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ESV: the Antics of Ensco, since the Rowan merger

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ESV: the Antics of Ensco, since the Rowan merger

ESV has dropped like a stone... since the merger with Rowan

I bought Calls yesterday

ESV / Ensco Plc

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The Ensco Rowan plc (NYSE: ESV) (“EnscoRowan” or the “Company”) board of directors received a proposal from Luminus Management, LLC (“Luminus”) dated June 12, 2019 (“the Proposal”). EnscoRowan’s board of directors welcomes investor perspectives on matters such as the Company’s capital structure and the return of capital to shareholders, and will evaluate the Proposal.

The Company proactively evaluates and manages its capital structure to execute its strategic priorities and deliver value for shareholders. To achieve these objectives, the Company has significant financial flexibility within its capital structure, including the ability to issue debt that would be structurally senior to the Company’s currently outstanding debt on both an unsecured and secured basis

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Ensco Rowan investor seeks $2.5 billion dividend payout - Reuters

2 days ago - Deep-sea oil driller Ensco Rowan's investor Luminus Management LLC on Wednesday urged the company to declare a special dividend of ...

June 12 (Reuters) - Deep-sea oil driller Ensco Rowan’s investor Luminus Management LLC on Wednesday urged the company to declare a special dividend of $2.5 billion to its shareholders, sending its shares down 6.3%.

Luminus, the investment advisor to funds and accounts that own 4.5% stake in Ensco Rowan, said it is disappointed by the stock’s performance both before, and since, the Ensco-Rowan merger.

Luminus urged the company to launch a priority guaranteed bond offering to fund the dividend.

Ensco Rowan’s shares fell to their lowest in more than 26 years on Wednesday.

Luminus Management is an investment management firm founded in 2002 with offices in New York, NY and Houston, TX. The firm focuses on a low net, long/short, relative value oriented strategy that invests opportunistically across the capital structure of companies within the broader energy ecosystem.

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Despite ESV being on the bottom of a channel, the stock has dropped straight down

"Catching a falling knife" is dangerous, so I used calls to buy, not an outright purchase

ESV dropped much faster than OIH & USO

ESV-etc ... 10d: $6.62 - $0.73, -9.93% vs. OIH-$13.17, -3.16%, USO-$10.94, +0.55%

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Ensco Rowan: Strange Investor Proposal At Times Of Panic

Summary

Ensco Rowan shareholder Luminus Management proposes raising additional debt and paying a special dividend.

The proposal has zero chances to be realized and comes at inopportune times, signaling panic rather than attempt to unlock value.

That said, Ensco Rowan's major downside move in the last month and a half is fundamentally unjustified.

When the market is in a panic mode, strange things happen. The recent proposal by Ensco Rowan (ESV) shareholder Luminus Management has good chances to win the title of "weirdest shareholder proposal of the year". In all likelihood, many investors and traders who are reading these words have already seen it: Luminus proposes to borrow $2.5 billion to pay a special dividend to shareholders (the proposal itself and the accompanying presentation can be found at this website).

The proposal - theory

Luminus Management is disappointed with the stock's recent performance and has the following idea (a full quote follows):

  • 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.

Current Ensco Rowan market capitalization is roughly $1.5 billion. If we assume that it can raise $2.5 billion of debt and then distribute it as a special dividend, anyone who purchased the shares below $12.5 is bailed out plus will retain the shares as a free option on the company's survival with a capital structure that includes an additional $2.5 billion of debt. In practice, the stock will surely rise much higher under such a scenario due to short covering and the fact that Ensco Rowan's equity won't be immediately priced at zero after the company has paid the dividend.

. . . this is where theory meets practice: who in his right mind will lend Ensco Rowan $2.5 billion that will be paid as a dividend rather than invested into the company's future? The market is currently expressing material concerns about the whole industry's chances to survive with the current capital structure. I believe that these concerns are premature, and that the industry's fundamentals are improving, although at a slower-than-expected pace. However, market sentiment plays a major role in financing. Luminus Management itself believes that 9% is an appropriate interest rate for debt. Adding $225 million of annual interest payments at times of poor dayrates and cash flow challenges is a pure suicide. There is simply no way how this proposal can be accepted, as well as there's no way to raise several billion dollars from creditors just to pay a dividend.

. . . Ensco Rowan shares lost half of their value since early May without any change in the fundamental catalysts. I continue to believe that such a punishment is undeserved, at least at this point - as I've shown in my articles on offshore drilling fundamentals (here, here and here), the situation is improving rather than deteriorating.

> More: https://seekingalpha.com/article/4270134-ensco-rowan-strange-investor-proposal-times-panic

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ESV bouncing (to resistance) - Almost $1 off the Lows

ESV-etc ... 10d: $7.37 +$0.46, +6.66% vs. OIH-$13.80, +2.22%, USO-$11.25, +4.07%

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Bought : ESV-Jan.$5c at $2.46. closed at $2.80-3.10= $2.95 mid, +19.9%

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