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Dividend Growth Investors Should Consider Seadrill Partners

Many investors are aware of oil driller Seadrill (NYSE: SDRL  ) . Recently, though, Seadrill gave investors a separate investment option to choose from. Seadrill held an initial public offering for Seadrill Partners (NYSE: SDLP  ) in October 2012. Separations of business entities are fairly common in the oil-drilling space, as rival Transocean (NYSE: RIG  ) is preparing a master limited partnership IPO for later this year.

While Seadrill and Seadrill Partners might seem identical on the surface, their respective investor distribution policies differ. Specifically, each will have significantly different growth profiles in their cash returns to investors going forward. Here are the basics investors should know when trying to decipher an investment in Seadrill or Seadrill Partners.

Is Seadrill Partners right for you?
Most investors likely understand Seadrill's investment case. Last year, it racked up 14% contract revenue growth along with 17% growth in operating profits and saw strength across its fleet. In addition, it pays a huge dividend at about a 10% yield. Investors have a separate option under Seadrill's corporate umbrella to choose from in Seadrill Partners.

Seadrill Partners was formed as a growth-oriented company to own and operate Seadrill's rigs. Seadrill Partners' drilling rigs are operated under long-term contracts with some of the biggest energy companies in the world. Seadrill Partners intends to use its relationship with Seadrill to produce long-term contracts for its fleet, and its recent developments are proving its success.

These types of initiatives are common in the industry. Transocean stated in its most recent 10-K filing that an MLP vehicle would positively complement its capital structure by providing an additional source of capital and flexibility, as Seadrill Partners complements Seadrill.

Seadrill Partners has some strong momentum going. It sealed an 18-month contract extension for its West Aquarius ultra-deepwater rig. The total revenue potential for this deal is an estimated $337 million. Seadrill Partners also received a $100 million investment from Seadrill during the fourth quarter as part of an equity offering to finance the West Sirius and West Leo rig drop-downs. Seadrill Partners closed on the acquisitions of these two rigs for $2.3 billion in the fourth quarter.

Seadrill vs. Seadrill Partners
Seadrill Partners' status as a growth-oriented entity is what differentiates it from Seadrill. This is evident in the respective distributions for each company. Seadrill recently raised its dividend by 3% to $0.98 per share quarterly, which provides a huge 10% yield. By contrast, Seadrill Partners yields almost half that.

However, investors should expect Seadrill Partners to maintain stronger growth in its distribution. In the aftermath of the West Sirius and West Leo acquisitions, Seadrill Partners management recommends a quarterly distribution increase to $0.50-$0.5125 per unit, which would represent approximately 15% growth. Keep in mind that Seadrill Partners' fourth-quarter distribution was also 15% higher than the year-ago distribution, so a rapid growth pattern is clear.

That's not so for Seadrill. Seadrill gave investors a small dividend increase very recently, but it seems the company's dividend growth potential is now tapped out. Going forward, Seadrill Partners management is confident of future drop-downs and investment. This is what gives Seadrill Partners' board of directors confidence to predict high growth rates for future distributions. By contrast, Seadrill investors shouldn't expect much growth in the company's huge dividend for the foreseeable future.

In Seadrill's fourth-quarter report, it stated: "Seadrill is currently trading at a yield of 10.4% based on an annual future dividend of $3.92 per share. In the current market, the [b]oard sees limited value in increasing the current quarterly distribution beyond $0.98 per share."

The Foolish bottom line
As a result, those investors looking for current income versus distribution growth should view Seadrill and Seadrill Partners differently. Seadrill offers a massive double-digit yield, but there probably won't be much in the way of dividend growth for the time being. By contrast, Seadrill Partners yields about half as much as Seadrill but should provide double-digit distribution growth for the next few years.

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Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2014, at 1:33 PM, Heidikitty wrote:

    This always confuses me when I think of Five years down the road do I keep SDRL or sell 1/2 and buy SDLP? I am looking for dividend income down the road 4 to 6 years.

  • Report this Comment On March 07, 2014, at 4:48 PM, 67Bulldog67 wrote:

    One point to consider is that SDLP has to grow their dividend substantially to even reach the dividend yield of SDRL. Currently SDRL has a 11.1% yield compared to 5.6% for SDLP, or almost double. That is a lot of dividend growth before it catches up to "big brother's yield"!

    Also as a SDRL investor, one is going to have dividend growth in the coming years. Their management has stated that growing their dividend is a very important corporate goal. On their conference call they announced they may not raise it much, if at all, for the next 12 months, since the market doesn't seem to care. However, this comes after they have raised it in each of the past 4 quarters!

    SDRL also announced they are establishing a dividend pool of available cash using 20% of the proceeds they receive from each rig "drop down" to SDLP. That doesn't sound like a company that has no plans to boost their dividend in the next year or two.

  • Report this Comment On March 10, 2014, at 8:48 AM, DukeMontrose wrote:

    The market "does not care"?

    Are you kidding me?

    SDRL has had a nose dive because investors do not like its almost maniacal obsession of paying all their hard earned cash flow in cash dividends. That leaves no room for a meaningful Reserves for Contingencies, the lack of which most large pools of capital abhor.

    Because "contingencies" DO occur, often at the most inconvenient time.

  • Report this Comment On March 10, 2014, at 10:09 AM, 67Bulldog67 wrote:


    I think what SDRL's management meant when they made the statement that they didn't expect to raise dividends further in the near term (hinted at 12 months) is that investors are at the point where the yield is very high and a few more pennies of dividend won't make a difference to the stock's attraction. i.e. the market doesn't care if the yield is 11.5% rather than 11.1%.

    I would disagree with you regarding the main reason the stock has come down. All of the drillers have sold off sharply beginning with NE's announcement that they saw the floater market weakening. I believe that SDRL sold off more than some of its' competitors because it has had a very strong run previously - outperforming most of the drillers in prior months.

    You obviously are not a fan of JF's management style, but anyone who makes a fair and balanced analysis of SDRL's history would have to give their management very high marks. While they don't have "Reserves for Contingencies" as you point out, they do have a $20.2 Billion backlog that to some degree mitigates their heavy debt load. With many NB's going on stream, their EBITDA is rising sharply, and will continue to do so over the next couple of years. If management slows their NB program in the future, their free cash flow will also increase nicely.

  • Report this Comment On April 29, 2014, at 2:41 PM, srockaz wrote:

    Hi Bob,

    Thanks for the comparison's shared in the article. There were two things I was hoping you'd examine as well:

    1. An examination of the two options from a tax perspective. SDRL is complicated as an MLP, but how is SDLP handled? Is it the same as any other basic dividend paying stock? What are the pro's and con's for each option?

    2. If the two companies are so closely related, why is there such a big difference in the dividend yields? How does the cash flow and how does that relate to the dividends/distributions?

    Thanks, srockaz

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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