This should be the moment that investors in offshore rig operator Seadrill Partners LLC (NYSE:SDLP) have been waiting for! With oil prices pushing steadily higher, there's a renewed interest in offshore drilling. Seadrill Partners is prepped and ready for takeoff!
Unless it's not. Which it may not be. There's a big cloud of uncertainty hanging over the company, in part thanks to its status as a very small fish in a very big deepwater ocean that's full of huge, hungry competitors like Transocean (NYSE:RIG) and Ensco (NYSE:ESV). Questions also abound about its parent company, Seadrill (NYSE:SDRL).
With that in mind, here are the likeliest places for Seadrill Partners to end up in a year.
Big fish tend to swallow little fish, whether we're talking about an ocean or a business landscape. And there's no denying that Seadrill Partners is a little fish that's maybe being eyed by a couple of hungry sharks.
Seadrill Partners' fleet is one of the smallest in the industry, consisting of just 11 vessels -- eight drillships, one tender, and two barges, to be precise. By contrast, Transocean currently has 31 active vessels, while Ensco has 47 vessels currently active. Not counting Seadrill Partners' vessels, its parent Seadrill has 40 vessels in its own fleet -- some of which are co-owned or operated for a third party -- and has another nine under construction. Plus there are many other players in this space.
There's been a wave of consolidation in the offshore drilling industry recently, with Transocean buying Songa Offshore SE, and Ensco purchasing Atwood Oceanics. There are plenty of operational synergies, not to mention market share, to be gained by buying a competitor's fleet, and tiny Seadrill Partners would be comparatively easy to digest.
Ordinarily, you wouldn't expect a parent like Seadrill to sell off one of its subsidiaries. But Seadrill only controls about 46.6% of Seadrill Partners. Seadrill Partners is operated independently of its parent, and in 2017, it took steps to completely separate its assets from its parent's so it wouldn't be dragged under by the parent's bankruptcy filing.
That's right: Parent Seadrill is currently in bankruptcy protection, but it has reportedly reached a deal with some 40 of its creditors, including banks and shipyards, to allow it to emerge again. That could happen as early as late June or July of this year. And if the new company is looking for ways to raise cash quickly to appease its creditors, it could conceivably sell its 46.6% stake in Seadrill Partners to one of its rivals, which might in turn just gobble up the rest.
We'll know more later this year, of course, but it's possible that by May 2018, Seadrill Partners will have been swallowed whole.
Dead in the water
For now, Seadrill Partners is still afloat, but compared to larger rivals like Transocean and Ensco, its operations look far from healthy.
Of Seadrill Partners' 11 vessels, just seven are currently under contract, and of those seven, two have contracts that expire later this summer. Three of the company's four idle rigs are drillships, which command the highest dayrates. And by high, I mean high: Some of Seadrill Partners' drillships are currently earning the company more than half a million dollars per day. So, every day those ships remain idle, the company is losing money in maintenance costs -- the ship still has to be ready to go if it gets put under contract -- and not earning anything.
That means 36% of Seadrill Partners' fleet is idle right now, much higher than the current idle rates of Transocean's active fleet (two vessels, or 6.5%), and Ensco's (eight vessels, or 17%). You could argue this might be good for Seadrill Partners: After all, with so many of its rivals' vessels under contract, that may make it easier for Seadrill Partners to secure contracts for its own vessels in a tightening market. However, a bird in the hand is worth two in the bush, and it's worth noting that Transocean and Ensco have a number of "stacked" -- basically, dry-docked -- vessels in their fleets as well. If demand begins to heat up, they -- and other companies -- could move those vessels back to active status, increasing supply to meet that demand. With no stacked vessels, Seadrill Partners doesn't have such an option.
Again, we'll have to wait and see if Seadrill Partners can secure contracts for more of its fleet by the end of summer when two more of its current contracts expire. And if it can't, Seadrill Partners may be as good as sunk.
In ship shape
There are a lot of ifs in Seadrill Partners' future, not least because of its parent company's woes. But it's possible that Seadrill Partners is going to get along just fine. Like its current situation, though, there are a lot of ifs.
If oil prices remain strong, expensive offshore drilling, in general, becomes more lucrative. And as oil companies look for opportunities to boost their production, that should increase the number of offshore contracts being signed. If that happens, there should be more interest in Seadrill Partners' fleet, which should cause its utilization rate to rise. If the industry can raise its overall utilization rate in a strong offshore market, industry dayrates should rise as companies compete to sign up rigs. Finally, this will only help Seadrill Partners if demand rises faster than other companies can bring their stacked fleets online and complete the vessels they have under construction.
That's a lot of ifs, and a downturn in oil prices or unforeseen problems arising from parent Seadrill's situation could upend this plan.
A risky proposition
Given Seadrill Partners' precarious situation, it doesn't look like a buy. While improving oil prices have bettered the industry outlook as a whole, Seadrill Partners isn't as well-positioned as its larger competitors, Transocean and Ensco, to capitalize on the situation. Meanwhile, its current poor fleet utilization rate and questions surrounding its parent's stake in the company mean smart investors would be better off looking elsewhere, at least until there's more clarity on these issues.