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Strong Buy on Seadrill Partners

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On Jan 4, Zacks Investment Research upgraded Seadrill Partners LLC to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

This offshore oil and natural gas drilling rig operator delivered positive earnings surprises in the last three quarters with an average beat of 105.56%. The long-term earnings growth of the partnership is presently pegged at 9.0%.

The significant deep and ultra deep water discoveries have prompted oil and natural gas exploration & production companies to invest capital in deep and ultra-deepwater acreage. Since the demand for rigs is strong, the prevailing day rates are in the range of US$550,000 to US$650,000.

Seadrill Partners' current contracted dayrates range from US$487,000 to US$580,000. Once the current contracts expire, Seadrill Partners can look forward to enjoying higher rates.

Seadrill Partners recently issued 11.2 million of common units and intends to utilize the net proceeds to fund its previously announced acquisitions. The demand for rigs is expected to increase from the present level, so the partnership’s decision to acquire additional rigs is well thought out.

We expect the initiatives undertaken by the partnership to enhance its cash flow generation capability and increase its distribution further from the present level.

The present valuation of the partnership in comparison to its peers also makes it attractive. The P/B multiple of the partnership is 0.77% reflecting a discount of 28.7% from its peer group average of 1.08%. Return on Equity is 6.2%, substantially higher than the peer group average of 2.9%.

The Zacks Consensus Estimate for 2013 increased 13.9% in the last 60 days to $1.80 per unit, reflecting an impressive year-over-year increase of 519.54%. The Zacks Consensus Estimate for 2014 increased 12.7% in the last 60 days to $2.22 per share, reflecting year-over-year projected growth of 23.56%.  

Other Stocks to Consider

Other players in the drilling rig industry, which also look attractive at current levels, include Pacific Drilling S.A. , Tesco Corporation and Transocean Ltd. (RIG - Free Report) . All these stocks carry the same Zacks Rank as Seadrill Partners LLC.

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