Author Topic: What's wrong with SDLP that I don't see?  (Read 8049 times)

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What's wrong with SDLP that I don't see?
« on: September 26, 2015, 07:04:59 AM »
Seadrill Partners LP (SDLP) pays out a $2.27 annual dividend.  But its share price has dropped from just over $13 in late July to just $9.20 at close of business this Friday.  That's a 30% drop in share price that brings SDLP's present dividend yield up to a mind boggling 24%.  Such a high dividend yield usually means that Mister Market expects that dividend to get cut or stopped.  But I don't see why that should be the case for SDLP.  What am I missing here?

Is it that SDLP's revenues are expected to drop big time going forward?  But SDLP has a $5.6 billion backlog in drilling contracts for 10 of its rigs that run an average of 3.3 years.  (One rig just went off contract and SDLP is seeking employment for it in Asia.)

Is it that SDLP's distributable cash flow is expected to dry up going forward?  But SDLP's present distributable cash flow to dividend ratio is a very healthy 1.53x, which should be maintained given that SDLP's revenue comes from contracts that would continue to deliver the same level of income.

Is it that SDLP has a debt maturity coming up that will wreck havoc with its balance sheet and cash flow?  But SDLP has no such debt maturities until well into 2017. And its present net income to interest cost cover ratio is a very strong 5.6x.

So... what is it?  Why should one expect SDLP's dividend payout to suffer -- and suffer soon?  Do you see why?

(The company's website is at  http://www.seadrillpartners.com.  And all the company data can be easily found in the website's reports tab and presentations tab.)


DaveR

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Re: What's wrong with SDLP that I don't see?
« Reply #1 on: September 26, 2015, 10:45:33 AM »
How much has the market dropped in the same time period? The sector and industry? What is SDLPs beta? What is the short/mid-term prospects for their industry and customers? Is SDLP just getting beat up over market conditions? How will management adjust? Keep a few more dollars on hand (so lower dividends) or do nothing? Over-reaction to market conditions?

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Re: What's wrong with SDLP that I don't see?
« Reply #2 on: September 26, 2015, 11:06:18 AM »
How much has the market dropped in the same time period? The sector and industry?... What is the short/mid-term prospects for their industry and customers? Is SDLP just getting beat up over market conditions?... Over-reaction to market conditions?

I am suspecting that SDLP's price drop is a consequence of and reaction to all of the above.  A case of throwing out the baby with the bath water.  But I am posting here to see if anyone wants to play devil's advocate and present a rationale for why SDLP should be so heavily discounted at this time.

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Re: What's wrong with SDLP that I don't see?
« Reply #3 on: September 26, 2015, 11:30:02 AM »
Is SDLP's revenue going to take a major fall?  Is that what is wrong that I haven't been able to see?

Well, I worked up some numbers and SDLP's revenues going forward look very strong to me.

SDLP has 11 drilling rigs it leases out on contract to oil companies at a daily use rate.  One rig is idle right now.  The other 10 are contracted out to Chevron, BP, Exxon, Total and Tullow.  So SDLP's customers are certainly solid.

SDLP's contracts have an average 3.3 years to run and represent a $5.6 Billion revenue backlog.  That's a lot.  And companies like BP and Exxon don't default on their contracts, either.

Setting such a default aside, I've worked up some now and future revenue comparisons to help me assess SDLP's future revenue prospects.

The base case is SDLP's recent daily contract revenue including the contract rate revenue from the rig that has just gone idle (West Vencedor).  That revenue is/was $2.394 million a day.

Since the West Vencedor went idle, SDLP has added an 11th rig (West Polaris) contracted to Exxon, and had BP exercise the contract termination clause on the West Sirius -- which termination clause will generate reduced payments to SDLP for the remainder of that contract's term (which expires in July 2017).  Taking all of that into account, SDLP's daily revenue going forward is $2.410 million a day.  Which is more than the $2.394 million base case.

No other rig contracts are due to expire until April 2017.  So where is the revenue panic?  And if that's not the reason for SDLP's big recent share price drop, what other company-specific reason is there for it?

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Re: What's wrong with SDLP that I don't see?
« Reply #4 on: September 26, 2015, 05:21:52 PM »
Could SDLP's dividend paying capability be seriously impacted going forward?  Certainly, that would go a long way towards explaining why the stock's share price has plunged 30% or so in just a few weeks.  But I find that proposition a bit dubious.  Or, at the very least, I have to judge the price drop to be a big overreaction to that possibility.

