Of the two messages issued yesterday from struggling drilling group, Boart Longyear (BLY), the market picked up on the most obvious – that the company faces a possible implosion in the next year if things don’t change and it’s not recapitalised.
But the other story from the company – that there is a chance things will improve, that the long slide in drilling activity might be ending, and that its banks remain supportive because they don’t want to take losses – was ignored.
Investors know there’s always time to pick up on a good story, especially if its from a struggling company.
They know the shares will remain cheap for a while yet, especially if its Boart, which has been a serial disappointer of late.
So sell, sell and sell, which they did, again yesterday (it has happened after every profit release and trading update from the company for the past two years).
The shares slipped 12.8% to 17c.
BLY 2Y – Can Boart recover?
In the June half alone, Boart Longyear lost $US142.8 million, an improvement from the loss of $US329.4 million a year earlier.
For the full year, it said it agreed with analyst estimates of full year revenue of around $US842 million, an EBITDA profit of $US47 million and net debt of $US531 million.
In the June half, the normalised EBITDA profit totalled just $US18.7 million, so the company is looking for a second half rebound with EBITDA surging by close to $US30 million.
But that won’t be enough. The company needs a capiital injection, asset sales (or a mix of both) and a deal from its financiers.
And without such a sweeping revamp, Boart Longyear says it is unlikely to comply with debt covenants by mid-2015, notwithstanding a recent easing of some of the conditions surrounding its funding.
"There is material uncertainty that may cast significant doubt on the ability of the company to continue as a going concern," it warned investors on Tuesday.
"The ability of the Company to continue as a going concern is likely to depend on the Company successfully concluding its strategic review of recapitalisation options with completion of a recapitalisation transaction no later than 30 June 2015," it said.
"Without such a transaction, in order to continue as a going concern, the Company would need to either experience a significant and rapid improvement in market conditions and the financial performance of the Company or secure a future amendment to the terms of the credit agreement to provide additional head room at 30 June 2015, none of which is being assumed at present," the company said.
Despite the long slide in the drilling industry over the past 18 months, there was optimism yesterday from the company that the rate of decline may now be slowing, although few are willing to call a recovery just yet.
"As indicated in our most recent market updates, we feel we are at, or approaching, the bottom of the market.
"Our view could change if commodity prices for mined products fall materially from existing levels, mining companies are not successful in pushing forward planned mine expansion and development activities, or mining companies otherwise significantly cut exploration spending from current levels that are already below recent historical levels.
"Utilisation rates appear to have stabilised, and we expect to remain at current rates for the balance of 2014, excluding the impact of the normal year-end, holiday reduction in activity.
"We also anticipate, however, that pricing will continue to be a headwind throughout the balance of the year, particularly in our Drilling Services division," the company said. said.
And on the continuing review of the company’s future, the company had this to say:
"The Company has narrowed both the focus of the strategic review and the number of parties with whom it is, and may be, negotiating, and it is pursuing discussions around several different forms of transactions.
"While interest in the strategic review by potential investors remains strong, there are no assurances that negotiations will continue, that the form or terms of transactions being considered will not change or that any recapitalisation will be completed," directors said.
That review is going to be important for the company’s future.
Could Boart Longyear end like Pacific Brands – gradually selling assets and slimming down until it no longer exists, or could it be sold holus bolus at a knockdown price?