Seadrill Partners - Q1 2016 Review In A Nutshell

| About: Seadrill Partners, (SDLP)

Summary

Seadrill Partners LLC released its 1Q'16 results on May 26, 2016. Total operating revenues were $444.0 million in 1Q'16 down 4.9% quarter over quarter.

The stock price had an excellent run up in 2016, so far, due primarily to the oil price momentum.

I believe the stock is now a little bit pricey, and it is still time to take some gain off the table.

(Image: West Aquarius)

Seadrill Partners, LLC (NYSE:SDLP)

Seadrill Partners is a limited liability company. The company was formed primarily to own, operate and acquire offshore drilling units from Seadrill Ltd. (NYSE:SDRL).

The company's subsidiaries, including Seadrill Operating LP, Seadrill Capricorn Holdings LLC and Seadrill Partners Operating LLC, own 100% interest in the drilling units.

Seadrill Ltd. owns 42,819,100 total common (26,275,750 shares) and subordinated shares (16,543,350 shares) of SDLP, or 46.6% (Minority holder).

This article updates my preceding article on SDLP on February 29, 2016 regarding the 4Q'15 results and fleet status.

The company released a 1Q'16 presentation.

I - Fleet Status as of February 2016

Semi-submersibles
#

Name

Class

Year built

Client

Location

Day rate in $K End of contract
1

West Sirius

6th HE

2008

[BP]

USA

297 paid by BP over the contract terminated.

7/17

Cold-stacked ($10k/d cost)

2

West Aquarius

6th HE

2009

[Hibernia]

Canada

615

4/17

3

West Capricorn

6th HE

2011

[BP]

USA

526

Includes the mob. fee of $30 million.

Contract swapped with the West Sirius.

7/19

Placed on standby at 60% in May for 30-day

4

West Leo

6th HE

2012

[Tullow oil]

Ghana

605

Mob. $18 million taken over a period. Includes 95% utilization bonus.

7/18
Drillships UDW
#

Name

Class

Year built

Location Day rate in $K End of contract
1

West Capella

2008

[Exxon Mobil]

Nigeria

627.5

4/17 Warm stacked at $60-$70k/d.

Termination fee: S125m

2

West Auriga

2013

[BP]

USA

562

Mob. $37.5 million taken over a period.

10/20
3

West Vela

2013

[BP]

USA

525

Mob. $37.5 million taken over a period.

11/20
4

West Polaris

2008

[Exxon Mobil] Angola 653 490 3/18
Others
#

Name

Year built

Location Day rate in $K End of contract
1

West Vencedor

2010

[Petronas]

Myanmar

100

8/16

(3 wells contract)

2

T15

2013

[Chevron]

Thailand

110 7/19
3

T16

2013

[Chevron]

Thailand

110 8/19
Click to enlarge

  • Order backlog of $3.6 billion and average contract duration of 2.2 years as of May 25th.

Click to enlarge

Details of contract backlog calculation:

SDLP 5/26/2016 2016 2017 2018 2019 2020 D/R Mob. 2016 2017 2018 2019 2020
West Sirius 7,1 6,2 0,0 0,0 0,0 297 0 63 55 0 0 0 119
West Aquarius 7,1 3,5 0,0 0,0 0,0 615 0 131 65 0 0 0 196
West Capricorn 7,1 12,0 12,0 6,2 0,0 526 30 112 189 189 98 0 589
West Leo 7,1 12,0 5,5 0,0 0,0 605 18 129 218 100 0 0 446
West Capella 7,1 3,2 0,0 0,0 0,0 0 0 0 0 0 0 0 0
West Auriga 7,1 12,0 12,0 12,0 9,2 562 38 120 202 202 202 155 882
West Vela 7,1 12,0 12,0 12,0 10,2 525 38 112 189 189 189 161 839
West Polaris 7,1 12,0 2,2 0,0 0,0 450 0 96 162 30 0 0 288
T15 7,1 12 12 6,5 0 110 0 23,4 39,6 39,6 21,5 0,0 124
T16 7,1 12 12 7,5 0 110 0 23 40 40 25 0 127
West Vencedor 2,1 0 0 0 0 100 0 6 0 0 0 0 6
73,1 96,9 67,7 44,2 19,4 123 816 1159 789 535 316 3616
Click to enlarge

II - 1Q'16 Financial results snapshot (6 consecutive quarters)