Here's my look at some worst-case scenario numbers.

In reply #4 of this thread, I arrived at a going-forward daily revenue for SDLP of $2.410 million  a day.  That revenue level would more than support the company's present $2.27 annual dividend.  In fact, it could support a dividend in the range of $3.50 or so a year.  But what if the 2 rigs coming off contract in April of 2017 fail to secure new contracts (because the world oil supply/demand situation has not improved from what it is today)?  What then of the dividend if SDLP has to limp along with 3 idle rigs (because in this scenario I have also kept West Vencedor from ever getting recontracted either)?

If those 3 rigs remained unemployed, SDLP's daily revenue would be reduced by $548,000.  On a quarterly basis, this would result -- after April 2017 -- in a worst case drop in distributable cash flow from the present $85 million to a much lower $36 million.  SDLP's dividend would then have to be reduced to $1.49 a year or less.

That's a big 35% drop in the dividend.  And it does track closely with the 30% drop in the stock's share price recently experienced.  But, even if that dividend drop did happen (more than 18 months from now), SDLP's annual dividend yield at today's $9.22 share price would still be a hefty 16%.  And there's nothing wrong with that!

So, I have to keep asking the question: what is wrong with SDLP that I am  not seeing?  Because even factoring in the company's annual dividend yield at "only" 16%, I would still consider it a buy.

Any thoughts?

beltim

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Re: What's wrong with SDLP that I don't see?
« Reply #5 on: September 26, 2015, 05:41:07 PM »
BP exercise the contract termination clause on the West Sirius -- which termination clause will generate reduced payments to SDLP for the remainder of that contract's term

What are the termination clauses on the other rigs?  The overall rig utilization rate in the industry is only in the mid 50s percentage, which is driving day rates way down: http://www.rigzone.com/data/utilization_trends.asp

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Re: What's wrong with SDLP that I don't see?
« Reply #6 on: September 26, 2015, 06:50:57 PM »
BP exercise the contract termination clause on the West Sirius -- which termination clause will generate reduced payments to SDLP for the remainder of that contract's term

What are the termination clauses on the other rigs?  The overall rig utilization rate in the industry is only in the mid 50s percentage, which is driving day rates way down: http://www.rigzone.com/data/utilization_trends.asp

Over the last 3 quarters, SDLP's utilization rate has been improving from 90% to 93% to 97%.  For this coming quarter, I calculate the utilization rate would be around 91%, if the West Vencedor remains idle throughout the quarter.

The termination clause on the West Sirius requires BP to pay SDLP $151,000 a day (instead of $273,000) from now until the contract's original expiration date in July 2017.  I have no way of KNOWING what the termination clauses are for the other rigs, but they are probably very similar.  I also don't know whether BP is obligated to keep paying that termination fee even if the West Sirius gets contracted out to some other oil company.  (Wouldn't that be a kick in the pants?!)

beltim

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Re: What's wrong with SDLP that I don't see?
« Reply #7 on: September 26, 2015, 06:55:13 PM »
BP exercise the contract termination clause on the West Sirius -- which termination clause will generate reduced payments to SDLP for the remainder of that contract's term

What are the termination clauses on the other rigs?  The overall rig utilization rate in the industry is only in the mid 50s percentage, which is driving day rates way down: http://www.rigzone.com/data/utilization_trends.asp

Over the last 3 quarters, SDLP's utilization rate has been improving from 90% to 93% to 97%.  For this coming quarter, I calculate the utilization rate would be around 91%, if the West Vencedor remains idle throughout the quarter.

The termination clause on the West Sirius requires BP to pay SDLP $151,000 a day (instead of $273,000) from now until the contract's original expiration date in July 2017.  I have no way of KNOWING what the termination clauses are for the other rigs, but they are probably very similar.  I also don't know whether BP is obligated to keep paying that termination fee even if the West Sirius gets contracted out to some other oil company.  (Wouldn't that be a kick in the pants?!)

You should be able to find if there are other termination clauses from the investor relations site on the company web site, or in its SEC filings.

Perhaps the question you should ask is: why does that company have utilizations rates that are 80% higher than the industry as a whole?  Is that sustainable?  My guess is the answer is no, and the market is pricing in an eventual return to industry-average utilization rates and day rates.

But again, I don't follow this company.  I'm just providing general guidelines.  And even with all of that, it might still be a good investment - I haven't run that calculation, but I would encourage you to do so.

