of the most confusing organizational structures in the energy industry. However, don't let that stop you from investing in it!

Jul 13, 2014 at 4:35PM

Seadrill Partners (NYSE:SDLP), a publicly traded LLC set up by Seadrill (NYSE:SDRL), has a very complicated business and ownership structure that may confuse many investors or may even lead some to shy away from investing in the company. But just because a company has a confusing business structure does not mean it is a bad investment, and that may be the case here. In this article, we will decipher Seadrill Partners' ownership structure and how the company may be a good fit for your portfolio.

Simplified organizational structure
We can get an idea of how Seadrill Partners is set up by reviewing a diagram that the company includes in its annual reports. Here it is:

Screen Shot

Source: Seadrill Partners. 

Seadrill Partners describes this as a "simplified" organizational structure, but I think we can agree that this is anything but simple! Basically, Seadrill Partners consists of ownership interests in three different companies that actually own the partnership's rigs. These three companies are referred to as its operating companies.

Seadrill Partners Operating LLC
The first of these operating companies is Seadrill Partners Operating LLC. This operating company is fully owned by Seadrill Partners and outright owns both of the company's tender rigs, T-15 and T-16. These are, by extension, the only two rigs in Seadrill Partners' fleet that are completely owned by Seadrill Partners.

Seadrill Operating LP
The second of these operating companies is Seadrill Operating LP. This company outright owns three of the rigs in Seadrill Partners' fleet, the West Aquarius, the West Vencedor, and the West Leo. Seadrill Operating LP also owns 56% of the West Capella rig (Seadrill Ltd. owns the other 44%). Unlike Seadrill Partners Operating, however, Seadrill Partners does not outright own this company. Instead, Seadrill Partners owns 30% of it while Seadrill Ltd. owns the remaining 70%. Therefore, Seadrill Partners is only entitled to 30% of the cash generated by the three rigs that this operating company outright owns, plus 30% of 56% of the cash generated by West Capella (16.8% of the total cash generated by this rig).

Seadrill Capricorn Holdings LLC
The third operating company is Seadrill Capricorn Holdings LLC. This company outright owns all three of the ultra-deepwater rigs in Seadrill Partners' fleet that are not owned by Seadrill Operating LP. These three rigs are the West Capricorn, West Sirius, and West Auriga. Seadrill Partners does not wholly own Seadrill Capricorn Holdings either, but it does own the majority of it. Seadrill Partners owns 51% of Seadrill Capricorn Holdings and is thus entitled to 51% of the cash generated by the three rigs that are owned by Seadrill Capricorn Holdings.

Now that the business structure of Seadrill Partners makes more sense, let's explore why the company could be a welcome addition to your portfolio.

Vehicle for income investors
Seadrill Partners was originally established as an income-producing vehicle like most master limited partnerships. While Seadrill Partners is not, strictly speaking, a master limited partnership, Seadrill Ltd. had this philosophy in mind when it established Seadrill Partners. In this goal, Seadrill Partners performs admirably. The LLC generates cash flow from the offshore drilling rigs in its fleet and then distributes this cash to investors. This cash flow is quite sustainable as every rig in the company's fleet has a long-term contract, thus ensuring that customers are going to pay the rig the same amount of money each quarter over a period of several years.

Forward growth prospects and dividend growth prospects
Seadrill Partners also offers growth prospects because of its right to purchase any drilling rig in Seadrill Ltd's fleet that is awarded a contract of at least five years in length or longer. Even though Seadrill Partners may not receive all of the cash flow generated by a purchased rig, depending on which operating company actually purchases the rig, it will still receive some, allowing the company to increase its distributions to investors. In fact, Seadrill Partners has a history of strong distribution growth.

Screen Shot

Source: Seadrill Partners. 

Foolish takeaways
In conclusion, Seadrill Partners is a confusing company on an organizational level. But it still has a lot to offer to an income-focused investor because of its stable, contractually backed cash flows and potential for forward growth. Investors may not want to ignore this one!

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Daniel Gibbs has a long position in Seadrill. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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