majors return to deep water? Rates are down nearly 50 % utilization down to 65% with many new rigs coming on line in the next year or so. If drilling remains steady utilization will fall to nearly 50% because of the new rigs. Day rates down 50% and utilization down 50% means average revenue per rig down 75%, If majors continue to cut budget these numbers drop further.
ATW and PACD have revenue cliff later this year. Many bonds trade in the 40s or lower. We haven't seen bottom yet.
For the price of 100 shares you can buy $10,000 worth of bonds. The stock would have to go to 100 to get the return of the bond if the co doesn't go ch11.
NOW YIELD 22-24%. iF they thought there was any value here they would be buying these large positions hand over fist. Others in this industry have much newer rigs but a revenue cliff looms as many of these rigs will NOT have a contract later this year as they roll off current contracts and are not renewed. Those that are renewed are at nearly half recent rates.
Financial restructuring is in the cards for many of these issuers. Rigs may be valued as low as 10 cents on the dollar. PACD has Sr Secured notes maturing in 2020 that trade at 19 cents. The company has about 5.4 billion in new ships (avg age about 3 years) and secured debt of about 2.9 billion. If you value the whole 2.9 at 19 cents you get a value of $550mm or 10% of book. If you think this is too low, then buy the 5.375% bonds at 19. Earn 27% annual cash return and 500% price appreciation if they don't restructure.
How old are RIGs rigs? Where should they be priced?
PACD currently has a SR SECURED bond 2020 trading at 19 cents on the dollar. The company has 5.4 billion in new rigs (2010-2014) with 2.5 billion in equity. If the company goes out of business you have an ownership position in the rigs at 10 cents on the dollar. If they survive you get 27% annual cash return on investment and over 500% price appreciation.
If you own stock in any company in this industry you may loose everything.
if you own unsecured debt you may get between 0 and 25% of face value.
This industry to get much more volatile when two land based oil frackers file for ch11 by March 16
linn energy 10 billion debt and exxi about 5 billion debt missed payments on Feb 15. Both have 30 day grace. This will upset banks, drillers, and oil companies.
Last September, the morning of the large DHS contract, RWC was trading at 3.80 (down about 20 cents) then the stock was halted and when the news of the 26mm contract was announced the stock rocketed back to 5.70 and in the next few days gave most of the gain back, Contracts continue to pour in but the stock is still stuck at 3.80.
26mm DHS 15.5mm funded
1mm foreign defense contract
2.2mm st of oregon 1.4mm funded
$$ blm blanket purchase order base + 4 years
new 4.2mm DHS contract (this does not look to be part of the 26mm)
These contracts total more than a normal years revenue but the stock has not responded.
Mr market seems to be giving us a gift to add to positions at these levels even though the outlook has improved to such a large extent. Insiders and other large holders were willing to add about 15 % of the outstanding shares to their positions when Privet (the largest stockholder) liquidated last December.
It looks like privet was forced out. The board removed Levenson as chairperson in Mid September and the other Privet board members soon after resigned. I thought that was why the stock was unable to retain the gains after the 26mm contract announcement because of the uncertainty of Privets large 2.3mm share position. I thought that the purchase of nearly all of Privets shares in mid December by insiders would have taken the ceiling of the stock price but it did not. This is a very thinly traded stock and the 200000 balance sold by Privet may not yet have been fully distributed.
I feel that we may be at the end of the distribution and may soon see a major move higher.
I"m adding again at these levels.
WHAT ABOUT THE CO2 CONTRACTS?
Who pays for the transportation of co2?
Haven"t they locked into multi year agreements?
If they go ch11 these agreements can be broken.
If Nat gas prices are too low the acquirer of the assets may let the fields sit and not
extract the gas. KMI looses on both sides.
Waiting patiently for the pullback.
For those expecting a Buffett floor, ask IBM holders how that floor has worked?
WHY DO YOU THINK PRICES WILL FALL?
THE ONLY THING THAT WILL HAPPEN IS THAT THE assets that were purchased for 4 billion will be purchased in bankruptcy for several hundred million, drilling contracts that locked in higher drilling rates or higher completion rates or high co2 cost will be invalidated and new much lower (current price) contracts will will be entered into which will lower the break even rate to produce oil or gas.
