McDermott International, Inc. MDR filed for protection under Chapter 11 of the U.S. Bankruptcy Code at Houston court on Jan 21.
This Texas-based fully vertically integrated player providing engineering and construction solutions to energy firms plans to restructure its operations with the help of its creditors.
McDermott with projected liabilities in the $1-$10 billion bracket will be cushioned by the two-third majority of its funding creditors who would help reduce more than $4.6 billion of its debt burden by equitizing the same. The company struggled with ballooning debt, primarily incurred from the $3.5-billion acquisition of Chicago Bridge & Iron Company in 2018.
This reorganization along with the cash generated from operations will aid the company to clear wages and return to its normal day-to-day activities. Further, this strategic action will allow the company to control its cash flows, improve its balance sheet, stabilize its trade debt and strengthen its position in the long run.
With all the restructuring transaction along with securing committed exit financing of approximately $2.4 billion McDermott hopes to get bailed out of bankruptcy with a debt load of about $500 million.
For a while now, McDermott had been considering the sale of its industry-leading Lummus Technology business after piquing prospective buyers’ interest. The company finally reached a definitive agreement via a partnership deal with The Chatterjee Group and Rhône Group (the Joint Partnership) to divest Lummus Technology for 2.73 billion.
Financial Terms of the Transaction
Pursuant to Section 363 of the Bankruptcy Code, McDermott will conduct a court-supervised auction and sell-off process wherein the "Joint Partnership" will serve as the "stalking horse bidder.”
This strategic move might brace this heavily leveraged company to better its financial condition by utilizing the proceeds from the sale of Lummus Technology for repaying the debtor-in-possession (DIP) financing in full and funding emergence costs plus providing cash to the balance sheet for long-term liquidity.
However, the "Joint Partnership’s" bid is subject to higher or more lucrative offers as other involved parties can also grab an opportunity to submit competing bids. If the proposal meets with success, McDermott will have the choice to procure 10% common equity interest in the entity acquiring Lummus Technology.
McDermott Stock Down a Whopping 92% in a Year
McDermott’s share price movement has been weak, both in absolute and relative terms. This oilfield equipment provider has plunged 91.7% in a year’s time, much wider than the industry’s 21.7% decline.
The company’s lower-than-expected earnings in each of the trailing four quarters displeased investors, the average negative surprise being 465.13%.
This sharp depreciation in McDermott’s stock is mainly due to the drop in oil prices over the past year. As crude prices trended down, lesser activity in the energy industry induced the lack of contract wins for McDermott. The factors primarily responsible for this guidance cut include disappointing third-quarter 2019 operating results, soft revenues and escalated unallocated operating expenses due to postponement in certain new award wins and project timing changes on the part of customers.
Following worse-than-expected third-quarter results, McDermott retained its trimmed 2019 guidance, dampening investors' confidence. The company’s slashed outlook now anticipates a net loss of $310 million against the earlier predicted $170 million of net income.
McDermott’s negative free cash flow expectation for 2019 is likely to be about $640 million, higher than the prior forecast of $470 million.
With the aforementioned concerns being on the rise, the company omitted the Nov 1, 2019 interest amount on its bonds, leading to a 30-day extra time to make the payment. As a relief, a handful of its bondholders had relented from inflicting any punitive action on the defaulter until Jan 21.
Zacks Rank & Key Picks
McDermott currently carries a Zacks Rank #3 (Hold). Investors interested in the energy space may look at some better-ranked options like Suncor Energy Inc. SU, Cenovus Energy Inc. CVE and Murphy USA Inc. MUSA, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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