Transocean Partners (RIGP, Financial) has performed exceeding well in difficult market conditions since the limited liability company was listed on July 31, 2014. While offshore drilling stocks have witnessed significant carnage, Transocean Partners has declined by only 5.8% since its listing. This article discusses a few important reasons to remain bullish on Transocean Partners with a 12-24 month investment horizon.
Firm contracts for ultra-deepwater floaters
Transocean Partners has three ultra-deepwater floaters and firm long-term contracts are the first reason to remain bullish on the stock.
According to the October 2014 fleet status report, Discoverer Inspiration is contracted with Chevron (CVX, Financial) until March 2020, and the floater is currently commanding a day rate of $585,000. Discoverer Clear Leader is contracted with Chevron until August 2018 and is currently commanding a day rate of $590,000. Development Driller III, also with Chevron, is contracted until November 2016 at a day rate of $431,000.
This means that the current fleet is fully contracted for 2014 and 2015. Further, only 10% of 2016 is not contracted (for Development Driller III). The cash flow visibility is also firm considering the fact that the contracts are with a strong counterparty (Chevron).
At a time when offshore drillers have declined by 30% to 40%, a 5.8% decline in Transocean Partners is largely due to firm cash flow and distribution visibility. Transocean Partners has recommended a quarterly distribution of $0.2246 per unit, and this implies an annual distribution of $0.9 per unit, which is certainly sustainable for the next two years considering the current set of floaters. Transocean Partners is therefore providing a healthy distribution yield of 3.9%.
Clean balance sheet for growth
As of September 2014, Transocean Partners had a clean balance sheet with cash and equivalents of $49 million and a debt of $43 million. This is an important factor to mention as it will have an impact on the distribution yield over the next 1-2 years.
Transocean Partners also had an undrawn revolving credit facility of $300 million, which expires on August 5, 2019. An undrawn credit facility will help Transocean Partners fund any potential drop-down from Transocean (RIG, Financial).
Transocean Partners is therefore sufficiently funded and as new floaters are added to the fleet, the company distribution and distribution yield will also increase.
Depressed industry sentiments
The above two positive factors combine with depressed industry sentiments to make Transocean Partners an excellent stock to consider. With strong fundamentals, Transocean Partners is trading at attractive valuations, and I believe this is a good opportunity to consider the stock.
Transocean Partners currently trades at an EV/EBITDA of 5.4 as compared to an EV/EBITDA of 6.6 for Seadrill Partners (SDLP, Financial). While Seadrill Partners offers a high distribution yield, both the stocks have a strong day rate and modern fleet. I therefore believe that the valuation difference will close down, and Transocean Partners will move higher in the next 1-2 years.
Further, as industry sentiments improve, Transocean Partners is likely to see further stock upside, and this is largely dependent on how soon oil prices recover.
In conclusion, Transocean Partners is an excellent stock to hold for the next 12-24 months. The stock will provide a stable to higher distribution yield and the stock is also safe from a fundamental point of view with a clean balance sheet. Depressed industry sentiments provide a good exposure opportunity.
