RE: RE: January 2013 Presentaiont 0.26) Risk Rating: ABOVE AVERAGE
Q3/12 RESULTS – EBITDA IN LINE; CURRENT UTILIZATION BELOW EXPECTATIONS
Q3/12 Results Summary:
? EBITDA of US$14.7 million was in line with JCI estimate of US$14.6 million (consensus of US$14.1 million), with higher average day rates offsetting lower utilization when compared to our estimates.
? EBITDA margins of 20% vs. JCI estimate of 21%.
? G&A (excluding stock-based compensation) was 10% of revenue, in line with our estimates.
? Revenue per day was US$35,198 vs. JCI estimate of US$28,500. Approximately 80 days of mobilization revenue for Rig 115 was included in the quarter.
Utilization: Utilization for Q3/12 was 63% versus JCI estimate of 70%.
? As depicted in Exhibit 2, the Company has 25 rigs under contract or working, 12 not working and 4 out of service.
? This implies current utilization of ~68% based on rigs available for service.
? Rig 115 was moved to Manaus and Rig 116 will arrive shortly. The Company is actively marketing the rigs as well as entering into an arbitration process relating to the termination fees. Recall, these rigs were contracted by HRT for a term of four years and were cancelled mid-way through the contract.
Changes to our estimates: We have decreased our forecasts to reflect lower current utilization in Q4/12 and reduced utilization estimates for 2013, given drilling market conditions. See Exhibit 3 for changes to our estimates.
Conclusion: We continue to expect weakness in the stock given Tuscany’s leveraged position in a relatively weak drilling market. The next few quarters will be important to watch, specifically relating to the Company’s ability to improve utilization and margins in a challenging market. If margins and utilization do not improve, supporting debt repayments (commencing Q4/13) could be challenging given that the principal repayments of ~US$13 million/quarter exceed operating cash inflow of ~US$11 million/quarter (Q4/13 estimate).
We have revised our rating and 12-month target to a SPECULATIVE BUY recommendation and C$0.50/sh based on a 4.5x EV/EBITDA(13) multiple.
Changes to our Estimates
? We have decreased our utilization and margin forecasts based on reduced rig demand
expectations in the Company’s operating areas over the next 12 months.
? If the Company does not increase utilization/margins, it could be required to alter its debtrepayment
schedule again at the end of 2013, based on our forecasts.
o For 2013, we estimate the Company will cash flow ~US$42.4 million. In December 2013,
the Company is required to commence repaying debt (~$13 million/quarter thereafter). In
2014, total debt principal repayments will amount to ~US$51.5 million. Annualizing
Q4/13 estimated operating cash flow would equate to operating cash flow of
~US$44 million, less than the aforementioned principle repayment requirements. Adding
capital expenditures to that equation would only increase the delta between cash inflow
and outflow. Therefore, without an increase to the Company’s utilization/margins we
foresee another debt restructuring, or potentially, an asset sale to de-lever.
This Report was from Nov 9 2012 PT2