2. How to Find Stocks?
• Look at Stock Spinoffs
– http://www.stockspino
ffs.com/
– http://spinoffmonitor.c
om/
• Follow Famous
Investors
– Go to SEC website and
look for 13HR filings of
your favorite hedge
fund
3. How Else to Find Stocks
• Read Blogs
– Seeking Alpha
– Reminiscences of a Stock Blogger
– Alpha Vulture
– Whooper Investments
– Oddball Stocks
– Wexboy (Great Britain Stocks)
– Red Corner
4. Found a Stock! Now What!?!?
• Look at the Income
Statement and
Balance Sheet,
Perhaps Peruse the
Annual Report
– Bad News: 90% of the
time, there is
something wrong
with the company
5. What could be Wrong with my
Company?
• Over-Leveraged
• Earnings too high (ie Cyclical Peak)
• Lots of Preferred Stock
• Untrustworthy Management
• Not Cheap Enough
– Big reason not to invest
6. Coming Up with a Thesis
• Once you have identified that 1 in 10 stock
that passes a quick analysis, now is the time to
come up with a Thesis
• Thesis should write itself if you haven’t come
up with one
7. Ex 1. Kenon
• Sum of the parts of this recent spinoff
indicates upside of 100%
– Kenon is made up of five segments
– The money earning segment is overshadowed by
the other 4 money losing segments
– On a P/E basis this one segment (electrical utility)
is trading at a 9 multiple and will increase capacity
by 50% in the near term
8. Ex. 2 Third Federal Savings and Loans
• Mutual Holding Structure Hides Cheap
Valuation; Company also buying back lots of
shares
– Trading at a P/Book of about .5
– Buying back 15% of stock per year
9. Background of the Company
• Look over the Companies Risk Factors and
Business Description in the 10-K
• Try to capture the essence of the background
of the company that a.) either people want to
know or b.) is important to the thesis
• In the case of Kenon, should talk about recent
spinoff as well as the holding company
structure
11. Business Model
Paragon Offshore is a supplier and operator of low end “standard-spec” jack-ups
and floating drilling platforms that was spun off of Noble Energy on August 1, 2014
PGN Key Metrics
Market Cap $477MM
EV $2.67BN
12 mo Trailing PE 1.15x
EV/EBTIDA 2.86
EBITDA margin 44%
Select CustomersParagon’s Assets
34 Jack-ups
5 Drill-ships
3 Semisubmersibles
Charges
Dayrate
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
EBITDA Breakdown
12. Spinoff Details
Noble’s Reasons for Spinoff
• Separate newer high-spec assets from mature standard-spec assets
• Raise $1.8B cash to pay off long term debt
• Allow management of each company to focus on its own strategy
Spinoff Logistics
• The spinoff was completed on August 1st 2014
• NE shareholders received 1 share of PGN for every 3 shares of NE
Average Fleet Age (years)
13
34
0
10
20
30
40
NE PGN
Market Cap (millions) 2013 EBITDA (millions)
1,268
718
0
500
1,000
1,500
NE PGN
4,900
485
0
2,000
4,000
6,000
NE PGN
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
13. Valued at a
discount to NAV
and NPV
Company Thesis
PGN is a victim of
significant
overselling
PGN’s rigs will
remain competitive
Paragon has been oversold for reasons unrelated to the
underlying business leading to a ~50% decline since being spun
off
Paragon is currently trading below its net asset value, and the
market does not fully appreciate the strength of their cash
flows
Paragon’s low-spec rigs can maintain relevancy in current
operating regions through their lean cost structure relative to
their high-spec peers
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
14. Share Price Since Spinoff
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
15. Institutional Ownership
Paragon has been oversold due to non-fundamental reasons
Noble Ownership
86%
16%
Paragon Ownership
Investment
Managers
Other
Reasons for Selling
Tiny Market Cap PGN’s 480m Mkt Cap makes it too small for many funds to hold
Indebtedness 2.4x D/EBITDA makes it appear too risky for many funds
