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Shares of Seadrill Partners (NYSE: SDLP) are up 19% as of 10:30 a.m. EDT today after the company announced several credit resolutions related to parent company Seadrill Limited (NYSE: SDRL) and reinstated its distribution to shareholders.
Seadrill is sinking. The company has some credit facilities coming due for new rigs currently under construction, and it has so far struggled to find anyone willing to refinance those short-term borrowings. The company's debt load and the uncertain picture of the offshore rig market has led management to believe going through Chapter 11 proceedings is inevitable.
As Seadrill's subsidiary master limited partnership, Seadrill Partners could have been dragged into Chapter 11 proceedings because Seadrill was the guarantor on several of Seadrill Partners' credit facilities.
Today, the company announced that it had reached an agreement in which Seadrill Partners' debts will be guaranteed by its own fleet as collateral rather than by the parent organization. The agreement will provide a level of insulation that should prevent Seadrill Partners from becoming involved in Seadrill's bankruptcy negotiations.
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It's also worth mentioning that thanks to this deal, management has reinstated Seadrill Partners' distribution to shareholders. It had deferred distributions while the company was negotiating this credit facility change.
Without the fear that Seadrill would drag Seadrill Partners down with it, Seadrill Partners can now be viewed more as an independent investment. Sure, Seadrill is still the general partner, but this move keeps Seadrill Partners' assets out of the negotiation.
By itself, Seadrill Partners actually looks like an OK investment in the offshore market. It has a decent fleet, all of which was under contract as recently as last month. As the market for rigs either holds steady or increases slightly, these rigs are more likely to get contracts than rigs that have been idle for months. Also, the company has no new construction commitments and more than enough cash to cover its short-term borrowings.
It's hard to say with any certainty that Seadrill's bankruptcy will have no effect on Seadrill Partners, but at least after this move that prospect is much less likely. With shares trading at a massive discount to tangible book value, Seadrill Partners might just be another one of the high-risk, high-reward stocks in the offshore market.
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