1Q'16 4Q'15 3Q'15 2Q'15 1Q'15 4Q'14

Contract Revenues

in $ million

401.9 428.7 403.4 385.6 385.9 369.1

Total operating revenues

in $ million

444.0 467.2 456.5 417.2 400.7 380.6

Total operating expenses

in $ million

220.5 229.1 247.1 211.7 210.0 211.7

Net operating income

in $ million

223.5 238.1 209.4 205.5 190.7 168.9

Net income

$ million

73.2 189.6 35.4 192.5 70.9 70.1

Net income attributable to SDLP

in $ million

36.1 96.2 21.5 101.3 38.2 33.1

EPS

$/share

0.39 1.05 0.23 1.10 0.42 0.36

Cash and Cash equivalent

in $ million

401.2 319.0 189.4 197.7 242.0 242.7

Long-term debt

$ million

3,416.8 3,440.4 3,464.1 3,484.6 3,210.3 3,227.4

Total non-current liabilities

in $ million

3,817.9 3,897.0 3,883.0 3,899.0 3,652.9 3,674.2

Adjusted EBITDA

Adj./Year

in $ million

305.4

1,160.4

308.8

1,235.2

273.7

1,094.8

272.5

1,150.4

261.0

1,044.0

241.8

967.2

Coverage ratio 5.27 5.26 1.54 1.532 1.483 1.448

Distributed Cash Flow ("DCF")

in $ million

99.2 98.9 85.4 84.7 82.0 80.1

Quarterly dividend

$/share

0.25 0.25 0.5675 0.5675 0.5675 0.5675

Shares outstanding

in million

91.821 91.821 91.821 91.821 91.821 91.821
Click to enlarge

Important graph: Ratio Net Debt/EBITDA (annualized).

M. John Roche, CFO, said in the conference call:

Second quarter adjusted EBITDA is expected to be in excess of 320 million. We expect the West Capella termination payment to be partly offset by reduction in the West Capricorn day rate.

Commentary:

Seadrill Partners LLC released its 1Q'16 results on May 26, 2016. Total operating revenues were $444.0 million in 1Q'16 down 4.9% quarter over quarter, with a Net Income of $73.2 million versus $189.6 million the previous quarter. Overall, another good quarter with some highlights:

  • Exxon Mobil (NYSE:XOM) terminated earlier the West Capella working in Nigeria in the Usan Field. The contract was a contract extension for 3 years signed by Total SA (NYSE:TOT) that was supposed to end in April 2017.
    Seadrill Partners will receive a payment of approximately $125 million in two equal installments. I commented on the issue on May 13, 2016.
  • In the conference call, M. Mark Morris, CEO, said the following: "the West Capricorn was placed on a 30-day extended standby rate at 60% of day rate, as we discuss long-term options with the operator. You'll recall we announced amendments to three of our secured credit facilities that have both Seadrill Limited and Seadrill Partners as guarantors. This forms part of a broader package of measures being undertaken by Seadrill Limited, our largest shareholder, and its banking group. We have consented to the amendments on the grounds that they are beneficial to Seadrill Partners. Seadrill Partners involvement in Seadrill Limited's financing plan will be limited to the three facilities where there is crossover."
  • Later, Mark Morris indicated that the West Capricorn will probably be terminated and warm stacked at the same rate as the West Capella.

Note: If the West Capricorn is terminated by BP (NYSE:BP), SDLP is entitled to a termination fee, of course. The question was asked to Mark Morris and he answered:

Yes we would, I think what you can read into this extended stand by rate if you will, just a little bit of background there, in February we began -- the operator began looking at its current work program for the rig and there wasn't too much in there in their current budget, so it went down to 98% of day rate. As we entered into a negotiation period since it was on an extended rate and based on the contract terms it dropped down to 60%. I am not going to get into exactly what the terminated rate is as we are in the middle of commercial discussions, but you can expect there to be a termination payment if it is in fact terminated. I stress, we're not there yet though.

Another interesting point clarified by John Roche, is about the covenants attached to SDLP credit facilities (3), where both Seadrill Ltd. and Seadrill Partners Ltd. are guarantors. However, these covenants relate to SDRL exclusively, and SDLP was asked to agree to the amendments.

On a final note, Mark Morris said that the dividends are quite secure despite two potential idle rigs. However, the decision about the cash distribution to shareholders will be analyzed on a quarter-to-quarter basis.

So I don't think we have any current plans to change it, but like all these things, if more rigs were to come off contract then we would have to look at it.

Stock analysis:

Click to enlarge

The stock price had an excellent run up in 2016, so far, due primarily to the oil price momentum. I believe the stock is now a little bit pricey, and it is still time to take some gain off the table. Not a big amount, but around 20% should be a safe move, especially before the West Capricorn termination becomes real. This assumes that you have a gain, of course.
However, SDLP presents a solid business model, and offers a very good cash distribution, relatively safe, assuming no more termination after the West Capricorn, which is still negotiated with BP.

Important Note: Do not forget to become one of my followers on SDLP and receive update regularly. Thank you.

Disclosure: I am/we are long SDLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a little amount as a long-term investment and trade regularly the stock.