Time Cost Negative factors discourage investors from doing further research
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
16. Find information to Support Thesis
• Show graphs of revenue, earnings or expenses
• Perhaps do a survey look at market conditions
• Run a Monte Carlo simulation with different
possible events to get range of intrinsic values
• I like to display backtested results of similar
companies
• Market Analysis
18. Future Supply
Deferred investment from 2008-2010 materializing in the next 4 years
The market assumes newbuilds will hit the market immediately after they are
constructed
Executive
Summary
Industry Thesis
Valuation &
Recommendation
Market Overview
19. Jackup Supply and Demand
139 high-spec newbuild rigs coming on market between 2014-2017
We project utilization to fall to 87% during after the bulk of uncontracted supply hits
the market in 2015 and stay around historical lows for the foreseeable future
International Jackup Supply/Demand
BIG Projections
The jackup market will see significant decreases in utilization and dayrates
Executive
Summary
Industry Thesis
Valuation &
Recommendation
Market Overview
20. Varying Rig Cost Structures
Standard Spec Rig
(numbers in thousands/day)
Cash Operating Costs: $50
Interest Expense: 8
Maintenance Capex: 12
Allocated SG&A: 5
Break-even dayrate: $75
High Spec Rig
(numbers in thousands/day)
Cash Operating Costs: $65
Interest Expense: 10
Maintenance Capex: 15
Allocated SG&A: 5
Break-even dayrate: $95
vs
High-spec rigs cannot compete with standard-spec rigs on price
Limited downside for standard-spec dayrates from newbuild rigs
All newbuild jackups will be high-spec
Executive
Summary
Industry Thesis
Valuation &
Recommendation
Market Overview
21. Floater Market Trends
•Market believes that PGN’s 4 floaters are next to be released by
Petrobras
•Petrobras faces severe supplier pressure with orderbook facing
significant delays and litigation
•Petrobras has huge DW reserves that it will be unable to access
with current fleet and orderbook
• Large order book following
financial crisis: 91 on order vs
current fleet of 277
• All major recent discoveries are in
deepwater or UDW
• Projected 8% demand CAGR
• Forecast supply gap to reappear
by 2018 0
100
200
300
400
500
600
200520062007200820092010 2011 2012 2013 2014 2015 2016 2017 2018 20192020202120222023
RigCount
Floater Market Demand
Floater
Demand
Brazilian and International floater demand will outstrip supply
Executive
Summary
Industry Thesis
Valuation &
Recommendation
Market Overview
22. Valuation
• Provide DCF and Comps in all situations
– Use CapIQ for comps significantly reduces the
time required
– Outline Assumptions
• Provide other valuations as needed
– Company undergoing a transaction like a mutual
thrift conversion
– Sum of the Parts Analysis if analyzing a
conglomerate
26. Net Asset Value – Assumptions
Average Market Transaction Valuation: 4.7x
BIG-assumed Valuation: 2.7x
Average Market Transaction Valuation: 5.3x
BIG-assumed Valuation: 3.4x
Market Scrap Value
PGN’s Jackups
PGN’s Floaters
Cold Stacked
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
Rig Cohort/ Rig
Name
EV/
EBITDA
Mexico - 390' 3.0x
Mexico - 300' 2.5x
Mexico - 250' 2.2x
Middle East - 300' 2.5x
Middle East - 250' 2.2x
Middle East - 150' 2.0x
North Sea - 350-390' 4.0x
North Sea - 250' 3.3x
West Africa - 300' 2.5x
West Africa - 250' 2.2x
Misc - 300' 2.5x
MDS1 2.8x
DPDS1 3.2x
DPDS2 3.5x
DPDS3 4.0x
MSS1 3.3x
MSS2 3.5x
DPDS4 50,000
MSS3 30,000
27. Net Asset Value – Returns
Both rigs and floaters sold at a significant discount to current transaction comps of
4.7x EV/EBITDA to account for illiquidity
Two cold stacked rigs can be sold at market scrap value
Assumed capital gains tax rate of 15%
Liquidation value at a 30% discount to a third-party asset appraisal valuing PGN’s rigs
at $3.4 billion.
