Seadrill Partners (SDLP) units have had very challenging few months as the market started to question the company’s ability to renegotiate debt terms with creditors amidst declining oil prices. The company’s units got a boost in early 2019 like everything else in the offshore drilling space, but now risk falling under additional pressure as the company’s CEO abruptly leaves.
Mark Morris, the CEO of Seadrill Partners and the CFO of Seadrill (SDRL) decided to leave his positions in June 2019, providing both companies the time to find a replacement. In the Seadrill Partners’ press release, Mark Morris commented: “It has been a privilege to have led the company over these last three and a half years, but now I am looking to seek new and different challenges. I wish the company every success in the future”. He shared the following in Seadrill’s press release: “It has been a privilege to have led the restructuring of Seadrill through what was a very complicated set of negotiations and transactions. I have enjoyed my time here as CFO, and now is the right time to seek new and different challenges. I wish the company every success in the future”.
One can argue that big challenges are indeed behind Seadrill who has emerged from bankruptcy in mid-2018, although this is not necessarily the case due to the company’s high leverage and the current state of the ultra-deepwater market. However, Seadrill Partners obviously presents a major challenge for anyone leading the company since it will have to negotiate with creditors in upcoming two years to ensure its survival. In this light, the departure of the CEO does not look great.
In the offshore drilling space, the most notable CEO departure of the recent years was Pacific Drilling (PACD) CEO departure in August 2017. In November 2017, Pacific Drilling filed for bankruptcy and has recently emerged from it and relisted on NYSE. Of course, Pacific Drilling’s case and Seadrill Partners’ case are different, but it’s worth noting that CEO departure ahead of debt negotiations is rarely a good sign.
In “Seadrill Partners: Expectations For 2019”, I stated that I was not expecting that the company will start negotiations with creditors soon. The basis for this opinion was that Seadrill Partners’ Term Loan B, which will have to be re-negotiated, matures at the beginning of 2021, while the company has enough cash cushion to operate and even continue paying a distribution. The departure of Mark Morris hints that the company will start negotiating with creditors in the second half of 2019, once the new CEO takes the reigns.
It remains to be seen whether Seadrill Partners will cut the distribution in the meantime. Technically, it has more than enough cash on the balance sheet to support it, and the money saved on the distribution cut don’t really matter for the big picture because the debt is just too big and minor savings won’t help. That said, the cut of the distribution could be viewed as a symbolic gesture to please creditors before the beginning of negotiations.
I’d reiterate that a bet on Seadrill Partners comes with a risk of losing principal. In case Brent oil (BNO) slips below $60 per barrel in a correction after the rapid rebound from $50, Seadrill Partners’ units might easily test new lows. I believe that the company’s units will lag shares of leading offshore drillers because the market will price in the risk of tough negotiations with creditors and a potential distribution cut. I think that oil prices will need to be higher and the activity on the floater side of the offshore drilling market will also need to increase for Seadrill Partners to have a chance of successful negotiations with creditors that does not outright eliminate the common unitholders.
I’m rather optimistic on Brent, expecting to see it at $70 sometime this year, but timing is important as investor confidence was clearly damaged during the rapid oil price decline from $85 to $50. I don’t think that Seadrill Partners’ units are the best choice for a rebound play in offshore drilling right now, giving preference to leading drillers like Ensco (ESV), Rowan (RDC), Transocean (RIG), Noble Corp. (NE) and Diamond Offshore (DO) even in short-term speculative trades. That said, opportunities may still emerge in Seadrill Partners. The story will certainly develop in 2019 and will most likely bring additional volatility, so watch it closely and stay tuned!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the above-mentioned stocks.