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Re: What's wrong with SDLP that I don't see?
« Reply #8 on: September 27, 2015, 06:57:48 AM »
... The overall rig utilization rate in the industry is only in the mid 50s percentage, which is driving day rates way down: http://www.rigzone.com/data/utilization_trends.asp

Over the last 3 quarters, SDLP's utilization rate has been improving from 90% to 93% to 97%.  For this coming quarter, I calculate the utilization rate would be around 91%, if the West Vencedor remains idle throughout the quarter.
...

...Perhaps the question you should ask is: why does that company have utilizations rates that are 80% higher than the industry as a whole? Is that sustainable?  My guess is the answer is no, and the market is pricing in an eventual return to industry-average utilization rates and day rates... I haven't run that calculation, but I would encourage you to do so.

To answer first your question (in italics above), SDLP's much higher than the industry's utilization rate results from SDLP's contract-based business model, the nature of their drilling rigs, and who its customers are.

SDLP has (now) 11 very modern, very advanced ocean drilling rigs, ships and tenders.  Offshore drilling equipment is not all created equal.  SDLP's gear, by virtue of its depth capabilities, newness and efficiency of operation give it a market/demand advantage.

SDLP only does business on longer range leasing contracts.  These contracts can and do run for 5 years or more sometimes.  At the time last year that the oil demand/supply war was launched by the Saudis, SDLP had ALL its rigs on these long term contracts.  This means that current rig demand for new drilling projects does not have a present effect on SDLP's utilization rate.

SDLP's customers are BP, Chevron, Exxon Mobil, Total and Tullow.  These are all deep-pocketed, longterm planning concerns that are conducting drilling projects now to have new supplies of oil to sell 10 years from now.  Those drilling projects now in progress are not going to be called off (something with huge cost consequences of its own) just because the price of oil is down at the moment.  And these companies don't renege or default on contracts.

To answer your second question (in bold) above, SDLP's high utilization rate is sustainable for the next 2 years and then -- if the present oil demand/supply issues still persist -- will gradually deteriorate.  Based on the contract expiration dates for SDLP's rigs -- and assuming a complete and total failure on the part of SDLP at recontracting any of its rigs -- I would calculate the company's utilization rate to stand at 91% through the first quarter of 2017, then go to 64% through the third quarter of 2018, then go to 34%.

The very unrealistic part about those dismal utilization rate projections is that they assume that over the next 3 years there will be NO resolution to the present oil demand/supply imbalance, that SDLP will not find employment for its rigs at ANY price, and that major integrated international oil companies will stop planning ahead for their futures.  I cannot buy the likelihood of such a perfect storm.  Do you think I should?  If so, why?

index

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Re: What's wrong with SDLP that I don't see?
« Reply #9 on: September 27, 2015, 08:21:28 AM »
An investment in sdrl depends on oil going back to ~$100/barrel over the next 3 to 5 years. No one is going to sign new deep water drilling contracts unless this happens. Are you a gambling man?

Also, sdrl eliminated the dividend... Might want to read the companies annuals and not yahoo finance.

Which managers are buying during this great opportunity? Goose egg.

Face punch- Go back to index funds.

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Re: What's wrong with SDLP that I don't see?
« Reply #10 on: September 27, 2015, 09:29:26 AM »
An investment in sdrl depends on oil going back to ~$100/barrel over the next 3 to 5 years. No one is going to sign new deep water drilling contracts unless this happens. Are you a gambling man?

Also, sdrl eliminated the dividend... Might want to read the companies annuals and not yahoo finance.

Which managers are buying during this great opportunity? Goose egg.

Face punch- Go back to index funds.

You MISREAD here!!!  I am NOT talking about Seadrill Limited (SDRL).  I am talking about SDLP (Seadrill PARTNERS).

And where did you think I got all that financial detail?? The funny papers??

YOU better be more careful about your reading... thank you very much!

(Face punch right back at you!)

beltim

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Re: What's wrong with SDLP that I don't see?
« Reply #11 on: September 27, 2015, 09:40:28 AM »
The very unrealistic part about those dismal utilization rate projections is that they assume that over the next 3 years there will be NO resolution to the present oil demand/supply imbalance, that SDLP will not find employment for its rigs at ANY price, and that major integrated international oil companies will stop planning ahead for their futures.  I cannot buy the likelihood of such a perfect storm.  Do you think I should?  If so, why?

