Category Archives: Oilfield Services

McDermott CFO resigns after worse than expected results

McDermott International has announced the resignation of CFO Stuart Spence, effectively immediately. Chris Krummel, currently the Chief Accounting Officer, has been promoted to the CFO position.



It’s been approximately two weeks since the company announced that it had obtained $1.7 billion in additional financing (at 12% interest rates) to tackle its liquidity crisis. In the same press release, the company also announced that the senior management were granted retention bonuses. Mr Spence was granted $1.3 million, with a third of that payable immediately.

McDermott announced third quarter results even worse than forecast last month in its refinancing presentation. Free cash flow for the quarter was a negative $146 million compared with negative $86 million in the presentation.

The SEC filing by the company makes no mention of the severance package, if any, that would be granted to Mr Spence. If he has truly resigned voluntarily he would be required to repay the retention bonus already paid out.

Interestingly, the company has signed contracts with the senior executives that only spell out severance payments in the event of a change in control. There is no formal provision for severance in the event of an involuntary termination without cause. When the predecessor to Mr Spence left in 2014 he received a lump sum payment of $640,000. His salary at the time was $515,000.

Mr Krummel joined the company in October 2016. He was previously the Chief Accounting Officer of Cameron International. No compensation was disclosed for Mr Krummel.

SEC filing – McDermott CFO resignation

Oilfield Services company misses interest payment as bankruptcy looms

Photo by Joshua Doubek

Key Energy Services has announced that it has engaged Moelis & Company as its financial advisor and Sullivan & Cromwell as its legal advisor to analyze various strategic alternatives. The company also elected not to pay interest on its $250 million term loan. The interest was due October 18, 2019. This caused a default on the loan.



On October 29, the company entered into forbearance agreements with its lenders in which the lenders agreed not to exercise any rights related to the loan default until the earlier of December 6, 2019 or the occurrence of certain early termination events.

Key operates the largest well service rig fleet in the US. It also provides fishing and rental tools, coiled tubing and fluid management services. It is based in downtown Houston.

For the six months ended June 30, 2019, the company had revenues of $222 million and a net loss of $42 million. At that date, it only had $6 million in equity.

2016 Bankruptcy

Key entered into a pre-packaged bankruptcy agreement in October 2016. As part of that deal, its $1 billion of debt was reduced to $250 million (due in December 2021). The term loan had an average interest rate during 2018 of 12.42%. No wonder the company is seeking strategic alternatives!

Big loss for Platinum Equity

$338 million of the original debt was owned by Platinum Equity, a large PE firm based in Beverley Hills. After the restructuring, Platinum ended up with 50% of the equity of Key. After emerging from Chapter 11, the total equity of the company was valued at $252 million. The current market capitalization is $10 million (47 cents per share). So Platinum is sitting on a big loss. Even their $2.75 million annual advisory fees are now in jeopardy. Platinum subsequently acquired $30 million of the term loan so they will have some say in the restructuring.

Goldman Sachs stake

Back in May, Goldman Sachs disclosed it owned 1.5 million shares, or 7.5% of the company. The shares were acquired between February and April 2019. At the time Goldman said it planned to engage with Key’s management and board to discuss issues including corporate structure, board compensation, dividend policy and transactions such as asset sales or mergers “as a means of enhancing stockholder value”. In June, Goldman disclosed it had reduced its stake to 4.4%.

Robert Drummond, the CEO at the time of the bankruptcy, left in May 2018 to become the CEO of Keane Group. They have just merged with C&J Energy Services. Later that year, Key tried to merge, in an all-stock deal with Basic Energy of Dallas. Basic rejected the merger offer.

SEC Filing – Key Energy loan default

Oilfield service companies complete merger

Two Houston-based oilfield companies, C&J Energy Services and Keane Group, have completed their merger. When the deal was originally announced in June 2019, the merger was valued at $1.5 billion. At completion, the companies were worth about $1 billion. The shareholders of each company will own 50% of the equity in the combined company.



The combined group will now be called Nextier Oilfield Solutions and have a stock ticker ‘NEX’. The board will consist of 12 directors, six designated by each party. The chairman is Patrick Murray (ex Chairman of C&J) and the CEO is Robert Drummond (ex CEO of Keane). The C&J CFO, Jan Kees van Gaalen becomes the combined group’s CFO. Greg Powell, the Keane CFO, becomes Chief Integration Officer.

For the six months ended June 30, 2019, C&J had revenues of $1 billion and adjusted EBITDA of $102 million. Keane’s figures were $849 million and $147 million respectively.

Synergies

The companies expect to achieve $100 million in cost synergies within 12 months. $45 million will come from sales, general and administrative expenses. $45 million will come from reduced material spend with $10 million of savings from consolidating real estate.

