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Paragon Offshore PLC (PGN): Impressive 2015 Guidance Underscores Bull Thesis


It has been a bumpy ride (to say the least) for investors in Paragon Offshore PLC (NYSE:PGN) since my last report. The company reported their August fleet report on August 10 and their 2015 Q2 results on August 12.

The call included surprisingly detailed guidance for 2015 and disclosed a contract dispute with Petrobras over the drillships DPDS 2 and DPDS 3, the two highest dayrate rigs in Paragon’s fleet.

2015 Guidance underscores Bull Thesis

In terms of updating the models after the Q2 earnings call and August fleet report, the company gave fairly detailed guidance for 2015. If we compare this full year guidance with the 1st half results, we see that the investment thesis is playing out as expected operationally.

Paragon Offshore 2015 Q1 2015 Q2 2015 Guidance 2015 H2
$ millions $ millions $ millions $ millions
Revenues 430.6 393.2 cons> 1520.0 696.2
Cash operating costs 250.7 221.4 790.0 317.9
G&A 15.4 13.7 57.5 28.4
EBITDA 164.5 158.1 672.5 349.9
Capex 50.7 62.4 195.0 81.9
Interest 30.2 29.0 124.2 65.0
Taxes 6.6 -18.5 0.0 11.9
FCF 77.0 85.2 353.3 191.1

Note that FCF in the 2nd half will be higher than in the 1st half. That is possible because of cost control. The company has aggressively cold stacked idle rigs at the end of Q2, dramatically reducing cash operating costs. Cold stacking rigs has also led to slashed capex. Capex is guided to $195 million down from roughly $300 million last year.

The aggressive drop in cash operating and capex expenditures validates the fundamental thesis underlying the PGN long position – that the company can scale its cost structure to the size of its business, staying cash flow positive even in extreme market scenarios.

Petrobras Drillship Contracts

On the call, management announced that Petrobras is contesting some of the backlog on their drillships DPDS2 and DPDS3. There is little I can add other than what was discussed on the call. My expectation would be that Paragon and Petrobras are able to negotiate a settlement, but I am simply eliminating the disputed period from the contracted backlog, assuming that these contracts are terminated early and not renewed.

Obviously that is a hit on 2016 and 2017, but, surprisingly not an unmanageable one.

Updated Forecasts for 2015 and 2016

In the following forecasts for 2015 and 2016, I have included the impact of a full loss of the DPDS2 & 3 contracts for the disputed period.

$millions 2015 2016
Revenue $1,512 $988
Cash Cost $790 $424
SGA $60 $60
EBITDA $662 $504
Net Interest $122 $105
Tax $0 $0
Capex $194 $135
FCF $346 $265

As you can see, the company remains firmly cash flow positive and should remain able to repurchase...