Most oil industry stocks would be a hugely profitable investment if, in the next 2-3 years, the price of oil returns to $100 per barrel.  That certainly applies to any surviving offshore drillers.  But what about $80, or $70, or $60 per barrel? 

As for the find employment at ANY price, that's not quite accurate.  SDLP will only hire out its rigs if it can run them at a profit.  I don't know what that level is, but it certainly depends on the price of oil, as well as competition.  If I were you, I would run the numbers assuming SDLP is able to replace its contracts at current day rates and current utilization rates, and use that as your base case.

I'm not saying that this is a bad investment - I certainly have energy investments that would benefit from higher oil prices.  I'm just brainstorming a few reasons why SDLP is trading lower than you think it should.  And, I think the exercise of figuring out meaningful pseudo-worst case scenarios is good for every investor.

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Re: What's wrong with SDLP that I don't see?
« Reply #12 on: September 27, 2015, 11:45:12 AM »
Who owns SDLP stock and does that mean anything as far as an evaluation of SDLP goes?

In reply #9 of this thread, a responder brought into the discussion another company: Seadrill LIMITED (SDRL).  This is not just any other company; this is SDLP's PARENT, which owns 47% of SDLP stock.  So Seadrill LIMITED management could have a lot of influence on what SDLP decides to do going forward regarding the dividend.  (More on this in a paragraph or 2.)

Of the existing 91 million shares of SDLP, Seadrill LIMITED owns about 43 million, some 25 million are owned by institutional investors and another 20 million shares are held by mutual funds.  Which just leaves 4 million shares (a little over 4% of the total) in the hands of individual investors like me.  The conclusion here is, in my view, that SDLP is a stock overwhelmingly held by professional investors. (Not that those people always know what they are doing.)

Getting back to Seadrill LIMITED's ownership of SDLP, that ownership is -- again in my view -- a strong influence going forward to maintain the SDLP dividend.  Here's why.

Not too long ago, Seadrill LIMITED eliminated its own dividend.  It did this even though it had/has plenty of money to keep paying it out.  But Seadrill LIMITED made a strategic decision to redirect that cash towards the repayment and lowering of its debt.  Seadrill LIMITED wants cash to pay down its debt.  And the only way Seadrill LIMITED can get cash from SDLP is for SDLP to keep paying its dividend so that Seadrill LIMITED can collect it on the 43 million shares of SDLP stock that it owns.  So management at Seadrill LIMITED is going to push/help/influence in whatever way it can to keep SDLP paying that dividend.

This takes away for me one worry that I had in the back of my head:  that SDLP would be pushed into following in its parent's (Seadrill Limited's) dividend eliminating footsteps.

Now here is the thing: shouldn't the same thing be "obvious" to the institutional and mutual fund holders of SDLP stock?  I would think it is, and that therefore "the Seadrill LIMITED question" is not the reason why the SDLP share price has dropped so much and its dividend yield conversely made to spike up so much.

So... why?  I'm still looking for the answer that makes sense to me.

Any more thoughts?

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Re: What's wrong with SDLP that I don't see?
« Reply #13 on: September 27, 2015, 11:52:03 AM »
It seems that there are always a handful of mining or petro stocks that have dividends in the 20-40% range.  Without knowing anything at all about this particular investment, those rates are usually the result of a company closing down or selling assets, like the dividend rates skyrockets because they're returning everyone's capital before going out of business.

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Re: What's wrong with SDLP that I don't see?
« Reply #14 on: September 27, 2015, 01:17:37 PM »
Who owns SDLP stock and does that mean anything as far as an evaluation of SDLP goes?

In reply #9 of this thread, a responder brought into the discussion another company: Seadrill LIMITED (SDRL).  This is not just any other company; this is SDLP's PARENT, which owns 47% of SDLP stock.  So Seadrill LIMITED management could have a lot of influence on what SDLP decides to do going forward regarding the dividend.  (More on this in a paragraph or 2.)

Of the existing 91 million shares of SDLP, Seadrill LIMITED owns about 43 million, some 25 million are owned by institutional investors and another 20 million shares are held by mutual funds.  Which just leaves 4 million shares (a little over 4% of the total) in the hands of individual investors like me.  The conclusion here is, in my view, that SDLP is a stock overwhelmingly held by professional investors. (Not that those people always know what they are doing.)

Getting back to Seadrill LIMITED's ownership of SDLP, that ownership is -- again in my view -- a strong influence going forward to maintain the SDLP dividend.  Here's why.

