It’s been a wild few years for investors in Seadrill Partners, LLC (NYSE:SDLP). The master limited partnership’s shares lost more than 90% of their value as oil prices plunged in 2014 and 2015. However, with oil and gas prices on the rise again, the offshore rig industry is starting to show signs of life. Major players Transocean (NYSE:RIG) and Ensco (NYSE:ESV) have seen shares rise more than 20% over the last six months.
So is this a sign that 2018 will be the best year yet for Seadrill Partners? Let’s take a closer look at the company — and its fleet — to find out.
Seadrill Partners’ status
Things are a bit uncertain for Seadrill Partners right now. Although it managed to disentangle its finances from the ailing Seadrill (NYSE:SDRL) in Q3 2017, the now-bankrupt parent still owns a 46.6% stake in Seadrill Partners. That position includes a direct 28.6% stake in the company, with an additional 18% consisting of subordinated units (assuming full conversion). Right now, nobody knows exactly what’s going to happen to that stake, and until we do, the company’s future is unclear.
On the flip side, in Q3 2017, Seadrill Partners resumed cash distributions to shareholders. The company even went so far as to retroactively pay investors $0.10 per share for each of Q1 2017 and Q2 2017, in addition to Q3. The payment seems to be on firm footing — at least for the time being.
The company posted a decent third quarter, in which both revenue and EPS were up sequentially but down year over year. Seadrill Partners has $845.3 million in cash on hand and plenty of available credit, so if oil prices continue to rise or hold steady, the company should remain in stable condition. Its average contract duration of 1.3 years (as of Nov. 21, 2017) sounds like a strong 2018 is already in the bag. But let’s look more closely into that number, because in this case it’s a little bit misleading.
The fleet status
We know how much money Seadrill Partners has been making as of Q3 2017, with eight of its 11 rigs operating. But the big question is how much money those rigs — and their idle brethren — will make in 2018. And at this point, that’s still an open question.
Using data from the company’s most recent Fleet Status Report, we see that two of Seadrill Partners’ 11 vessels (18.2%) are uncontracted, while four (36.4%) have contracts expiring in 2018, three have contracts expiring in 2019, and two have contracts expiring in 2020. That means that, unless the company signs additional contracts, more than half of its fleet will be idle before the end of this year.
That shouldn’t worry investors too much. Long-term rig contracts are hard to come by. Even giant Ensco, with its active fleet of 48 vessels, only has eight contracts that last beyond 2020. And 18.8% of Ensco’s active fleet is currently uncontracted, while 16% of peer Transocean’s active fleet is uncontracted, so Seadrill Partners is in line with its industry in that regard.
But what’s more worrisome for Seadrill Partners is the quality of its existing contracts.
Dayrates for vessels vary wildly depending on the type of vessel and how deep it can drill. The most expensive ultra-deepwater drillships command dayrates of between $400,000 and $620,000 per day.
The good news for Seadrill Partners is that its two longest-term contracts — the ones expiring in 2020 — are for these ultra-deepwater drillships. However, two of its other ultra-deepwater drillships have contracts expiring this year. And of its other currently contracted vessels, two are semi-submersible barges and one is a tender, which command dayrates well below industry average.
Transocean, on the other hand, has 13 active ultra-deepwater drillship contracts — in other words, half its fleet! Seven of those contracts last at least to 2020, including one $519,000-per-day contract that lasts until 2027. Ensco, too, has six ultra-deepwater drillships — about one-eighth of its fleet — under contract, including a monster $618,000-per-day contract that lasts until 2020. Of course, Transocean and Ensco are much larger companies than Seadrill Partners, but that doesn’t change the economic realities for Seadrill Partners’ investors.
If things go right for Seadrill Partners, 2018 is poised to be its best year yet. The company’s idle rig percentage is in line with its peers’, and with the offshore drilling industry on firmer footing than it has been in years, Seadrill Partners has a good chance of putting those idle rigs to work again. The company has successfully separated its finances from its bankrupt parent and has resumed unitholder distributions.
But something could go wrong and upend the company’s recent successes. Competitors Transocean and Ensco “stacked” a number of their rigs during the oil price downturn, meaning they are temporarily out of service. But if the industry begins heating up again, they could bring those rigs back online, which could hurt Seadrill Partners. Seadrill Partners is a small fish in a very big ocean, and that’s a risky position to be in. Plus, depending on what happens to bankrupt Seadrill’s 46.6% stake in Seadrill Partners, the company might not be around for much longer.
While 2018 is looking up for Seadrill Partners, all that uncertainty means investors should probably steer clear.