OREANDA-NEWS. Paragon Offshore plc ("Paragon") (NYSE: PGN) today reported a third quarter 2015 net loss of $1.08 billion, or a loss of  $12.46 per diluted share as compared to a third quarter 2014 net loss of $869.2 million, or a loss of $10.26 per diluted share.  Results for the current quarter included:
  • a$1.15 billion, or$13.22 per share, non-cash asset impairment charge comprising:
    • $781.2 million related to five rigs of Paragon's floating fleet including the Paragon MSS2, Paragon MDS1, Paragon DPDS1, Paragon DPDS2, and Paragon DPDS3;
    • $289.3 million related to 16 rigs of Paragon's jackup fleet including rigs currently cold-stacked;
    • $43.0 million related to deposits previously made by subsidiaries of Prospector Offshore Drilling S.A. to the shipyard for the construction of Prospector 6, Prospector 7, and Prospector 8; and
    • $37.4 million of goodwill related to the company's previous acquisitions
  • a $66.3 million, or $0.76 per share, tax benefit as a result of the impairment

Excluding the above charge and tax benefit, Paragon's adjusted net loss for the quarter (see Reconciliation of GAAP to Non-GAAP Financial Measures Table for a reconciliation to net income) was $0.3 million, or $0.00 per diluted share.   Results for the third quarter 2014 included a $928.0 million, or $10.95 per diluted share, non-cash impairment charge net of tax benefits related to Paragon's three drillships in Brazil and its cold-stacked FPSO in the U.S. Gulf of Mexico and a $6.9 million, or $0.08 per diluted share, gain related to the previously disclosed repurchase of an aggregate principal amount of $50.2 million of its senior unsecured notes.

"Conditions in the contract drilling industry continued to worsen during the third quarter as customers continued to curtail capital spending in light of low commodity prices," said Randall D. Stilley, President and Chief Executive Officer. "Dayrates and utilization deteriorated for all rig classes in all markets and as a result, our annual assessment of asset values resulted in a required impairment of various rig values.  Despite these conditions, Paragon delivered operational performance ahead of expectations for the quarter."

Stilley continued, "Consistent with our strategy as the high-quality, low-cost drilling contractor, we have taken steps to lower costs as we aggressively market our available units.  We have quickly stacked idle rigs, reduced shorebased support costs, and lowered our corporate operations support costs.  As a result, we expect our 2015 full-year contract drilling services costs will be approximately 13% lower and our G&A costs to be approximately 14% lower than 2014 totals, excluding certain costs related to our ongoing review of strategic alternatives related to our capital structure.   We also expect our capital spending for the year will be close to $60 million below 2014 levels.  Finally, Paragon has a significant available cash balance of $733 million, providing liquidity and flexibility in this difficult market."

Total revenues for the third quarter of 2015 were $369.0 million compared to $393.2 million in the second quarter of 2015. Paragon reported utilization for its marketed rig fleet, which excludes available days related to rigs that were stacked and not marketed during the quarter, as 69 percent for the second and third quarters of 2015. Average daily revenues decreased three percent in the third quarter of 2015 to $144,000 per rig compared to the previous quarter average of $149,000 per rig. Contract drilling services costs declined in the third quarter to $190.5 million compared to $197.0 million in the second quarter of 2015.

Net cash from operating activities was $79.7 million in the third quarter of 2015 as compared to $96.6 million for the second quarter of 2015.  Capital expenditures in the third quarter totaled $43.7 million. At September 30, 2015, liquidity, defined as cash and cash equivalents plus availability under the company's revolving credit facility, totaled $735.7 million while the company's leverage ratio, the ratio of the company's net debt to trailing twelve months EBITDA as defined in the company's revolving credit facility, was 3.07 at September 30, 2015.

On July 24, 2015 the company closed a sale-leaseback transaction in connection with Prospector 1 and Prospector 5.  Net of fees and expenses, the company received proceeds of approximately $291.6 million.

Operating Highlights

Paragon's total contract backlog at September 30, 2015 was an estimated $1.29 billion compared to $1.59 billion at June 30, 2015, including approximately $142.1 million of backlog for the Paragon DPDS3 which Paragon's customer Petrobras has indicated it may contest in connection with the length of prior shipyard projects relating to the rig.