Not too long ago, Seadrill LIMITED eliminated its own dividend.  It did this even though it had/has plenty of money to keep paying it out.  But Seadrill LIMITED made a strategic decision to redirect that cash towards the repayment and lowering of its debt.  Seadrill LIMITED wants cash to pay down its debt.  And the only way Seadrill LIMITED can get cash from SDLP is for SDLP to keep paying its dividend so that Seadrill LIMITED can collect it on the 43 million shares of SDLP stock that it owns.  So management at Seadrill LIMITED is going to push/help/influence in whatever way it can to keep SDLP paying that dividend.

This takes away for me one worry that I had in the back of my head:  that SDLP would be pushed into following in its parent's (Seadrill Limited's) dividend eliminating footsteps.

Now here is the thing: shouldn't the same thing be "obvious" to the institutional and mutual fund holders of SDLP stock?  I would think it is, and that therefore "the Seadrill LIMITED question" is not the reason why the SDLP share price has dropped so much and its dividend yield conversely made to spike up so much.

So... why?  I'm still looking for the answer that makes sense to me.

Any more thoughts?

That's not the only way Seadrill can get cash from SDLP. In fact, the other method was recently used....sell stuff to the LP. They moved a couple hundred million from the LP to Seadrill and a few hundred million in debt the other direction. SDLP doesn't even keep all the profits as Seadrill gets part of the day rate on a rig they don't even own anymore (at least not directly).

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Re: What's wrong with SDLP that I don't see?
« Reply #15 on: September 28, 2015, 09:53:01 AM »
Sorry I missed you were talking about the LP.

Dividends are not the only way for SDRL to use SDLP as an ATM machine. The Master partner (SDRL) can dictate the terms the LP (SDLP) receives when they acquire a new rig. Take the latest sale for instance:

http://www.seadrill.com/investor-relations/news/pr-story.aspx?ResultPageURL=http://cws.huginonline.com/S/135817/PR/201506/1929042.xml

SDLP is paying $750M ($204M cash + $336M Debt + $34M buyers option + $176M Excess day rate) for a rig with a max day rate of 450K until 2018 because SDRL added a clause that the master partner gets any day rate in excess of 450k per day. After 2018 SDRL gets 50% of any day rate exceeding 450k.

Why is this such a bad deal for SDLP? Because the drill ship, the West Polaris, was bought by SDRL is 2012 from Ship Finance Co. (SFL) for $456M (which consisted of $108M cash and $348M in debt) (http://www.rigzone.com/news/oil_gas/a/136565/Seadrill_Acquires_West_Polaris_Drillship_from_Ship_Finance_International). Keep in mind the Rig has depreciated ~17M per year since 2012. So SDRL is selling an asset they have on their books for $397M to their LP for $750M. In addition to this, they get 50% of the day rate above 450K until 2025??? Just for a reference, these rigs cost ~550-600M new from the ship yard. So SDLP could buy a new rig and keep the entire dayrate for 150M less than they are paying SDLR.

This has been repeated over and over with SDLP paying SDRL 50% to 100% the price of the asset.

Also, keep in mind SDRL gets 50% of SDLP's distributive cash flow over $3/share. Doesn't affect SDLP yet, but it will if SDRL keeps dumping assets on SDLP. 

So lets say you don't care that SDLP is overpaying for assets from the parent (this is just used to show they can cut the dividend and still make a 50-100% return on whatever they transfer to the LP). SDLP is still very leveraged to oil prices in that if the day rate falls SDLP's cash flow will get crushed. For simplification, lets assume all 11 ships in their fleet are the same and get the same day rate. So:

Yearly per rig it is:

$227M net income divided by 11 Rigs is 20.6M per Rig. 

Costs associated with a rig that fixed regardless if the rig is working are Interest, and other opex is fixed - 336M/year or ~30M/yr per rig.

So in 2017 when their first rig comes off contract. If they can't find work because oil is <$70/barrel net income drops not by 20.6M but by 50.6M (expense + lost income). This brings net income for the company to: $176M which is a reduction of 22% from one rig being unemployed.

Now a more likely scenario is they have to take a hit on the day rate. Right now, they make about: 1.54B/11 ~$140M/rig with $120M/rig in expenses and payments to non-controlling interests (SDRL). A 20% decrease in day rate means that rig is only taking in $112M. A lot of the costs- tax, payments to non controlling interests, are variable so you would expect the 120M/rig in expenses to adjust but it won't be a 1:1 reduction in costs because there are a lot of fixed operating costs. So even a 20% reduction in day rate or utilization can affects the distributive cash flow by 1.2c per 1M in reduction.

