Seadrill Partners (SDLP) has boosted its cash distribution payout by 31% to $2.03 from $1.55 in October 2012, when the company was first listed. For the first quarter of 2014, the company declared a distribution of $0.5075 per unit, which translates into an annual distribution of $2.03 and a current yield of 6.2%. Discussed in this article are the factors that will help Seadrill Partners further boost its distribution.
In the first quarter, Seadrill Partners completed the acquisition of West Auriga for $1.24 billion from Seadrill (SDRL). This acquisition is a part of the drop-down agreement with Seadrill and was financed with debt and $355 million from the recent common unit offering. With each acquisition in the past, Seadrill Partners has increased its quarterly distribution and therefore this transaction was important to mention.
Subsequent to this transaction, Seadrill Partners has recommended a quarterly distribution increase as a result to between $0.54 and $0.545. Even if a quarterly distribution of $0.54 is considered for the remainder of 2014, the yield jumps to 6.5% for the year and to 6.6% on an annualized basis.
From a distribution sustainability perspective, Seadrill Partners has a firm order backlog of $5.5 billion with an average contract term of 3.74 years. The distribution can therefore be sustained at these levels even if no further vessel acquisition is assumed.
In terms of concerns, there are headwinds in the broad offshore market in 2014. Seadrill Partners is shielded from any negative impact with no exposure to 2014 day rates. Only West Vencedor's contract is scheduled to expire in the first quarter of 2015.
Contrary to any growth concerns, Seadrill Partners has a strong distribution growth pipeline and the financial flexibility to acquire rigs. In terms of growth, the omnibus agreement with Seadrill allows Seadrill Partners to acquire new rigs from the former, whenever they are delivered.
With Seadrill having a pipeline of 19 new rigs for delivery over the next few years, Seadrill Partners is likely to continue rig acquisition and further boost the cash distribution.
The company's aggressive growth strategy is evident from the fact that the fleet size has more than doubled with the acquisition of five rigs since the IPO in October 2012.
For the first quaretr, Seadrill Partners had an EBITDA interest coverage ratio of 5.6. A high coverage ensures that the company can leverage further to expand its fleet. Funding the expansion is therefore not a great concern.
On June 5, 2014, Seadrill Partners also announced the launch of a $1 billion term loan primarily for debt refinancing. I believe that with a comfortable debt service position, debt refinancing will not be a concern in the future. This ensures that healthy cash continues to flow for cash distribution.
In terms of distribution risk, it is also worth mentioning that the company's distribution coverage ratio declined to 0.77 in the first quarter from 0.86 in 4Q 2013. The offsetting factor is that the coverage ratio should be 0.92 assuming the first quarter distribution only paid pro-rata for 11 days for new units. Therefore, the distribution coverage ratio is close to 1 and should increase with the addition of new rigs.
In conclusion, Seadrill Partners has established its growth and distribution-paying credentials since the IPO in October 2012. With several new rigs lined up for delivery for Seadrill, the drop-down agreement will ensure that the company's distribution growth is sustainable. Seadrill Partners is certainly a good high-yield stock to own.
