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By Micheal Kaufman

Transocean Partners LLC has filed for an initial public offering of 17.5 million common shares with an expected price range of $19-$21 per share. The company will be formed by Transocean Ltd. (NYSE:RIG), a global provider of offshore contract drilling services for oil and gas wells.

The lead underwriters for the application are Morgan Stanley (NYSE:MS) and Barclays PLC (ADR) (NYSE:BCS). If the underwriters’ option is exercised, Transocean Ltd. will own 49% of the spin-off company. The IPO will result in net proceeds of $423 million, which will be used to buy a 51% stake in three existing drill rigs of Transocean Ltd.

Transocean Partners’ unaudited revenues for the first quarter of its 2014 fiscal year (1QFY14) increased 28.1% on year-over-year basis (YoY) to $146 million. The company reported a net income margin of 42.6% in 1QFY14 – 11.6% higher YoY. It is expected that the company’s FY15 revenue will increase 6.2% to $549 million.

Upon the finalization of the offer, the company’s limited-liability partnership will provide a minimum quarterly distribution of $0.36 per share. The estimated yield of its shares is 7.3% (calculated using the midpoint of the offer price). That will be healthy if the company can sustain it in the long term. The company has estimated that cash available for distribution will be $110 million in FY15.

Transocean Partners generates revenues from contract drilling services. Contracts are obtained through a process of competitive bidding against other contractors.

Some of the risks surrounding the company include the possibility that cash from operations will be insufficient to pay the minimum quarterly distribution on common shares because of fee payments and the creation of a cash reserve.

There are also risks in the revenue stream rooting from the company’s operations in the Gulf of Mexico. Furthermore, the company currently relies on only two customers for revenue generation, which makes it susceptible to a major financial hit if any one of them is lost.

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Disclosure: No positions.

Source: Transocean Partners Files For $350 Million IPO