Image source: Seadrill Partners LLC.

What: Units of Seadrill Partners (OTC:SDLP) plunged on Tuesday and were down 29% at 11:00 a.m. EDT after the company cut its distribution again.

So what: Seadrill Partners announced it would reduce its quarterly distribution to just $0.10 per unit. That's down from the previous rate of $0.25 per unit, which itself was down from the $0.5675 per unit it was paying last year.

Driving Seadrill Partners' decision to reduce its dividend were two recent changes to its fleet. In May, the company received notice that a customer had terminated the contract for the West Capella, resulting in the company receiving a $125 million early termination payment. Meanwhile, last month, Seadrill Partners reached an agreement with another customer to keep the West Capricorn on an extended standby rate through late next year. As a result, the company will only earn $316,000 per day as opposed to the full operating rate of $536,000 per day.

While the company is still getting paid something for these two vessels, the overall weakness in the offshore drilling market is driving the company's decision to cut the payout to bolster its liquidity.

That market continues to go from bad to worse. Just last week, leading deepwater driller Transocean (NYSE:RIG) noted that it idled another six rigs, bringing its idled fleet up to 28, or nearly half of its 60 vessels. That's despite being very aggressive when bidding on the few contracts that are available. For example, Transocean recently won a 730-day contract in India. However, it bid just a $127,000 dayrate, which was well below the $175,000 dayrate analysts thought that rig could fetch in the current market. Further, Transocean recently issued new debt, but because of weak demand, it had to trim its deal and boost the yield just to entice investors to lend it the money.

Now what: With the offshore market not showing any signs of improvement, Seadrill Partners is making the prudent move to reduce its payout again. While investors clearly do not like the decision, it's better for the company to be safe than to be sorry in the future should the downturn persist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.