UPDATE: Wells Fargo Downgrades Seadrill Partners LLC (SDLP) to Underperform
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(Updated - September 9, 2016 9:31 AM EDT)
Wells Fargo downgraded Seadrill Partners LLC (NYSE: SDLP) from Market Perform to Underperform. Analyst Michael Webber highlighted cash concerns.
"We are downgrading SDLP to Underperform from Market Perform, as we believe continuing risks ranging from counterparty/rollover risks to credit/covenant/cross default risks make any case for residual value thesis for the equity difficult," said Webber.
The analyst added, "With Offshore fundamentals remaining weak, SDLP has continued to navigate through the difficult market as best it can, preserving liquidity (it cut distributions twice in the last 7 months) as it braced for a prolonged downturn in the Offshore drilling industry. While SDLP’s liquidity/leverage is in good shape for now, in our view – coverage 13.2x; leverage 2.9x, - a number of tangible risks to its cash flow (rollover risk, counterparty risk), combined with covenant requirements for Term Loan B makes an eventual covenant breach a likely scenario (late 17, early 18?), while the risk of cross default from SDRL also remains on the table (SDLP has 2 facilities – West Vela and West Polaris with cross defaults with the parent), in our view. While SDLP continues to build cash, we think there’s likely a long line of claims for that cash almost all of which is senior to common unit holders (or has GP control), with SDLP either eventually syphoned up to the parent, or caught in an eventual cash sweep for Term Loan B if/when covenants are breached."
Shares of Seadrill Partners LLC closed at $3.80 yesterday.
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