IPO Preview: Seadrill Partners

| About: Seadrill Partners, (SDLP)

Based in London, UK, Seadrill Partners (NYSE:SDLP) scheduled a $185 million IPO with a market capitalization of $869 million at a price range mid-point of $21 for Friday, October 19, 2012.

Four IPOs are scheduled for the week of October 22. The full IPO calendar is available here.

F-1A filed October 17, 2012.

Manager, Joint Managers: Citigroup; Morgan Stanley; Wells Fargo Securities.
Co Managers: Credit Suisse; Deutsche Bank Securities; RBC Capital Markets; ABN AMRO; BNP PARIBAS; DNB Markets.

SDLP is a $869 million market capitalization carve-out of Seadrill Limited (NYSE:SDRL), an offshore drilling rig company, which has a market capitalization of $18.7 billion. SDLP initially has four rigs, with the right of first refusal for two more tender rigs (see "Near term growth plan" below).

For the 12 months ended September 30, 2012, the projected distribution is 7.7%. SDRL incentive rights kick in at an 8.5% payout

Buy on the IPO. The parent, SDRL, pays about 8.5% in dividends. It looks like SDLP can get up to that rate based on its near-term growth plan, and there are tax advantages to the SDLP distributions (see "Federal tax considerations" below).

IPOdesktop believes SDRL should edge up in the IPO after market.

SDLP is a growth-oriented limited liability company recently formed by Seadrill Limited to own, operate and acquire offshore drilling rigs. The parent, SDRL, has a market capitalization of $18.7 billion.

Seadrill is one of the world's largest international offshore drilling contractors, and SDLP believes Seadrill will be motivated to facilitate SDLP's growth because of its significant ownership interest in SDLP.

SDLP's drilling rigs are under long-term contracts with major oil companies such as Chevron (NYSE:CVX), Total, BP (NYSE:BP) and ExxonMobil (NYSE:XOM) with an average remaining term of 4.1 years as of June 30, 2012.

SDLP intends to grow its position in the offshore drilling with a modern, technologically advanced fleet.

SDLP also intends to leverage the relationships, expertise and reputation of Seadrill to re-contract the fleet under long-term contracts, and to identify opportunities to expand the fleet through acquisitions.

SDLP is a carve-out of four drilling rigs from SDRL.

SDLP was formed in June 2012 as a Marshall Islands limited liability company to hold an interest in OPCO (the operating company) and its subsidiaries, which own and operate a fleet of offshore drilling rigs owned and operated by SDRL.

Historically, Seadrill Partners' LLC predecessor and its subsidiaries were operated as an integrated part of Seadrill. As such, Seadrill has provided general and corporate management services, and technical and commercial management services for OPCO, the operating company.

The combined net assets and results of operations of 100% ownership in each of two semi-submersible drilling rigs (the West Aquarius and the West Capricorn), one tender rig (the West Vencedor), and one ultra-deepwater drillship (the West Capella), are collectively referred to in the S-1 filing as the "Predecessor." Post-IPO, SDLP will have a 30% partnership interest in Operating subsidiaries for three rigs. The post-IPO organizational chart is a little complicated. You can view it here.

During the recent period of high utilization and high dayrates, industry participants have increased the supply of drilling rigs by ordering construction of new drilling rigs.

Historically, this has resulted in an over-supply of drilling rigs, and has caused a subsequent decline in utilization and dayrates when the drilling rigs have entered the market, sometimes for extended periods of time, until the new units have been absorbed into the active fleet.

According to ODS-Petrodata, the worldwide fleet of tender rigs, semi-submersible rigs and drillships consisted of 331 units, comprised of 33 tender rigs, 214 semi-submersible rigs and 84 drillships as of September 30, 2012.

As of September 30, 2012, an additional 12 tender rigs, 20 semi-submersible rigs and 75 drillships were under construction or on order, which would bring the total fleet to 438 units.

A relatively large number of the drilling rigs currently under construction have not been contracted for future work, which may intensify price competition as scheduled delivery dates occur and lead to a reduction in dayrates as the active fleet grows. Any further increase in construction of new units may increase the negative impact on dayrates and utilization.

For the 12 months ended September 30, 2013, forecast per common unit is $1.62, page F-1, page 65.

When all unit holders receive an aggregate distribution of $0.4456 (annualized $1.78, annualized 8.5%), then the holders of incentive distribution rights (initially, the Seadrill Member parent) will receive increasing percentages, up to 50%, of the cash distributed in excess of that amount.

SDLP can issue an unlimited number of additional units, including units that are senior to the common units in rights of distribution, liquidation and voting, on the terms and conditions determined by the board of directors, without the consent of unitholders.

SDLP intends to capitalize on opportunities to grow OPCO's (the operating company) and SDLP's fleet of drilling rigs through acquisitions of offshore drilling rigs from Seadrill, either by SDLP or by OPCO, and acquisitions of offshore drilling rigs from third parties.

SDLP will have opportunities to acquire additional interests in OPCO, to acquire certain of Seadrill's other drilling rigs with drilling contracts of five or more years, and to purchase the T-15 and the T-16 tender rigs.

