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Pacific Drilling: The End Of Sharav Contract Hurts, But Valuation Stays Compelling

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About: Pacific Drilling S.A. (PACD)
by: Vladimir Zernov
Summary

Pacific Drilling reports 3Q 2019 results.

The company has several news on the fleet front. Pacific Bora will work again after being warm stacked for some time.

The end of Pacific Sharav contract puts pressure on the company's financials.

Pacific Sharav

Pacific Drilling (PACD) has just reported its third-quarter results. The company’s shares have recently been under pressure due to negative sentiment on drillers and fears about the potential cash burn at the company. Let’s look at the results to see whether such fears are justified.

Fleet update

Pacific Drilling had a few contracts to report:

  1. Drillship Pacific Khamsin got a second option well from Equinor (EQNR). The rig will now work into the third quarter of 2020.
  2. Drillship Pacific Bora got a new one-well contract from Eni (E) in Oman.

Interestingly, Pacific Drilling’s report did not provide any additional data on the Bora contract – we do not know when the work starts and what is the estimated duration of the contract. Anyway, that’s good news since Bora was without work since July 2019. Currently, all four of Pacific Drilling’s active rigs have contracts while three drillships remain cold stacked. Drillship Pacific Sharav will end its current contract with Chevron (CVX) in January 2020 so this rig will most likely be the main focus of Pacific Drilling’s marketing efforts in the near term. Importantly, Sharav’s contract has three additional option wells at escalating dayrates (current dayrate is $175,000) so there’s a chance that Sharav will get additional work straight after the end of the current job.

Financials

Pacific Sharav completed its contract at a previous-era dayrate in August 2019, and this development had an immediate impact on Pacific Drilling’s financial performance. The company’s revenue dropped from $76.4 million in the second quarter of 2019 to $54.3 million in the third quarter. Net loss jumped from $73.6 million in the second quarter to $90.8 million in the third quarter. At the same time, successful management of receivables led to an increase of cash position from $305.5 million in the second quarter to $355.9 million in the third quarter. This is an important development as liquidity is a crucial factor for Pacific Drilling whose main strategy is to wait out the current low dayrates and then put its modern fleet to work at higher rates that will allow it to service its debt.

Valuation

Following a major downside revision of deepwater rig values, Bassoe Offshore values Pacific Drilling’s fleet at $1.35 billion-$1.49 billion. With $356 million of cash on the balance sheet and $1.06 billion of debt, Pacific Drilling’s “theoretical” value should be about $700 million while the current market cap is about $200 million. A no-brainer? Unfortunately, it’s not that simple since there are two main concerns. First, the company will experience downside pressure on liquidity following the end of the lucrative Sharav contract – a $551,000 dayrate was replaced by a $175,000 dayrate. Second, three rigs out of seven are cold stacked. This is a major risk since these rigs hold $500 million-$550 million of fleet value. Should these rigs never work again, their value will be essentially zero. Currently, the market completely writes these rigs off the company’s valuation. My opinion is that at least one rig out of these three, Pacific Meltem (current valuation $199 million-$220 million) will make it back to the market since Pacific Drilling has the financial resources to put it back to work and will most likely aim to do this closer to 2021. A possible positive catalyst is a favorable decision on Zonda arbitration (Pacific Drilling is in a court battle against the yard that was building the Zonda drillship; the claim could be found on the balance sheet under “receivable from unconsolidated subsidiaries - $205 million).

Conclusion

Pacific Drilling stays risky as ever, and investors and traders alike should keep in mind that the stock will remain highly volatile for the time being and that proper risk management and take-profit techniques should be used when dealing with the company’s shares. However, current levels look interesting due to valuation – but broader investor interest in drillers’ shares will be necessary to turn the current setup into a momentum play.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PACD over 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 may trade any of the above-mentioned stocks.