Utilization of Paragon's marketed floating rig fleet was 100 percent in both the third quarter and the second quarter of 2015. Average daily revenues for Paragon's floating rig fleet increased one percent to $260,000 per rig in the third quarter of 2015 from $258,000 per rig in the second quarter of 2015.

Utilization of Paragon's marketed jackup rig fleet was 64 percent in the third quarter and in the second quarter of 2015.  Average daily revenues for Paragon's jackup fleet during the third quarter declined by six percent to $116,000 per rig from $124,000 per rig during the second quarter of 2015. 

At the end of the third quarter of 2015, an estimated 55 percent of the marketed rig operating days were committed for 2015, including 56 percent and 54 percent of the floating and jackup rig days, respectively. The calculations for committed operating days exclude available days related to rigs that were stacked and not marketed during the quarter.

During the quarter, Paragon added approximately $39.3 million in net backlog related primarily to $209.8 million of previously disclosed new contracts and extensions in the Middle East and North Sea, offset by $170.5 million in backlog reductions primarily related to the early release by Petrobras of the Paragon DPDS2 in Brazil. In the Middle East, the Paragon B152 received a contract extension from late November 2015 to late November 2017 at a rate of $81,000 while the Dhabi II received a contract extension from mid-July 2015 to mid-July 2017 at a dayrate of $76,000. In the North Sea, the Paragon C461 received a contract extension from mid-November 2015 to mid-November 2017 at a dayrate of $113,000. The Paragon C20051 received a contract extension from early December 2015 to late May 2016 at dayrates between $125,000 and $135,000. The company agreed to a backlog swap between the Paragon C462 and Paragon C463 and received a contract extension from late December 2015 to early March 2016 on the Paragon C463 at a dayrate of $130,000. In addition, the Paragon C462 received an accommodation contract from early September 2015 to late October 2015.

Paragon Extends Delivery of High Specification Jackup Prospector 7

Paragon also reported that a wholly-owned subsidiary has signed an agreement with Shanghai Waigaoqiao Shipbuilding Co., LTD., to extend the delivery date of the high specification Friede and Goldman JU-2000E jackup Prospector 7 to a date 12 months after the subsidiary has technically accepted the unit from the shipyard.  The company anticipates that technical acceptance of the unit will occur on or before December 31, 2015.  Under the terms of the agreement, no payments are due to the shipyard until the delivery date and upon completion of the delivery protocol.

Paragon Comments on Advisory Process and Outlook

In September 2015, Paragon announced the engagement of Lazard and Weil, Gotshal & Manges LLP to advise the company on strategic alternatives related to its capital structure.   The company also drew down substantially all of the remaining available capacity of its Revolving Credit Facility in the amount of approximately $332.0 million.

Mr. Stilley commented, "In light of current market conditions, we do not expect the company to remain in compliance with our Revolving Credit Facility leverage ratio covenant at some point during the next twelve months.  Accordingly, under the direction of an independent committee of the board of directors, the company has been proactively exploring long-term solutions to improve Paragon's overall balance sheet strength and position the company for long-term success.  The board has approved engagement with the company's lenders and noteholders with the intent of maximizing value for the company's shareholders and other stakeholders.  We believe that significant value can be unlocked through this process and we intend to work constructively with all involved parties to move forward as quickly as possible and reach our desired outcome.  In the meantime, we continue to operate normally and fulfill our commitments to our customers, suppliers, and employees."

Turning to the market outlook, Mr. Stilley concluded, "There is no indication that conditions in offshore drilling markets will improve in the near future.  Current oil prices suggest that our customers' 2016 capital budgets may be at or below 2015 levels, placing additional pressure on utilization and dayrates in our industry.  We expect oil markets to begin a recovery late in 2016, with drilling activity, particularly in shallow waters, to follow.  In the meantime, Paragon remains committed to its strategy of supplying safe, reliable, and efficient operations to our customers.  We will focus on our core areas of operation and continue to optimize our cost structure for this environment in order to best position ourselves for the recovery."