Our latest Special Situation recommendation is a firm with near-term upside catalysts in the contract-drilling space, explains energy sector specialist Elliott Gue, editor of Energy & Income Advisor.
In our model portfolio, we recently moved out of our position in SeaDrill (SDRL). Although it remains one of our favorite deepwater contract drillers, the company could suffer additional downside in coming months because of uncertainty regarding day-rates.
However, those looking for an opportunity in the contract-drilling space should consider SeaDrill Partners LLC (SDLP), a publicly traded partnership formed by SeaDrill to monetize drilling rigs in its portfolio that have already secured long-term fixtures.
The partnership doesn't face any re-contracting risk until October 2015, when the West Aquarius' fixture with ExxonMobil (XOM) expires.
However, as of November 2013, the energy giant had opted to extend this contract through April 2017; we expect SeaDrill Partners to disclose the details of this agreement when the driller reports fourth-quarter results.
More recently, SeaDrill announced the sale of the West Sirius and West Leo rigs to SeaDrill Partners in a $527.8 million all-cash transaction.
These sixth-generation semi-submersible rigs operate under fixtures through June 2018 and July 2019, providing a visible stream of cash flow and setting the stage for the partnership to announce another distribution increase.
The current pause in the drilling cycle could prompt SeaDrill to accelerate the pace at which it drops down assets to SeaDrill Partners, driving distribution growth and price appreciation at the master limited partnership.
In the third quarter, SeaDrill Partners generated enough distributable cash flow to cover its distribution by 113%—ample coverage for an MLP that generates a reliable stream of revenue from its multiyear contracts.
Although the publicly traded partnership has no exposure to the anticipated downdraft in offshore day-rates, the stock could pull back in sympathy with the rest of the group.
SeaDrill Partners LLC rates a buy up to $32.00 per unit; investors should regard any pullback to less than $28.00 as a stellar buying opportunity.
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