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Why Seadrill Ltd. and Seadrill Partners LLC Plunged in December

By Travis Hoium – Jan 9, 2016 at 12:15PM

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If oil prices don't jump soon, the future is looking dark for these offshore drillers.

What: Shares of Seadrill Ltd. (SDRL) and Seadrill Partners LLC (SDLP) dropped 44.2% and 57.5%, respectively, in December as pressure from oil prices continued to weigh on their future.

So what: Instead of recovering in 2015, as many analysts predicted, oil prices continued to fall, ending the year around $35 per barrel. The problem for both companies is that a once-impressive backlog is being whittled away because new offshore contracts are nearly impossible to come by. That means less revenue and earnings in the future, which is a problem when you have added billions of dollars in debt to build ultra-deepwater offshore rigs that no one wants anymore.

SDRL Total Long Term Debt (Quarterly) Chart

SDRL Total Long Term Debt (Quarterly) data by YCharts.

Now what: Seadrill has one of the youngest and best deepwater drilling fleets in the world, but it's also in a market that doesn't have any interest in making long-term bets on expensive offshore oil fields. If explorers are even spending at all, they'd rather spend money on short, shallow-water drilling contracts or even shale oil. That puts Seadrill in a tough position and the debt hanging over the company becomes a bigger and bigger cloud the longer oil prices stay low. If oil prices recover to anywhere near $100 per barrel, these stocks will be big winners, but that's looking less and less likely every day.

Travis Hoium does not have a position in any company mentioned. The Motley Fool recommends Seadrill. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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