Mr Powell will serve as the Chief Integration Office for the earlier of (i) 18 months or (ii) the date at which the company achieves $100 million in annualized savings. He is eligible for a performance bonus of $2.6 million upon the achievement of specified performance criteria tied to the realization of synergies.

Background to the deal

In July 2017, Murray, the C&J chairman first met with Scott Wille, a director of Keane and employee of Cerberus to discuss the potential benefits of consolidation in the oilfield services sector. (Cerberus is the PE firm that bought Keane in 2011 and took it public in January 2017).

In the middle of 2018, Keane had discussions with another unnamed competitor about a business combination. When that deal fell apart, discussions with C&J began in earnest in November 2018. Keane briefly resurrected discussions with the unnamed competitor in early 2019 before deciding the merger with C&J was the better deal.

The deal almost fell apart at the end of May 2019 due to C&J’s insistence that it have a 52% / 48% equity split. It was resolved by C&J giving its shareholders a special pre-merger dividend $1 followed by a 50/50 split.

 

SEC filing – completion of merger

 

Monaco-based brothers plead guilty to bribery scheme

Cyrus Ahsani and Saman Ahsani, CEO and COO of Monaco-based Unaoil, have pleaded guilty in a scheme to make millions of dollars in bribe payments to officials in multiple countries. The countries included Algeria, Angola, Azerbaijan, the Democratic Republic of Congo, Iran, Iraq, Kazakhstan, Libya and Syria.



Guilty plea in March

The pair pleaded guilty in the Southern District of Texas back in March, but the Department of Justice only announced the news today. It’s not clear why there has been a delay. However it does answer the question of why the United Kingdom’s Serious Fraud Office suddenly dropped its fraud investigation into Unaoil back in June.

Cyrus and Saman Ahsani are set for sentencing April 20, 2020.

Companies involved

Unaoil is an intermediary company that provided services for multinational companies operating in the energy sector. The information sheet lists two companies specifically;

  • Rolls Royce plc (paid £170 million in fines to the UK authorities in 2017, specifically related to Unaoil)
  • SBM Offshore NV (paid $475 million in fines worldwide in 2017 – some related to Brazil which don’t involve Unaoil)

A further 25 companies are unnamed, of which 5 have their head office in Houston.

Many of these companies have been named through previous press reports. They include;

  • TechnipFMC (paid SEC $5m to settle bribery allegations in Iraq)
  • KBR (allegedly paid Unaoil over $10 million to help it win contracts in Kazahkstan. DOJ and SEC investigations still ongoing)
  • Baker Hughes (investigation ongoing)
  • Weatherford
  • Cameron
  • Core Labs (investigation closed – no action taken)

Other companies involved include Honeywell, ABB, Samsung and Hyundai.

Downfall

Unaoil’s downfall started as a result of a 2013 court case involving an Australia company, Leighton Holdings. It had entered into an agreement with Unaoil with the aim of securing a $500 million Iraq pipeline contract but later referred the deal to the police for possible bribery.

Nick McKenzie, an Australian journalist started following the case and was soon contacted by a whistleblower who gave him a hard drive containing 10 years’ worth of internal Unaoil emails.

You can read the investigative report by The Age newspaper here

Ahsani charges filed by DOJ

https://www.justice.gov/opa/pr/oil-executives-plead-guilty-roles-bribery-scheme-involving-foreign-officials

McDermott executives enrich themselves as company gets expensive new financing

Photo: Nandu Chitnis

McDermott International has obtained $1.7 billion in additional financing as it grapples with a growing liquidity crisis. The financing is expensive, with loan interest rates of 10% above the Eurodollar rate (i.e almost 12%). As well as large fees, the lenders will also get a 15% equity stake.



$650 million was made available immediately. A second tranche of $350 million will be made available in December. A third tranche of $150 million will be made available as soon as January 2020. The final tranche of $550 million will be made available in Q1 2020. The availability of future tranches is subject to McDermott delivering on its forecasts and the approval of 95% of existing bondholders.

In addition, the lenders will also receive new equity up to 15% of the company’s issued share capital.  The $1.7 billion facility is gross of $200 million of fees, expenses and interest costs through the mid-2020 trough.

Sharp fall in EBITDA and free cash flow

  • The company announced that its adjusted EBITDA for 2019 will fall from $725 million (previous guidance issued in late July) to $474 million.
  • Free cash flow for 2019 will fall from negative $640 million (previous guidance) to negative $1.2 billion.
  • John Castellano, Managing Director at AlixPartners has been appointed Chief Transformation Officer, reporting to the CEO.

The EBITDA adjustment is a result of an additional $80 million of costs on the Cameron LNG project, $33 million on the Freeport LNG project, $67 million on other projects and an additional $70 million contingency.

