Ensco Bondholders Unhappy With Atwood Oceanics Deal

By FeaturesDow Jones Newswires

A group of Ensco PLC's bondholders are considering agitating against the offshore contract drilling company's plan to buy Atwood Oceanics Inc., a smaller peer, in an all-stock deal, according to a person familiar with the matter.

As part of the deal, Ensco has committed to paying off $1.3 billion of Atwood's debt. To do so, it must use up a big chunk of the $1.1 billion in cash sitting on its balance sheet. Ensco bondholders worry that if oil prices and spending on drilling for oil offshore remain depressed in the next two years, the cash drain from the Atwood purchase could force Ensco to face a cash crunch down the road, according to the person familiar and a bondholder.

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Atwood generates no free cash flow, though it does have $450 million in cash on its balance sheet, which Ensco will use toward the debt repayment.

Adding to bondholder worries is that Ensco has $5.3 billion in debt of its own. Moreover, both Ensco and Atwood are expected to burn cash this year, according to a report from AllianceBernstein and the person familiar with the matter.

Over the past year, many offshore oil drilling companies with high debt loads have filed for bankruptcy or restructured debt out of court as demand and rates paid by oil producers to hire out the rigs have crashed. Among these are Ocean Rig UDW Inc., Paragon Offshore PLC and Hornbeck Offshore Services Inc.

Ensco touts its $2.25 billion in undrawn revolver capacity as a cushion that will help it ride out the oil downturn, especially since the company has little in the way of debt maturities until 2020; it has $1.55 billion in debt maturing in 2020.

"The deal significantly elevates risk but does not trigger any imminent liquidity crisis," wrote Colin Davies, oil field services equity analyst at AllianceBernstein in a July 13 report.

The biggest argument in favor of the deal is that it adds a number of high-quality oil drilling rigs to Ensco's fleet. The question, however, is whether this is the right time for Ensco to make such a purchase since oil prices and offshore drilling activity could remain weak for years, noted the person familiar and the bondholder.

The deal requires the approval of Ensco and Atwood shareholders, but bondholders have few avenues to pursue to block the deal, noted the person familiar and the bondholder. Some of the same concerns will likely weigh on shareholders' minds, but they are likely to approve the deal, according to the AllianceBernstein report.

Ensco forecasts it will be able to cut $65 million in costs annually as a result of the deal, starting in 2019.

Both Ensco's and Atwood's shares have declined since they announced the merger on May 31, with Ensco shares off close to $1 per share, closing at $5.25 Monday, and Atwood's shares down almost $2, closing Monday at $8.07.

Meanwhile one tranche of Ensco's bonds due in 2027 had dropped to 89.375 as of July 10, from 94.875 on May 15, according to MarketAxess. Atwood's bonds have also traded down, though they remain close to par. The company's notes due 2020 were at 97.25 Monday, down from 100.7 on May 31, according to MarketAxess.

An Ensco spokesman declined to comment, while Atwood couldn't immediately be reached.

Write to Soma Biswas at soma.biswas@wsj.com

(END) Dow Jones Newswires

July 17, 2017 19:03 ET (23:03 GMT)

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