PGN’s downside is protected even in the worst possible scenario
Assumptions
Exit EBITDA
Sales Multiple
(EV/EBITDA)
Liquidation
Value
Drillships 217,947 3.5x 763,438
+ SemiSubs 82,581 3.4x 281,880
+ Jackups 566,920 2.9x 1,626,031
+ Stacked - 0.0x 80,000
= Total 867,448 3.2x 2,751,487
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
Base Case Returns
After-Tax EV 2,338,764
- Net Debt 1,730,000
= Implied Market Cap 608,764
Current Market Cap 476,310
ROI 27.8%
28. RecommendationCurrent Price
Purchase PGN below $5.70/share for an expected return of 100% in our upside
case, 50% in our base case, and -30% in our downside case
Executive
Summary
Valuation &
Recommendation
Market Overview Industry Thesis
29. Risks
• Pick two or three risks in your thesis and show
why these risk are overblown or not potential
problems
• Don’t put all the risks here if you have a short
presentation, leave most in appendix if
question gets asked
31. ● A 300 basis point increase in interest rates will
reduce economic value of equity by 23%
o This situation is mitigated by the fact that the
company trades at a huge discount to book
value and is quickly becoming more asset
sensitive
Worst Case Scenario: Rise in
Interest Rates
32. ∗ Loans are gradually shifting away from Fixed Rate
Mortgages to ARMs
Becoming more Asset
Sensitive…
33. Appendix
• Should provide all the supporting details like
the math that are too complex to go into the
presentation
• Also should put in answers to potential
questions
• Analysis of additional problems/risks
• Analysis of transaction details if relevant
• Definitions
34. Appendix (cont)
• Add details on commodity analysis when
dealing with a relevant company
• Analyze management
• Include sensitivity analysis
• Look at competitors
• Look at suppliers and customers
• When in doubt, put it in
38. Breakeven Company Costs
Cash Operating Costs
Interest Expense
Maintenance Capital Expenditures
SG&A
Total
600mm
100mm
150mm
45mm
895mm
At 90% Utilization, 895mm in cash per annum requires a day rate of $82,500, down
more than 20% from current levels. This assumes zero income from floaters.
Back to Table of Contents
39. • Backlog is concentrated in floaters due to longer contract
length (~5 years vs 1 year)
Company Backlog
0
400
800
1200
1600
Jackup Backlog Floater Backlog
Contracted Backlog
Pre 2015 Post 2015
42%
14%
7%
5%
4%
28%
Backlog by Customer
Petrobras
Pemex
Total
ADMA-OPCO
Nexen
Other
Back to Table of Contents
41. Petrobras
Petrobras is Key to PGN’s Future
• 4 Floaters Contracted: MSS2 (2015), DPDS1 (2015),
DPDS3 (2017), and DPDS2 (2017)
•Dayrates at 270,000-340,000 vs ~120,000 for jackups
•PGN bears assume inability to hold on to these
contracts
•Majority of oversupply in UDW and presalt segment
•Problems with local supplier solvency have put newbuild order
book at risk
•SBM corruption investigation threatens largest supplier
•Cost overruns and political climate will cause focus on more
efficient standard specs
•Long term floater supply gap will ensure new customers
Petrobras Risk is Overstated
0
400
800
1200
1600
Jackup Backlog Floater Backlog
Contracted Backlog
Pre 2015 Post 2015
Petrobras
42%
Backlog by Customer
Back to Table of Contents
42. Floater Exposure – Petrobras
Petrobras is Key to Floater Market
4 of 6 Floaters Contracted: MSS2 (2015), DPDS1 (2015),
DPDS3 (2017), and DPDS2 (2017)
Dayrates at $270,000-340,000 vs ~ $110,000 for jackup
Bears Assume inability to hold Contracts
Petrobras has let go 10 standard-spec rigs in the last two years
Petrobras ordering 52 floaters, to come online in the next
decade
Back to Table of Contents
43. Floater Exposure – Petrobras
Majority of oversupply in UDW and presalt segment
Problems with local supplier solvency have put newbuild order book at
risk
SBM corruption investigation threatens largest supplier
Cost overruns and political climate will cause focus on more efficient
standard specs
Long term floater supply gap will ensure new customers
Petrobras Risk is Overstated
Valuation Considerations
Assume MSS2 is cold stacked after end of contract in 2015
Assume 15% drop in dayrate and 20% drop in utilization for
DPDS1 and 2017 rigs
Back to Table of Contents
44. Steven Manz
Current: CEO of Paragon
Past:
• Managing Partner of SEH Offshore Ventures (2011-2014)
• President and CEO of Seahawk Drilling (2008-2011)
• President and CEO of Hercules Offshore (2004-2008)
Current: CFO of Paragon
Past:
• CFO of Prospector Offshore Drilling (2010-2013)
• CFO of Seahawk Drilling (2008-2010)
• CFO of Hercules Offshore (2005-2007)
Randall Stilley
Management
45. Management Incentives
Management is incentivized to meet certain EBITDA targets
(yet to be released) and safety standards.
