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R&B Falcon's Cash Crunch
Threatens Drilling Plans
By Mavis Scanlon
Staff Reporter
5/18/99 7:00 AM ET
A persistent cash crunch threatens to ground R&B
Falcon (FLC:NYSE) just as it seeks to complete
its deep-water expansion and join the nascent
recovery in shallow-water drilling.
The Houston-based contract driller pulled off a $1
billion bond offering in March and sold $300 million
in preferred stock in April, garnering breathing room
and much-needed cash to fund its construction of
seven deep-water rigs. Falcon figures its
construction program will cost $1 billion.
But in a filing last week with the Securities and
Exchange Commission, Falcon said its cash flow
from operations and borrowings still won't be
enough to fund working capital needs and other
obligations, including lease payments and debt
service.
Falcon's management says the onerous language
in the filing was to some degree boilerplate to
satisfy the SEC's strict disclosure regulations. It's
confident it will have enough cash. But its debt load
of $2.7 billion puts it in a precarious position.
Falcon, like other drillers, still faces possible
contract cancellations from oil companies that
contracted rigs before the industry downturn at
rates higher than current rental rates. In addition,
there's the threat that the recent rise in oil prices
won't hold.
Falcon's long-term debt-to-capital ratio is 130%,
which towers over offshore driller Transocean
Offshore's (RIG:NYSE) 29% ratio and Diamond
Offshore's (DO:NYSE) 18%.
"I have a lot of respect for management, and I think
there is going to be a turnaround" in the
shallow-water market, says Bryan Dutt, founder and
principal of Ironman Energy Capital, a
Houston-based hedge fund. Falcon's shallow-water
fleet, which contributed about 40% of last year's
revenue, will benefit from any rental-rate upswing.
But Falcon "is on a financial precipice," adds Dutt,
who holds no position in the company. "I think it is
still touch-and-go whether they are going to make
it."
Falcon's financial situation, coupled with its diverse,
attractive drilling fleet, have added to speculation
that it's a takeover target. Falcon's management
indicates it's amenable to an offer -- at the right
price. Shares of Falcon have doubled since
February, to 10 1/2 Monday.
But Falcon also contends that it can survive through
this tough period, "no matter how extended," says
Charlie Ofner, a vice president. The company is
finalizing the sales of some surplus equipment, he
says, which could bring in $50 million to $100
million. And it plans other noncore asset sales that
could raise another $300 million.
In addition, Falcon is still working on two project
financings that will capitalize on the value of two
new rigs, Ofner says. The first should be completed
by the end of June, he says. Falcon will net $235
million through its financing of the state-of-the-art
floating rig RBS 8M. The second financing project
will be triggered when Falcon secures a contract for
the drill ship Deepwater Frontier, which will be
challenging due to weak conditions and declining
rental rates in the deep-water market.
Oil companies are not jumping to book rig time in
deep water. In fact, they're using any excuse
possible to wriggle out of contracts, says Dutt at
Ironman. Falcon and other drillers already have
been hit with several cancellations this year.
Of immediate concern is the possible termination of
a contract by Petrobras of Brazil for the Falcon
100 semisubmersible, or floating, rig, which is
behind schedule. Under the contract, Falcon is
subject to late-delivery penalties of $26,500 per day;
a significant delay could result in the contract's
cancellation.
In addition, it needs to rent out two and one-half
years of time for the rig Deepwater Frontier,
which Falcon built through a joint venture with
Conoco (COC:NYSE). Conoco plans to use the rig
for the other half of the five-year contract. If Falcon
can't contract out its allotted time, it will be stuck
paying the rental rate of $165,000 per day. The
company only says it is hopeful it will get a
contract.
On the plus side for Falcon is the expected
resurgence in shallow-water natural-gas drilling later
this year and into 2000 in the Gulf of Mexico.
Utilization for the industry's 180-rig gulf fleet stood
at 62% at April 30, up from 60% a month ago but
still well below the year-ago 95%. As oil and gas
exploration companies become comfortable with
current prices, drilling will pick up; once utilization
hits 85% or 90%, rental rates will rise.
Also driving the shallow-water market is the high
depletion rates for natural gas wells. Falcon has
"enormous operating and financial leverage" with its
large fleet of shallow-water rigs, says Matthew
Conlan, who follows the offshore drilling group at
Prudential Securities in Houston. Still, he has an
accumulate rating on the stock since the risk that
"any disappointment from the company could be
much more devastating than it was when we went
into the slump," he says. Prudential has not done
underwriting for Falcon.
Indeed, the Gulf of Mexico activity hasn't been fully
appreciated, says Arvind Sanger, an analyst at
Donaldson Lufkin & Jenrette. "In the next two
years, the domestic business could contribute an
incremental $1 per share," he wrote in a research
note Friday. In 1998, Falcon earned $91 million, or
$1.10 a share, on revenue of just over $1 billion.
R&B Falcon is currently Sanger's top pick; DLJ has
been an underwriter for Falcon.
"We believe we're down to blocking and tackling
here to get us through," says Ofner at Falcon. That
is "largely based on the resilience we see in the
domestic gas industry."
But as Dutt at Ironman points out, Falcon's
missteps began when it used debt to finance
projects at the top of a cyclical industry. Now,
everything has to go right for it to emerge intact and
unscathed. |
