Seadrill Partners LLC (NYSE:SDLP) up 4.4% here’s why $SDLP

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Seadrill Partners LLC (NYSE:SDLP) jumped 4.4% following the release of its 2015 annual report, for the 12 months ending December 2015.

Seadrill reported  a 29% increase in revenue of $1.7 billion, up from $1.3 billion for the previous corresponding period (pcp). Net profit was up 79% to $257 million from $138 million for the pcp.

This may be the start of a positive turnaround in what’s been a tough 12 months for the share price of Seadrill, falling 54% in that time.

(Source: Google Finance)

About Seadrill

Seadrill Partners LLC owns, operates and acquires offshore drilling rigs.

The Company’s drilling units are under long-term contracts with oil companies, such as Chevron, BP, ExxonMobil and Tullow. The Company provides services to these customers with its fleet. The Company’s fleet consists of the semi-submersible West Aquarius, West Capricorn, West Leo, West Sirius; the semi-tender West Vencedor; the tender rig T-15 and T-16; the drillship West Auriga, West Vela, and West Capella. The Company provides drilling services on a dayrate contract basis.

The main reasons for the increase in 2015 revenues included:

Contract Revenues

Contract revenues increased by $300.9 million, or 23.1%, to $1,603.6 million, for the year ended December 31, 2015, from $1,302.7 million in the year ended December 31, 2014. The increase was primarily due to contract revenues from the West Auriga which was acquired on March 21, 2014, contract revenues from the West Vela, which was acquired on November 4, 2014, and contract revenues from the West Polaris, which was acquired on June 19, 2015.

The acquisitions of the West Auriga, West Vela and West Polaris contributed approximately $56.4 million, $183.4 million and $123.3 million respectively to the increase compared to the year ended December 31, 2014.

Lower Downtime

Lower downtime on the West Aquarius in the the year ended December 31, 2015 compared to the year ended December 31, 2014 also contributed to an increase of approximately $65.7 million.

Lower downtime on the West Capricorn contributed to the increase in revenues by approximately $33.5 million. The increase was partly offset by a decrease in contract revenues of approximately $122.2 million relating to the West Sirius which came off contract in April 2015, and is now receiving a termination fee rather than the full dayrate. The termination fee is included in “Other revenues”.

Also offsetting the increase was a decrease of approximately $38.5 million in initial contract revenues from the West Vencedor, which was stacked after its contract ended in June 2015, before commencing a short-term contract in Myanmar in late 2015. The remaining movements were due to variations in the operations of the drilling units.

Reimbursable Revenues

Reimbursable revenues increased by $10.0 million, or 25.1%, to $49.9 million for the year ended December 31, 2015, from $39.9 million for the year ended December 31, 2014. The increase is due to additional equipment purchased on behalf of customers, for which the company has been reimbursed.

Other Revenues

Other revenues were $88.1 million for the year ended December 31, 2015, compared to nil for the year ended December 31, 2014. During the year ended December 31, 2015, the company earned other revenues within its Nigerian service company billed to Seadrill for certain services, including the provision of onshore and offshore personnel, which is provided to Seadrill’s West Jupiter and West Saturn drilling rigs, amounting to approximately $13.4 million.

OK, so that’s the good news however, one of the biggest issues facing Seadrill is its high debt load. So it’s no surprise when we read the following from Bloomberg.

Offshore drillers are struggling to repay debt as competition and reduced spending by oil companies hurt income. Falling demand for rig services is forecast to reduce sales at the world’s largest offshore contractors by 25 percent this year and at least 10 percent in 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove.

So, it was good news on Friday when Seadrill announced, that it has reached agreement with its banking group to extend its three nearest maturing borrowing facilities and amend certain covenants across its secured credit facilities, as the first phase of a broader plan to refinance and recapitalize the business.

The facility extensions relate to:

  1. The US$450 million credit facility originally maturing in June 2016 is now extended until December 2016
  2. The US$400 million credit facility originally maturing in December 2016 extended until May 2017
  3. The US$2.0 billion NADL credit facility originally maturing in April 2017 extended until June 2017

The covenant amendments extend to 30 June 2017 and relate to the following:

  1. A reset of the leverage covenant
  2. A revised definition of the Equity Ratio to exclude the impact of any change to the market value of our rigs
  3. A suspension of the provision that allows lenders to receive a prepayment under their secured credit facilities if rig values decline below a minimum value relative to the loan balance outstanding

Mark Morris, Chief Financial Officer said: “This is an important first step in our funding plan.  By deferring our imminent borrowing maturities, resetting a number of covenants and removing the risk of facility prepayments related to declining rig values we have established a more stable platform to pursue and conclude negotiations with our stakeholders.  We are pleased with the support shown by our banking group and continue to make good progress on negotiating a broader package of measures intended to significantly improve liquidity and bridge us to a recovery in the sector.”

In terms of valuation, we currently have Seadrill at #20 in the All Investable Screener here at The Acquirer’s Multiple. The company has an Enterprise Value of $4.2 billion, and operating earnings of $844 million, giving it an Acquirer’s Multiple of 4.99. Incredibly, the company is trading on a price-to-earnings ratio of just 1.79, and a Free Cash Flow to EV Yield (FCF/EV) of 10%.

I think Seadrill has had a great 12 months, based on its latest annual report. I agree that the company does appear to have a high debt load however, I also believe that its long dated contracts and substantial contract backlog will mean that it is well positioned to “weather the  storm”.

For me, Seadrill is still a buy.

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