Since the oil price downturn, the offshore drilling industry have been in free fall. Now, the landscape (seascape?) is littered with companies in crisis. Seadrill (NYSE:SDRL) filed for bankruptcy. Transocean (NYSE:RIG) shares are down more than 80% over the last five years. Atwood Oceanics has ceased to exist after being purchased in 2017 for a song by rival Ensco (NYSE:ESV)

You might wonder if the bleeding has stopped, and whether it's now time to sort through the wreckage to try to find bargains. And Seadrill Partners LLC (NYSE:SDLP) -- not to be confused with its parent company, Seadrill -- might seem like a good deal. But even though some of the issues surrounding the company have been cleared up, a lot of questions remain.

A young man in a suit watches a large red arrow crashing downward through the ground.

Most offshore oil rig stocks have trended lower for the past year. Will Seadrill Partners continue to fall? Image source: Getty Images.

First, the good news

Seadrill Partners LLC is a master limited partnership (MLP), which means that even though Seadrill controls about 46.6% of the company, it's operated independently. In fact, in 2017, Seadrill Partners took steps to completely separate its assets from its parent's so it wouldn't be dragged under by the parent's bankruptcy filing. 

However, investors should note that MLPs have very particular -- and sometimes cumbersome -- tax filing requirements for their unitholders, so they're not for everyone. The flip side to this is that their particular tax structure means that MLPs pay out big distributions to unitholders, which is why Seadrill Partners is yielding about 7.2% right now. That's huge for an industry in which the next-highest yield -- Ensco's -- is just 0.9%, and many have cut their dividends altogether (like Transocean).

Finally, there was some concern that if Seadrill (the parent) were liquidated through its bankruptcy, its stake in Seadrill Partners might be sold to a competitor or otherwise disposed of in a way that wasn't favorable to the company and its unitholders. That uncertainty was a big red flag for investors considering the stock. But in February, Seadrill and its creditors came to an agreement to keep Seadrill in business, so for the time being at least, it looks like those concerns are alleviated. 

That doesn't mean, though, that Seadrill Partners is without challenges.

Next, the middling news

Seadrill Partners' yield of about 7.2% may look fantastic, particularly in this industry. After all, even high-yielding giant Royal Dutch Shell only yields about 6% currently. But that yield may be in jeopardy down the road.

The company has been churning out gobs of free cash flow -- more than enough to completely cover its distributions. But over the past year, that cash flow has shrunk by about 50%. It would have to fall quite a bit farther for Seadrill Partners' yield to be in jeopardy, but there's reason to believe that its cash flow may take a significant hit in the coming year.

Seadrill Partners makes its money by contracting its fleet of rigs to clients. But using data from the company's most recent fleet status report, we see that five of Seadrill Partners' 11 vessels (45.5%) are uncontracted. So until the company signs additional contracts, nearly half its fleet will be sitting idle, costing the company money instead of making it. 

By contrast, only eight of Ensco's 47-vessel active fleet (17%), and just three of Transocean's 30-ship active fleet (10%) are uncontracted this spring (and one of Transocean's three has a contract beginning in October 2018). Of course, Ensco and Transocean also own several "stacked" (essentially, drydocked) vessels, but a stacked ship costs far less for the company than one that's merely idle but still needs to be staffed and ready to go if it receives a contract.

Of course, rig companies sign new contracts all the time -- one of Seadrill Partners' currently contracted vessels just received a new contract that will commence in July -- but there's no guarantee. And considering that Seadrill Partners just restarted its cash distributions to shareholders in Q3 of last year, there's no guarantee that they won't go away again if money gets tight.

Finally, the bad news

Offshore oil drilling is naturally more expensive and difficult than traditional onshore shale drilling. So when the price of oil goes down -- like it did in 2014 -- offshore projects are often the first to be shelved. 

Since 2014, average day rates for all types of drillships have collapsed by more than 50%, according to data from IHS Markit. Utilization of those drillships is likewise down 25% to 50%. And some analysts believe that oil prices -- which have stayed above $60 per barrel for almost all of 2018 so far -- may be about to drop back down into the $50-per-barrel range.

Certainly, the oil price boom hasn't paid off for offshore rig companies, most of whose shares have fallen so far this year. Both Ensco's and Seadrill Partners' shares are down more than 25% so far in 2018. Even giant Transocean's shares are down more than 7%. The industry may have hit bottom, but it's anybody's guess when it might start coming up for air.

Investor takeaway

Seadrill Partners' future looks more secure than it did a year ago as a result of its parent Seadrill's recent agreement with its creditors. However, given the state of the industry and the amount of its fleet that is currently idle, the company is still looking pretty risky, even when its high yield is thrown into the mix.

If you're looking for a high-yielding energy MLP, there are plenty of others that look more financially secure than Seadrill Partners (and have higher yields, to boot). For now, though, you're better off avoiding the urge to get greedy with this beaten-down company.