Description

Superior Offshore

DEEPQ

Shares Out: 25.9 mil

Price: $0.55

Mkt. Cap = $14.2 mil

Net Debt = -$28.9 mil

EV = -$14.7 mil

     Superior Offshore was a supplier of subsea construction and commercial diving services to oil & gas companies on the Gulf of Mexico.  Despite earning $48.5 mil in net income in 2006 in the aftermath of Katrina and $14.0 mil in 2005 with their existing assets, management went on a wild spending spree (financed with debt) in an effort to take the company from a niche shallow water domestic player to a big international deep water player.  However, this strategy was ill-conceived and when a light hurricane season hit in 2007 the company found itself in significant financial trouble.  They declared bankruptcy on April 25^th, 2008.  While equity holders usually get wiped out in such a situation, I will demonstrate below what I expect to be a significant recovery for the equity holders of DEEPQ.  I believe the recovery is no less than $1.50 per share and could be up to $2.50 per share or more.  At $0.55 the shares are significantly undervalued.

     Most of the information I will show here comes from court filings.  Anyone can access them for $0.08 per page with a Pacer password.  The website is: https://ecf.txsb.uscourts.gov/cgi-bin/login.pl and the case number for this case is: 08-32590.  Any time I refer to document xxx it is a court filing.

     So let’s start with the balance sheet.  As of the end of July (according to Document 789 filed on 08/20/2008) it looks like this (in millions):

ASSETS

Cash                                                    $17.5

AR, Net                                                $27.5

Inventory                                             $0.4

Prepaid Expenses                                $2.5

Other – Restricted Cash                      $12.8

PP&E (net)                                           $64.7 (actually now $67.2 in cash – see below)

Other Assets                                       $22.0 (of which $18.2 is a deferred tax asset)

Total Assets                                        $147.4

LIABILITIES

Post-Petition Liabs                             $1.0

Note Payble – Secured                       $1.4

Secured Debt – LoC                            $10.7

Priority Debt                                       $0.8

Federal Income Tax                            $7.9

Unsecured Debt                                 $41.3

VAT Tax Payable                                $3.4

Total Liabilities                                  $66.5

So as of June you had a book value of $80.9 mil or $3.12 per share.  But how, much of this is recoverable you might ask?  Let’s review these line items in detail to find out.

ASSETS

• Cash is cash; $17.5 mil is a good number.
• Accounts receivable $28.2 million.  $23.5 million of these were 90 days past due in July, but my suspicion is that it is because no one has been out to collect since the company is in bankruptcy.  Let’s be conservative and assume only a 50% recovery.  Adjusted accounts receivable $14.1 mil.
• Inventory.  Let’s be conservative and apply $0 value.
• Prepaid expenses.  Not sure what these are (some may actually be legal fees), but let’s assign $0 value to be conservative.
• Restricted cash.  This was deposited in escrow to offset any draw on letters of credit related to the construction of the Superior Achiever and some other capital projects and charters (see the 10Q for 09/30/07 pg. 9) and a draw (presumably of the Achiever piece) occurred in May according to document 789.  Let’s write it to zero and assume a reduction of the corresponding $10.7 million letter of credit on the liability side of the ledger.  This is probably conservative by $2.1 million.
• PP&E.  On 07/16/2008 document 568 was filed showing Infinity purchased what appears to be a substantial majority of the company’s assets for $67.2 mil.  While there may be some additional recovery let’s use this as the PP&E value since the cash is now in the bank.
• Other Assets.  Let’s just write them down to $0 and cancel out the federal income tax due on the liability side of the balance sheet to offset the deferred tax asset.
• The net “adjusted” asset number is $98.8 mil.

LIABILITIES

• On the liability side of the ledger let’s assume that the claims are all good with the exception of the federal tax bill for $7.9 mil and the $10.7 mil letter of credit which will be offset with restricted cash.
• Finally assume that the bankruptcy costs $1 mil per month in expenses for another 12 months while things are wound down, so add $12.0 million to the liabilities.
• Our adjusted liability figure is now $59.9 mil.

This leaves our very conservative adjusted book value at $38.9 mil or $1.50 per share.  This is a rock bottom minimum recovery in my opinion.

How could the recovery be higher?

First, the adjusted accounts receivable number used above was very conservative.  In fact, $26.2 mil is a receivable from BP’s Trinidad & Tobago division (see Doc 235 filed on 06/19/08).  It seems highly likely to me that the recovery on this piece of the AR will be substantial considering that Superior likely did substantial diving work for BP.  If 75% of BP alone is recoverable then that adds $5.55 mil more to the recovery assumption on accounts receivable or $0.21 per share, bringing the total recovery to $1.71 per share.

Second, some of the unsecured claims may be bunk.  No one has reviewed them yet.  I hesitate to assign a hard value to the savings that could be generated, but there will likely be some.

Third, the bankruptcy court might be able to go after some of the bad deals the incompetent management made before their departure.  For instance on January 9, 2008 Superior entered into a fire sale of their Achiever vessel to Hornbeck for $70 million in cash to pay their creditors.   However, Superior had agreed to pay 61.7 million Euros for the boat (according to their 10-Q for 06/30/07) at January 9^th exchange rates that equates to $90 million.  This suggests that management sold a brand new boat at a $20 million discount to construction costs in the eleventh hour – that is nearly $0.77 per share in value destruction on one deal alone.  Surely this kind of deal and any others like it should be turned over by the court in bankruptcy.

Finally, the court assigned an equity committee to protect the interest of equity holders (see document 504 filed on 07/09/2008).  The fact that the court felt that an equity committee was necessary strongly supports the case that there will be a recovery.

Risks

The major risk to the recovery is a class action lawsuit against the company and former management team.  However, I view this risk as minimal because document 210 filed on 06/16/2008 confirms that DEEPQ did indeed have D&O Liability Insurance and Excess Liability Insurance to the tune of $509,000 in annual premiums from Chubb, AIG, and Travelers.

Obviously time is another risk here.  The longer the bankruptcy goes on the more legal costs eat into the ultimate recovery.  I think $12 million and 12 months is an appropriately conservative assumption of ongoing costs considering that most of the assets have been converted to cash already, but you never know with court cases. 

Liquidity is a final risk.  The shares are now trading by appointment on the pink sheets.  Buying the shares is a commitment to seeing this bankruptcy to completion.  Surely this is part of the reason that the valuation is absurd as it is.

Catalyst

The wind down and distribution of the significant recovery of at least $1.50 to equity holders.
Additional upside (bringing the total recovery north of $2.50 potentially) may be driven by a substantial recovery of net accounts receivable, a reduction in the unsecured claims once the court reviews them, and the reversal of any potential bad deals done in the eleventh hour by management.