Songa Offshore SONG NO
November 13, 2009 - 8:28pm EST by
thoreau941
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 $M): 820 EBIT 267 187
TEV ($): 1,520 TEV/EBIT 4.4x 5.9x

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Description

 

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

  • Most of the rigs being completed in the next year are under contract limiting new supply
  • Almost no additional midwater supply is coming online to compete directly with the company's assets

Risks

  • Oversupply of rigs has the potential to cause lower day rates due to near term deliveries and potential oversupply in the deepwater segment, capacity however is unlikely to meaningful until 2011
  • A limited number of assets poses a threat in the case of an accident involving one of the rigs, common downtime for a rig is 3 months to 2 years, the company is insured for the asset, but not the business interruption
  • There is a potential tax liability that will be levied in Norway (headquarters now in Cyprus for lower ECB tax rate) of the company, this could be as high as USD 150MM - unlikely as ECB rules are trump
  • Significant leverage on the assets, which will diminish quickly with increased cashflow and amortization  is a risk to equity holders should there be a pricing or cash flow disruption

Rig Summary

  • Venus
    • F&G L-900 design semisubmersible drilling unit, capable of operating in water depths up to 1,500 feet using a 18-3/4", 10 ksi BOP and 21"OD riser.
    • Contracted in Australia/NZ
    • Previous contract at 225k/day - pricing from 2006
    • Current contract at 400k/day with singly and severally liable ADA consortium through 11/09 with options through 12/10
    • Operating expense of ~135k/day
  • Saturn
    • A shipshape drilling unit, capable of operating in water depths up to 3,280 feet using a 18-3/4", 10 ksi BOP and 21"OD riser.
    • Operates in West Africa, currently offshore Libya
    • Previous contracts at 330k/day - pricing from late 2007
    • Current contract at 400k/day with Nippon Oil led singly and severally liable consortium through 8/09 - 12/09 (depending on options)
    • Future contract at 400k/day with CNOOC from 1/10
    • Operating expense of ~105k/day
  • Mercur
    • F&G 9500 design semisubmersible drilling unit, capable of operating in water depths up to 1,200 feet using a 18-3/4" x 15 ksi BOP with 21" OD riser.
    • Contracted in Australia
    • Previous contract at 300k/day - pricing from early 2007
    • Previous contract at 400k/day with Santos through 7/09
    • Current contract at 280k/day
    • Operating Expense of ~135k/day
  • Dee
    • Mitsubishi type MD-602 enhanced design stabilized, semi-submersible drilling unit, capable of operating in water depths up to 1,800 feet and is winterized for work in arctic conditions.
    • Contracted in Norway
    • Previous contract at 41k/day as bareboat
    • Current contract at 424k/day with Marathon through 2/11
    • Operating expense of ~140k/day
  • Trym
    • Self propelled type Aker H-3 modified semi submersible drilling unit, capable of operating in water depths up to 1,312 feet using a 18-3/4", 10 ksi BOP and 21" OD riser
    • Contracted in Norway
    • Previous contract at 50k/day as bareboat
    • Current contract (starts 2/09) at 365k/day gross with StatoilHydro through 6/12
    • Operating expense of ~135k/day
  • Delta
    • "Ocean Ranger" design column stabilized, semi-submersible drilling unit, capable of operating in water depths up to 2,300 feet.
    • Contracted in Norway
    • Previous contract at 170k/day - pricing from 2005
    • Current contract at 435k/day gross with ~413k/day net with Revus (acquired by BASF 12/08) basfand Det Norske through 3/12
    • Operating expense of ~135k/day

 

 

 

 

Catalyst

i) additional contracts

ii) new debt structure

iii) equity accretive paydown of debt

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