Traditionally, Seadrill and associated companies have been great dividend stocks. Seadrill Partners is no exception. For the first quarter of 2014, Seadrill Partners announced a cash distribution of $0.5075 per share, which represents an increase of 14% in dividends as compared to the fourth quarter of 2013.
On an annual basis, the dividend comes to $2.03 per share, which is in line with the company’s guidance of $2.00 to $2.05 per share. Further, at a current market price of $32.65, the dividend yield translates into a healthy 6.2%.
Another key point to note here is the fact that Seadrill Partners recently completed the acquisition of the West Auriga for US$1.24 billion on a 100% basis, financed with debt and a US$355 million from the recent common unit offering. Post this acquisition, the management has recommended a quarterly dividend increase to $0.54 to $0.545 per share. If the dividend increases to these levels, the annual dividend yield will jump to 6.5%.
While the current dividend yield is strong, it is important to investigate the sustainability of the dividend. Even from that perspective, Seadrill Partners is well positioned to keep paying and increasing its dividend.
The reason for the conviction is the company’s long-term contract coverage with solid counterparties. As of first quarter 2014, Seadrill Partners had a total order backlog of $5.5 billion with an average remaining contract term of 3.74 years. The firm order backlog ensures that steady cash keeps flowing and dividend payout is likely to continue.
From a dividend growth perspective, Seadrill Partners has an OPCO agreement with Seadrill, which allows the company to buy 70% stake in three ultra deep-water and one tender rig. Further, Seadrill Partners also has the right to buy a 49% stake in three ultra deep-water rigs.
Since the company’s IPO in October 2012, the dividends have increased by 31% and dividends have increased with each subsequent vessel acquisition. Going forward, this trend is likely to continue as Seadrill Partners acquires more vessels from Seadrill as a part of the dropdown agreement.
One concern to mention is that point that the coverage ratio for the first quarter of 2014 was 0.77 as compared to a coverage ratio of 0.86 for the fourth quarter of 2013. However, assuming that first quarter 2014 dividends are paid pro-rata for 11 days for the new units, the coverage ratio comes to 0.92. I believe that the coverage ratio will get healthier with more UDW units scheduled to be acquired from Seadrill.
In terms of debt and debt service, Seadrill Partners is comfortably placed. For the first quarter of 2014, the company had a debt to EBITDA of 3.5 considering an annualized first quarter 2014 EBITDA. More importantly, the EBITDA interest coverage for the first quarter was 5.6. This implies that the company is generating more than sufficient cash to service its debt. Seadrill Partners therefore has the option to leverage further for acquiring vessels from Seadrill.
Finally, industry dynamics also support the company’s growth and ensure that day rates will remain stable. With relatively high oil prices and with large oil discoveries happening offshore, Seadrill Partners is well positioned to grow. Also, Seadrill Partners is well equipped to cater to the strong demand for high-specification rigs.
I must also mention here that Seadrill Partners is protected from relatively sluggish day rates in 2014 as the company has no exposure to 2014 day rates. The relatively challenging offshore rig market in 2014 will be well navigated by Seadrill Partners.
Investors can therefore consider this high dividend yielding stock with a firm revenue visibility. It is very likely that the dividend yield will further increase over the next one year as more dropdowns from Seadrill commence operations.
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