Strong June Fleet Report And Acceptable Administration Steps Bode Well For Paragon Offshore

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• Publié par: sidneykory89
• Publié le: 19 juin 2015
• Nombre de lectures: 0
• Licence : En savoir +
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• Langue: English

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powerful june fleet report and

Summary Paragon Offshore continues to be a extremely misunderstood inventory with explosive appreciation likely. Management is doing a excellent task of contracting rigs in a hard setting, they have commenced to cold-stack idle rigs, and the SinoEnergy bank loan has cut default threat significantly. Paragon continues to be dangerous but it is an attractive speculation at the recent value. Paragon Offshore (NYSE:PGN) filed their June Fleet Report a few times in the past, on June 15th. In contrast to some of the other authors on Searching for Alpha, I identified the June fleet report to be unambiguously robust. This is the very first monthly fleet report in which Paragon would seem to have really made a internet natural addition to its backlog by which I imply that the monthly revenue earned in the quarter was much more than completely replaced by the value of new contract activity. The contracting photograph was certainly bolstered by the long-expression three 12 months agreement on L784 and a sequence of brief term new contracts/extensions on M826, MDS1 and a couple of remaining Pemex rigs (M841, B301, M824) which hold acquiring extended month to month. Paragon also cold stacked two GoM rigs which will support lessen opex and hold marketed utilization at least steady with the degree of last quarter (even now as well lower, in my viewpoint). In my last post, regarding the SinoEnergy sale-leaseback transaction, I had advised ready till the June fleet report before committing new money to Paragon. With the June fleet report in, I uncover the bullish thesis to be intact. Paragon Offshore continues to be a quite misunderstood inventory. There is certainly a whole lot of unfavorable sentiment about the inventory. Worries about the long phrase contracting photo in oil services are definitely suitable. Nevertheless there are overblown anxieties close to the SinoEnergy mortgage, the Moody's downgrade, credit card debt covenants, and the Pemex circumstance which continue to weigh on the inventory. The SinoEnergy Loan (its a Loan, not a Sale!) Men and women even now look to believe that Paragon offered their Prospector rigs for $292 million and is now leasing every single of them back for $71k/thirty day period (or $four.two mil/month for the pair). In their versions, they are dinging Paragon's FCF by up to $twelve million/quarter. Listed here is why that is bogus: as talked about in my previous write-up, the SinoEnergy transaction is genuinely a secured financial loan in which Paragon is receiving $292 million in bank loan proceeds secured by the Prospector rigs. The lease payments are payments on that bank loan and they consist of curiosityas effectively as principal compensation. So, in the very first month, the interest expense may well be 7.5% x $292 million / twelve months = $one.8 million. So the $two.4 million stability of the $four.2 million lease payment is in essence principal reimbursement on the bank loan. Just like a house loan, over time the curiosity

component will drop as the principal receives compensated off. Principal repayment is not usually deducted from Free of charge Cash Stream. So, in terms of impact on free money flow from the SinoEnergy offer, the organization will shell out $5.four mil for each quarter in curiosity as an alternative of the $two.five mil they had been paying out on the revolver (assuming the three.five% revolver fee on $292 million). So the extra expense is a lot more like $3 million/quarter, not $12 million. But even that is not the entire story, simply because the business is now totally free to use its free of charge money circulation to pay down its discounted financial debt. With an aggressive financial debt buyback hard work, Paragon would help save much more than the $three million/quarter. Moody's Downgrade If the SinoEnergy bank loan is so great, then why did Moody's downgrade the firm's bond rating? In using out a loan, Paragon is escalating their indebtedness whilst the firm's functions continue being the same. This will anxiety the regular metrics this sort of as the leverage ratio. But in Paragon's scenario, I imagine that the bank loan proceeds will most likely be used to decrease credit card debt. When this happens, the credit metrics will increase and the downgrade may well well be reversed. Moody's is not the most prescient forecaster both. You might remember that they forecasted that PGN would do $a hundred thirty mil in totally free income circulation for the calendar year 2015. Then PGN went and did $one hundred mil free of charge money streamin Q1 alone! Credit card debt Covenants A lot of folks are carping about Paragon's debt covenants and the back again fifty percent of 2016. I would invite all this sort of men and women to overview Paragon's presentation at the JP Morgan Worldwide Substantial Yield &amp Leveraged Finance Meeting. Specifically review internet pages 19-22 where we see that the $800 million revolver is the only element of Paragon's money composition which carries any financial covenants. Paragon will not breach any covenants in 2016 simply because the revolver will have been paid off well ahead of then. I estimate that there was $370 million left on this revolver at Q1. Following the $292 million financial loan cash in July and Q2 operations are in the guides, Paragon will be capable to considerably spend the revolver off in July. Undoubtedly they can do so by the finish of Q3. No revolver means no covenants to breach which means default is basically off the table for the following 5 a long time. Pemex More than the earlier handful of months, Pemex has abruptly terminated several of their contracts. These terminations have influenced Paragon twofold. Very first the terminations have affected Paragon simply because the company had a lot of rigs doing work for Pemex that had been matter to termination. Next, it has affected Paragon simply because the company is spending to maintain a lot of of people now idle rigs warm-stacked, hoping/anticipating that some of these rigs will be recontracted when Pemex drilling action returns to regular. Hence Paragon is spending a double price because of to the recent uncertainty. This situation will not last extended. Possibly the rigs will be re-contracted, which will be bullish clearly, or the rigs will be cold-stacked and utilization will return to typical amounts. This will also be bullish (albeit much less bullish) simply because it will minimize charges by up to $40 million for every quarter.

Searching at Q2 With Q2 mostly in, my estimates are as follows: &nbsp Estimate Paragon Q2 2015 $ million Earnings $384. Income Value -$233.2 Depreciation -$90. SGA -$15. Running Revenue $forty five.8 Net Desire -$28. Taxes -$3.six Net Earnings $fourteen.3 &nbsp&nbsp EBITDA $a hundred thirty five.eight FCF $fifty four.three These estimates are at the higher end among the variety of road estimates. So you can say I am hunting for a mild earnings conquer. Bottom Line If one particular designs the curiosity payments accurately and agrees that the big number of idle, warm-stacked rigs is an anomaly and chilly-stacking is the foreseeable future norm, then it stays difficult to generate scenarios where Paragon goes funds circulation unfavorable. The decks are cleared for accretive financial debt repurchase action starting next thirty day period and even operational enhancement (both by recontracting or cold-stacking idle rigs). Take gain of a bit of misplaced Moody's-inspired quick expression stress and use June and July (just before the mortgage closes) as a good time to re-enter the inventory. I am ready for unambiguous comply with by way of on the investment thesis (financial debt repurchases and a rebound in promoted utilization) before upgrading my estimates and targets for Paragon.