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Why Seadrill Partners LLC Surged Nearly 20% in April

Matthew DiLallo, The Motley Fool

What happened

Seadrill Partners LLC (NYSE: SDLP) rallied in April, ending the month up 19.6%. While higher oil prices played a role, the main fuel was news that its parent company received court approval on a restructuring deal with bondholders.

So what

Crude oil continued rebounding in April, with the global benchmark price, Brent, jumping 7.7% to nearly $75 per barrel. Driving that rally was the continued improvement in market fundamentals as demand growth remained strong while supplies tightened. Those stronger oil prices make it increasingly likely that oil companies will approve additional offshore drilling projects, which should boost rig demand and dayrates, setting Seadrill Partners up to earn more money in the future.

An offshore drilling rig with the sun setting in the background.

Image source: Getty Images.

While those improving market conditions provided a boost to Seadrill Partners' valuation, the main driver of last month's surge was the news that its parent company's plan to exit bankruptcy received court approval. That agreement will extend the maturity of $5 billion in bank loans and convert $2.3 billion of bond debt into new equity. Further, several major investors will inject another $1 billion of equity into the company. While Seadrill Partners severed its financial ties to its parent last year, the bankruptcy deal is good news for the company. That's because the deal didn't result in its parent dumping the 46.6% stake in the offshore driller it currently holds to repay debt, which lifted some of the weight of uncertainty that had been holding down Seadrill Partners' valuation.

Now what

With oil prices higher, offshore drilling activity levels should start improving in the coming months, which would be good for Seadrill Partners. Add in the improving financial situation of its parent, and things are starting to look up for the offshore driller. However, that doesn't mean volatility is in the rearview mirror, which is why investors need to keep risk in mind before diving into this stock.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.