Things weren't looking so hot for offshore rig operator Seadrill Partners LLC (SDLP). It had lost more than 85% of its value since the oil price slump hit in 2014. Its parent company, Seadrill LLC (SDRL), was in debt up to its proverbial eyeballs and had lost more than 90% of its value over the same period. Meanwhile, oil prices seemed stuck at around $50/barrel, and big oil companies seemed to have largely lost their appetites for the risky and expensive ultra-deepwater drilling that offered offshore drillers the biggest paydays.
But what a difference a year makes! Seadrill Partners' stock may not have gained ground in 2017 -- in fact, it dropped 12.9% -- but in the second half of the year, it actually started to move upwards. Here's why 2017 may be the year Seadrill Partners turned the corner.
Offshore rig industry player Seadrill Partners had a busy 2017. But outperformance may still be a long way off. Image source: Getty Images.
The naughty parent
Friction between parents and children is nothing new, but in the case of Seadrill and Seadrill Partners, the parent's problems came close to collapsing its subsidiary.
Back when oil prices were high, Seadrill made a bet on the continued success of the industry. It went deep into debt to pay for new state-of-the-art rigs for its fleet. At the time, it seemed like a good move, giving Seadrill the youngest fleet in the industry. But when oil prices dropped and demand for those new rigs dried up, Seadrill found itself stuck with a lot of debt, 13 unfinished rigs, and not enough income to pay for either.
Seadrill Partners, on the other hand, was being hammered by the same market forces that were decimating the rest of the industry. But it had less debt than its parent -- in fact, much of its debt had been transferred from its parent -- and all of its 11 rigs were operational, with most under contract. But Seadrill was still weighing on Seadrill Partners in a significant way.
Cutting ties
The problem for Seadrill Partners was that Seadrill had used some of its assets to guarantee some of Seadrill Partners' credit when it formed the company. If Seadrill filed for bankruptcy, those assets could have no longer been considered as viable for guaranteeing the credit. Which could have thrown Seadrill Partners into the same credit quagmire that had been plaguing Seadrill.
Luckily, in August 2017, Seadrill Partners was able to make changes to its credit agreements so that it was guaranteeing them with its own assets and not its parent's. That insulated Seadrill Partners from its parent's bankruptcy, which came shortly afterwards, in September 2017.
The bankrupt Seadrill still owns a 46.6% stake in Seadrill Partners. That position includes a direct 28.6% stake in the company, with an additional 18% consisting of subordinated units (assuming full conversion). But regardless of what happens to that stake, Seadrill Partners (and its shareholders) dodged a bullet there.
Fundamentally speaking
Seadrill Partners investors should most remember 2017 as the year the company resumed cash distributions to shareholders. After dodging the bankruptcy bullet during Q3 2017, Seadrill Partners announced it would retroactively pay investors $0.10 per share for each of Q1 2017 and Q2 2017. That quarterly payment of $0.10 continued in the third quarter, and it seems to be on firm footing -- at least for the time being.
The company posted a decent third quarter, in which both revenue and EPS were up sequentially but down year over year. Seadrill Partners has $845.3 million in cash on hand and plenty of available credit, so if oil prices continue to rise or hold steady, the company should remain in stable condition. Its order backlog of $1.7 billion and average contract duration of 1.3 years (as of November 21, 2017) should also help keep it afloat (no pun intended).
The prognosis
In some ways, 2017 will be a year Seadrill Partners investors will want to forget. The stock continued its slide, and its parent's bankruptcy injected some uncertainty into its fate. On the other hand, Seadrill Partners was able to get its finances untangled from Seadrill's to avoid being pulled down by the latter's bankruptcy, it resumed payments to unitholders, and it actually saw its share price rise in the second half of the year.
On the whole, it's probably more a year to remember than to forget for Seadrill Partners. But it's still uncertain what 2018 will bring for the company, which is why investors should think long and hard before buying in.
