Seadrill Partners LLC (SDLP)
Ari Lazar, Jessica Kan, Sai Poddutur , Gongsheng Wang
New Company Presentation 3/17/15
1
Introduction
Oil drilling company that rents rigs to large oil companies in exchange
for daily payments.



jack-up rigs, tender rigs, semi-submersible rigs, and drill ships
Long term contracts with average duration of 3.3 years
Customers: BP, Exon Mobile, Chevron, Tullow Oil
Locations: 10 Oil Rigs in Canada, the US Gulf of Mexico, southeast
Asia and West Africa
Major Competitors: Atwood Oceanics, Teekay Offshore Partners,
Ocean Rig UDW, Hercules Offshore Inc
Business Phase: Growth
Price: $11.70
P/E Ratio: 7.77
52 Week Range: $11.52 - $36.07







2
Sources: SDLP 2014 Investor Presentation and Yahoo Finance on 3/15/15
Macroeconomic Review
Price of oil decreasing drastically in the past few months


Decline in price that Seadrill can charge on new contracts

Close relationship between oil price, rig count, and revenue
Historic Oil Price
2500
Historic Rig Count
2000
1500
1000
500
1/7/2000
7/21/2000
2/2/2001
8/17/2001
3/1/2002
9/13/2002
3/28/2003
10/10/2003
4/23/2004
11/5/2004
5/20/2005
12/2/2005
6/16/2006
12/29/2006
7/13/2007
1/25/2008
8/8/2008
2/20/2009
9/4/2009
3/19/2010
10/1/2010
4/15/2011
10/28/2011
5/11/2012
11/21/2012
6/7/2013
12/20/2013
7/3/2014
1/16/2015
0
3
Source: trading economic website,
Relevant Stock Market Prospects
Long Term Contracts


Average duration of 3.3 years


Seadrill plans to extend existing contracts at slightly lower prices
All contracts are legally enforceable

Unlike Diamond Offshore (DO) who is losing contracts

9 out of 10 contracts are locked in at pre oil crash prices until at least 2017

If price of oil rises, SDLP will likely increase as well
Acquisitions and Expansion


Recently purchased new rig in November for $900 Million

Management is committed to future expansion

New, advanced floaters compared to the aging old floaters
17.30% Dividend Yield

4

Based on current price

Management has promised to maintain or raise dividends throughout 2015

Operating agreement forces them to distribute all excess cash
Source: SDLP Q4 2014 earnings call transcript
Business Overview- Portfolio
5
Sources: SDLP 2014 Investor Presentation
Business Overview – Portfolio Changes
West Vela


Recently purchased West Vela rig on November 6th for $900 Million

$525,000 day rate from BP with contract locked until November 2020
West Vencedor

6

Contract expires at the end of Q1 2015 with a day rate of $218,000

Future contracts for this rig are still being explored

Only contract that expires before 2017
Source: SDLP Q4 2014 earnings call transcript
Business Overview - Management
CEO: Graham Robjohns


In office since June 2012

Previous experience: CEO and CFO Golar LNG Partners Nov 2009-July 2011

Under his management stock saw over 200% returns
Management Goals and Outlook

7

See themselves to be in a challenging macroeconomic environment

Committed to expansion and future acquisitions

Maintaining excellent customer service

Sustaining or raising dividends

47% of stock held by Seadrill Limited (SDRL)

High incentive for highest possible dividends
Source : Capital IQ and SDLP 2014 Q4 earnings call transcript
Business Overview - Risks
Price of Oil


If Oil prices do not increase new contracts will see a decrease in price

West Vencedor rig is a “tender situation” because new contract expires at the end of this quarter and no
agreement has been reached yet on a new contract
One time Expenses


Had 36.4 million dollar investing expense for hedging floating rate interest but remains as a fully non cash
movement unless swap is terminated

10 year swap and will directly increase net income if interest rates rise
Natural Disasters


Hurricanes or other storms could potentially cause damage to equipment
Alternative Energy


Alternative energy may decrease demand for oil in the future
Debt Obligations

8

Very high debt levels which have lead to recent negative outlooks from Moody’s

No long term debt due until the end of 2016

98% of debit is locked in at 2.5% + Libor and fully hedged with an interest rate swap
Source: SDLP Q4 2014 earnings call transcript
Porter 5 Analysis
Threat of Substitutes - Moderate
Threat of New Entrants - Low
Supplier Bargaining Power – Low
Customer Bargaining Power – Moderate/High
Rivalry Within Industry - Moderate





9
SWOT Analysis


Strengths

Long-term, legally enforceable contracts

Attractive rates paid daily in cash

High dividend pay out rates
Weaknesses



Tender situation with West Vencedor rig
Opportunities

Contract length extensions with current customers at slightly lower day rates

Acquisitions of new rigs
Threats

10
Challenging macroeconomic environment especially with oil prices
Recent Earnings (Q4 2014)



Revenue of $380.6 Million

34.8% Increase year over year

Beat Analyst Expectations by $27.04 Million
Net Income of $70.1 Million

Before minority interest

Slightly lower than Q4 2013
EPS of $0.86

11
Outperformed analysts expectations of $0.76
Source: SDLP Q4 2014 earnings call transcript
Recent Returns
12
Source: Google Finance
Capital Structure



Cash

$243 million in cash

$200 million in undrawn revolvers

Used to Finance Dividends
Capital Structure
Debt

No debt due until 2016

$4,302 million

Used to finance expansion
Equity

$2,044 million

47% of company held by Seadrill ltd (SDRL)
13
Source: SDLP Q4 2014 earnings call transcript
Cash
Debt
Equity
Technical Analysis

Current Price Below 20 day and 200 day moving averages

14
Strong bearish signal
Source: bigcharts.marketwatch.com
Financial Analysis
15
Source: Capital IQ
Financial Projections - Revenue
16
Financial Projections
17
Discount Rate
18
DCF
19
Price Target Sensitivity Analysis
Change in Oil Price
Discount Rate
20
Comparable Analysis
21
Source: Capital IQ
Comparable Analysis

Large difference in comparable implied price and market price

Levered ratios vs. Unlevered ratios

Seadrill has more debt than competitors
22
Source: Capital IQ
Comparable Stats
5
4
3
2
1
Seadrill Partners LLC
Comparables Average
0
-1
23
Recommendation



Current Price: $11.70
DCF Implied Price: $30.83
Comparable Analysis Implied Price: $32.98

Average Projected Price of $31.90

Technical Analysis Conclusion: Sell

We recommend adding SDLP to watch list

24
Should be reconsidered if macroeconomic conditions improve