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Summary

  • RIGP priced at $22, above range of $19-$21; closed Friday up 12% over IPO.
  • Stronger positive market reaction than anticipated.
  • Current MLP yield of 5.9% appears fair; accumulate for distribution not for appreciation.

Transocean Partners LLC (NYSE:RIGP) had a successful debut on the worst trading day of the year (July 31), closing at $24.30, an increase of 10%+ over the IPO price of $22.00/share. The IPO should be considered a huge success for RIGP and its largest shareholder, Transocean (NYSE:RIG), as the offering not only rose on a day the DJIA fell over 300 points, but opened above the $19-$21/share suggested in the S1/A the prior week. As highlighted in my article last week, the offering represents a 25.4% stake in RIGP (29.2% if the underwriters exercise their overallotment, which seems likely given the increase in price). Before expenses, $385 million ($443 million with full overallotment exercise) was raised from the sale of 17.5 million common units. The IPO was priced to yield 6.6%, less than the $7.0% originally projected. As of Friday's $24.60 (4 PM) closing price, RIGP yields 5.9%, less than "parent" RIG (currently yielding 6.6%). The offering had solid institutional support, with Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) serving as lead managers. Expect initial research notes the week of August 25.

The response to the RIGP's IPO was far more enthusiastic than I had anticipated, and demonstrates the value of a safe, pure-play in a yield hungry world. Originally, the prospect of a 7% distribution (not a dividend as RIGP is a MLP) appeared reasonable. Friday's yield of 5.9% seems on the one hand aggressive, but on the other, considering the leases to blue-chip credits, Chevron and BP, in line with the underlying credit. Coming during the same week as Windstream (NASDAQ:WIN) announced its well-received plan to spin-off non-core, but highly predictable assets into a REIT, RIGP's success highlights the value the market places on secure, high yielding financial instruments.

The 5.9% yield for stable assets appears to be fair for those seeking income in the current market climate. I would expect prices to fall as interest rates rise. As the underlying contracts on RIGP's rigs have an average life of four years, I don't expect much discussion about new contracts/renewals for at least a couple of years.

Disclaimer: The opinions expressed are solely those of the author and should not be relied upon in making an investment decision. Investors should always conduct their own due diligence and make their own buy and sell decisions.

Disclosure: The author is long RIG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Transocean Partners Has Successful IPO On Worst Day Of The Year!