This isn't a retail store which goes out of business and the strip mall sits vacant for 5 years or so. The assets from the oil and gas companies will be repriced based upon the discounted cash flows from current market prices. The development has already been paid for. The up front royalty payments have already been made. The knowledge base on how best to frack a field has been discovered. and the debt burden has been eliminated.
in the long run this is great for KMI but in the next few weeks companies with tens of billions in obligations will bite the dust and bond holders and other creditors including KMI will suffer losses exceeding 90%. In the next 12 months probably companies with total liabilities of over 100 billion will go bust.
Price of the companies, banks, and creditors will show huge volatility for the next 6 months or so. I may not catch the top or the bottom but I expect to be able to pick up the middle 80% of each rally. I didn't catch the bottom but from 13 to 17.75 is a trade I will take any month.
sd missed coupon payment will file ch 11 in 30 days 4 billion in debt
exxi missed coupon payment will file ch 11 in 30 days 4 billion in debt
linn energy 10 billion in debt just drew last of credit line
chk bonds yield 50 -80%
Together these companies have billions in accounts payable. If the sr bonds trade at 1-3 cents on the dollar that's about what the other creditors AKA KMI will get on their receivables from these companies in chapter 11.
SD & EXXI have already missed coupon payments. After 30 days grace period they will file ch11. March 17 for both companies.
I also sold today 17.75. Look to re enter between 12-13.
Don't think oil hit bottom yet. New contract on Monday.
worried about receivables. Too many clients are close to ch11.
See my post Not worried about debt but their clients debt"
Add sd to the list 4 billion debt some that trades less than 1 cent on the dollar.
look at "FINRA BONDS" and look at the debt of
LINE 10 billion debt trades at 1-2 cents on the dollar
exxi 4 billion debt trades at 1-2 cents on dollar
chk 11 billion yield 50-80% last week short bonds traded at over 200% yield
Many other smaller companies in just as bad shape.
The bond market is saying that many of these over leveraged companies aren't going to make it.
If they owe KMI payables you can only expect to get what the un secured bondholders expect to get (1-2 cents on the dollar) KMI has 1.3 billion in receivables.....You can bet that some portion of this will never be collected.
Linn energy completely drew down 750mm available credit line (usually 2nd last event prior to ch 11.
exxi missed semi annual interest payment this week (30 day grace) last event prior to ch 11.
report from analyst this week said 175 companies are at risk of ch 11. I think we are weeks away for many of these companies not months or years.
Took my profits today.... expect to repurchase between 12-13.
Last year the first quarter had sales of 8.5mm which was much larger than the year before. If you assume a normal first quarter is about 5mm and you layer on 1/3 of the 15mm homeland security September contract and half of the 4mm current DHS contract you bring the revenue line to 12mm. Sales this year may be 50+mm compared to about 30mm last year. Second and third quarter could be $15-16mm each.
The market will punish a company that mises sales and should reward those with growth. I would think 60% should be enough growth to get the markets attention.
All of those companies that have rigs on order to be delivered in the year or so are buying assets that are worth only half of what they have paid or contracted price.
If a rig costs 750mm , were delivered today and you had a choice of purchasing the rig or repurchasing your own debt at 50 cents on the dollar, which would you do?
If you could purchase the rig at half price or repurchase your debt for 50 cents, which would you do?
I would think that companies would repurchase your debt. 100% chance of 100% return in five years. With a rig, who knows?
If this is the case, then should all assets be written down by 50%? Maybe a little extreme but others in this industry aren't going to make it and I bet their assets are sold for much less than half of book.
Patiently waiting, but surprised that NE bonds are selling off as much as they are. Some little rally in oil isn't going to turn things for this industry. Keep an eye on the bonds of companies of this industry. As long as they continue to fall there is NO chance the stock can have a meaningful recovery.
That''s usually the first thought of any wall street banker or analyst.
Up to now there was no need for any analyst to cover this stock. They weren't growing and had losses. But more importantly they did not need any financing. The big money on wall street is doing IPO's, secondary offerings debt issues or credit line fees.
ULBI spent their cash load on this recent $11mm acquisition. and indicated on the call that they were still looking for potential acquisitions. Any additional acquisitions will need financing
Ulbi has now had 4-5 profitable quarters with a good pipeline going forward. They may need additional financing in the near future and now have a good story for the analyst community. With the possibility of banking fees on the horizon we may now soon see some positive analyst coverage.
I will take the other side of your trade.
