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Pacific Drilling in Downturn: Healthy Enough to Survive?

Sue Goodridge

Pacific Drilling in Stormy Weather: Must-Know Facts

(Continued from Prior Part)

Leverage

Pacific Drilling (PACD) is a highly leveraged company with a current debt-to-equity ratio of 113%. The company is more leveraged than its peer Seadrill (SDRL), which has debt-to-equity ratio of 103%, and other offshore companies (OIH)(XLE) like Diamond Offshore Drilling (DO), Noble Corporation (NE), Atwood Oceanics (ATW), Ensco (ESV), Transocean (RIG), who have debt-to-equity ratios in the range of 61%–73%.

As we observe this downturn for the company, it’s important to determine whether Pacific Drilling is in any position to pay off its short-term and long-term debt. Money management is especially crucial for the company during bad times like these, since leverage magnifies risk amid a sluggish market and increases the probability of a bankruptcy.

Financial health

Pacific Drilling (PACD) had a total outstanding debt of $3 billion as of June 30, 2015. Of this debt, the company needs to pay only 2% in the remaining half of 2015, but between 2016 and 2017, a significant portion of the total debt—23%, or $676 million—needs to be paid off. This amount is far more than the company’s estimated free cash flows for 2016 and 2017. Otherwise put, the company will face major problems repaying its debt.

The company has a net debt-to-estimated-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 5.6 (forward 12 months). This means that, at its current levels of EBITDA and cash, Pacific Drilling will need more than five years to pay back its debt.

The company has a comfortable liquidity position, however, with a current ratio of 1.71. This implies that its current assets exceed its current liabilities. At face value, this would appear to mean that the company would not face a liquidity crunch in 2016 with such a comfortable current ratio. However, other than company’s current liabilities, it also needs to direct $336 million toward the payment of its newbuild ship, the Pacific Zonda (if it takes delivery in 2015), and the company still has $124 million of purchase obligations to be paid before the end of 2015.

In the next and final part of this series, we’ll look at Pacific Drilling’s enterprise multiple, or EV (enterprise value)-to-EBITDA, and its attractiveness as a possible takeover candidate.

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