Distressed Oil-Rig Bond in Mexico Shows Crude Rout Spares No One

  • Offshore Drilling's bonds sink to a one-year low of 65 cents
  • Company generates enough cash to pay bondholders, BCP says

Like many companies in the oil industry, Mexico’s Offshore Drilling Holding SA is struggling to convince bond investors it can withstand the collapse of crude prices.

The rig provider’s $950 million notes due in 2020 have tumbled to a one-year low of 65 cents on the dollar, leaving investors with a loss of 3 percent this month. That’s more than twice the average slump in emerging markets. 

Yet to BCP Securities LLC and MainFirst Schweiz, Offshore Drilling’s bondholders are underestimating the company’s ability to weather the turmoil. Despite generating less revenue from its biggest client -- Mexico’s state-owned oil producer -- Offshore Drilling’s cash balance was little changed at $138.5 million last year. And unlike fellow rig provider Oro Negro, which defaulted in October after Petroleos Mexicanos chopped its day rates, Offshore Drilling doesn’t have bonds maturing until 2020.

“Given their current cashflows, even with a lower day rate they should still be able to service the bonds,” said Mariela Anguiano, an analyst at BCP in Greenwich, Connecticut.

An investor relations official at Offshore Drilling in Mexico City didn’t return calls for comment on Tuesday. Brent crude fell 3.9 percent Wednesday to $27.64 a barrel as of 11:41 a.m. in New York, bringing its decline over the past two years to 74 percent.

The company’s notes due in 2020 are currently backed by rigs Centenario and Bicentenario, which can operate in depths of up to 10,000 feet. In July, Offshore Drilling agreed to reduced the day rate for the two rigs to $365,000 a day, down from $550,000 for Centenario and $565,000 for Bicentenario. The company also extended the contracts for both rigs into 2017.

Last month, Offshore Drilling announced a separate five-year deal for two new jack-up rigs at $130,000 a day.

Three quarters of Pemex’s crude output comes from the waters of the Gulf of Mexico, where Offshore Drilling’s rigs have drilled 17 of 21 ultra-deep wells. 

“The company was very proactive and renegotiated their contracts, lower, but they go longer out,” said Cornel Bruhin, a money manager at MainFirst Schweiz who owns Offshore Drilling’s bonds. “These days it’s very rare that you get new contracts and it shows us that these guys have good contacts with Pemex.”

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