Trinidad Drilling's Buy Back of Convertible Debentures Should Boost Shareholders

Mar.25.09 | About: Trinidad Drilling (TDGCF)

Trinidad Drilling Ltd.'s (OTCPK:TDGCF) decision to buy back a percentage of its convertible debentures should give shareholders a much needed boost but any reduction in company debt from the plan will be minimal if at all.

That's the prognosis from analysts following the announcement Monday that Trinidad will acquire and cancel up to 10% or C$35.4-million of its C$354-million face-value convertible debenture issue.

Blackmont analyst Roy Ma wrote in a note to clients:

Given that we believe the convertible debentures are one of the factors placing downward pressure on Trinidad's stock price, we anticipate this announcement to eventually be positive for Trinidad's shareholders.

However, based on our current forecast, we do not expect Trinidad to generate enough cash flow to meaningfully reduce corporate debt in 2009. Therefore, while a step in the right direction, we do not expect the initiative to improve Trinidad's balance sheet until 2010 at the earliest.

Mr. Ma maintained his "hold" rating and left his C$4.50 price target unchanged.

Raymond James analyst Andrew Bradford reiterated his "outperform" rating and C$6.50 price target, noting Trinidad can offset C$113 in interest expense for every C$1,000 it spends buying back its convertible debentures.

Trinidad cannot disclose the rate it is paying on its revolving credit facility, but we think it's fair to assume it's lower than 11.3%, making this a marginally cash flow improving proposition (by approx. 1/2-cent per share annually, after tax, assuming the full C$35.4 million face value is repurchased at C$68.75). Also, every dollar it spends buying back debentures will reduce its total debt obligation by $1.45.

That said, Mr. Bradford also believes Trinidad's C$165-million capital program this year that will likely exceed its cash flow generation until sometime in the third quarter.

As such, any amounts allocated to buying back its debentures would, in the interim, come from tapping its C$225 million revolver. So in essence, Trinidad will be increasing its secured debt load to reduce its junior debt load (albeit at a rate of C$1.45 reduction in junior debt for every C$1 increase in senior debt).

So depending on how one prices seniority in debt, buybacks today will not reduce as much risk as it will later this year when Trinidad's free cash flow should turn positive, and it begins reducing total debt.