Paragon Offshore plc (fka PGNPQ)

[SPARK]

Nice article on PGNPQ: The expected recovery in the markets along with Paragon Offshore's strong market position make Paragon Offshore a strong, yet high risk play, on an offshore recovery.

Paragon Offshore - High-Risk Play On An Offshore Recovery
Jan. 3, 2017 1:19 PM ET| About: Paragon Offshore PLC (PGNPQ),
Paragon Offshore has had a difficult time since it was spun off from Noble Corporation with an aging fleet and a high debt load.

Paragon Offshore has been working on reducing costs while serving the bottom portion of the market. At the same time, we can expect the oil markets to recover soon.

Combining Paragon Offshore's impressive market position along with restructuring plan should allow the company to survive a drawn out crash. When oil prices recover, this should reward shareholders.

Paragon Offshore (OTCMKTS: OTCPK:PGNPQ) is an offshore driller that operates a large fleet of offshore jackups. Since the start of the oil crash, the company has seen its stock price drop rapidly to present share prices of $0.2 per share. However, Paragon Offshore is currently undertaking a major restructuring, a restructuring that will enable it to handle a drawn out crash. This restructuring combined with an anticipated recovery in the oil markets, as we will see, make Paragon Offshore a solid bet on an eventual oil market recovery.

Introduction

Paragon Offshore is a young company that was originally formed in 2014 by Noble Corporation (NYSE: NE), when the company spun off its older rigs. Shares in the company were handed to shareholders based on how many shares in Noble Corporation investors had at the time. The company has a well diversified fleet of jackups spread across the world.



Paragon Offshore Rig - Offshore Energy Today

Paragon Offshore has had an incredibly difficult time since the start of the oil crash. After the company's spin-off from Noble Corporation, the company's debt load along with a rapid drop in the oil markets have significantly hurt the company's stock price. In early 2016, the company declared Chapter 11 bankruptcy, and has since been attempting to restructure itself and exist bankruptcy.

Paragon Offshore Chapter 11 Progress

Paragon Offshore is an offshore driller with a well distributed fleet. However, the debt load that the company was saddled with by Noble Corporation combined with a broad oil market downturn, means that the company has been struggling to survive.



Paragon Offshore Restructuring Plan - Paragon Offshore Investor Presentation

Paragon Offshore was one of the first offshore drillers to declare bankruptcy, when it filed Chapter 11 bankruptcy on February 14, 2016. The company anticipates that despite being one of the first offshore drillers to declare bankruptcy, it won't be the last. And Paragon Offshore's shareholders have punished it. Despite being spun off with a share price of roughly $10, the company has seen its stock price drop by 98% to a present share price of just over $0.20.

On June 21, Paragon Offshore began its confirmation hearing. On August 5, the company revised its restructuring plan. The company originally anticipated emerging from Chapter 11 in early to mid 4Q. Through this plan, Paragon Offshore anticipated paying $285 million in cash to bondholders along with giving them 47% of the company. In exchange, bondholders were trading in a massive $984 million in debt.

However, Judge Christopher Sontchi, the advising judge in this case rejected the bankruptcy plan. The company feels that this $285 million in cash to bondholders removes too much cash from the company in the midst of the downturn. While this is not something I agree with, I am not the judge in this case. And in order to push this plan through, Paragon Offshore will need to revise its plan and get its bondholders to accept this.



Paragon Offshore Rejected Restructuring Plan - Paragon Offshore Investor Presentation

I will not attempt to speculate on the details on this new agreement. But one thing is clear, Paragon Offshore will need to decrease the cash it hands out to shareholders. The rumored proposed alternative to the plan is that Paragon Offshore shareholders will receive 18% of the new company in exchange for only $115 million in cash being paid to bondholders at the present time. The same amount of debt will be eliminated.

Personally, I find this very unlikely to happen. Shareholders that were previously looking at 53% of the combined company and now, in exchange for a company with slightly more cash, shareholders are looking at 18% of the combined company. Personally, I find that there will be some sort of middle ground. Shareholders will have roughly 35% or so of the combined company and the cash paid will be approximately $200 million, or slightly less.

And as we will see, regardless of how things work out, Paragon Offshore will have the market position to handle a drawn out crash with strong income potential. Now that we have an overview of where restructuring is headed, let's look at the combined company. However, through this analysis, keep in mind that there is a very good chance that if you invest today you might only end up owning 20% of your stake in the company today, in a few months.

