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Pradeep Kandasamy
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A sell side broker and an investor for the last 2 years looking to move into buy side.
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  • Seahawk's (HAWK) value is around $6 7 comments
    Feb 15, 2011 12:10 AM | about stocks: HAWKQ, HERO, PDE
    Asset Sale and Chapter 11 Details
     
    The following links are the press releases from HAWK and HERO.
     
    Highlights of the transaction
     
    ·          HAWK sells all operational assets to HERO (all 20 rigs and related assets)
    ·          HERO takes over not only the assets but also cash, receivables, payables and contractual rights related to the rigs.
    ·          HAWK gets 22.3 million shares of HERO and $25 million is cash. The cash part which is to pay back the DIP loan can be increased upto $45 million if needed. In that case, the number of shares paid will be reduced based on a fixed share price of $3.36.
    ·          Every $10 million is additional cash means 2.976 mio HERO shares less for HAWK
    ·          HAWK has obtained a DIP loan of $35 million from DE Shaw Group
    ·          DIP credit facility is to support its business and liquidity needs when in Chapter 11
    ·          Transaction is expected to be closed in second quarter 2011
     
    A Look at Liabilities

    HAWK submitted a list of 30 largest unsecured creditors as part of the Charpter 11 documents in the court. The entire list can be found below in Annexure.
     
    ·          The largest claim is from Pride for $15.62 million (contingent and disputed). As per the agreement, all Pride claims and assets are retained by HAWK and will not be taken over by HERO.
    ·          HAWK also has a claim due from Pride for $1.44 million. Hence the net liability works out to $14.18 million.
    ·          All other claims in the top 30 list are trade payables which as per the asset sale agreement will be taken over by HERO
    ·          As per the 3Q numbers, HAWK has a differed tax liability of $16.4 million, which as per the agreement stays with HAWK.

    For more details on items included and excluded in the asset sale agreement, please refer to the HAWK’s 8-K filling. It contains the full asset purchase and DIP credit agreement. Therefore the retained liability post transaction which HAWK might have is $30.58 million; everything else is taken over by HERO.

    I am not going beyond the top 30 claims which were filled with the court as the size would be insignificant. The last claim in the top 30 list is for just $28,438. Again I highlight HAWK settlement with pride could be lower as they are disputed.
     
    A Look at DIP Loan
     
    The DIP loan obtained from DE Shaw needs to be paid back from the cash part of the consideration paid by HERO. The facility secured from DE Shaw is USD 35 million. The initial cash part of the asset sale agreement is $25 million. This DIP loan is to support business activities and liquidity till the transaction is closed in Q2. Though the secured facility is USD 35 mio, it might not be fully utilized.

    To estimate the DIP loan outstanding when the transaction is completed in Q2, I looked at the operational cash flow of HAWK.
     
    Operation cash flow of HAWK
    Q3 2010 – Negative $ 14.23 million
    Q2 2010 – Negative $ 21.15 million
    Q1 2010 – Negative $ 15.49 million
    Q4 2009 – Negative $ 9.65 million
     
    Assuming the transaction will be closed within one quarter from the date of announcement, it’s unlikely that the cash part of the consideration needs to be increased from $25 million. Even in the worst quarter (Q2 2010) the operation burnt only $21.15 million. So I assume the cash part of the sale consideration will remain at $25 million.
     
    Actually there might be some cash left with HAWK after paying for DIP loan from the $25 million. But again being conservative, I am assuming that the full $25 million will used to pay back the DIP loan.
     
    HAWK Valuation
    When the transaction gets completed, I expect the following scenario (on a conservative note)

    ·          HAWK will be left with 22.3 million share of HERO
    ·          HAWK will have a liability to Pride of $14.18 million
    ·          HAWK will have some Differed Tax Liability (DTL)
    ·          HAWK would have used USD 25 million cash from the sale to pay back the DIP loan in full
    ·          No other assets and liabilities as all operational asset and liabilities taken over by HERO

    To value HAWK in this scenario is quiet simple which is (assuming DTL at $16.4 million)

    HAWK = ((22,300,000 * HERO) – 14,180,390 – 16,401,000) / 11,993,305

    Without considering differ tax liability (DTL)

    HAWK = ((22,300,000 * HERO) – 14,180,390) / 11,993,305

    Where
    HAWK and HERO are stock prices of each
    11,993,305 is no of outstanding shares of HAWK

    Based on HERO’s closing price of $4.27, the implied value of HWAK based on the above formulas is $5.39 and $6.76 (with and without considering DTL).
    DTL has been coming down consistently quarter over quarter and I expect it to be much lower than $16.4 million when the transaction is completed.

