Summary
McDermott is down by over 50% in the last month on the back of poor performance in CBI legacy business.
McDermott credit is under stress and it has issued preferred shares at a 20% all-in cost of debt.
It has now reached deep value territory, and I see a potential gain of 100-400% gain within two years.
I have opened a long position which I will complement if the stock becomes even cheaper.
Introduction
McDermott (NYSE:MDR) is an oil services engineering firm. A leader in offshore services, it acquired Chicago Bridge & Iron Co. (NYSE:CBI) in 2018 to rebalance its business and became a mixed onshore/offshore oil services firm. Before merging with CBI, it rejected a bid from Subsea 7 (OTCPK:SUBCY). In the last two months, McDermott has lost over 50% of its market cap on the back of legacy issues in CBI and the overall oil services sector pullback. In this note, we will first highlight the risks and then explain our rationale in opening a long position.
The high cost of the preferred debt suggests a material risk of bankruptcy
McDermott announced its Q3 last week and the stock price fell by 40% in a single day. The announcement of further losses ($744mn, source: Q3 presentation) on CBI legacy projects shocked the market. What shocked me as well, was the company acutely needs to seek liquidity. Firstly, by raising preferred debt from close parties at high cost and, secondly, by starting the sale of two businesses.
