Paragon Offshore (OTCQX:PGNPQ)
This article is an update to my preceding article about Paragon on March 12, 2016.
Today, March 25, 2016, the company filed an 8-K SEC filing to announce the following:
As previously reported, on February 14, 2016, Paragon Offshore plc (the "Company") and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief (the "Bankruptcy Cases") under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
In connection with the Bankruptcy Cases, on March 24, 2016, the Debtors filed an amended plan of reorganization (the "Amended Plan") and disclosure statement (the "Amended Disclosure Statement") with the Bankruptcy Court.
What is the amended plan of reorganization?
99.1 - Updated Financial Projections
99.2 - Updated Valuation Analysis
99.3 - Amended Risk Factors
First, let's talk about 99.1:
(US$ in thousands)
My first thinking was, where are these numbers coming from?
In my preceding article, I reported the 2015 results, which verify the revenues for 2015. Now, let's analyze the "projected" numbers for 2016, 2017, 2018 and 2019.
1 - How the revenues for 2016 have been calculated
To be able to come up with a possible number, we have to look at the actual backlog first, right? What does it say?
Assuming a revenue of around $290 million for 1Q '15 - PGNPQ has $299.6 million in 4Q '15. Here is a complete calculation of what remains from 4/1/2016 to 12/31/2016.
|PGNPQ 4/1/2016||2016||2017||2018||2019||Day rate||2016||2017||2018||2019||Total|
|Noble Ed Holt||9||12||9,8||0||38||10||14||11||0||35|
The remaining backlog for 2016 is estimated at $333 million that will be added to the $290 million of 1Q '16 to be a total of $623 million in backlog revenues for 2016, which is close to the revenues projected for 2016 in the 8-K or $675 million.
However, nothing has been indicated about the dispute with Petrobras (NYSE:PBR), which represents a whopping 370-day or $128 million in backlog.
An excellent article from oilpro.com explained it:
Upstream reports that the nearest the state-run company has come to triggering arbitration proceedings in these negotiations was with Paragon Offshore, regarding the DPDS2 and DPDS3, formerly the Noble Leo Segerius and Noble Roger Eason.
The two parties disagreed over contractual terms inked between Petrobras and Noble Corp. (NYSE:NE) roughly four years ago, relating to a major upgrade of the two drillships, undergone at the BrasFels shipyard in Brazil.
Under the original agreement Petrobras agreed to pay a stand-by rate of $80,000 (according to reports) for the first 150 days of the dry-docking for each drillship. However, Noble Corp. assumed the risk of any delay beyond this time. The same clause said that all dry-docking time would be appended onto the four-year contracts, set for expiry in 2016 and 2017.
However, the upgrades took 450 days and 370 days, respectively. The two vessels were thereafter transferred to Paragon as a consequence of Noble's decision to spin off much of its fleet, Upstream reported.
Though the vessels have performed well, the current cost-cutting climate prompted Petrobras to inform Paragon that it was considering only 150 days of dry-docking as charter time - thereby eliminating nearly a year of backlog on one unit, and 220 days on the other.
Upstream wrote that with "little to lose... Chief Financial Officer Steve Manz went public with the dispute, suggesting that a legal battle was imminent." The contract for Paragon-managed semisub Dave Beard is also up in Q3-16.
Paragon said that the two contracts, as originally signed, comprised $493 million of drilling services backlog with Petrobras now putting about half of this at risk.
This issue will not go away by magic, and it is totally certain that Paragon Offshore will have to negotiate a cost under a "blend & extend" potential situation, if lucky, or an outright day rate reduction for the remaining contract.
2 - Now we have the real problem coming to light, with the 2017P, 2018P and 2019P - P as financial projections.
I estimated the total backlog for 2017 at approximately $321 million, with an exposure of $83 million for the DPDS3 dispute with Petrobras.
Revenues "projected" in the 8-K are set at $702 million, which is absolutely overblown.
The situation is getting even worse for 2018 and 2019! Paragon Offshore has a backlog remaining of $63 million in 2018, and $3 million in 2019 compared to a "projected" revenues of $934 million and $1,109 million, respectively.
This is pure fiction, and based on absolutely no logical reasoning, albeit the numbers are indicated to the dollar.
My projection will be:
I have made a graph below to show the disparity between the actual backlog and the revenues projected.
How can it be possible? Where will the company be able to get this extra $1 billion a year in contract backlog for 2018 and 2019?
The question is whether or not the court will be convinced by these incredible numbers.
This simple test is putting a credibility doubt on the entire valuation analysis that will be presented to the court, which is scheduled to give its approval on June 2016.
3 - Risk of Non-Confirmation of the Plan
This part explains what may happen if the plan is not confirmed.
Furthermore, Paragon's parent negotiated forbearance under its Prospector-related lease agreements through April 15, 2016. The company is not in compliance with the covenants and is negotiating a permanent waiver of the default under the lease agreements.
If no waiver can be obtained the Prospector entities may file for Chapter 11 as well, complicating the entire process.
This whole process seems to hang on a frivolous "financial plan" that makes no sense at all. Revenues projected are totally unrealistic and overblown to hide a catastrophic situation. It will be interesting to see if the court is playing along with this fabricated plan and gives its green light.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I trade the stock occasionally
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