Transocean Partners LLC (RIGP, Financial), formed by Transocean (RIG, Financial) to own three ultra-deepwater rigs in the Gulf of Mexico, raised $385 million by offering 17.5 million shares at $22. The stock is currently trading at $24.6 and this article discusses why the limited liability company is a good one to own.
About Transocean Partners
Transocean Partners is a growth-oriented limited liability company recently formed by Transocean, one of the world’s largest offshore drilling contractors, to own, operate and acquire modern, technologically advanced offshore drilling rigs.
The company’s initial assets consist of 51% interests in the rig companies that own and operate three ultra-deepwater drilling rigs that are currently operating in the U.S. Gulf of Mexico. Transocean owns the remaining 49% non-controlling interest in each of the rigs.
The company generates revenue through contract drilling services, which involves contracting its mobile offshore drilling fleet, related equipment and work crews on a day rate basis to large international energy companies to drill oil and gas wells.
Strong Initial Revenue Visibility
The company’s drilling rigs currently operate under long-term contracts with Chevron (CVX) and BP Plc (BP). As of July 7, 2014, the company’s initial fleet had a remaining contract term of 4.1 years and this provides strong revenue visibility.
The company’s drillship, Discoverer Inspiration is on a long-term contract with Chevron in the Gulf of Mexico until April 2020. The company’s drillship, Discoverer Clear Leader is also on a long-term contract with Chevron until September 2018. Finally, the company semi-submersible, Development Driller III, is on a contract with BP until November 2016.
These contracts ensure that there is a steady inflow of cash over the next few years. Contract with strong counterparties is an added advantage. For 1Q14, the company had operating revenue of $148 million, an EBITDA of $72 million and a net income of $63 million. Considering this, the company’s annualized EBITDA for 2014 will be $288 million.
Omnibus Agreement Will Increase Fleet
The initial fleet of three rigs is likely to increase over the years and so will the company’s revenue and payout. Under the omnibus agreement, Transocean Partners has the right to purchase not less than a 51% interest in four out of six drillships over the next few years.
All the six drillships under the agreement are currently under long-term contracts and this will ensure that the acquisition by Transocean Partners has an immediate impact on revenue and cash flows. Therefore, Transocean Partners has a strong growth pipeline besides having a strong revenue visibility.
Strong Cash Distribution
Transocean Partners intends to make minimum quarterly distributions of $0.3625 per common unit ($1.45 per unit on an annualized basis). This translates into a yield of 5.9% based on the current unit price of $24.6.
I believe that the cash distribution will increase at a robust pace over the next few years as Transocean Partners is likely to acquire more rigs under the omnibus agreement. Acquisition of more rigs will only serve the purpose of creation of the limited liability company.
Therefore, investors can continue to expect high dividends and a strong dividend yield over the next few quarters and years. The cash distribution can double from current levels if four more rigs are added as per the above discussed omnibus agreement.
Strong Financial Flexibility
On closing of the initial public offering, Transocean Partners has an undrawn committed $300 million revolving credit facility with an affiliate of Transocean that allows for uncommitted increases in amounts to be agreed upon by Transocean and Transocean Partners.
This gives the company a strong financial flexibility for acquisition of fleet under the omnibus agreement. Further, with a clean balance sheet, the company always has the option to leverage for more fleet expansion. The initial fleet along with possible four more fleet under the omnibus agreement will ensure that strong cash flows make fundamentals stronger.
Conclusion
Transocean has taken the right step forward with the creation of Transocean Partners. The latter currently offers stable revenue, high cash distribution and robust growth prospects.
Investors looking for high payouts along with a clean balance sheet can consider Transocean Partners. I believe that the company’s cash distribution will double from current levels over the next 2 years, making the company an attractive investment to consider.