SDLP will have a right of first offer to purchase additional interests in OPCO. In addition, SDLP will have the right to purchase the following two tender rigs from Seadrill, either directly or through OPCO, at any time within 24 months after their respective acceptance by their customers:

- T-15, a tender rig barge due to be completed in the first quarter of 2013, which is capable of drilling in water depths of up to 6,500 feet. The T-15 is expected to enter service in April 2013 with Chevron under a five-year drilling contract.

- T-16, a tender rig barge due to be completed in the first quarter of 2013, which is capable of drilling in water depths of up to 6,500 feet. The T-16 is expected to enter service in June 2013 with Chevron under a five-year drilling contract.

The West Aquarius, the West Capricorn, the West Capella and the West Vencedor commenced operations in 2009, 2012, 2009, and 2010, respectively. The first below three have a maximum capability of drilling in water depths of up to 10,000 feet, with a drill depth 35,000 ft.

OPCO's two semi-submersible rigs are 6th Generation and DP3 ultra-deepwater, with proven design and drilling technology. These rigs were built by experienced and highly reputable shipyards, and designed with a focus on performing safe and reliable operations with minimum impact to the environment. These rigs have technological advancements that promote the safety of their crews, protection of the environment, operational performance and drilling efficiency, allowing our customers to drill wells faster and in a safer manner than older, less capable drilling rigs.

West Aquarius. The West Aquarius is a dynamically positioned semi-submersible drilling rig capable of operating in harsh environments, such as offshore Norway and Canada.

West Capricorn. The West Capricorn is a dynamically positioned semi-submersible drilling rig built in 2011.

The West Capella is a 6th generation ultra-deepwater drillship of the Samsung 10,000 design built by Samsung Heavy Industries in 2008. The West Capella is a self-propelled dynamically positioned Class 3 drillship that is suitable for drilling in remote locations because of its mobility and large carrying capacity. The West Capella also contains a large storage area, high variable deck load and full dual drilling operation capabilities

Tender Rig
The West Vencedor is a tender rig that was built in 2010. The West Vencedor has an enhanced design as compared to older units that makes it capable of operating in harsher environments with higher air gap for mooring in deep water to enable it to work on tension leg platforms, which are vertically moored floating structures used for the offshore production of oil or gas, and spar platforms, which is a type of floating oil platform typically used in very deep waters.

The West Vencedor has the following specifications: max water depth 6,500. Max drill depth 35,000.

All of OPCO's drilling rigs operate under long-term contracts. As of September 30, 2012, the average remaining term was 4.1 years for OPCO's drilling rigs. The majority of these contracts have dayrates that are fixed over the contract term.

All of OPCO's long term contracts include escalation provisions. These provisions allow OPCO to adjust the dayrates based on stipulated cost increases, including wages, insurance and maintenance cost, however, because these escalations are normally performed on an annual basis.

If held until December 31, 2014, 20% of total cash received will constitute taxable income.

SDLP is organized as a limited liability company that has elected to be treated as a corporation for U.S. federal income tax purposes.

Consequently, all or a portion of the distributions investors receive from SDLP will constitute dividends for such purposes.

The remaining portion of such distributions will be treated first as a non-taxable return of capital to the extent of the tax basis in common units and, thereafter, as capital gain.

SDLP estimates that if investors hold the common units purchased in the IPO through the period ending December 31, 2014, the distributions received, on a cumulative basis, that will constitute dividends for U.S. federal income tax purposes will be less than 20% of the total cash distributions received during that period.

Assumed formation transactions
IPO formation transactions assumed for the financial forecast for the 12 months ending September 30, 2013 include the following:

SDLP will acquire a 30% limited partner interest in Seadrill Operating LP (which owns and operates 3 rigs) and a 100% interest in Seadrill Operating GP LLC, which holds the non-economic general partner interest in Seadrill Operating LP;

SDLP will acquire a 51% limited liability company interest in Seadrill Capricorn Holdings LLC; which owns and operates the West Capricom rig

SDLP will issue to Seadrill (the parent) 16,065,025 common units and 16,543,350 subordinated units, representing a 78.8% limited liability company interest in SDLP;

SDLP will issue to Seadrill Member LLC, a wholly owned subsidiary of Seadrill, the Seadrill Member interest, which is a non-economic limited liability company interest in SDLP, and all of SDLP's incentive distribution rights, which will entitle the Seadrill Member to increasing percentages of the cash SDLP distributes in excess of $0.4456 per unit per quarter; and

SDLP will issue 8,750,000 common units to the public in this offering, representing a 21.2% limited liability company interest in SDLP.

SDLP expects to receive net proceeds of $167.3 million from the sale of 8,750,000 common units at the price range mid-point of $21.

The proceeds are allocated to pay the parent, SDRL, for SDLP's acquisition of its interest in OPCO (the operating company).

In addition to the net proceeds from this IPO, the parent Seadrill will also receive the following:
- 16,065,025 common units and 16,543,350 subordinated units;
- the incentive distribution rights; and
- the Seadrill Member interest.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This SDLP] IPO report is based on a reading and analysis of SDLP's F-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

About this article:

Tagged: , , , Oil & Gas Drilling & Exploration, SA Submit, United Kingdom
Problem with this article? Please tell us. Disagree with this article? .