The problem is SDLP is running on a knifes edge because they are overpaying for the assets from SDRL. 

       

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Re: What's wrong with SDLP that I don't see?
« Reply #16 on: September 28, 2015, 03:12:38 PM »

... Not too long ago, Seadrill LIMITED eliminated its own dividend.  It did this even though it had/has plenty of money to keep paying it out.  But Seadrill LIMITED made a strategic decision to redirect that cash towards the repayment and lowering of its debt.  Seadrill LIMITED wants cash to pay down its debt.  And the only way Seadrill LIMITED can get cash from SDLP is for SDLP to keep paying its dividend so that Seadrill LIMITED can collect it on the 43 million shares of SDLP stock that it owns.  So management at Seadrill LIMITED is going to push/help/influence in whatever way it can to keep SDLP paying that dividend...

That's not the only way Seadrill can get cash from SDLP. In fact, the other method was recently used....sell stuff to the LP. They moved a couple hundred million from the LP to Seadrill and a few hundred million in debt the other direction. SDLP doesn't even keep all the profits as Seadrill gets part of the day rate on a rig they don't even own anymore (at least not directly).

That "stuff" you point out was sold to SDLP by Seadrill LIMITED was the West Polaris drilling rig.  And it does look like it was a GREAT deal for Seadrill LIMITED.  But it was not a bad deal for SDLP.  At least, not bad in my view.

SDLP got a drilling rig which had a net book value of $564 million on Seadrill LIMITED's books.  To get it, SDLP forked over $204 million in cash and assumed a $366 million mortgage on the rig.  So SDLP put out a nominal $570 million for the rig.  But SDLP didn't just get the rig.  It also got, with the rig, a drilling contract with ExxonMobil that still has 30 more months to run.  And that's worth something, for sure -- particularly in this market.

Under that contract, SDLP will get $450,000 a day from now until March 2018.  That adds up to approximately $405 million in revenues.  And that's a good deal for SDLP.

The part of the overall deal that's great for Seadrill LIMITED -- and which I do admit is a bit much -- is that, under that same drilling contract,  Seadrill LIMITED will get $203,000 a day from ExxonMobil even though Seadrill LIMITED no longer owns the rig.   Yep, that's a sweetheart deal, all right.

But it doesn't change the fact, in my view at least, that SDLP got a good deal.  Because acquiring drilling rigs -- from whomever -- to put out on drilling contracts is what SDLP does.  And pulling in $405 million in revenue over 30 months from a $204 million cash asset outlay sounds like a good deal to me.

So, I'm still looking for SDLP's Achilles heel.  And it might be hiding in the company's debt structure.  I'll soon see.


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Re: What's wrong with SDLP that I don't see?
« Reply #17 on: September 30, 2015, 12:08:20 PM »
Honestly I only skimmed the 20-F and recent press releases. I haven't done nearly enough research to know whether SDLP investors got a good deal or not from the West Polaris deal. I was simply trying to point out that the Seadrill had asset sales as another option to get cash from the LP.

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Re: What's wrong with SDLP that I don't see?
« Reply #18 on: September 30, 2015, 12:24:08 PM »
You seem to be saying SDLP will behave differently than SDRL.

Why do you think that will be true when these two stocks have been very highly correlated in the past (as they should be given the relationship)?

https://www.google.com/finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1443643200000&chddm=98532&chls=IntervalBasedLine&cmpto=NYSE%3ASDRL&cmptdms=0&q=NYSE%3ASDLP&ntsp=0&fct=big&ei=8yYMVum8GMK-jAHdxK4g

The oil majors are abandoning the Gulf of Mexico right now.  If you don't think they will cancel drilling contracts at these prices you haven't been paying attention.

http://fuelfix.com/blog/2015/07/16/conocophillips-to-scale-back-deep-water-exploration-and-gulf-of-mexico-programs/#34117101=0

Quote
HOUSTON — ConocoPhillips said Thursday it would cut spending on its Gulf of Mexico and deep-water exploration programs, as the driller continues to tighten its belt amid lower prices.

Houston-based ConocoPhillips has already trimmed its 2015-2017 capital spending program from an initial $16 billion to about $11.5 billion per year after crude oil prices fell last year. Of that $11.5 billion, less than $1.8 billion was dedicated to exploration.

