Pacific Drilling (

There’s little that Pacific Drilling can do in the current environment. Contracts remain very scarce in the drillship space, and the activity is expected to pick up closer to the second half of the next year. The company’s own recent contract confirmed these expectations – drillship Pacific Sharav got a contract with Murphy Oil (MUR) in the U.S. Gulf of Mexico from Q2 2021 to Q3 2022 at a dayrate of just $180,000.

Currently, Pacific Drilling has only one active drillship, Pacific Khamsin, whose contract is about to end. Drillship Pacific Santa Ana is on standby, while Sharav’s contract will start in the second quarter of 2021. The remaining four drillships are stacked, and their contract prospects are non-existent at this point.

In this situation, Pacific Drilling needs to cut costs to the bone and get rid of its debt burden. However, even this exercise will not make it a viable company after restructuring, since the offshore drilling business could not be done with just three drillships at current market dayrates. Given the fact that dayrates are unlikely to improve for the first contracts that are projected to be obtained for work starting in the second half of 2021, Pacific Drilling will need to exist with low cash flows for the foreseeable future.

In my opinion, the key intrigue of this story is whether Pacific Drilling will be able to go through a speedy restructuring process, emerge with a clean balance sheet and find an M&A partner to join a bigger company.

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Theoretically, creditors should be happy with such an outcome. The risk of dissolution appears to be real at this point, and the market value of Pacific Drilling’s rigs should be very low, since there is no market for the sale of modern drillships in the current market environment.

However, the other bankruptcy stories (Diamond Offshore Drilling (OTCPK:DOFSQ), Noble Corp. (NE), Valaris (OTCPK:VALPQ)) show that reaching a deal may take plenty of time. At this point, none of these companies managed to get out of restructuring, while it was clear that the industry received an unprecedented blowback in April 2020.

Time is an important factor in this case, since offshore drillers cannot start the transformation into businesses adopted to the new reality before they exit their bankruptcy. In addition, any M&A, which is badly needed for the industry’s well-being, is postponed until restructurings are complete.

I believe that Pacific Drilling may run into real trouble even if its creditors swiftly support any restructuring plan. The company does not look like a viable business, as it has just three active drillships with no prospects to get the non-active rigs out of the stacked state without external help even if the offshore drilling market starts to show signs of life.

Obviously, creditors, who are set to become new owners of the company in the upcoming restructuring, will do everything to avoid dissolution, which will be a complete disaster for what’s left of their positions. However, the pressure to get the company merged into a stronger competitor will be immense, and it is not clear whether other players will be ready to take additional rigs after they emerge from their restructurings.

While Pacific Drilling’s current market capitalization is miniscule, the company is still overvalued, since the shareholders are set to be completely wiped out. The recent upside move is just another example of wild speculations that often happen in pre-bankruptcy stocks, and the company’s shares will get to new lows once the bankruptcy is officially announced – or earlier.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.