Back to Table of Contents
46. Seahawk Story
• In August 2009, Seahawk was spun off of Pride International but declared bankruptcy
in 2011. While both look similar, they are actually quite different:
Qualities of Seahawk:
• Old fleet: average rig age was 28 years
• Customer Concentration: 58% of revenue from
Pemex
• Declining business: only had 1 rig on contract at
time of spinoff
• BP Oil spill made it extremely difficult to operate in
the gulf
Qualities of Paragon:
• Much more geographically diversified
• Much more diversified in customers as well
• Much larger backlog
• Much more diversified fleet types
Back to Table of Contents
47. Debt
800
650
580
500
Secured Term Loan, Matures 2021
• LIBOR + 2.75%
• 1% annual repayment
6.75% Senior Unsecured
Notes due 2022
• Non-call for 4 years
7.25% Senior Unsecured Notes
due 2024
• Non-call for 5 years
Revolving Credit Facilitiy, Matures
2019
• Undrawn
• LIBOR + 2.00%
$7 $7 $7 $7
$800
$7
$609
$500 $580
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Covenants for Revolver
• Maximum Net Debt to EBITDA of 4:1
• Minimum EBITDA to Interest Expense of 3:1
Ratings
• Revolver: BBB- (S&P), Baa3 (Moody’s)
• Term Loan: BBB- (S&P), Baa3 (Moody’s)
• Senior Notes: B+ (S&P), Ba3 (Moody’s)
Despite high debt load, PGN can meet all its obligations and is not at risk of defaulting.
Capital Structure Debt Maturity Profile
49. Third-party Asset Valuation
Prior to the spinoff, an unaffiliated third-party appraised Paragon’s assets. That appraisal value
was reflected as PP&E on the company’s 10-12B filing submitted on 5/23/2014
49
We believe that the appraisal value of PGN’s rigs is
aggressive, but supports the conservativeness of our
valuation methods
Source: Deutch Bank
10-12B valuation
After -Tax LV 2,894,065
- Net Debt 1,730,000
= Implied Market Cap 1,164,065
Current Market Cap 476,310
ROI 144%
Back to Table of Contents
50. Comparable Transactions – Jackups
Jackup Transactions January 2012-May 2014
Rig Sold Day Rate Utilization Revenue EBITDA Margin EBITDA Sale Price EV/EBITDA
Ensco 85 130 80% 37,960 30% 11,388 64,000 5.6x
GSF Monitor 136 81% 40,061 30% 12,018 85,000 7.1x
Vicksburg 116 95% 40,100 52% 21,000 55,400 2.6x
Ben Avon 105 94% 36,120 34% 12,281 55,000 4.5x
Ocean Heritage 120 90% 39,420 30% 11,826 45,000 3.8x
Ocean Columbia 90 80% 26,368 34% 8,965 40,000 4.5x
Average 116 87% 36,671 35% 12,913 57,400 4.7x
Description of Jackups Sold 2012-2014
Rig Sold Date of Transaction Year Built Last Upgraded Water Depth
Ensco 85 4/24/2014 1981 2012 300
GSF Monitor 2/1/2014 1989 N/A 350
Vicksburg 10/1/2013 1976 1998 300
Ben Avon 2/1/2013 1980 N/A 250
Ocean Heritage 4/1/2012 1981 1981 300
Ocean Columbia 3/1/2012 1978 N/A 250
Back to Table of Contents
51. NAV Assumptions & Returns
Jackup Sale Multiple
FloaterSaleMultiple
Realistic Realm of Possibilities for ROI
28% 2.5x 2.7x 2.9x 3.1x 3.3x
3.3x -21.7% -1.5% 18.8% 39.0% 59.2%
3.5x -8.3% 11.9% 32.2% 52.4% 72.6%
3.8x 5.1% 25.3% 45.6% 65.8% 86.0%
4.0x 18.5% 38.7% 59.0% 79.2% 99.5%
4.3x 31.9% 52.2% 72.4% 92.6% 112.9%
Base Case Returns
After-Tax EV 2,338,764
- Net Debt 1,730,000
= Implied Market Cap 608,764
Current Market Cap 476,310
ROI 27.8%
Rig Cohort/ Rig
Name
Multiple/
Scrap Val
Mexico - 390' 3.0x
Mexico - 300' 2.5x
Mexico - 250' 2.2x
Middle East - 300' 2.5x
Middle East - 250' 2.2x
Middle East - 150' 2.0x
North Sea - 350-390' 4.0x
North Sea - 250' 3.3x
West Africa - 300' 2.5x
West Africa - 250' 2.2x
Misc - 300' 2.5x
MDS1 2.8x
DPDS1 3.2x
DPDS2 3.5x
DPDS3 4.0x
MSS1 3.3x
MSS2 3.5x
DPDS4 50,000
MSS3 30,000
Back to Table of Contents
52. NPV Valuation – Bear
Key Assumptions
Jackup utilization by 2019: 67%
Jackup dayrates by 2019: $75,000
2019 Floater utilization: 55%
2019 Floater dayrates: 195
Cash flow is used to pay down debt
MSS2 floater is coldstacked
CDS = Contract Drilling Services
Total CDS EV 1,543,414
Debt Balance 2019 1,373,507
Cash Balance 2019 30,000
Scrap value of stacked rigs 75,000
Total CDS Market Cap 274,907
