Seadrill Partners LLC Shows off Its Growth

Offshore drilling contractor Seadrill Partners (NYSE: SDLP  ) announced its fourth-quarter earnings results on Feb. 25 in conjunction with its corporate parent Seadrill (NYSE: SDRL  ) .

Overall, these results were quite positive, with increases in both revenue and net income driven by the addition of three new rigs to the partnership's fleet. The partnership also hiked its dividend and suggested that another dividend increase may be coming due to the addition of West Sirius and West Leo, both ultra-deepwater drilling rigs, to the partnership's fleet. The dividend hike and further potential increase combined with the company's overall stability could make it an appealing choice for dividend investors.

Highlights
Before delving into the meat of this analysis, let's take a few moments to look at the highlights from the company's fourth quarter. This will help to put the following discussion into perspective:

  • Total contract revenue of $282.1 million in the fourth quarter: This is an increase from the $262.4 million that the partnership brought in during the third quarter.
  • Net operating income of $134.4 million in the fourth quarter compared to $118.1 million in the third quarter.
  • Net income for the fourth quarter was $113.6 million compared to $78.4 million in the third quarter.
  • Total distributable cash flow of $23.2 million in the fourth quarter compared to $15.9 million in the third quarter.
  • Seadrill Partners will pay a distribution of $0.4450 per unit for the fourth quarter, which gives the partnership an annualized distribution of $1.78 per unit.

Reasons for growth
As the numbers show, Seadrill Partners delivered significant growth on a quarter-over-quarter basis. This is because of two factors. The first was fleet growth. On Oct. 11, Seadrill Partners announced that it agreed to acquire the T-16 tender rig from Seadrill for a total purchase price of $200 million, including $93 million in debt. The deal was expected to close in October and it did, adding another tender rig to the partnership's fleet.

Presumably, Seadrill paid all of the cash flow generated by the rig during the time that it was owned by the parent to Seadrill Partners, as the partnership's earnings report stated that the fourth quarter was the first quarter in which it (Seadrill Partners) received a full quarter of revenue from T-16.

However, if the deal to purchase the rig closed at the end of October, as the purchase announcement states, then the partnership would not have earned a full quarter of revenue from the rig. The same would be true if Seadrill Partners received all of the revenue from the date of the purchase announcement. Therefore, the partnership must have received the back revenue.

The second reason for the quarter-over-quarter revenue growth was the absence of the revenue hit that Seadrill Partners had to take in the third quarter as the resolution to a dispute involving itself, ExxonMobil (NYSE: XOM  ) , and Statoil (NYSE: STO  ) .

The cause of this dispute was downtime on the West Aquarius rig so that it could receive modifications in order to be allowed to operate in Canadian waters. The oil companies balked at paying dayrates to Seadrill Partners during the time that the rig received these upgrades and was unable to perform any drilling work. Seadrill Partners agreed to accept non-payment for 37 days (basically giving the oil companies 37 days of free work) as compensation for the money that was paid to Seadrill Partners during the downtime.

Seadrill Partners was forced to take a $22 million write-down in the third quarter to account for this. There was no such write-down in the fourth quarter, and so the absence of such increased the partnership's fourth-quarter revenue relative to the third.

Increased distribution yield
As mentioned earlier, Seadrill Partners increased its distribution as a part of this earnings announcement to $1.78 per year. This is a positive development for investors who are looking to generate income from their portfolios. At the time of this writing, Seadrill Partners yields 5.7%. This is one of the higher yields in the industry, but it is certainly not the highest.

However, Seadrill Partners does have one advantage that higher-yielding drillers such as Seadrill and Ensco (NYSE: ESV  ) do not. This is its MLP status. As an MLP, Seadrill Partners is able to pass through certain tax write-offs. These write-offs essentially make 80% of the distribution completely tax free. Thus, Seadrill Partners may end up with a higher after-tax distribution yield for investors who purchase it in a taxable account.

Forward growth potential
Seadrill Partners is likely to grow its revenue and distributable income further in the first quarter. This is due to the addition of two new rigs to its fleet. Near the end of the fourth quarter, Seadrill Partners acquired the West Sirius and West Leo, two ultra-deepwater semi-submersible rigs that already possess long-term contracts. As these two rigs were acquired late in the fourth quarter, they have not been operating long enough under Seadrill Partners' ownership to have significantly boosted revenue.

However, this all changes in the first quarter, as both rigs will contribute a full quarter of revenue and cash flow to the partnership. Because of the expected revenue growth that will be caused by these two rigs, management has recommended that the partnership increase its quarterly distribution to $0.50 to $0.5125 per unit for the first-quarter distribution. This distribution would be paid in May.

Assuming the partnership increases its distribution, investors buying today would see their yield-on-cost increase to between 6.4% and 6.5% at that time. Plus, the partnership would continue to offer the already discussed tax benefits!

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