Morgan Stanley Is Taking Profits On Seadrill, Transocean Partners

While offshore drilling headwinds persist, floater and jackup utilization could plummet to the levels witnessed in the 1980s, Morgan Stanley’s Ole Slorer said in a report. He added that this could be a good time to take profits on Seadrill Partners LLC SDLP and Transocean Partners LLC RIGP, following the run-up in their shares year-to-date.

Seadrill Partners

Analyst Ole Slorer downgraded the rating on the company from Overweight to Equal-weight, while maintaining the price target at $7.50. Shares have tripled from their February lows amid a broader MLP market recovery and alleviating concerns related to a fallout in the company. Shares have appreciated more than 81 percent year to date.

Seadrill Partners has West Leo “currently contracted to Tullow in Ghana at a relatively high $605kpd till Jun 2018,” Slorer mentioned. He added that the project is nearly completed and is expected to deliver first oil in the next few weeks. Drilling may not restart until the Côte d’Ivoire / Ghana border dispute is resolved.

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“Our latest channel checks suggest this dispute could form the basis on which Tullow declares force majeure on West Leo’s contract,” the Morgan Stanley report noted.

Transocean Partners

Slorer downgraded the rating on the company from Overweight to Equal-weight, while maintaining the price target at $14. Shares have appreciated by more than 40 percent year-to-date, versus an 11 percent gain for offshore drillers, OSX up 4 percent and AMZ up 12 percent.

Focus is now on Development Driller III, which is scheduled to become available in November 2016. “We only see a slim chance of the rig being awarded extra term by BP, with the operator already having excess rig capacity…We model for Development Driller III to see new work only in 2018 (at a low $200kpd), but there is risk that this also fails to transpire,” the analyst wrote.

The company would likely support Distribution Coverage via buybacks, given its net cash position, Slorer added.

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