    This gives HAWK a value range of $5.39 to $6.76 based on HERO price of $4.27. Mid of this range is $6.075. If HERO moves higher, HAWK should follow as well.


    Annexure: Top 30 Creditor Details



    Disclosure: I am long HAWK.

    Additional disclosure: Bought HAWK at open yesterday.
    Stocks: HAWKQ, HERO, PDE
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Comments (7)
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  • Ian Bezek
    , contributor
    Comments (1087) | Send Message
     
    Pride wants more money than you stated. Whether they get it or not is a different question.
    15 Feb 2011, 09:33 PM Reply Like
  • Andrew August
    , contributor
    Comments (7) | Send Message
     
    The Mexican tax issue will also rear its ugly head in this process. The amount Pride is claiming is $50m.
    From the 8-K:
    "The Notice states that the Company has failed to pay to Pride credit support fees, which are based on the credit support provided by Pride during the fourth calendar quarter of 2010, that have become due and payable in the amount of $459,215.63. In addition, the Notice states that the Company’s failure to make a payment to Pride in the amount of $260,866.31, which amount represents reimbursement to Pride for payments that Pride made to a third party pursuant to the credit support provided by Pride under the Tax Support Agreement, as requested by Pride in a written letter dated January 6, 2011, has resulted in an event of default under the Tax Support Agreement. In the Notice, Pride also states that it terminates its obligation to provide any additional credit support instruments under the Tax Support Agreement and directs the Company to cash collateralize Pride’s current aggregate credit support exposure under the Tax Support Agreement by paying to Pride an amount in U.S. Dollars equal to 600,136,853 Mexican Pesos.

     

    The Company believes that it has defenses to the claims set forth in the Notice and expects to contest such claims in the Bankruptcy Case. The ability of Pride to seek remedies to enforce its rights under the Tax Support Agreement is automatically stayed as a result of the filing of the Bankruptcy Case, and Pride’s rights of enforcement are subject to the applicable provisions of the Bankruptcy Code."
    15 Feb 2011, 11:29 PM Reply Like
  • YngvaiMalmsteve
    , contributor
    Comments (171) | Send Message
     
    Pradeep,

     

    The HERO transaction was at a *fixed* share price of 3.36...it states this very clearly on HERO's website. That means, using your formulas, HAWK's valuation is $5.06 *at best*, and $3.70 with the DTL. That makes HAWK a very poor choice to buy given that it's in the 4's right now.
    15 Feb 2011, 11:34 PM Reply Like
  • Pradeep Kandasamy
    , contributor
    Comments (67) | Send Message
     
    Author’s reply » Fixed price of 3.36 will be used for calculating for no of HERO shares HAWK will receive if HAWK draws more than $25 million in cash. If HAWK draws only $25 million in cash (which i expect) then HAWK will receive 22.3 million HERO shares, which HAWK can sell at market price. So the fixed price can be used only to estimate the number of shares not its value (for which market prices must be used).
    16 Feb 2011, 12:18 AM Reply Like
  • qwerty3656
    , contributor
    Comments (52) | Send Message
     
    What about the Mexico Tax claim?
    17 Feb 2011, 05:05 PM Reply Like
  • Ian Bezek
    , contributor
    Comments (1087) | Send Message
     
    I think he is assuming the court will dismiss these -- which if he is correct -- will result in his investing thesis probably being correct. I wouldn't bet on that legal outcome though...
    17 Feb 2011, 05:16 PM Reply Like
  • qwerty3656
    , contributor
    Comments (52) | Send Message
     
    I worked for a company where our parent went bankrupt, but we (the subsidiary) did not. All our claims/contracts were treated just like a 3rd parties claim (we had our own creditors and had to look out for their interests). I don't see why that tax claim is not legitimate.
    18 Feb 2011, 09:47 AM Reply Like
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