Current Market Cap 433,930
ROI -37%
Back to Table of Contents
53. NPV Valuation – Base
Key Assumptions
Jackup utilization by 2019: 74%
Jackup dayrates by 2019: $80,000
2019 Floater utilization: 57%
2019 Floater dayrates: 203
Cash flow used to pay down debt
MSS2 floater is coldstacked
Total CDS EV 1,823,230
Debt Balance 2019 1,257,686
Cash Balance 2019 30,000
Scrap value of stacked rigs 75,000
Total CDS Market Cap 670,544
Current Market Cap 433,930
ROI 55%
Back to Table of Contents
54. NPV Valuation – Bull
Key Assumptions
Jackup utilization by 2019: 76%
Jackup dayrates by 2019: $82,000
2019 Floater utilization: 67%
2019 Floater dayrates: 241
Cash flow used to pay down debt
No currently active floaters stacked
Total CDS EV 1,965,150
Debt Balance 2019 1,182,878
Cash Balance 2019 30,000
Scrap value of stacked rigs 60,000
Total CDS Market Cap 872,271
Current Market Cap 433,930
ROI 101%
Back to Table of Contents
55. Management Capital Allocation
Valuation is driven by company’s aggressive
cash flow generation in 2014, 2015, and part
of 2016.
We believe debt repayments are the most
tax-efficient way to provide value to
shareholders
Added optionality of repurchasing debt at
around a 10% discount to par
Back to Table of Contents
56. WACC Schedule
2014 2015 2016 2017 2018 2019
Beta 2.5 2.5 2.5 2.5 2.5 2.5
Risk-free rate 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Expected market returns 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Cost of Equity 16.3% 16.3% 16.3% 16.3% 16.3% 16.3%
Cost of Debt 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Value of debt 2,268,613 2,034,890 1,801,168 1,567,445 1,333,723 1,100,000
Value of equity 507,700 507,700 507,700 507,700 507,700 507,700
Total Value 2,776,313 2,542,590 2,308,868 2,075,145 1,841,423 1,607,700
WACC 8.7% 8.8% 9.0% 9.3% 9.6% 9.9%
Assume that debt is paid off with excess cash flow
Cost of equity significantly higher than street assumptions
Back to Table of Contents
57. Oil Consumption and Supply: Past
Increase in petrol production
between 2005 and 2014 can be
entirely attributed to Canadian oil
sands and U.S. Fracking.
60% of the increase in petrol
consumption during the period
attributed to China. 25% of the
increase is attributable to South
East Asia.
Back to Table of Contents
58. Oil Consumption and Supply: Future
OPEC seeks to regain market
share by increasing supply to
match world demand
North American “tight oil”
production doubles during
projection period
90% of future consumption
increase driven by South East
Asia, India, and China
Partially offset by steady to
decreasing demand from the West
Back to Table of Contents
59. Conclusion: Market will Remain Tight
OPEC still represents 41% of the world’s liquids
production and will continue to be able to tighten a
slack market or inject supply to match demand.
The North American energy boom is almost entirely
attributed to tight oil which is 50% more expensive to
extract compared to conventional sources.
Back to Table of Contents
60. Cost/bbl by Production Method
Shallow water drilling done by jackups is the cheapest extraction method
outside of the Middle East
The spot price for oil would have to approach $40/bbl before demand
for offshore jackup contracting is threatened
Note: white lines refer to average production costs for each production method
Back to Table of Contents
62. • PGN’s tax rate was 44% in Q4 2014 due to restructuring provisions resulting
from the spinoff
• As debt obligations from Noble and other provisions expire, the tax rate will
return to normal.
Tax Rate
Back to Table of Contents
63. Time to transport jackups and semisubs
“wet tow” = 4 knots“dry tow”= 14 knots
Middle East to W. Africa
Distance: 9,620 mi
Dry tow: 25 days
Source: http://www.offshore-technology.com
North Sea to W. Africa
Distance: 3,480 mi
Dry tow: 10 days
Gulf Coast to W. Africa
Distance: 4,572 mi
Dry tow: 13 days
Distance 14,850 mi
Dry tow: 42 days
S.E Asia to W. Africa
Back to Table of Contents