Sevan Marine Piranema Bond SEVAN04
December 22, 2008 - 10:54pm EST by
gatsby892
2008 2009
Price: 50.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 270 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

At 26% YTM, the Sevan04 Piranema bonds present an attractive risk/reward. Not only is there significant asset value protection for the bond investor, but bond investors are also being well compensated for investing in a low operating risk environment and for assuming the unlikely counterparty risk that an investment grade customer defaults on its contract, even though the customer has little incentive to break the contract.


Company Overview
Sevan Marine designs, constructs and operates oil production platforms for wells located in deepwater oceans, referred to as Floating Production Storage and Offloading platforms (FPSO’s). An FPSO floats on top of the water and is connected via subsea pipelines to wells that sit on the ocean floor miles below. Sevan Marine’s FPSO design is a bit of a revolutionary concept within the e&p space as it utilizes a different ship design that not only provides better floating dynamics, but it also requires significantly less steel, resulting in substantially less building costs. 
 

Security Overview

·         $270mm Bond; Maturity – May 14, 2013; Call – First call at 103.5% May 2010

·         Coupon - 6m LIBOR + 300 bps

·         Bond Issued by Parent – Sevan Marine ASA

·         Security – First priority pledge on FPSO Sevan Piranema

·         Trading at 50% of par; Yield to Maturity of 26%

 

FPSO Sevan Piranema

The Sevan04 bonds are directly tied to the Sevan Piranema asset. Sevan Piranema is an FPSO that has been producing oil for over a year for the Piranema oil field owned by Petrobras. Sevan Piranema’s contract is with Petrobras and the contract has an 11 year duration with fixed dayrates, plus one six-year option and five one-year options. The Piranema field is expected to be larger than initial estimates and it is likely the Sevan Piranema will be working on this specific field for over 30 years. With revenues on a fixed escalating schedule, cashflow variability comes from 1) fluctuation in operating costs (which are relatively stable and at 30% of revenue have limiting cashflow impact) and 2) utilization (up-time of the platform). It is quite rare that these platforms need to come off-line beyond scheduled maintenance. (The company is paid its day-rate for scheduled maintenance). In Q3 2008, the Sevan Piranema had a 99.9% uptime. In Appendix, Chart I outlines a cashflow sensitivity to Piranema having 95% utilization and still having decent cashflow coverage under this extremely unlikely scenario.


Primary Risks For Sevan Piranema Bonds and Potential Mitigating Factors

Petrobras breaking the contract – while unlikely, worth exploring impact of this tail event

·         Petrobras is an investment grade company, little debt and one of the largest oil companies in the world. 

·         Beyond a legal obligation to honor the contract, Petrobras has little incentive to renegotiate the contract such that it bankrupts the bondholders and Sevan Marine is better off removing the FPSO from the Piranema field. Much of an oil company’s cost is in exploration and renting drilling rigs. Oil prices would need to be below $10-15 before most oil companies would be better off shutting in production.

·         Sevan Piranema was Sevan Marine’s first FPSO and as a result of being a first user, Petrobras was able to negotiate an attractive dayrate that is ~30-50% below current dayrates. Unlikely Petrobras can find a cheaper solution.

·         Petrobras (and in turn the Brazilian government) have a multi-year gameplan to develop their massive offshore discoveries and need access to multiple deepwater rigs and production platforms. Breaking a contract on a low-cost FPSO would likely freeze their access to additional fleet equipment.

·         The topside equipment on an FPSO are designed to specific fields. It is not possible to replace one FPSO with another without significant retrofitting. Topside equipment represents half of the total $500-600mm cost to build an FPSO.

·         Sevan Marine would not only have legal recourse, but it also has the ability to re-contract the platform to another oil company (after a retrofit of the top-side equipment).

Poor Utilization - Piranema has insurance to protect against catastrophic malfunction.

Ability of Sevan Marine ASA (parent) to pay interest and principal – cashflows are predictable due to day-rate contracts

·         2009 ebitda - $100mm; Total Company interest - $75mm

·         2010 ebitda - $275mm; Total Company interest - $115mm

·         If Sevan Marine couldn’t/didn’t make payment to Piranema, bondholders are able to take-over Sevan Production (which holds assets and staff) and has cashflows to cover debt payments. See Appendix, Chart II



Primary Risks For Sevan Marine ASA Equity and Potential Mitigating Factors

$425mm Equity Funding for 2 committed Driller FPSO projects – This is big overhang on stock, but doesn’t effect bonds

·         $1b of debt has been secured (in October 2008); risk to equity is of massive dilutive offering for $230mm market cap

 

Asset Value Protection

·         A new FPSO 6 months ago cost ~$800mm. Assuming deflation, new FPSO today might cost ~$500mm.

·         With the $270mm bonds trading at $0.50 on the dollar, bondholders are purchasing Sevan Piranema for $135mm. Retrofitting topside to another field might cost ~$75mm, resulting in total cost of $210mm. Virtually all existing FPSO’s in construction are not built on speculation and are already tied to a specific field.  It would be tough for Petrobras or any other company needing an FPSO to find a better solution for <$210mm.

·         Mitigating Asset Devaluation Risk from falling Oil Prices – In the unlikely event Sevan Piranema needed to find a new customer, there is risk of demand for Sevan Piranema’s assets in an auction sale to a new buyer if oil prices stay below $35 (although Petrobras would still want to keep operating the Piranema at $35 oil). One way to counter this risk is to purchase insurance - purchase December 2010 oil future puts at $35 strike price for $1.00/put option. December 2010 Oil Futures are trading at $66. If Dec 2010 prices were to fall 47% to $35 within the next year, the options would likely be worth ~$10/put option – 10x return. Foregoing 2.5-5.0% of annual yield over next two years could protect 50-100% of the investment.



Chart I

 

Sevan Piranema Contractual Cashflows

 

 

 

Base Case

 

Conservative Case

 

 

 

 

 

99% Utilization

 

95% Utilization

2009

36

 

35

   2010

36

 

35

2011

36

 

35

2012

36

 

35

2013

40

 

38

2014

40

 

38

2015

40

 

38

2016

40

 

38

2017

40

 

38

2018

43

 

42

 

 

 

 

Total CF thru Bond Life (May 2013)

                  158

 

                         151

Total CF thru Contract Life (2018)

                  387

 

                         371





Chart II

Sevan Piranema Cashflows

 

Ebitda

 

Interest Payments

 

Amortization Schedule

LIBOR

 

 

2.50%

 

 

 

97.5% Utilization

 

 

 

 

2009

36

 

                         15

 

 

2010

36

 

14

 

20.0

2011

36

 

13

 

22.5

2012

36

 

12

 

25.0

2013

39

 

4

 

202.5

2014

39

 

-  

 

 

2015

39

 

-  

 

 

2016

39

 

-  

 

 

2017

39

 

-  

 

 

2018

43

 

-  

 

 

 

 

 

 

 

 

Total CF thru Bond Life (May 2013)

                      155

 

                         57

 

270

Total CF thru Contract Life (2018)

                       381

Catalyst

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