Company continues to control costs, Sg&a down to 3.2mm from 3.9mm last year. R&D was up 350k. If you adjust for the R&D and other 150k adjustment your earnings would be nearly the same as last year with lower sales in both divisions. This is a smaller company and has lumpy sales based upon government contracts that have uncertain timing.
The company took several years to make an acquisition. They didn't just make any acquisition to show growth but took their time to find the best opportunity. I suppose that they will be able to provide synergies with current operations and wring out cost as they have done with ULBI over the past few years.
I don't currently like the market but i seems that most people are cautious with the russell 2000 down 20% from its recent highs.
I am holding my position and plan to add id we dip below 5.
LOOK AT THE CHK BOND THAT MATURES IN 4 WEEKS.
company has 1.7 billion in cash and 4 billion in credit line availability. The bond has 475mm outstanding.
It only trades at 84 giving a yield to maturity over 200%.
the next CHK maturity is over a year later. Once they clear these bonds they have over a year's breathing room to have commodity prices recover or to restructure the company.
This market is spooked.
If CHK bondholders are selling at these levels you may find the NE bonds that mature in 2017 trade much lower than the current market.
YOU CAN BUY THE BONDS FOR ABOUT A PENNY.
If the company doesn't file for ch 11 you only get back 100 times your money.
If they do you still may get something.
But at one cent the matket telling you that you probably won't see anything. Secured holders will get everything.
Today ATW bonds fell 6 points (from 41 to 35) boosting the yield above 40%. At the same time the stock was up over 20%. You can bet your bottom dollar that the stock will retrace if the bonds don't rebound. Why would anyone own the risky stock when the bond has a yield that would double your money every other year (41% square root of two). In addition in the event of failure you may get cents on the dollar vs nothing with the common. (recent HERO ch 11 was an exception. Common got 3% of surviving company and bond holders 97%).
ATW is on the precipice of a revenue cliff. They had about 97% of their fleet on charter but all of it but one rig comes off this year. The bonds are saying that they may not have toe cash flow to service the debt in the next couple of years (I agree). If all of their rigs are released at current rates (about half of outstanding contracts) they will still have tight cash flow problems prior to maturity.
Paragon already in default, transocean bonds yield north of 21%. PBR the worlds largest rig user on a investment decline with 24 billion of bonds due in the next 24 months. North sea oil among the most expensive in the world.
I would think that only three quarters of the rig fleet will be deployed in the next 3-5 years and at only 1/2 of previous charter rates. This industry needs 10-15 year time line from bidding on tracts, doing simsic, preliminary drilling and evaluation, if oil is present then additional exploratory work to find the extent of the field then years and billions to develop the field. On the other hand fracking needs a good futures curve and the driller can hedge drill frack and produce within 3 months.
This market has changed. Bonds reflect this,
The market won't hit bottom until the excesses in this market are flushed out.
THEIR BONDS TRADE AT 17%.... cost of capital much higher than 10%
Equity cost by definition should be higher than bond cost because of higher risk.
THIS RIG COST 235MM TO BUILD IN 2014. iF YOU ASSUME A 10% COST OF CAPITAL AND A 10% DEPRECIATION RATE YOU NEED ABOUT 46MM A YEAR TO BREAK EVEN. 95k a day is only about 35mm a year. Better than nothing but doesn't provide a positive return.
Don't follow the stocks of this industry. Follow the bonds. google FINRA BONDS choose the morningstar bond sight , plug in the NE symbol into the search function. sort by maturity.
longer bonds yield over 17- 18%.
others in the industry are over 20-25%
THIS WILL GET VERY UGLY LATER THIS YEAR AS OTHERS HAVE RIGS COME OFF CONTRACT AND DEBT REPAYMENTS WILL COME INTO QUESTION. tHIS INDUSTRY MUST FIRST FLUSH OUT THE UNDERCAPITALIZED BEFORE IT CAN RECOVER.
Patiently waiting for an entry point.
4 YEAR BONDS NOW YIELD OVER 20%.
Too much debt.
Too many new rigs on order.
I bet by the end of the year riggs that were just built for over $600mm will trade in the secondary market for less than $200mm. PGN on the verge of ch11 (currently in default). Who will buy their riggs.
If a company can repurchase their 5 year debt for less than 50 cents on the dollar why would they buy a rig in the secondary market. They have a 100% chance of a 100% return in five years with the repurchase of their own debt . You can't say that about a rig purchased at a discount.
At least another year of misery in this sector.