ConocoPhillips spokesman Daren Beaudo said in an emailed statement the company wasn’t detailing the magnitude of the cut to its deep-water spending at this time, or the number of layoffs that may accompany it. ConocoPhillips reports is second-quarter 2015 earnings on July 30.

The company did say it had terminated a three-year drilling contract with the Ensco Plc DS-9 deep-water drill ship, which was scheduled to begin drilling in the Gulf in late 2015.

The move will require ConocoPhillips to pay Ensco monthly termination fees equal to the about $550,000-per-day operating rate for two years, according to a statement from Ensco. Those fees could be reduced if Ensco is able to re-contract the rig within that time period.


“Our decision to reduce spending in deepwater will further increase our capital flexibility and reduce expenses without impacting our growth targets,” said ConocoPhillips CEO and Chairman Ryan Lance, in a written statement. “This strengthens our ability to achieve cash flow neutrality in 2017 even if lower commodity prices persist.”

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Re: What's wrong with SDLP that I don't see?
« Reply #19 on: October 01, 2015, 02:47:57 PM »
You seem to be saying SDLP will behave differently than SDRL.

Why do you think that will be true when these two stocks have been very highly correlated in the past (as they should be given the relationship)?

https://www.google.com/finance?chdnp=0&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1443643200000&chddm=98532&chls=IntervalBasedLine&cmpto=NYSE%3ASDRL&cmptdms=0&q=NYSE%3ASDLP&ntsp=0&fct=big&ei=8yYMVum8GMK-jAHdxK4g

The oil majors are abandoning the Gulf of Mexico right now.  If you don't think they will cancel drilling contracts at these prices you haven't been paying attention.

http://fuelfix.com/blog/2015/07/16/conocophillips-to-scale-back-deep-water-exploration-and-gulf-of-mexico-programs/#34117101=0

Based on the above reply post, I took another harder look at "the Seadrill LIMITED" question with regards to SDLP. And, yes, I DO expect SDLP to behave differently than SDRL.  The companyNot whatever the market may be doing on any given day regarding the stock prices.

The revenue picture going forward is going to be very different for the 2 companies.  SDLP will continue to collect hefty day rates on 10 of its 11 rigs (a 91% economic utilization rate) until at least April 2017.  In contrast, Seadrill LIMITED, by the end of this next quarter, will only be collecting revenue on 28 of its 38 rigs (a 74% economic utilization rate) because, in addition to the 4 rigs that already are unemployed, 6 more of its rigs will be going idle after completing their contracts.

The cash drain from rig unemployment picture going forward will be tremendously different for both companies.  Between now and April 2017, SDLP will have only 1 of its 11 rigs without a work contract (assuming the worst case scenario that no employment is in fact obtained for the West Vencedor between now and then).  Seadrill LIMITED, on the other hand, will be scrambling to find work for the 10 existing rigs that will have no contract by the end of this coming quarter PLUS another fifteen (15!!) newbuild rigs that will be coming off the shipyards between now and April 2017. 

Financing requirements going forward will therefore also be very different for the 2 companies.  Seadrill LIMITED will have to find an extra $4.3 billion in cash or debt to pay for those newbuilds, even as its EBITDA progressively shrinks... something SDLP won't have to deal with at all.

(And please note that any drilling rig contracts that may get cancelled still obligate the cancelling oil company to make daily use rate payments until the end of the contract.)

So, as I see it, it makes no sense to judge SDLP by whatever troubles are awaiting Seadrill LIMITED.  And if the stock market does do that, it may be presenting an opportunity.  Maybe.  I think it all depends now on SDLP's own longterm debt picture and the particulars of its loan covenants.  Which I will be reviewing next.

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Re: What's wrong with SDLP that I don't see?
« Reply #20 on: October 01, 2015, 04:18:03 PM »

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Re: What's wrong with SDLP that I don't see?
« Reply #21 on: October 01, 2015, 09:06:01 PM »
Here's a good article directly addressing your concerns:
http://seekingalpha.com/article/3529626-how-has-seadrill-partners-maintained-its-distribution

Thanks loads for that.  Very informative.  A big takeaway from the article is that SDLP should be expected to pay its annual $2.27 dividend for the next 6 quarters, and then its ability to continue doing so (at its current level) may be highly compromised if oil prices remain below $50 a barrel.

