Market Overview

Luminus Management Sends Proposal to EnscoRowan plc Board of Directors

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Long-term shareholders have been disappointed by the absolute and
relative trading performance of EnscoRowan both before, and since,
consummation of the Ensco-Rowan merger

Proposes that EnscoRowan launch a priority guaranteed bond offering
to immediately fund a special dividend of $2.5 billion

Believes a near-term special dividend would precipitate a re-rating
of EnscoRowan's stock, helping to crystallize the Company's
underappreciated fundamental value while allowing it to retain extensive
financial flexibility to harvest the benefits of the emerging offshore
drilling recovery and Management's post-merger value-creation strategy

EnscoRowan will also be able to utilize its significant remaining
financial flexibility to effect liability management

Luminus Management LLC (together with certain of its affiliates,
"Luminus" or "we"), the investment advisor to funds and accounts that
beneficially own 4.5% of the outstanding ordinary shares of EnscoRowan
plc ("EnscoRowan" or the "Company") (NYSE:ESV), sent a letter to
EnscoRowan's Board of Directors (the "Board") expressing its urgent
recommendations for the Company.

This press release features multimedia. View the full release here:
https://www.businesswire.com/news/home/20190612005528/en/

Relative Prices from 2/20/2019 close:
Source: Luminus Management, LLC; Bloomberg; numbers through 6/ ...

Relative Prices from 2/20/2019 close:
Source: Luminus Management, LLC; Bloomberg; numbers through 6/7/2019

The key points from Luminus' letter are as follows:

  • Luminus has been extremely disappointed by the absolute and relative
    trading performance of EnscoRowan both before, and since, consummation
    of the Ensco-Rowan merger. We cannot imagine that other long-term
    shareholders feel differently.
  • Luminus proposes that EnscoRowan launch a priority guaranteed bond
    offering to immediately fund a special dividend of $2.5 billion to
    shareholders.
  • Luminus believes that a dividend in excess of the current $1.6 billion
    market capitalization will demonstrate that the Board and Management
    are willing to share a portion of the Company's financial flexibility
    to deliver value for shareholders.
  • This commitment should precipitate an immediate re-rating of
    EnscoRowan's stock. We estimate that, after paying this special
    dividend, the Company will retain its significant financial
    flexibility to harvest the benefits of the emerging market recovery
    and Management's post-merger value-creation strategy.
  • EnscoRowan will also be able to utilize its extensive remaining
    financial flexibility to effect liability management

The full letter and accompanying presentation are available at www.enscovaluecreation.com,
and an unformatted version of the letter can be read below:

June 12, 2019
 

Via Email and FedEx

 
The Board of Directors
 
EnscoRowan plc
6 Chesterfield Gardens
London, England W1J 5BQ
United Kingdom
 
5847 San Felipe
Suite 3300
Houston, TX 77057

Re: Balance Sheet Optimization and Shareholder Value Creation

Members of the Board:

Luminus Management LLC (together with certain of its affiliates,
"Luminus" or "We") is the investment advisor to funds and accounts that
beneficially own 4.5% of the outstanding ordinary shares of EnscoRowan
plc ("EnscoRowan" or the "Company") (NYSE:ESV).

Luminus has been actively involved in the offshore drilling sector, and
we have continuously owned at least one of EnscoRowan's predecessor
companies since 2013. We are an investment management firm founded in
2002 focused on the core sectors of power and energy, energy
infrastructure, and related industrials. We are long-term,
value-oriented investors, and our strategy employs a rigorous,
fundamental, bottom-up, sector-focused approach.

As one of the Company's largest shareholders, Luminus has been
extremely disappointed by the absolute and relative trading performance
of EnscoRowan both before, and since, consummation of the Ensco-Rowan
merger.
We propose that EnscoRowan launch a priority
guaranteed bond offering to immediately fund a special dividend of $2.5
billion to shareholders. We believe that a dividend in excess of the
current $1.6 billion market capitalization will demonstrate that the
Board and Management are willing to utilize a portion of the Company's
significant value and financial flexibility to deliver value for
shareholders.
We believe this commitment will highlight
value and extensive balance sheet flexibility, and precipitate a
re-rating of EnscoRowan's stock. In fact, we estimate that, after paying
this special dividend, the Company will retain ample financial
flexibility to harvest the benefits of the emerging market recovery and
Management's post-merger value creation strategy.
EnscoRowan
can also utilize its significant remaining financial flexibility to
execute liability management.

