What: Shares of Seadrill Partners LLC (SDLP) dropped 24% in November, a drop that has continued in December because of low oil prices.
So what: Operating results released during November weren't all bad. Revenue rose from $417.2 million a year ago to $456.5 million, driven by the addition of West Polaris to the fleet. But losses from derivatives and higher interest expenses resulted in a loss of $125.4 million, something that didn't please investors.
With oil prices reaching a six-year low, there's also concern that Seadrill Partners' dividend won't last much longer. Backlog of $4.7 billion and a contract duration of 2.8 years will give the company runway for a little while, but if oil stays below $40 through 2016, it's hard to see how the dividend of $0.5675 declared for the quarter could be maintained.
Now what: Sometimes a high dividend yield is really a warning that a stock has a rocky road ahead. Seadrill Partners may look attractive with an implied dividend yield of 38%, but that kind of payout rate means investors don't expect the dividend to continue for long. I think a dividend cut could be in order as early as next quarter. With that kind of uncertainty ahead, and oil seeing no bottom in sight, this is a stock to approach with caution.
