2009 | 2010 | ||||||
Price: | 27.40 | EPS | $1.99 | $1.20 | |||
Shares Out. (in M): | 144 | P/E | 2.5x | 4.2x | |||
Market Cap (in $M): | 700 | P/FCF | 3.7x | 3.1x | |||
Net Debt (in $M): | 820 | EBIT | 267 | 187 | |||
TEV (in $M): | 1,520 | TEV/EBIT | 4.4x | 5.9x |
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Songa Offshore (SONG NO) represents an attractive and asymmetric equity opportunity. The company is an offshore drilling company operating 5 semi-submersible rigs and one drill ship in the midwater space. The shares currently trade at ~27.5 and a greater than 60% upside in the near term with less than 10% downside.
I'll start with the downside which I view as quite limited. Using a conservative replacement value estimate of 1,400MM USD for the rigs (market value with embedded contracts and recent capital improvements likely higher than 1,800MM USD) and subtracting the net debt (considering CF, amortization of the bank line and capex for improvements coming in the next 4 months) at 3/31/10 yields an outright ownership value of ~750MM USD or ~25 NOK/share - less than 10%.
A brief history is important. The company was growing rapidly, took on a material amount of leverage and added a rig mid 2008. As higher priced contracts of average duration 1.5+ years were beginning to bring in more cash (daily revs going from 900k to 2.5MM) they were pretty comfortable. In the fall of 2008, the company did not anticipate that come the winter they would not be able to roll some supplemental CP they had issued. They were forced to amend bank lines, dilute the shareholders and restructure some convertibles which were a great investment at their lows (40 cents on the dollar).
Currently, the financing situation has stabilized, the company is paying down debt at a rate of 60+MM/ quarter and the lending environment for hard asset businesses (especially offshore) has opened up. Several of their rigs (in Australia and Western Africa) have rolled off contracts and are working on shorter duration contracts. Should these rigs gain additional contracts at market rates (275+/day) there will be no issue. Being conservative in our assumptions however we model significant downtime and lower rates for such rigs. The result of such conservative assumptions is that the company, after considering capex, amortization of debt etc. will have to raise money in Q1 2011. Hence the current valuation.
Please see the following table for a comprehensive quarter by quarter look at cash needed and generated based on a full build out of the company financials and month by month contract rates (not sure how well this will post):
Dec-09 |
Mar-10 |
Jun-10 |
Sep-10 |
Dec-10 |
Mar-11 |
Jun-11 |
Sep-11 |
Dec-11 |
Mar-12 |
Jun-12 |
Sep-12 |
Dec-12 |
|
Beginning Cash |
69.8 |
73.0 |
74.7 |
71.8 |
62.0 |
44.6 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
Minimum Cash |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
20.0 |
Cash Available |
49.8 |
53.0 |
54.7 |
51.8 |
42.0 |
24.6 |
- |
- |
- |
- |
- |
- |
(0.0) |
Cash Created |
63.2 |
61.7 |
57.1 |
50.2 |
42.6 |
49.2 |
52.0 |
44.8 |
41.4 |
44.9 |
35.3 |
33.5 |
36.1 |
Available / (Required) |
113.0 |
114.7 |
111.8 |
102.0 |
84.6 |
73.8 |
52.0 |
44.8 |
41.4 |
44.9 |
35.3 |
33.5 |
36.1 |
Mandatory Payments |
60.0 |
60.0 |
60.0 |
60.0 |
60.0 |
84.0 |
60.0 |
45.0 |
45.0 |
45.0 |
107.5 |
45.0 |
45.0 |
Modified Available / (Required) |
53.0 |
54.7 |
51.8 |
42.0 |
24.6 |
(10.2) |
(8.0) |
(0.2) |
(3.6) |
(0.1) |
(72.2) |
(11.5) |
(8.9) |
Beginning Balance |
952.1 |
892.1 |
832.1 |
772.1 |
712.1 |
652.1 |
578.4 |
526.4 |
481.6 |
440.2 |
395.3 |
360.0 |
326.5 |
Borrowings |
- |
- |
- |
- |
- |
10.2 |
8.0 |
0.2 |
3.6 |
0.1 |
72.2 |
11.5 |
8.9 |
Payments |
60.0 |
60.0 |
60.0 |
60.0 |
60.0 |
84.0 |
60.0 |
45.0 |
45.0 |
45.0 |
107.5 |
45.0 |
45.0 |
Ending Balance |
892.1 |
832.1 |
772.1 |
712.1 |
652.1 |
578.4 |
526.4 |
481.6 |
440.2 |
395.3 |
360.0 |
326.5 |
290.4 |
There are several events on the horizon which will unlock value in the shares i) the "free agent" rigs will likely be contracted for the majority of 2010 before the end of the year - capital budget allocation at oil companies in action and constrained rig supply in Australia due to strict licensing requirements ii) the company may raise additional debt with a 2+ year tenor for reasonable rates eliminating any concern related to refinancing iii) the sell-side brokers offering valuation targets on the company and openly discussing the risks associated with equity are the same ones pitching the company on new (and quite obtainable/reasonable) debt structures - once they get their pound of flesh in fees they will explain with great pride that they have found a gem of a stock among rubble which will surely outperform. The value at a 4x forward EV to EBITDA is ~NOK45 (more than 60%) with more upside should the oil markets tighten and contract pricing rise.
Should folks indicate interest in the comments, I will try to post a comprehensive model so you can stress the assumptions. Not quite sure the logistics of this, but I will likely try to do so in a manner similar to doobadoo802's 10/8/07 writeup of CALM with a posting on geocities or its equivalent.
Some additional info:
Please see the company's presentation for some color slides that lay out info regarding the contracts etc in easy to read graphics: http://www.songaoffshore.no/index.php?name=Investor_Relations%2FPresentations.html
Industry
Risks
Rig Summary
i) additional contracts
ii) new debt structure
iii) equity accretive paydown of debt
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