The Cameron LNG project is now projected to incur an overall loss of $1.7 billion (on a contract value of $6.9 billion). The Freeport LNG project will lose $700 million on a contract of $7.5 billion. These projects were part of the disastrous CB&I acquisition in 2018. I wrote about this last month.

The free cash flow deterioration is due to $150 million outflows on projects, $107 million due to a possible delay in a project award and $301 million in unrealized net working capital improvements (!).

Sale of businesses

The company was planning to sell the industrial storage tank business. However the net cash proceeds would likely be significantly below initial expectations. As a result, the business has been pulled off the market.

The company is still planning to sell Lummus, its technology license business. This could be worth as much as $2.5 billion.

Retention Bonuses

For this spectacular deterioration of the business since July the Board of Directors has decided to award retention bonuses to certain senior executives. A third is payable immediately, a third when Tranche B is funded (Dec 2019) and rest when Tranche C is funded.

  • David Dickson, CEO – $3.375 million
  • Samik Mukherjee, COO – $1.4 million
  • Stuart Spence, CFO – $1.3 million
  • John Freeman, Chief Legal Officer – $510,000
  • Ian Prescott, Senior VP, Asia Pacific – $425,000

In addition to the large sums, note the disconnect in that the senior executives get all their retention bonuses paid out before the $550 million Tranche D payment is made available. That’s not right.

Mukherjee is the executive who stole trade secrets from TechnipFMC

SEC filing – McDermott

 

Oilfield Services company delisted

Photo by Joshua Doubek

Superior Energy Services, based in downtown Houston, has been delisted by the New York Stock Exchange. This is because the share price has been below $1 for more than 30 days. The company plans to appeal the decision.



Superior provides a number of different oilfield services such as downhole rental tools, pressure pumping services and coiled tubing. It has been struggling for a few years and last made an operating profit in 2014.

At the time of delisting it had a market capitalization of $13 million but had debt of over $1.3 billion. $800 million of this matures in December 2021.

At lot of debt stems from the acquisition of Complete Production Services for $2.9 billion in February 2012. The company paid cash of $550 million and issued stock for the rest. However, three months prior to the finalization of the deal, it issued $800 million of senior loan notes (the ones that are due next year).

The Complete acquisition also involved $1.9 billion of goodwill. This has been written off in subsequent years.

The NYSE has acted unusually quickly in delisting the company. The NYSE originally informed the company about the non-compliance on August 9. The company issued a press release on August 12 stating that it planned to notify the NYSE by August 23 of its receipt of the notice and of its intention to cure the non-compliance.

The company didn’t issue a press release or file anything with the SEC on or after the August 23 deadline. Maybe they forgot to respond! Normally the NYSE are usually patient if a company files a plan to get back into compliance. That’s how many companies can go months with the stock price below $1.

https://ir.superiorenergy.com/news-releases/news-release-details/superior-energy-services-receives-notice-nyse-regarding-0

Oilfield Products Distributor hires new CFO

Kelly Youngblood has been appointed as the next CFO of MRC Global, an oilfield products distributor, based in downtown Houston.

Mr Youngblood replaces Jim Braun, who announced last month that he intends to retire in March 2020. He has been the CFO since November 2011. Mr Youngblood will join MRC right away but won’t take over the CFO position until Mr Braun retires.



MRC Global is the largest distributor of pipe, valve and fitting products and services to the energy and industrial markets. It went public in 2012 and was previously called McJunkin Red Man Holding Corporation. The company has revenues of $4 billion and a market capitalization of $1 billion.

Mr Youngblood joins from BJ Services, another oilfield services company, where he had been CFO since December 2017. Prior to that, he was the CFO of Diamond Offshore Drilling and the VP of Investor Relations at Halliburton.

BJ Services filed for an Initial Public Offering in July 2017 but withdrew its registration statement in March 2019.

Mr Youngblood will receive a base salary of $500,000 (same as Mr Braun). He will also receive a signing bonus of $380,000 (to be paid in two installments in 2020) and an initial equity long-term incentive award with a target value of $1.5 million (to vest over three years).

SEC filing – Youngblood appointment

McDermott moves closer to large debt restructuring

Photo: Nandu Chitnis

The news surrounding McDermott International keeps getting worse as its liquidity crisis deepens. Just in the past week, it has emerged that

  • the company has hired Kirkland & Ellis (legal) and AlixPartners LLP (Financial advisers) to advise it on its debt restructuring.
  • A group of bondholders has hired Paul Weiss Rifkind Wharton & Garrison (legal) and Houlihan Lokey (Financial advisers) to advise them.
  • Another group of lenders has hired Davis Polk & Wardwell as counsel (Jones Day was initially hired but had to step down due to a conflict) and Centerview Partners.
  • The company has hired Evercore to help it sell Lummus, a technology business for $2.5 billion.
  • The company is seeking a bridge loan to help it cover a $1.7 billion working capital deficit until it can sell an asset such as Lummus.
  • Moody’s downgraded McDermott one notch to B3 (speculative, high credit risk).