Price of SDLP stock today: $9.25.

(Where is my crystal ball??)

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Re: What's wrong with SDLP that I don't see?
« Reply #22 on: October 01, 2015, 10:22:54 PM »
You are getting caught by a cyclical company. The long contracts at the top of the cycle lag on the way down, but they will lag on the way up to. Day rates and contacts wont magically come back when/if oil gets back to $70. The majors will have to see some strong support it will stay there before they will make huge capital investments in deep water. There is a good chance the market is efficient on this. You will pocket a few dollars in dividends then watch them dry up.

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Re: What's wrong with SDLP that I don't see?
« Reply #23 on: October 02, 2015, 09:03:22 AM »
The one big problem I see from reading that article (and I think why he doesn't recommend buying SDLP) is that the day they announce they are reducing their dividend, the stock will plummet.  Go look at SDRL on November 26, 2014 when they announced they were suspending their dividend.  Down 19% in one day and down 50% in less than a month!  http://finance.yahoo.com/echarts?s=SDRL+Interactive#{"allowChartStacking":true}

I don't want to be sitting with SDLP shares that day. 

They likely will continue for a few quarters but after that I think it gets much more risky with more risk of them (SDRL and SDLP) doing some "creative" transfers to help SDRL out and hurting SDLP.

Quote
Conclusion

If experience is any indication, most of these levered income energy plays will slash dividends well before any impasse occurs. That's why I recommend sitting on the sidelines with Seadrill Partners. It looks as if Seadrill Partners has taken a 'wait and see' approach, and the partnership has plenty of time to wait. I suspect that Seadrill Partners should be able to continue its distribution for another six quarters. If Brent Crude is going to hover around $50 for the next few years, then the partnership will invariably have to slash the distribution.

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Re: What's wrong with SDLP that I don't see?
« Reply #24 on: October 10, 2015, 09:18:39 AM »
... So, as I see it, it makes no sense to judge SDLP by whatever troubles are awaiting Seadrill LIMITED.  And if the stock market does do that, it may be presenting an opportunity.  Maybe.  I think it all depends now on SDLP's own longterm debt picture and the particulars of its loan covenants.  Which I will be reviewing next.

I still think that SDLP's fortunes are not joined at the hip to Seadrill LIMITED's much more troublesome situation.  That being said, I did go ahead and dig into SDLP's longterm debt picture.

SDLP's longterm debt is overwhelmingly structured as individual mortgages secured by specific rigs or groups of rigs.  That's not a negative in itself, but there is a potential time bomb lurking in the loan covenants. Those covenants require that a certain ratio (mostly 135%) be maintained between the market value of the rigs and the outstanding loan amount.  And that ratio is recalculated every 6 months (next coming up in October) to adjust rig market values based on existing market conditions at the time of the recalculation.  And I think it's obvious that this coming recalculation is not going to go in SDLP's favor.  Whether that minimum 135% value to loan ratio is maintained is an open question.  If it isn't, SDLP would have to reduce/suspend dividends at least long enough to pay down the loan balances in question in order to get back up to that 135% ratio.

And there's the risk I was not seeing to begin with.  Now, that doesn't mean this makes SDLP a "don't buy" for me.  It means that I should factor that risk into the size of  my buy.

So I proceeded accordingly...

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Re: What's wrong with SDLP that I don't see?
« Reply #25 on: October 10, 2015, 09:32:40 AM »
I did go ahead and make an SDLP buy.  My standard procedure is to make a buy equal to 5% of my total portfolio book value (which spreads my risk across 20 different positions).  But because of the loan covenant risk I discussed in the reply above, I decided to just go with an investment equal to 1.5% of my  total portfolio book value.

So, between September 28 and September 29 I built up that position at an average share price of $9.11.

Then Mr. Market pulled one of its "gotcha!" surprises.  Oil prices spiked up -- and so did the price of SDLP shares.

Since I always prefer to "book my dividends in advance" whenever I can by taking profit on a sale, I went ahead and sold my SDLP position on October 7th at an average $10.98 per share.

I took the 20.5% realized gain on the sale and put it in my pocket.  I'll keep capital available to buy back into SDLP when the price slides back down again, which it should (right?!!) either by the end of October and the announcement of the loan ratio recalculation results, or the next time (soon??) that oil prices hit a piece of bad news and slide back down.

And that, folks, is the story.

(Thanks, everyone, for all your devil's advocate feedback.  It was super helpful.)