A key component of the merger rationale was to create value for
shareholders through both synergies and balance sheet flexibility. The
current market's disregard of the future prospects of EnscoRowan has
created an enormous opportunity to reward shareholders with the
synergies and extensive balance sheet flexibility gained through the
merger.

In the pages that follow we will further detail our analysis,
recommendations, and rationale.

Executive Summary:

EnscoRowan has meaningfully underperformed the market since approval of
the Ensco-Rowan merger. From February 20, 2019 through June 7, 2019,
EnscoRowan's stock price declined by approximately 56%, underperforming
peers and the broader oilfield services market by approximately 26% and
32%, respectively.

Investors seem to refuse to give EnscoRowan credit for many of its
positive attributes and factors, including:

  • High-quality assets
  • Tightening jackup market
  • ARO joint venture
  • $165 million per year in projected transaction synergies
  • Emerging tangible floater recovery
  • Extensive balance sheet flexibility

In recent months, we have seen the consummation of the merger,
inflection in floater and jackup dayrates, the advancement of the ARO
joint venture, and increased synergy projections. Yet, the stock price
has dramatically underperformed. Simply put, in our view the investment
community has failed to understand EnscoRowan's true value, and sees no
path for the market to reassess the stock's valuation.

Where does this leave us?

We believe that the Company must now consider a broader
range of options
than Company Management has previously
communicated. The Company's largest remaining unutilized asset that can
be unlocked and shared with equity is its
extensive balance sheet flexibility
.

EnscoRowan—and particularly its
shareholders—have paid for this flexibility
:

When other drillers utilized their flexibility earlier in the cycle to
increase leverage and add layers of debt, EnscoRowan sold equity and
convertible bonds. In fact, EnscoRowan is the only tier-one driller that
has issued equity and equity-linked debt since 2011 outside of a
corporate transaction or bankruptcy. In total, EnscoRowan has issued
~$1.5 billion in equity and convertible bonds and ~$1.4 billion in
equity consideration in the Rowan merger.

Additionally, EnscoRowan prioritized creditors following the Rowan
acquisition by providing corporate guarantees on assumed debt rather
than allowing a lower-priority layer of debt to exist within its capital
structure. In our opinion, the lower priority would have weighed on bond
prices and opened more lucrative opportunities for "equity-accretive"
liability management.

These actions – while consistent with EnscoRowan's long-term aspiration
to return to investment-grade – have prioritized creditors at a cost to
equity. Given our view that the benefits of investment-grade status are
at a minimum five years away, we believe these actions to improve the
Company's credit rating to enhance shareholder value on a "present
value" basis actually hurt shareholders. Furthermore, we believe that a
special dividend does not stop EnscoRowan from becoming
investment-grade; it only delays attaining that status by a few years. We
strongly believe now is the time to further consider the interests of
shareholders in corporate priorities.

Do shareholders have a seat at the table?

Management has made it clear to debt and equity holders that liability
management will be a near-term component of their capital allocation
strategy. Investors are expecting EnscoRowan to announce a
liability-management bond tender in the near term. Assuming EnscoRowan
funds this tender with new bonds, those bonds are likely to contain
covenants and restrictions that will constrain the
Company for many years
to come.

In light of the disproportionate underperformance of the equity versus
the bonds, the relative cost of capital between equity and senior
unsecured debt has shifted dramatically. Following this significant
repricing of EnscoRowan's securities, we believe that the Company must
reconsider
the broader available range of options, and shifting
the capital structure away from extremely high cost equity and towards
lower cost debt has become essential.

Recommendation:

EnscoRowan's stock value has decoupled from the fundamental strength of
the business, and the stock is trading at a significant discount to its
fundamental value. As a result, it is our opinion that the Board should:

  • Raise $2.5 billion of priority guaranteed debt, and safeguard the
    Company's ability to issue additional structurally senior debt
  • Safeguard future financial flexibility (on both a junior and senior
    priority guaranteed basis)
  • Fund a $2.5 billion special dividend
  • Better incentivize Management to continue to pursue this value
    creation plan, and at the very least, re-value employee equity and
    option grants

EnscoRowan's market capitalization currently stands at $1.6 billion. We
believe that announcing a special dividend that is 56% larger than
today's market capitalization will crystallize many of the merger
benefits for EnscoRowan's shareholders
. Our proposal is the best way
to maximize shareholder value in a fiscally responsible way AND
ensure that shareholders still benefit from the ultimate industry
recovery. The cost of paying the dividend is limited; ultimately the
Company's long-term target of achieving investment-grade status would be
deferred, but its ability to achieve all the rest of its objectives
would be retained.

