Seadrill (NYSE:SDRL) restructuring has been the main concern for Seadrill Partners (NYSE:SDLP) shareholders. Initially, both companies stated that Seadrill Partners is not part of Seadrill restructuring. However, both Seadrill and Seadrill Partners reported earnings today, and their language has changed.
Seadrill Partners indicated that Seadrill restructuring impacted it as both companies were obligors under three Seadrill Partners secured credit facilities, related to the West Vela, West Polaris, T-15 and T-16. Seadrill restructuring could cause events of default under these facilities in certain circumstances.
The company stated that it was working to insulate its debt from events of default. To accomplish this task, Seadrill Partners is seeking to remove Seadrill as guarantor under each of the three facilities. Also, the company wants to extend the maturity of each of the three facilities by 2.5 years.
Seadrill Partners also gave comment that for some reason did not influence the stock's trading as of now:
"We are targeting extending these amendments on a consensual basis prior to or concurrent with the main Seadrill Limited restructuring agreement. In the event a consensual agreement cannot be reached, we are preparing various contingency plans that may be needed to preserve value and continue operations including seeking waivers of cross default with Seadrill Limited and potential schemes of arrangement and chapter 11 proceedings".
I think that this is a worrisome statement for Seadrill Partners' shareholders. I see two problems. First, Seadrill Partners may not reach agreement with creditors and may find itself dragged in Seadrill's restructuring. The restructuring process obviously was more complicated than all parties expected, and all scenarios are possible before April 30, 2017.
The second problem is that Seadrill Partners will be seeking to amend credit facilities. In this situation, the company must show good will to creditors. I expect that the company will eliminate its distribution completely should it be able to reach an agreement with creditors.
Siphoning precious cash out of the company is definitely not in the interest of creditors. They are in the driver's seat now as if they don't agree to Seadrill Partners' proposal, cross default provisions will be activated.
It is a lose-lose situation. Either the company finds itself a part of Seadrill restructuring (bad for Seadrill Partners units) or it eliminates distribution (also bad for Seadrill Partners units). Seadrill Partners units have been a good performer this year as the market assumed that the company was insulated from Seadrill restructuring. It is obviously not the case now.
As I'm writing this, Seadrill Partner's units are even higher than the close of the previous day. I don't know why the market chose to ignore the new data, but it helps investors to sell their positions at a decent price. Once the market realizes that all available options will likely lead to the downside in Seadrill Partners, its units will have significant downside.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SDLP over the next 72 hours.
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.