Paragon Offshore Operational Overview

Now that we have a thorough overview of the bankruptcy process that Paragon Offshore is going through, let us discuss Paragon Offshore's operations.



Paragon Offshore Operational Performance - Paragon Offshore Investor Presentation

In the event of a drawn out oil downturn, customers have their pick of the drilling contractor they want to choose. At the same time, however, they have greatly reduced budgets. They are looking to maximize the amount of drilling that they get done with that budget, and Paragon Offshore, with its old rigs, is in a unique position. The company can afford to offer customers rigs at a low cost occupying the bottom sector of the market.

As a result, Paragon Offshore, to dominate this sector, needs to keep its costs low. The company has managed to significantly reduce its total recordable incident rate with Noble Corporation. As a result, the company's incident rate in 2015 was roughly 20% of the company's 2001 incident rate. By maintaining a low incidence rate, Paragon Offshore will have lower expenses and a strong safety record. This will help the company maintain a strong market position.

At the same time, Paragon Offshore has been working to reduce its overall costs in all other sectors. The company's operational downtime has decreased to just 0.8% in the most recent quarter, an operational downtime that will continue to decrease. This low operational downtime will allow Paragon Offshore to lower its costs. This will allow the company to continue to profit at a lower dayrate.

Offshore Drilling Industry Outlook

So far we have discussed the process of Paragon Offshore's restructuring along with how that restructuring will place Paragon Offshore in a significantly better market position. We have also discussed Paragon Offshore's impressive operational performance along with how the company's costs should continue to decrease. This will allow Paragon Offshore to continue to serve the bottom end of the offshore drilling market.

Now that we have done this, let us finish up by discussing the offshore drilling industry.



Offshore Drilling Industry - Paragon Offshore Investor Presentation

As a result of the market crash, oil companies have been significantly reducing their capital budgets. Oil prices, despite their rapid recovery from the beginning of 2016, have continued to remain volatile. However, jackup activity is expected to increase. At the same time, the jackup market is full of old rigs. These old rigs will be removed from the market soon decreasing available supply.

On top of this, the oil market can be expected to recover soon. OPEC production has reached a peak with the recently announced large production cut by the organization. Not only that, but this is the first production cut to incorporate non-OPEC countries since 2001 with Russia joining the production cut. This should help oil prices continue to recover in the future.

This recovery in oil prices should result in an increase in capex boosting the offshore drilling markets, and with it Paragon Offshore. More importantly, a recovery in the oil markets should free up the capital markets too for oil companies. This will make it easier for Paragon Offshore to restructure its debt, or push it out, in anticipation of additional future cash flow.



Oil Market Recovery - Paragon Offshore Investor Presentation

As we can see above, historic oil downturns have traditionally lasted less than 24 months. This crash, even though it was a drawn out crash, is anticipated to have seen its bottom in January 2016. That means it was 20 months from the time when oil prices began to fall to their low, one of the larger oil downturns. Despite this drawn out oil crash, we can expect oil prices to recover in the coming months.

A recovery in oil prices should support the offshore drilling industry. This, in turn, will support Paragon Offshore. As we can see here, it appears that the worst has passed for Paragon Offshore. While the company is in a difficult market environment, the company has massive potential if it can get its restructuring done on favorable terms to shareholders. This combined with a recovery in oil prices make the company a high risk plan on an offshore recovery at the present time.

Conclusion

Paragon Offshore has had an incredibly difficult time since the start of the crash when it was spun off from Noble Corporation. The company was saddled with an aging fleet and a significant debt load at the start of what was one of the worst oil crashes in recent time. As a result, in early 2016, the company became one of the first offshore drillers to declare Chapter 11 bankruptcy. On top of this, the company recently had to deal with its restructuring plan being rejected due to its cash usage.

Paragon Offshore, however, is in a strong market position. The company operates in the bottom sector of the oil market, offering oil companies a cheap option to carry out their expensive offshore drilling. On top of that the company has been significantly improving its operational performance. Lastly, we can expect the offshore oil market to recover in the coming years after oil prices bottomed in early-2016 and OPEC announced a production cut.

The expected recovery in the markets along with Paragon Offshore's strong market position make Paragon Offshore a strong, yet high risk play, on an offshore recovery.

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