Seadrill Partners (SDLP) is popular among investors due to its high dividend yield. Seadrill (SDRL), Seadrill Partners’ parent company, is close to filing Chapter 11 bankruptcy. Seadrill Partners deferred its 1Q17 distribution until an agreement is reached with its lending banks to insulate the company from potential default events. Seadrill is targeting execution of an agreement during June 2017. Seadrill Partners aims to maintain the current distribution level once the agreement is reached with lending banks.
In 2Q16, Seadrill Partners cut its quarterly dividends to $0.10 per share—equivalent to an annual distribution of $0.40. From 2Q16 until 4Q16, Seadrill Partners paid a similar dividend every quarter. Dividend cuts have been common among offshore drillers during the downturn. Most of the offshore drillers (IYE) have suspended dividends. Rowan Companies (RDC), Diamond Offshore Drilling (DO), and Atwood Oceanics (ATW) eliminated their dividends in 2016.
Distributable cash flow
The coverage ratio is distributable cash flow as a percentage of its distribution. Seadrill Partners’ distributable cash flow for the first quarter was $68.9 million—compared to $60.3 million in the previous quarter. In the earlier quarter, the company’s coverage ratio was healthy at 8.01x. The coverage ratio is a measure of a company’s ability to pay its dividends. A ratio of less than one indicates that a company’s cash flow is less than its dividends paid, which might indicate that its current level of dividends isn’t sustainable in the long term. A higher ratio is a healthy sign.