According to the National Association of Publicly Traded Partnerships (NAPTP), of the approximately 120 publicly traded partnerships, two are classified as Oilfield Services. Cypress Energy Partners (NYSE: CELP) is a growth-oriented master limited partnership (MLP) providing saltwater disposal and other water and environmental services to US onshore oil and natural gas producers and trucking companies in North Dakota and west Texas. This partnership debuted as the first MLP initial public offering (IPO) of 2014, and was first mentioned here in the March article Play Ball: More IPOs on Deck.

The other oilfield services partnership is one we are asked about frequently, Seadrill Partners (NYSE: SDLP). SDLP is a growth-oriented limited liability company (LLC) formed in 2012 by Seadrill (NYSE: SDRL), one of the world’s largest international offshore drilling contractors. Like its parent, Seadrill Partners is based outside the US, and like several other marine transportation partnerships it has chosen to pay taxes as a corporation. (Why a partnership might opt to pay taxes as a corporation was explained in the March article Marshalling the Marines.)

Seadrill Partners is presently the only offshore drilling services company structured as a partnership, although international offshore drilling contractor Ocean Rig (Nasdaq: ORIG) has plans to drop down assets into an MLP this year. The Seadrill Partners IPO involved a drop down of four drilling rigs from the parent — two semi-submersibles (the West Aquarius and the West Capricorn), one tender rig (the West Vencedor), and one ultra-deepwater drillship (the West Capella). These drilling rigs are under long-term contracts with major oil companies such as Chevron (NYSE: CVX), Total (NYSE:TOT), BP (NYSE: BP) and ExxonMobil (NYSE: XOM).

Since the IPO, Seadrill Partners has made five additional acquisitions from SDRL. Tender rig T-15 was acquired for $210 million and tender rig T-16 was acquired for $200 million. Both are contracted to Chevron in Thailand until the summer of 2018.

In December two accretive dropdowns were announced. West Leo is a semi-submersible rig contracted to Tullow Oil (LSE: TLW) until June 2018 for a day rate of $605,000 (up from the previous day rate of $525,000). This rig will be used in Ghana, Ivory Coast, and Guinea. West Sirius is another semi-submersible under contract to BP, and being used in US waters. This contract is for a day rate of $490,173 until July 2014, and then increases to $535,000 until July 2019.

In March, SDLP acquired the West Auriga drillship from SDRL. This ship is contracted to BP for operations in the US Gulf of Mexico at a day rate of $565,000 per day. This contract runs until October 2020

These acquisitions have enabled management to increase distributions consistently since the IPO. The latest dropdowns are projected to increase the annual distribution by $0.22 – $0.27, for a total estimated annual distribution of $2.00 – $2.05 (up from $1.55 per unit annualized at the IPO). At the current unit price of $33.69 (which represents an increase of 38 percent from the October 2012 IPO), this implies an annualized yield of 5.9 percent.

Source: Seadrill Partners investor presentation

Following the West Auriga acquisition in March, management signalled it would seek a distribution hike to an annualized $2.16-2.18 per unit starting in July. But while the current 30 percent distribution growth rate looks attractive, the coverage ratio is less appealing at 0.77x, and only 0.92x pro-forma for the West Auriga acquisition.

Less concerning is the 61 percent decline in net income in Q1 2014 versus the previous quarter. This decline was primarily a result of a large unrealized loss in SDLP’s portfolio of interest rate swaps, used to manage its exposure to interest rates. While this decline may seem alarming at first glance, management described it as a one-time event that does not affect the long-term outlook of the partnership. In fact, cash flows were unaffected, and the partnership’s distributable cash flow actually increased 42 percent quarter-over-quarter.

Seadrill Partners has an enterprise value (EV) of $5.5 billion, an EV/EBITDA ratio of 8.5, and a debt/EBITDA ratio of 4.8. In comparison, Seadrill Limited has an EV of $30.7 billion, an EV/EBITDA ratio of 12.4, and a debt/EBITDA ratio of 5.7.

Seadrill Partners is the rare MLP yielding less than its corporate parent, no surprise given Seadrill Limited’s 10.3 percent current dividend yield. The question for investors is whether the MLP’s more modest yield and lower (but still high) debt leverage provide an increased margin of safety.  

After all, the partnership’s prospects will continue to depend entirely on Seadrill’s health, and on the fairness of dropdown prices dictated by its parent. Seadrill Partners is also highly likely to keep issuing new shares to finance acquisitions, which should eventually slow the growth in per-unit payouts. The parent Seadrill remains the choice at our sister publication The Energy Strategist.    

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Updates

Options Fly on KMI

The action among MLPs has been so bullish that even Kinder Morgan (NYSE: KMI) is coming out of its funk; the stock has regained 5 percent since our upgrade from Hold to Buy on April 22, premised on the improved results delivered recently by KMI’s MLP affiliate Kinder Morgan Energy Partners (NYSE: KMP).

Sentiment got a boost last week when KMI director Sarofim Fayez bought 400,000 shares in the market for a bit more than $13.5 million. That followed founder Richard Kinder’s latest buy in May for $3.2 million. Fayez previously bought the same number of shares in August when the stock was still above $37, so his latest investment may not have much predictive value.

More encouraging is the recent volume buying of in- and out-of-the-money KMI calls well in excess of open interest. July $35s, December $37.50s and December $40s have been bought, and there has also been some action in KMI’s $40 warrants.

The past year’s hazing by critics has left KMI as something of a value play, still yielding nearly 5 percent despite a decent shot at maintaining dividend growth of nearly 10 percent. Few if any MLP general partners still offer a yield this generous. Meanwhile, the growth looks on track. Buy KMI below $37.

A Good Deal for NGL

Things are looking up for NGL Energy Partners (NYSE: NGL), the natural gas liquids, crude and water logistics provider and propane distributor that’s returned a quick 12 percent since joining the Growth Portfolio two months ago.

The latest new high follows news that NGL will acquire from Morgan Stanley the general partner of the Transmontaigne Partners (NYSE: TLP), along with a limited partner stake of nearly 20 percent in that MLP, for $200 million in cash, plus $550 million for working capital. Transmontaigne’s crude and refined fuels terminals and storage capacity along the Gulf Coast and across the Southeast looks like an excellent fit for NGL’s rapidly growing logistics network.

Morgan Stanley, which like other investment banks is exiting commodity operations in response to regulatory pressure, appears to have priced Montaigne to move: its limited partnership interest alone has a market price of some $150 million

Meanwhile, the assets NGL already controls continue to deliver excellent results: fourth-quarter EBITDA reported on May 30 came in 10 percent above the partnership’s forecast, supporting  per-unit distribution growth of 15 percent in calendar 2014 and the promise of at least 10 percent in subsequent years. The current yield of 5.1 percent is very competitive given EBITDA growth in excess of 50 percent and the strong 1.5x coverage ratio. Buy NGL below $44, a price target we will likely be raising in short order.   

— Igor Greenwald