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Summary

  • RIGP is up over 30% from its IPO price.
  • Three "Buys" and one "Hold" from initial analyst reports.
  • "Parent" RIG is the biggest loser in this transaction.

After a month of being a public company, Transocean Partners (NYSE:RIGP) surprised most observers (if anyone was paying attention) by soaring 30% over its IPO price (which was above the pre-IPO range) and capturing three "Buys" (or Outperform/Overweight) and a "Hold" (or Equal Weight) from analysts.

RIGP is a creation of Transocean (NYSE:RIG). RIG "dropped down" three rigs, strongly contracted with an average contract life of four years, to RIGP. RIG retains a 70%+ interest in RIGP and a 49% interest in the dropped down rigs.

(click to enlarge)

Source: RIGP 8-K

RIGP has a first right of refusal to acquire RIG's stake in selected rigs as well as the right to purchase 51% of six ultra-deepwater rigs currently being constructed by RIG (within five years of the IPO). RIGP has an untapped $300 million line of credit, under a five year revolver, available to provide financial flexibility.

(click to enlarge)

Source: TDAmeritrade (left line points to $22 IPO price; right line points to first analyst estimate on August 25 and subsequent estimates on August 26)

Morgan Stanley's (NYSE:MS) analyst, Ole Slorer, considered one of the best in understanding the complex world of underwater drillers, gives RIGP an Overweight rating with a price target of $31/share. Mr. Slorer said, "We see a robust distribution growth story (+/- 25% CAGR) as a result of RIG's strong motivation to dropdown assets."

Barclays, the only firm to rate RIGP a "Hold" ("Equal Weight" in Barclays speak) noted in their comments, that "We estimate the company can deliver distribution growth of 12.5% p.a. through at least 2018 supported by a large inventory of assets that are eligible for dropdown from RIGP's parent."

Analyst earnings forecasts are shown below.

Source: TDAmeritrade

I will admit I blew this one; I was interested in participating in the IPO, but none of my brokers had availability. After the initial pop on July 31 (the worst market day of 2014) from the IPO price of $22.00 to a close of $24.30, I lost interest. Obviously, the wrong call as RIGP's closing price on August 29 was $28.51!

Source: Yahoo!

Most of the analyst reports are out (underwriters Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) may still provide coverage); I don't expect any strong "Buys" given RIGP's current price level from any trailing reports. So there are not likely to be any near-term analyst report "bounces." The highest price target is $31 and the lowest is $26 (Barclays).

More importantly, from a valuation perspective, RIGP seems pricey. I based RIGP's yield on the minimum distribution per unit of $1.45 disclosed in the Company's S1/A filing. Compared to industry peer, Seadrill Partners (NYSE:SDLP) (53% owned by Seadrill (NYSE:SDRL)), and larger, more established, energy MLPs, RIGP's yield, at 5.1%, is lower than any of the selected comp group. The Company also has a lower projected five-year growth rate (Source: Yahoo!), though based on analysts' comments, I would expect that number to be revised upward in the near future.

RIGP looks well positioned for a solid future. In addition to the under-construction rigs, I look forward to seeing which rigs RIG drops down into the entity. If solid, well contracted rigs are added, there will likely be upside to RIGP's current price.

I would be remiss, if I did not add that RIG, while certainly gaining some flexibility on the financing side, is the big loser in the RIGP transaction. RIG has lost substantial distributions from the three dropped down rigs, and from the six more rigs under construction (the desirable, new rigs which should command premium day rates and are easier to contract) which most likely will also be dropped down into RIGP (see my previous article, "Transocean Partners Files S1/A In Anticipation of IPO") for a graphical interpretation of the transaction.

This article reflects the author's opinions and is not meant to be the basis of an investors' buy or sell decisions. All investors should conduct their own due diligence and make investment decisions solely on their research.

Source: Transocean Partners Had A Great First Month, But Can It Keep Up The Pace?