Why Seadrill Partners LLC Dropped Almost 15% in July

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What happened

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Shares of Seadrill Partners LLC (NYSE: SDLP), a subsidiary of offshore oil-rig operator Seadrill (NYSE: SDRL), sank 14.4% in July. By contrast, its beleaguered parent actually finished the month up 2.3%.

The entire offshore rig industry has been hit hard by collapsing oil prices, and Seadrill and Seadrill Partners are no exceptions. Although it's a little unclear exactly why Seadrill Partners' share price dropped when it did, there's no shortage of reasons for investors to be concerned about the company.

So what

It was a mixed month for offshore-rig companies. Oceaneering International, for example, jumped more than 10% on a surprisingly good earnings report. Seadrill Partners, on the other hand, was at the bottom of the (oil) barrel:

You'll notice that Seadrill Partners' big drop (July 25-26) came at the same time as its parent Seadrill (the red line) saw a pop-then-drop. On July 26, Seadrill announced that its creditors had allowed it to kick the can down the road, extending the maturity date of $850 million in credit to September 14, so that it could work out a plan to restructure its debt. 

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But the company ominously reiterated that:

"[I]mplementation of a comprehensive restructuring plan will likely involve chapter 11 proceedings, and we are preparing accordingly. ... It is likely that the comprehensive restructuring plan will require a substantial impairment or conversion of our bonds, as well as impairment and losses for other stakeholders, including shipyards. As a result, the Company currently expects that shareholders are likely to receive minimal recovery for their existing shares."

Because the two companies are inextricably linked via their corporate structures, it's unclear exactly what will happen to Seadrill Partners if Seadrill files for Chapter 11 bankruptcy protection, which at this point seems a near certainty. Certainly, this isn't the first time that the market has moved one way for Seadrill and the other way for Seadrill Partners. 

Now what

If you bought shares of Seadrill Partners before mid-2014, it might cost you more to get rid of them than they're currently worth. Some of the moves on the chart above look big, but not when you check out the three-year picture:

The stock has lost more than 90% of its value. Still, it seems like the worst may be yet to come. 

If you're considering buying the stock because it looks cheap, think again. Absent a near-immediate jump in the price of oil that suddenly makes offshore rigs a hot commodity again -- and really, how likely is that? -- the problems for Seadrill Partners aren't going away. It's best to steer clear.

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John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of Atwood Oceanics. The Motley Fool recommends Oceaneering International. The Motley Fool has a disclosure policy.