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Msg  235 of 242  at  9/11/2019 5:05:33 AM  by

ICE


SEEKING ALPHA, not the one I trust in US stock, but still, this is what they say

Seadrill Partners Units Leave NYSE, But The Story Is Not Over

Long/short equity
 
 
Summary

NYSE has decided to delist Seadrill Partners' units due to low market capitalization.

Seadrill Partners intends to appeal the ruling.

Meanwhile, creditor negotiations have not even begun yet. There's plenty of action ahead, and it will impact Seadrill which has material interest in Seadrill Partners' rigs.

Seadrill Partners (former (SDLP), current (SDLPF)) has recently received notification from NYSE stating that the proceedings to delist the company’s common units have commenced. The reason for this was the company’s low market capitalization. The trading of Seadrill Partners' units on NYSE has been suspended, and the shares started trading on the OTC market. Seadrill Partners stated that it intended to appeal the delisting determination and that delisting procedures would be suspended pending the outcome of the appeal.

Apparently, the market has lost any faith that Seadrill Partners’ negotiations with creditors can end with anything different than a complete wipeout of unitholders and equitization of debt. Let’s look at the numbers. Seadrill Partners ended the second quarter with $552 million of working capital and $2.8 billion of long-term debt which is due 2020-2021. Seadrill Partners should reach the deal with creditors before October-November 2020 as its two drillships, West Auriga and West Vela, will roll-off contracts with BP (BP) that have dayrates of $575,000. Current drillship dayrates have just exceeded $200,000 for recentSeadrill (SDRL) contracts, so while I’d expect drillship rates to continue rising through 2020, they will certainly be much less than those of the previous contracts, and Seadrill Partners will take a cash flow hit.

The above-mentioned $2.8 billion debt should be serviced by just 6 rigs – semi-subs West Aquarius and West Capricorn and drillships West Polaris, West Capella, West Auriga and West Vela. Two semi-subs, West Sirius and West Leo, are currently cold stacked and are unlikely to be unstacked any time soon, if ever. The tender rig segment (T15, T16, West Vencedor) is also in a challenging position since only T15 has a contract that ends in September 2019.

So, this is the picture that creditors are now looking at. For the sake of conservatism (and creditors are by definition more conservative investors than common units owners), let’s mentally write off all tender rigs and cold stacked rigs and see what the value of Seadrill Partners' fleet is in this case. Here are current Bassoe estimates: 1) West Aquarius: $374-413 million; 2) West Capricorn: $132-146 million; 3) West Polaris: $182-201 million; 4) West Capella: $195-216 million; 5) West Auriga $272-300 million; 6) West Vela $272-300 million. In the midpoint, the “core” fleet is valued at $1.5 billion. There’s a problem, though:

For the full value to be realized by creditors, Seadrill, which has a substantial interest in Seadrill Partners’ rigs, has to “give up” its share. Fellow contributor Henrik Alex has several times aired the idea that the elegant solution for Seadrill and Seadrill Partners is to restructure at the same time (this would be the second restructuring for Seadrill), become a combined company again and start from scratch. It remains to be seen whether Seadrill is open for such a possibility (the stock price action this year suggests that such fears circulate in the marketplace).

The other solution for creditors is to kick the can down the road. Outside of operating expenses, the company has two major expenses – G&A and interest, with interest taking the lion’s share of the roughly $300 million burden. With 6 rigs at 85% utilization, Seadrill Partners will have 1,862 working rig days per year. To produce the desired $300 million, the company needs a margin of $161,000 per day per each of the six rigs. Assuming average floater expenses at $130,000 (this number differs based on geography and company; I’ve seen estimates as low as $110,000, but I don’t think it’s realistic to use the lowest number), Seadrill Partners needs dayrates closer to $300,000 for all six rigs to service its debt without cash bleed. Only the harsh-environment West Aquarius is almost guaranteed to surpass this mark. For drillships, the situation is less clear - recent Seadrill contracts marked a breakthrough, surpassing the $200,000 mark - it's a long road to $300,000.

It will be interesting to see what strategy will be chosen by creditors, who typically have no interest in owning equity and prefer to kick the can down the road as long as a company can service regular interest payments. Also, it remains to be seen what Seadrill plans to do with its stake in Seadrill Partners. If Seadrill Partners’ debt gets cut in any restructuring, Seadrill’s ownership in Seadrill Partners’ rigs will be jeopardized. Also, it is unlikely that Seadrill will provide some cash infusion into Seadrill Partners since it has its own problems due to big debt and insufficient speed of the offshore drilling market recovery.

At this point, there’s little reason to believe that Seadrill Partners’ units will return to NYSE. However, the story with creditor negotiations has not even begun yet, so I’ll continue to keep a close eye on it since it will have a material impact on the stock that remains on the Big Board – Seadrill.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.

 


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