EnscoRowan's stock is trading like an
out-of-the-money call option on asset value:

The Ensco-Rowan merger was approved on February 21, 2019. From that time
through June 7, 2019, EnscoRowan's stock price has declined by
approximately 56%, underperforming peers and the broader oilfield
services market by approximately 26% and 32%, respectively.

In our opinion, the market has clearly shown it will treat EnscoRowan's
stock like an option rather than as equity of a viable long-term
company. This was clearly demonstrated on Friday, May 17, 2019, after
the Company announced an unexpected $180 million arbitration award from
Samsung Heavy Industries. Despite the disclosure of a highly probable
cash inflow equal to almost 10% of the Company's market capitalization,
the equity failed to respond. An announcement of that magnitude in a
traditional equity would have seen a more commensurate improvement of
its stock price. In our opinion, the only way this award could have been
broadly ignored by the market is if investors believed the money would
not accrue to equity's benefit, and that the "ESV-equity-option" would
not benefit from the award.

EnscoRowan's balance sheet is misunderstood:

We believe that investors mistakenly view EnscoRowan's balance sheet as
a source of weakness:

Barclays, 3/5/2019: "ESV/RDC needs the floater market to recover
quickly, however, as debt maturities from now until 2024 year-end are
daunting… ESV/RDC generated a combined FCF loss of ~$800mm last year and
will likely be FCF-negative again in 2019, leaving the company with just
3-4 years to generate over $1.2bn of FCF to meet its obligations by
2024."

Barclays, 5/3/2019: "In our view there is now a clear distinction
between DO/RIG and ESV/NE. The former have better balance sheets giving
them a longer runway for the recovery to take hold ... ESV and NE, on
the other hand, have less time before things get better with looming
debt maturities in '24-'26."

BTIG, 5/30/2019: "We believe ESV's steeper discount on an implied value
per rig is a function of balance sheet concerns."

However, EnscoRowan has extensive flexibility and optionality around its
balance sheet that is likely not being appreciated by the market and is
not available to many of the Company's peers. EnscoRowan has maintained
this flexibility through the cycle by conservatively capitalizing with
equity, by issuing equity and convertible bonds totaling ~$1.5 billion
since 2011, and by issuing ~$1.4 billion in equity consideration in the
Rowan merger.

  • Incremental Debt Capacity:

EnscoRowan's bond indentures provide the Company with very
significant flexibility to raise additional debt, fund operations,
manage liabilities, and pay dividends.
Revolver aside, all
of EnscoRowan's outstanding bonds have light, investment-grade style
covenant packages, which include no limitation on dividends and allow
for significant amounts of structurally senior debt to be issued
.
Therefore, for the purposes of this analysis we conservatively assume
that EnscoRowan will terminate its revolver. In its place, we assume
that EnscoRowan will utilize its significant capacity for
first-money-out paper similar to Transocean Ltd.'s "priority guaranteed"
and Noble Corp's "senior guaranteed" bonds (hereafter referred to as
"priority guaranteed debt").

EnscoRowan has not tapped into any of these various capacities or
utilized these levers
, unlike the vast majority of its peers.
Transocean Ltd. (NYSE:RIG), Noble Corporation plc (NYSE:NE), Pacific
Drilling S.A. (NYSE:PACD), Seadrill Ltd (NYSE:SDRL), Odfjell Drilling
(ODL NO), Maersk Drilling (CPH: DRLCO), Borr Drilling Ltd (OB: BDRILL),
Vantage Drilling International (OTC:VTG), and Shelf Drilling Ltd
(OSE: SHLF) have all either availed themselves of secured debt markets
or layered their unsecured debt with guaranteed bonds. The capital
markets are giving the Company very little or no "credit" for its
flexibility; EnscoRowan should acknowledge that its strategy of
maintaining excess flexibility (pursued at the meaningful cost of equity
dilution) is not being valued, and this path should be comprehensively
reconsidered
.

