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.xmlSDLP 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.