I would actually now buy the debt over the equity in light of the fall in oil. I agree with peterdvorets that there is a higher chance of a liquidity crunch with the rollovers and no new work out there on the horizon. Dayrates will be coming down quite a bit in my opinion, eliminating profits for PACD for the next two years.
I think the debt offers better protection so long as it's the senior debt. In the event of a cash crunch and a forced Ch. 11, the debtholders would probably wipe out and replace the current equityholders. Just my .02 from the sidelines.
If the Jan. report does not show a follow-on contract, this stock could take out recent lows in my opinion.
If you look at the news around the world for offshore drilling (and onshore for that matter), the drop in oil prices has made quite a few drilling projects uneconomical currently. The layoffs are everywhere in the drilling sector.
Its financing costs appear to me to be much higher for whatever reason.
It's paying $220M/year in interest on $2.8B in debt so even with the great dayrates it has received to date, it makes minimal profit. It has recognized that fact and is trying to pay down debt but it will be years and years and years before it makes a dent. The big question mark for me (and the company's management according to the latest 10Q) is where the company plans to get $600M to pay for the Cobalt Explorer next year. It currently has no solid plans. Financing for the sector will now be prohibitively expensive. Since it is fully leveraged already and can't pay for it out of operations, I think the terms it receives for the $600M are going to be horrible and will eat up more than all of its profit.
When the Platinum Explorer rolls off contract at the end of 2015, I think it won't get anywhere near $590,000/day which will further exacerbate the losses. The Tungsten Explorer won't get anywhere near $641,000/day when it rolls off contract in 2016.
I think VTG accepted horrible initial loan rates to get the money to build the first few ships and had to pay it for years. It refinanced a good chunk to lower (but still high) rates while dayrates were high but the damage was done. I think it will have a problem coming up with the money to pay for its latest ship and to repay the $500M 2017 term loan and will have to refinance it at whatever rates exist then.
The lawsuits between it and its former board member wherein each alleges the other defrauded them sucks time, energy and $ away from the business. Allegations by the company that it was defrauded by its board aren't good for business relationships with clients.
Finally, as far as a signal, I'm looking for the first wave of bankruptcies for onshore producers some time next year. That will cause a capitulation panic dive for everything energy related in my opinion; after that, I think sanity will return and people will realize that with the bankrupt over-borrowers out of the way and lenders no longer willing to create more, the rest of the adults in the industry can get back to matching supply and demand in a profitable fashion and not borrowing hundreds of billions to drill as many holes as possible whether they're ever profitable or not.
As far as offshore drilling goes, the same macro concepts apply. However, whereas quite a few of the onshore producers (i.e. clients of onshore drillers) are highly levered, for the most part the offshore clients who use offshore drillers aren't as highly levered. They tend to be the big companies/NOCs since the average independent company isn't buying an offshore lease and spending billions of dollars and years of drilling, etc. to put together the resources to exploit a massive offshore play. If you had access to easy money (and they all did), you could declare yourself an onshore driller and jump into the mix; you can't do that offshore as easily. That barrier to entry is what will have saved offshore drilling from the lunacy that has gone on onshore where anyone with a pulse could borrow tens of millions and start digging holes whose production dropped off 60-70% in the first year and never actually made a profit.
Thus the clients for offshore drilling aren't as likely to go bankrupt.
With the exception of a few notables (SDRL and all of its affiliates and VTG), offshore drilling companies may be levered but they can survive the lower dayrates that have been dropping all year long. I think companies like HERO and PGN which have been touted as "pureplay" standard rig companies are going to go Ch 7, not Ch 11. They're dead and their assets are worth what the Southern Cross was worth: whatever someone is willing to pay to scrap them. With them out of the way, dayrates will stabilize.
In my view, SDRL will trip covenants next year or in 2016 and the lenders will all pile on with cross-defaults and force a Ch. 11. RIG, DO, ESV, and maybe ATW will pick it apart. SDRL's management screwed the pooch giving US and EU regulators the middle finger re: sanctions so its assets have value but only under a different management team. It is a pariah.
I like PACD based on valuation and its assets and think it will get acquired within 18 months.
Just my opinions
As much as all of the talk nowadays is on cutting capex for 2015 and oil prices falling to $40, I believe supply and demand will take hold again after all the panic selling and shorting going on nowadays.