  • Senior Debt:

EnscoRowan's high-quality asset base can backstop over $4.4 billion
in incremental priority guaranteed debt.
EnscoRowan owns three
primary types of assets: drillships, semisubmersibles, and jackups.
EnscoRowan also owns 50% of the ARO Drilling joint venture with Saudi
Aramco. We have estimated EnscoRowan's debt capacity using the following
metrics:

Drillships: Pacific Drilling raised just over $1 billion in
secured debt in September 2018 against 7 drillships, at an implied
debt/rig of ~$150 million and an average cash cost (at issuance) just
over 9%. These bonds currently trade near par, implying that these terms
are currently "on-market." Also noteworthy is the fact that PACD had
very limited contract coverage on its assets at the time of issuance,
highlighting that this debt capacity is based on asset values and not
cash flow. EnscoRowan's drillships cost on average $687 million per rig
to construct (per IHS), and recent transactions imply drillship value in
the $300-350 million range. EnscoRowan has 16 drillships (of better
quality on average than Pacific Drilling, in our opinion)—or 14 net of
two already-encumbered newbuilds in the shipyard—for an implied
debt capacity of $2.1 billion
.

Semisubmersibles: EnscoRowan has two 6th-Generation
semisubmersible rigs, seven 8500-series rigs delivered in 2008 and later
(three are working; four are cold-stacked), and three older
semisubmersibles. EnscoRowan's 6th-Generation rigs cost on
average $688 million per rig to construct, and the three active
8500-series rigs cost $492 million per rig to construct (per IHS). A
conservative approach would be to assume $100 million of debt on each of
the 6th-Generation rigs and $50 million on each of the three
working 8500-series rigs. This would represent an additional $350
million in debt capacity
.

Jackups: Borr Drilling in March 2019 obtained a $160 million bank
facility secured by mortgages over four jackup rigs, and a separate $120
million bank facility secured by mortgages over two jackups rigs. These
transactions imply $40-60 million in debt per modern jackup, which is
likely a conservative debt capacity benchmark as the bank market is
typically more conservative with respect to loan-to-values than bond
markets. EnscoRowan's 36 jackups delivered in 2000 or later (including
15 harsh-environment-capable rigs) cost on average $211 million per rig
to construct (per IHS), and modern jackup transactions are now over $85
million per rig, having troughed at around $65 million. Assuming no debt
capacity exists against the Company's older jackups and $45 million per
rig of debt capacity against the newer jackups, this fleet represents an
additional $1.62 billion in debt capacity.

ARO Drilling Joint Venture: EnscoRowan is a 50/50 partner with
Saudi Aramco, the world's largest jackup customer, which also has an
A+/A1 credit rating. ARO currently owns a fleet of seven jackup rigs
(five of which were delivered in 2004 or later), leases another nine
jackup rigs from EnscoRowan (included in the 36 jackups mentioned above)
and has plans to order up to 20 newbuild jackup rigs over the next 10
years with 8-year contractual commitments at 6-year EBITDA payback
rates. Additionally, the entity currently has over $200 million in
contract backlog from Saudi Aramco. We will not attempt to value the
joint venture here, but EnscoRowan owns a $455 million shareholder loan
against ARO drilling, and Saudi Aramco is also ARO's only customer. We
assume this loan could be monetized for an additional
$375 million
.

All these components would bring EnscoRowan's total debt capacity to
$4.45 billion on current asset-backed-financing comparables. The Company
could raise this entire amount incrementally to current outstanding
debt, as this debt could be issued closer to the assets with "priority
guaranteed" status, priming existing bonds. Using precedent transactions
at Pacific Drilling and Borr Drilling, and using the greater than 300
basis points spread between Noble Corp's senior guaranteed and senior
unsecured bonds, we triangulate to a 9% cost of debt.

  • Discounted Debt Repurchases:

Our analysis conservatively assumes that
EnscoRowan does not repurchase debt at a discount,
and that full
interest expense and principal balance are paid up to maturity of the
current outstanding debt. Based on current trading prices, we believe
EnscoRowan could save over $1.0 billion in principal payments if near-
and medium-debt were repurchased today; including long-term debt brings
this number to almost $2.0 billion.
Note, this is based on an
unaffected number before management proceeds with any of the shareholder
value-creation measures we have outlined.

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