For a while there it looked like Seadrill Partners (NYSE:SDLP) would get pulled under by its parent company’s financial restructuring and join it in filing for bankruptcy. However, in mid-August, the company broke those bonds by amending some of its credit facilities, which will insulate it from its parent company’s restructuring process. Because of that, Seadrill Partners’ financial situation is back on solid ground for the time being, which recently enabled the company to reinstate its quarterly distribution to unitholders.
However, Seadrill Partners’ future remains uncertain given the financial situation of its parent company. Until there’s more clarity about what to expect, it’s tough to tell where Seadrill Partners will be in five years since there seems to be more than one path it could take. Though two of the more likely possible options include becoming a fully independent company that charts its own course or getting acquired as part of the shakeout from its parent company’s bankruptcy proceedings. Here’s a closer look at what those two options might look like for investors.
Seadrill Partners was initially formed to own, operate, and acquire offshore drilling rigs under long-term contracts with major oil companies. It intended to leverage the relationships, expertise, and reputation of its parent company to recontract its fleet under long-term agreements when the current ones expire. Further, it believed that its parent would be motivated to help facilitate its growth given its large ownership interest in the company.
However, with its parent sinking toward bankruptcy and its reputation tarnished, one course of action is that Seadrill Partners could be set free to run as an independent company. To facilitate that option, its parent could sell its 28.6% stake in the offshore drilling partnership via a secondary offering. That would give Seadrill Partners the freedom to pursue new contracts and acquisitions so that the company could maintain and then eventually grow its distribution to investors with the goal of creating value for them over the long-term as the offshore drilling market recovers.
Getting gobbled up
Another potential future for Seadrill Partners is that it could eventually get acquired by an offshore drilling rival as part of its parent’s restructuring process. Given that its parent owns a 28.6% stake in the company, it could find that the best course of action is to sell that position to a rival, which could then make a formal offer to Seadrill Partners’ investors and acquire the rest of the company.
This option makes sense given that the industry is currently in the midst of a major consolidation wave as it seeks to cut costs and competition to survive its current downturn. Industry leader Transocean (NYSE:RIG), for example, recently agreed to acquire Songa Offshore in a $1.2 billion deal. Before that Ensco (NYSE:ESV) announced an agreement to buy Atwood Oceanics (NYSE:ATW). One of the draws of these deals is the expected cost savings by combining forces. Transocean noted that it expects to generate $40 million in annual savings by combining with Songa while Ensco anticipates that it can squeeze out $65 million in annual expense synergies by merging with Atwood Oceanics. It’s likely that a would-be acquirer of Seadrill Partners could generate similar savings.
Another draw of those deals is the contract backlog of the target, which increases the near-term earnings visibility of the combined entity. In Transocean’s case, it noted that Songa brought with it a $4.1 billion backlog, which would increase the combined company’s contract backlog up to $14.3 billion. Meanwhile, Ensco noted that by combining with Atwood Oceanics, its backlog would increase to $3.7 billion. Given that Seadrill Partners currently has an order backlog of $1.9 billion, it could provide a meaningful boost to a competitor’s position by providing it with more certainty on future revenue.
A cloudy crystal ball
While anything can happen, the future that seems the most plausible, in my opinion, is that Seadrill Partners will eventually get acquired. That’s because its parent would likely get the most value for its sizable stake in the company by selling it to a rival that intends to buy the rest of the company so it can capture the cost synergies and bolster its backlog.
That said, investors shouldn’t pile in hoping to make a quick profit on a future sale because there is no guarantee it will happen. Further, Ensco, Atwood Oceanics, and Transocean have all fallen sharply since announcing their deals due to the continued uncertainty in the offshore drilling market. Because of that, investors are better off waiting on the sidelines and watching how this all plays out.
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