A good portion of the companies heavily involved in onshore shale are way too highly levered to avoid Ch. 11 at this point in my view. Some have hedged out through 2015 at higher prices; others haven't. The ones that did have preserved their cashflow for at least a year. The ones that haven't will be forced into Ch. 11 by their creditors in the next 12 months in my opinion.
Those that did hedge aren't far behind. They can cut capex now but, given decline rates for the shale wells, that puts the US production levels potentially falling within 12 months which will stop the fall in the price of oil but with less oil being produced onshore US. I don't know what the price level will be but I believe it will be at a level that forces those onshore producers that hedged out a year into cashflow problems once those hedges are gone since their debt will still be there and they had debt coverage ratio issues at higher prices.
The big question for me is what the fallout will be of all the Ch. 11s since the hedges are executory contracts as I understand it and those can be assumed or rejected in bankruptcy. I think those companies that are users of oil and are locking in what they think are long term hedges against price rises are in for a bad surprise when the counterparties to their hedges go bankrupt and reject the hedge contracts in bankruptcy (i.e. they undo the deals).
The turning off of easy money for the sector has happened already as evidenced by credit default swap rates. That makes continuing to borrow to drill, drill, and drill some more onshore not doable prospectively. That won't change any time in the next few years since the hangover from the popping of easy $ bubbles doesn't go away for a while.
The "shale revolution" was just killed.
I believe over half were built on spec by non-drillers. If everyone thinks the companies that have experience drilling are in a world of hurt, I can only imagine how panicked the people are who are running the funds that agreed to pay hundreds of millions for a jackup they don' t know how to work and couldn't put to work anyway in this environment.
There should be some real good deals on brand new equipment in 12 months... below cost substantially in my view.
Waiting to buy into this one but the trend is amazingly down so I'll just keep waiting.
Should be an amazing investment when I finally take a position.
Anyone think it can get to a forward PE of 3?
I'm not sure but the company initiated a dividend to return money to shareholders in a different avenue than existed before the drop in oil/share price. In my opinion, they're pretty astute at running return calculations and taking action to increase EPS/leave options open.
I wouldn't expect any action before the annual meeting early 2015 but I don't think the oil price drop will rebound before then so the share price is probably going to be around these levels for months. I could see them authorizing a buyback at the annual meeting.
At these share prices, for the cost of one jackup, the company could buy back close to 10% of the stock.
Since the money can be borrowed under current credit facilities for next to nothing and one jackup would not boost EPS by 10% (and would contribute to market oversupply), it seems like a decent option.
The company doesn't need to scrounge up cash for current commitments like other companies.
Decent given the current environment.
Management played accounting games with its subsidiaries to keep the financing spigot open in my opinion. That spigot was just shut off apparently but SDRL's accumulated debt did not just go away.
Entering into the deal with Rosneft in an apparent attempt to evade sanctions was a mistake in my opinion. Giving the middle finger to the people who decide what is, or is not, illegal is foolish. SDRL learned that lesson the hard way when more onerous sanctions were imposed right after the lawmakers received the middle finger.
This company looks to me to be run by extreme gamblers whose assessment of relative risks has been way off.
Just my opinions.
Cut its dividend to $0. Necessary for it not to cashflow itself into insolvency but, given management's ludicrous reassurance that it could pay billions a year the company did not have in dividends going forward, will probably result in lawsuits.
Interesting flame out.
Who knows if it will stay here, but it's higher than it was pre-earnings now in only 8 trading days.
Highlights that investing timeframes are relative. If you were short, I hope you booked profit on the drop.
You'd never know it from the stock price but net institutional holdings went up through 9/30/14 according to the filings received so far.
Biggest reporting buyer so far was Herndon Capital Management, which purchased 2,047,192 shares.
Biggest reporting seller so far was Columbia Wanger which, finally, sold out so their basically non-stop selling over the last year is gone.
I'm normally not one to suggest a buyback since, for the most part, I think companies buy back stock at prices that are too high. However, if this goes sub-$30, I think the company would best be able to deploy its capital if it approved a stock buyback. It will be printing $ this year and will have paid down an additional $100M toward the two new ships by the end of 2014 leaving 2015 capex, the dividend, and scheduled debt payments well covered by cashflow.
With respect to Credit Suisse's report this morning, I've never understood why a paid analyst would change their 12 month target or other aspects of their outlook within hours of finding out whether the basis for the belief is accurate or not. Why not wait to hear what management says first before announcing you're changing your one year targets/taking other actions? Anyone who is paying the analyst for their opinion likely wants it to be based on current facts and not a guess, especially when the actual facts will be known within 2 hours.