Pacific Drilling - October Fleet Status Report May Have Pushed Moody's To Downgrade The Company

| About: Pacific Drilling (PACD)

Summary

Pacific Drilling released its October fleet status on October 7. Contract backlog estimated is now $701 million. Pacific Bora is now smart stacked.

Moody's downgraded PACD to Caa3 yesterday with Negative outlook.

PACD is likely about to announce a restructuring under chapter 11 as early as November.

This article is an update of my previous article on Pacific Drilling (NYSE:PACD) from September 23, 2016.

Click to enlarge

Image: Pacific Sharav - offshoreenergytoday.

Note: Quantum Pacific LLP is PACD's majority shareholder and is represented on its board of directors by three board members (~70%).

Note: PACD approved a 1-for-10 reverse stock split of the company's common shares. The reverse stock split was effective May 25, 2016. Please read my article about the subject here.

On October 11, 2016, Moody's investor service downgraded Pacific drilling.

Approximately $2 billion of rated debt affected

New York, October 11, 2016 --

Moody's Investors Service (Moody's) downgraded Pacific Drilling S.A.'s (PacDrilling) Corporate Family Rating CFR to Caa3 from Caa2 and Probability of Default Rating PDR to Caa3-PD from Caa2-PD. Moody's also downgraded the company's senior secured term loan B and the 5.375% senior secured notes to Caa3 from Caa2 as well as Pacific Drilling V Ltd.'s PDC5 7.25% senior secured notes to Ca from Caa3. The Speculative Grade Liquidity SGL rating is affirmed at SGL-4 and the outlook remains negative.

"Pacific Drilling's ratings downgrade reflects our extremely negative view of the offshore drilling sector with no near term signs of improvement. Depressed prices for the offshore drillships offers weak asset coverage for PacDrilling's overall debt. With no material signs of improving contract coverage or utilization for PacDrilling's drillships, cashflow through 2017 will be severely impacted resulting in an unsustainable capital structure" said Sreedhar Kona, Moody's Senior Analyst "Although the company has a significant cash balance, there is substantial risk of covenant breach in early 2017, a view reflected in our negative outlook"...

Fleet Status as of October 7, 2016. Company's fleet status here.

Last investor presentation September 6, 2016. Click here.

N Name

Year

Built

Specification

UDW

Contract

End

Day Rate

K $/d

Client

Location

1 Pacific Bora 2011 Samsung 10,000 design

Smart Stacked

-

Nigeria

2 Pacific Mistral 2012 Samsung 10,000 design

Smart stacked

-

Aruba

3 Pacific Scirocco 2011 Samsung 10,000 design

1/19/17

455

[Total]

Nigeria

4 Pacific Santa Ana 2012 Samsung 10,000 design 4/17 481

[Chevron]

US Gulf of Mexico

5 Pacific Khamsin 2013 Samsung 12,000 design Ready Stacked -

Limassol

Cyprus

6 Pacific Sharav

2014

Samsung 12,000 design

8/19

551

[Chevron]

US Gulf of Mexico

7 Pacific Meltem 2014 Samsung 12,000 design

Smart stacked

-

Aruba
Click to enlarge

Click to enlarge

Commentary:

Pacific Drilling released its October fleet status on October 7, 2016. I noticed a few changes:

  1. The Pacific Bora rolled off contract with Chevron in Nigeria -- 09/27/16 -- and is now warm stacked. This is disappointing news because I was expecting a contract extension possible.
  2. The Pacific Scirocco will have a day rate of $455k/d starting 10/15/2016 until the end of the contract.
  3. The Pacific Santa Ana working in the US Gulf of Mexico had her day rate has been adjusted from $559k/d to now $481k/d, effective 10/1/16.
  4. The Pacific Sharav working in the US Gulf of Mexico had her day rate has been adjusted from $609k/d to now $551K/d effective 10/1/16.

Also, as I indicated above PACD has been downgraded further into junk territory on October 11, 2016. Moody's is saying that "cash flow through 2017 will be severely impacted, resulting in an unsustainable capital structure."

PACD Balance sheet snapshot.

Pacific Drilling released its Q2'16 results on August 8, 2016. Revenues were$204 million, down 0.8% quarter over quarter.

The 4Q'16 will show some weak numbers with the Pacific Bora now idle and a day rate reduction of approximately 10% for the Pacific Sharav and the Pacific Santa Ana.

Despite some progress in reducing costs. For example, in the last presentation the company is indicating that the smart stacking has gone down from $80k-$100k/d to now approximately $30k/d.

According to the last 2Q'16 6-K filing. PACD has a total debt of $3.021 billion, and according to the last presentation in September 6, 2016:

  • As of Sept. 1, 2016, cash and restricted cash balance was $465M and RCF undrawn capacity was $215 million. A liquidity potential of $680 million (see 1)
  • To-date we repurchased ~$60.6M in principal amount of our 2017 notes resulting in a gain of ~$37 million or ~61%.

1 - PACD indicated that its ability to draw further indebtedness under the 2013 RCF facility is limited by a secured debt incurrence covenant contained in the 2017 senior secured notes.

Note: The company has in place a $500 million in revolving credit facility maturing in June 2018 and $285.0 million have been drawn under this facility.

Debt snapshot:

  1. $475 million in 2017 Senior Secured Bonds;
  2. $719 million under the 2018 Senior Secured Term Loan B;
  3. $285 million under the 2018 Revolving Credit Facility (soon to be $500 million);
  4. $737 million under the 2019 Senior Secured Credit Facility;
  5. $750 million in 2020 Senior Secured Notes.

With cash on hand of $465 million and just one drillship currently contracted beyond H2 2017, the company's capital structure looks clearly unsustainable here, as Moody's indicated yesterday.

On September 22, 2016, Pacific Drilling announced the following:

consent solicitation in respect of the Company's 7.250% Senior Secured Notes due 2017 (the "Notes").

The solicitation requests consent from holders of the Notes to amend a covenant in the indenture governing the Notes to allow PACD or certain of its subsidiaries (other than the Company), to incur indebtedness in an amount calculated with reference to the number of vessels owned by PACD or any of its subsidiaries (including the Company), based on a formula prescribed in the indenture governing the Notes. This amendment aligns this provision with the same provision in the indenture governing PACD's existing 5.375% Senior Secured Notes due 2020.

The proposed amendment would enable PACD to incur additional indebtedness which is secured on assets other than the collateral securing the Notes. In effect, the proposed amendment would enable PACD to draw further indebtedness under its revolving credit facility that matures in June 2018, which currently is limited by the secured debt incurrence covenant in the indenture for the Notes.

The indenture governing the Notes may be amended with the consent of holders owning at least a majority in aggregate principal amount of Notes, disregarding Notes owned by the Company or its affiliates.

The consent solicitation is expected to expire on October 4, 2016, but may be extended by the Company in its sole discretion.

Conclusion:

I was hoping for a miracle with this October fleet status, but it did not occur, unfortunately for the company.

Pacific Drilling owns one of the best UDW Fleet around, however, due to a terrible market situation the company is facing a huge problem and will have to restructure its debt load under chapter 11. My guess is that PACD will draw further indebtedness under its revolving credit facility that matures in June 2018 and then starts the restructuring process under chapter 11 that I see as earlier as November.

It is hard to see PACD trading at this level in the next few months and it is likely that the news of a restructuring under chapter 11 will have a strong negative effect on the stock price. A short position on any uptick should be seen as the right strategy and may be a good hedge for the shareholders who are caught with a much higher average.

Important note: Do not forget to follow me on Pacific Drilling and other offshore drillers. Thank you.

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 am trading PACD.

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