Seadrill Partners LLC SDLP has decided to slash its quarterly distribution amid an unfavorable offshore drilling market scenario. Notably, the partnership was formed by Seadrill Limited SDRL − one of the leading offshore drilling contractors in the world.
Seadrill Partners has agreed to significantly lower its distribution to 25 cents per unit from the present 56.75 cents. The 56% reduction primarily reflects persistent weakness in the offshore drilling business. The limitations in the sector are largely the result of an oversupplied rig market along with the prevailing low oil prices.
At this juncture, the partnership will be able to improve its balance sheet by lowering debt – especially middle-term obligations.
In details, upstream players are not being able to gain from the exploration and production activities as they are not being able to sell crude at attractive prices because of the low commodity prices. The events led to a sharp decline in the hiring of drilling rigs by upstream players. Thus, drillship operators are not getting high dayrates which is affecting its liquidity and increasing debt obligations.
We believe that lowering distribution payout to pay off debt is one of the best ways to survive the current business scenario. The partnership added that that the move will lead to an improvement in liquidity by more than $250 million per year. Further, Seadrill Partners will be able to save $200 million in cash every year for maintenance and replacement works.
Presently, the partnership carries a Zacks Rank #3 (Hold), implying that it will perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, better-ranked players in the energy sector include Energy Transfer Equity, L.P. ETE and Ocean Rig UDW Inc. ORIG. Both the stocks sport a Zacks Rank #1 (Strong Buy).
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