When the news broke that McDermott had hired Kirkland & Ellis, the go-to legal firm in Houston for restructuring, the company issued a weak statement that stated ‘it routinely hires external advisors to evaluate opportunities for the company.’

Debt trading at big discount

The company’s $2.2 billion term loan is quoted at 77 cents on the dollar. In contrast, the $1.3 billion 10.625% unsecured notes have been trading at 36 cents. A key date coming up is November 1 when there is $69 million of note interest due to be paid.

The share price is currently $2.15 (market cap $427 million), down from $21 in May 2018.

Disastrous acquisition

The problems stem from McDermott’s disastrous acquisition of fellow Houston company, CB&I in May 2018 for $4.1 billion ($2.4 billion cash, $1.7 billion stock). CB&I had a lot of legacy Engineering & Construction projects that have turned out to be much less profitable than McDermott expected at acquisition.

The costs to complete estimated at acquisition on just 3 projects (Cameron LNG, Freeport LNG and Calpine Power) increased by over $1 billion. As a result, the goodwill on CB&I ended up being $4.8 billion. McDermott wrote down $2.1 billion in goodwill 7 months after acquisition. That’s a quick destruction of shareholder value!

Since acquisition, the costs to complete on these three projects increased by an additional $199 million in 2018. For the first 6 months of 2019, costs on all major projects have increased by $116 million. No wonder the company is having cash flow problems.

Of course, all those high-priced lawyers and financial advisors have to be paid too!

Backlog

One thing in its favor is that the company has record backlog of $20.5 billion. Having worked at a large E&C company in a former life, I know from personal experience that investors & lenders view backlog has having value (‘somebody must be able to make money on $20 billion of revenue!). However, if you can’t execute, there is no value.

https://www.prnewswire.com/news-releases/mcdermott-statement-300921007.html

 

 

TechnipFMC pays SEC $5 million to settle Iraq bribery violations

TechnipFMC, has agreed to pay the Securities and Exchange Commission (SEC) $5 million to settle bribery allegations in Iraq.

Between 2008 and 2013, FMC Technologies (based in Houston) made over $794,000 in payments to a third-party consultant, who used some of these funds to pay bribes to Iraqi government officials to procure metering technology contracts with Iraq state-owned oil companies.



Back in June, the Department of Justice announced that TechnipFMC had agreed to pay $296 million to settle bribery allegations in Brazil and Iraq. $214 million of that was to be paid to the Brazilian authorities, with $82 million going to the DOJ.  In June, Technip issued a press release announcing a $301 million settlement. I noted, at the time, the $5 million discrepancy. I presume the $301 million includes the $5 million just announced.

The FMC sales manager who played an active role in the bribery scheme was based outside the US. However personnel in the US sent numerous documents and approved payments to Unaoil, the consultancy firm based in Monaco. The company disguised the payments as site installation expenses.

TechnipFMC did not self-report to the SEC until after being contacted by the DOJ. It has agreed to pay $4.3 million (representing profits on the contracts won) plus interest of $0.7 million.

Technip and FMC merged in January 2017. Last month, the company announced plans to split into two having spent $231 million on integration costs since 2016.

https://www.sec.gov/enforce/34-87055-s

 

 

CFO of Offshore Drilling Contractor resigns

Adam Peakes has resigned as CFO of Noble Corporation (NE) with immediate effect. The company is an offshore drilling contractor. It has its registered head office in London but its operational office is in Sugar Land.

The company has begun a search for a successor. In the interim, the accounting and Treasury teams will report directly to CEO Julie Robertson.



Mr Peakes joined the company in January 2017 from investment bank, Tudor Pickering Holt, where he was Managing Director and Head of OFS Investment Banking.

The company will pay Mr Peakes (who had a base salary of $450,000) a severance payment of $1 million. Just this February 2019, the company announced it would pay Mr Peakes a retention bonus of $900,000 with one half vesting in December 2020, and the balance in December 2021. Not clear why he has gone from hero to zero in a few short months.

As with other Noble executives, the employment contract of Mr Peakes only outlines termination payments in the event of a change of control. There appear to be no clauses with regard to termination without a change of control.

When he joined the company, the stock price was $7.25. It now trades at $1.89 (market cap $488 million).

Interestingly, Mr Peakes’ former employer was in the news this week. The week before Mr Peakes joined Noble, TPH announced it would merge with New York-based Perella Weinberg Partners.

This week it was announced that, one of the partners, Dan Pickering, is spinning off the energy asset management part of the combined firm into his own company, Pickering Energy Partners. Bobby Tudor and Maynard Holt will remain with the investment bank.

SEC filing – Noble Corp CFO departure