Paragon Offshore, the spinoff of offshore drilling contractor Noble Corp. (NE -1.2%), says it plans to issue $1.2B in private debt, using the proceeds to pay a portion of debt it expects NE to issue the new company as part of the spinoff.
Paragon will own and operate the majority of NE’s standard specification drilling business, while the remaining company will focus on running NE’s modern, high-tech assets and will concentrate on deepwater and ultra-deepwater operations.
NE announced the spinoff last September and suggested it could issue up to 20% of the shares in the new company through an IPO, but in April the companies scrapped that plan and instead decided to simply distribute shares of Paragon to existing NE shareholders without an IPO.
Shares of offshore drillers are floating higher as Morgan Stanley’s team returns from a visit to Norway having seen increased signs of demand returning, with the newest most efficient rigs favored.
Stanley views Seadrill (SDRL +0.2%) as the best way to play an improving rig market, as it expects to lock up 2014-15 availability relatively soon, which should again tighten up the dividend and financing debate and result in a tightening of the yield.
Noble Corp. (NE +1%) is higher even as Susquehanna cuts its estimates following last week's fleet status update, noting that newbuild jackup Tom Prosser was contracted at a $203K dayrate, and the contract on the Paul Romano was cut from two years to six months, causing a $223M reduction in contracted revenue for 2015-16.
Diamond Offshore (DO +1%) is upgraded to Equal Weight from Underweight with a $57 price target, up from $47.50, at Morgan Stanley, which says earnings risk has largely played out and shares have an attractive yield.
The cycle is turning and floater availability has peaked, the firm believes, expecting trading to be driven increasingly by the reduction of floater availability through a pickup in fixtures rather than the confirmation of negative data points on dayrates.
Stanley sees negative sentiment on the offshore drillers group reversing to the extent that ballooning floater availability is absorbed from upcoming contract announcements.
Noble Corp. (NE +0.2%) says it plans to go ahead with a spinoff of its standard specification rigs into a separate company but will not do so as an IPO; instead, it will effect the spinoff as a dividend of Paragon Offshore to NE shareholders during Q3.
Paragon Offshore will own and operate most of NE's current standard specification drilling business, including five drillships, three semisubmersibles, 34 jackups and one FPSO; NE will continue to own and operate its high-specification assets.
Cowen retains its Outperform rating on NE, believing the market has already priced in a low valuation on the new company; the firm sees new clarity surrounding the future of the spinoff as a slight positive for NE shares (Briefing.com).
Noble Corp. (NE) +1.4% AH after Q1 earnings surged 70%, beating expectations, as the offshore driller saw new rigs help lift revenues.
Noble, with a fleet of ~77 drilling units, says revenues from drilling services, which makes up most of the company's top line, rose nearly 30% Y/Y to $1.2B as several new rigs went into operation and operating days improved.
Average daily revenues gained 5% to $223.6K vs. the previous quarter average of $212K, reflecting the addition of premium assets, while fleet utilization rose to 84% in Q1 compared to 82% in Q4 2013.
Contract backlog as of March 31 was ~$14.3B, vs. $15.4B as of Dec. 31.
Societe Generale raises its rating on Seadrill (SDRL -1.7%) to Hold from Sell but the firm still isn't a fan of the offshore driller, and sees better investment opportunities in Noble Corp. (NE -1.2%), Rowan (RDC -1.5%) and Ensco (ESV -0.9%).
The firm believes 2014, 2015 and 2016 consensus might now be a bit too low and that the current $3.92 annual dividend (11% yield) might be secure, but in the event of an unexpected harsher scenario of declining oil prices and/or higher interest rates, it finds little reassurance in SDRL, whose net debt could rise to $17.5B by the end of 2015.
NE, RDC and ESV are the firm's preferred options because they offer only slightly less expected financial rewards for a much lower degree of financial risk.
RDC has fallen less than companies with exposure to the floater market thanks to its greater exposure to jackups, but Stanley sees a surge in jackup orders, driven largely by speculative drillers at Chinese shipyards; the jackup orderbook now stands at a record 140 units, of which only ~20 have been contracted.
In the sector, the firm recommends yield plays such as Seadrill (SDRL), Seadrill Partners (SDLP) and North Atlantic Drilling (NADL), and prefers premium asset exposure through Atwood Oceanics (ATW), Ensco (ESV) and Pacific Drilling (PACD) over lower-end fleets via Diamond Offshore (DO), Noble (NE) and Transocean (RIG).
Shares of offshore drillers have been sinking, but Citigroup is calling a bottom, at least for Transocean (RIG +1.4%), which the firm upgrades to Neutral from Sell.
The firm believes the fall in deepwater rig rates amid a softening of rig demand in 2014 will transition to stability and eventual recovery over the next 12 months; against a backdrop of strong oil prices and improving economic conditions, along with the large inventory of deepwater oil discoveries awaiting development, the firm thinks the current pain in the rig market will be short lived.
Drillers likely will be forced to settle for short-term contracts at dayrates of $400K-$450K for rigs that once commanded $600K, the firm says, but RIG shares should be able shrug off the bad news, as they did yesterday.
Other offshore drillers also are higher: DO +1.1%, NE +1.6%, ESV +1.2%, ATW +1.6%, SDRL +2.1%, HERO +2.4%, RDC +1.2%.
Shares of offshore drillers Transocean (RIG +0.8%) and Diamond Offshore (DO +1.6%) are holding up well despite lukewarm updates for the status of their fleets.
RIG said one rig had signed a nearly three-month extension but another floater is now idle, which puts the total number of idle rigs in the fleet at four; RBC analysts think 2014 will continue to be characterized by dayrate pressure for all floaters and downtime between contracts, and RIG could stack some older rigs if demand does not materialize.
DO signed a contract for one of its rigs, but Cowen cut its price target to $47 from $50 and earnings estimates to $4.50 from $4.60 as it increases the expected idle time on one rig to three months from one month and expecting another to be stacked next year.
National Oilwell Varco (NOV -2.8%) is downgraded to Neutral from Buy at ISI Group, which says deepwater and ultra-deepwater rig demand are diminishing, and dayrates are weaker than the market appreciates.
Other oil services names also are lower: SLB -0.9%, HAL -0.2%, BHI -0.2%, NE -3.8%, CAM -1.3%, WFT -1.8%, SPN -2%, FTI -1.3%, DRQ -2.9%, KEG -0.9%.
An offshore drilling platform owned by Noble Corp. (NE) and operated for Petrobras (PBR) has been stabilized and non-essential personnel were evacuated after tilting, but there appears to be no risk of it sinking.
The SS-53 platform, located in the Campos oil basin off the coast of Rio de Janeiro, began to list early this morning, leading to the evacuation of 79 crew members to another rig.
Seadrill (SDRL -3.3%) may fail to secure the sales prices and external financing required to sustain its current dividend as equity and asset values are slipping, Wells Fargo worries as it downgrades shares to Underperform from Market Perform.
The firm says SDRL's aggressive dividend policy has never been funded solely by the operations of its high-quality fleet, but instead through the sale of equity and convertible debt, equity in sponsored entities such as North Atlantic Drilling (NADL -1.3%) and Seadrill Partners (SDLP -1.5%), and the outright sale of rigs.
The dividends of other drillers, including Ensco (ESV -0.9%), Noble (NE -0.2%), Transocean (RIG -0.2%) and Diamond Offshore (DO -0.2%), look safer for now, the firm says.