By Alex Gavrish, Etalon Investment Research; author of "Wall Street Back To Basics"
Noble Corp. completes spin-off of Paragon Offshore
On August 4th, Noble Corp. plc (NYSE:NE) completed the spin-off of its standard specification offshore rig business into an independent, publicly traded company called Paragon Offshore plc (PGN). Noble distributed one share of Paragon Offshore for each three shares. Paragon Offshore started trading on August 4th on the New York Stock Exchange under the symbol PGN. The spin-off was received coldly by the market and share price declined 14% during the first two days of regular trading. We believe the Paragon Offshore spin-off provides investors with a classic spin-off and orphan equity situation.
Spin-off company profile
Paragon Offshore plc is a pure-play global provider of standard specification offshore drilling rigs. The company's drilling fleet consists solely of standard specification rigs and includes 34 jackups and eight floaters (five drillships and three semisubmersibles). This focus on a single specification supports the company's strategy to deliver its services in an efficient and cost-effective manner. Paragon Offshore's primary business is to contract its rigs, related equipment and work crews to conduct oil and gas drilling and workover operations for exploration and production, or E&P, customers on a dayrate basis around the world.
Based on a recent share price, Paragon Offshore plc had a market capitalization of $880 million and an estimated (using net debt estimate provided by the company) enterprise value of $2,580 million. Based on pro-forma financial statements for 2013, Paragon Offshore had EBITDA of $759 million and is currently valued at an EV/EBITDA multiple of x3.4. According to historical financial statements for 2013, standard specification rig business generated $822 million in cash flow from operations and $456 million in free cash flow. Paragon Offshore plans, initially, to spend approximately $85 million annually to pay a regular quarterly dividend. Such payout would provide a 9.9% dividend yield, based on the August 5th closing share price.
Initially, Noble Corp. plc planned to execute an IPO of 20% of Paragon Offshore plc as part of the spin-off process. The plans were cancelled later as equity markets were not "favorable" to the process. Noble Corp. proceeded with plain spin-off of a 100% stake in the company. Paragon Offshore raised debt financing in order to repay intercompany debt and pay for assets transferred to it in a spin-off. As Paragon Offshore market capitalization is small both in absolute and relative terms, the spin-off situation presents investors with a classic spin-off situation and a typical orphan equity. With the parent company not in the best of times, at least judging by its share price performance, it is no wonder that during its first two days of trading the spin-off was received coldly by Mr. Market. According to registration filings, Paragon Offshore expects to initially pay a quarterly dividend at a rate of $80 to $90 million annually. Taking a midpoint of this range would provide investors a dividend yield of 9.9%. It is reasonable to assume that the dividend amount projected by the company as part of a spin-off registration is conservative, and the company might increase it in the future. High dividend yield should provide a downside support for the share price while a classic spin-off situation (small cap, unfortunate timing, small market capitalization relative to parent, weak share performance of the parent and weakness in the sector) creates opportunity and should provide significant upside potential going forward.