Image: Paragon Jackup M823.
On Friday, February 12, 2016, Paragon Offshore announced the following:
Entered into a plan support agreement (the "PSA") with respect to the terms of a chapter 11 plan of reorganization with holders representing an aggregate of 77% of the outstanding $457 million of the Company's 6.75% senior unsecured notes maturing July 2022 and the outstanding $527 million of the Company's 7.25% senior unsecured notes maturing August 2024 (together, the "Noteholders") together with lenders ("Revolver Lenders") representing an aggregate of 89% of the outstanding debt (including letters of credit) under the Company's Senior Secured Revolving Credit Agreement (the "Revolving Credit Agreement"), to support a restructuring on the terms of the Plan (as defined below) described herein, as well as the terms of a continuing letter of credit facility in the case of the Revolver Lenders. The PSA contemplates that the Company will file for voluntary relief under chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware (the "Bankruptcy Court") on or before February 14, 2016 in accordance with the terms of the form of plan of reorganization annexed to the PSA (the "Plan").
Paragon Offshore also entered into an agreement with Noble Corp. (NYSE:NE). However, I will not comment in detail about this second part, because I consider it, as not important.
This agreement involved 77% of the bondholders of the $457 million senior unsecured due on 7/2022, and the $527 million of the unsecured due 8/2024, representing an aggregate of 89% of the outstanding debt.
In short, the bondholders will exchange $984 million of debt for 35% of the share outstanding, and $345 million in cash payment. It is an exceptional deal considering the situation that far exceeded my expectations, I must admit.
Looking at the bondholders they still get a good deal considering that the 2022 note was trading under 3, and the 2024 was trading under 18 and they go 35.
However, ~$1.4 billion secured debt is still remaining, and the cash position is now $224 million. The new covenants are a tiny less draconian with a consolidated EBITDA 2017 equal or above $248 million. Also:
The Revolving Credit Agreement shall be amended to provide for a $165 million upfront cash payment, an extension of the maturity to 2021, a rate increase to LIBOR + 450bps with a 1.00% LIBOR floor, a minimum liquidity covenant at all times set at $110 million (subject to a grace period if the minimum liquidity remains above $95 million), a suspension of the net leverage ratio and interest coverage covenants until the first quarter of 2018.
As always, the devil is in the details... And I see a huge problem arising with the minimum liquidity covenant and minimum cash. PGN will have to control cash burn very tightly over the next 2 years.
Why I am not really confident Paragon Offshore will be able to survive?
First, we will have to look at the source of the problem, which has not changed, and is getting even more serious.
It is called contract backlog expectation for the next two years. I have created a graph below that resumes the situation as of 2/2016. I calculated a contract backlog at approximately $831 million - $925 million, including the entire 2016 - that ends in 2018. After 2018, the company has zero backlog left.
However, the drillship DPDS3 contract, is still renegotiated with Petrobras and the dispute involves 380-day, which means a total risk of $131 million (not sure exactly if it is about the total day-rate or not?) and an estimated 62-day at 0-rate indicated in the FSR.
This is a total of $138 million that can be deducted to the backlog as a safety. I do not even indicate the cost of some 5-year survey that may occur in 2016-2017.
For the ones who need more details, I have indicated the total backlog calculation (my best estimate). Not indicated is the 19 rigs actually cold stacked or idle.
|RIG name|| |
|Day rate $k/d|| |
|Noble Ed Holt||11||12||9,8||38||13||14||11||37|
The contract backlog of 2016 (11 months) is approximately $496 million ($590 million for the entire 2016) and for 2017 is approximately $296 million.
Now, the question is whether or not this contract backlog will be increased by new contracts. The answer is not an easy one, however, judging by the situation, PGNPF will be extremely lucky to add any significant contract backlog in 2016 and part of 2017. I have estimated about $100 million for 2016-2017.
In this eventuality, we will have to look at the balance sheet. I commented on the 3Q'15 on November 9, 2015.
Here is an excerpt of the PGNPF balance sheet:
3Q'15 Financial Snapshot (3 consecutive quarters)
|Q2 2015||Q1 2015|
|Revenues $ million||368.97||393.24||430.65|
|Net income $ million||(1,084.8)||47.33||61.16|
|Net cash from operating activities $ million||79.7||96.6||210.4|
|Net income excluding special items $ million||0.30||47.33||40.07|
|Gain on disposal of assets $ million||12.72||4.08||16.795|
|Non-cash impairment $ million||1,150.9||1.7||0|
|Gain on debt repurchased $ million||0||0||4.3|
|Earnings per share - basic||(12.46)||0.51||0.69|
|EPS excluding special items||0.00||0.57||0.47|
|EBITDA $ million||140.3||158||160|
|Contract drilling operating costs $ million||190.54||196.97||225.11|
|Average daily revenues $||144,158||148,537||152,353|
|Capital expenditures $ million||43.7||62.4||50.7|
|Cash and cash equivalent $ million||735.7||112.36||85.77|
|Outstanding long-term debt $ million||2,569.4||1,984.4||1,990.9|
|Shares outstanding in millions||87.077||85.836||85.055|
|Rig utilization in %||64%||67%||73%|
|Backlog in $ billion||1.29||1.6||1.9|
At September 30, 2015, liquidity, defined as cash and cash equivalents plus availability under the company's revolving credit facility, totaled $735.7 million while the company's leverage ratio, the ratio of the company's net debt to trailing twelve months EBITDA as defined in the company's revolving credit facility, was 3.07 at September 30, 2015.
I estimate the total revenues for 2015 at $1.5 billion, with a trailing EBITDA at $672 million. Now, with $590 million in 2016 and $296 million in 2017, how PGNPF can seriously make it alive?
I'd rather let you decide for yourself.
Honestly, PGNPF is on its way to oblivion, and I do not say that with pleasure, it is just simply a fact when I look at the actual fundamental and FSR.
That said, I see a tremendous potential to trade the stock, and I have been actively trading this news on Friday. However, I did not want to keep anything over the weekend.
Based on the future expectation, I see PGNPF going back to trouble very soon, and I do not think the oil price situation will allow the company to survive this bear cycle. I may be wrong, but it is my honest conclusion.
I simply hope shareholders can use this unexpected gift, as a rare opportunity to exit at a profit for some, and at a limited loss for others.
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 only trade PGNPF on special occasion.
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