Parker Drilling (PKD) – Reverse Split – $850 Upside (Too Risky)

Current price: $21.45

Cash Out Price: $30.00

Upside: $850 (for odd-lots)

Expiration Date: TDB

Proxy Statement

 

Over the last few days there has been a lot of publicity regarding the risk free opportunity to make $850 from Parker Drilling reverse stock split. While the spread is definitely attractive, I think the risk of this transaction getting cancelled or terms amended is very high.

I do not have any position at the moment.

Parker Drilling (PKD), drilling and well service provider for O&G industry, has decided to reduce its amount of shareholders to less than 300 in order deregister from SEC and delist. The company intends to commence a 1 for 100 reverse stock split followed by a forward stock split, which will result in all shareholders holding less than 100 shares getting cashed out at $30/share. The offer still has to be approved by the shareholders, but as the two main holders (own almost 62%) have agreed to vote for the split, approval seems to be guaranteed. The real risks lie elsewhere.

  • The aim of this transaction is $0.8m in annual savings that could be realized by cutting the expenses related to the public listing. This means that there should definitely be a limit of how much the company is ready to pay to buy-out the minority shareholders, especially at 50%-150% premium to market prices before the announcement.
  • The initial number of shares to be cashed out was estimated at 37.5k (0.03% of the total) resulting in aggregate buyback cost of c. $1.1m with additional $0.8m for various professional fees related to this transaction. However, due to apparent large risk free upside for smaller shareholders and high publicity, the eventual number of shares to be repurchased will be multiple times higher than the initial estimate. 20x increase in volume after the announcement clearly shows accumulation by odd-lot accounts - hard to imagine anyone else suddenly becoming interested in soon-to-be-delisted stock at large premium to where it was trading just a few days ago.
  • Recent transactions with large odd-lot benefits/priority had 10k+ of odd lot accounts (CBS - 12k and FTV - 10k). On top of that, as this is a reverse split rather than a tender offer investors should be able to participate in the transaction from multiple odd-lot accounts under the same name which will add further upward pressure on the number of shares to be repurchased. And while higher risk and smaller market cap are likely to somewhat offset these effects even with 5k odd lot accounts the cost of transaction would jump to $16m. More than a third of that would simply be spent on paying the premium to the market prices.
  • There have been numerous cases where similar transactions (with lower premiums) got cancelled or modified due to the increased odd-lot accounts number. The most recent is BLBD - a tender offer with odd lot priority and $200 potential upside. Transaction has received considerable attention from investors and 3 weeks later the company removed the odd-lot priority. BLBD stock dropped below $23/share (pre-announcement price was $26/share, offer price - $28/share) and stayed under $24/share right till the expiration date. In the end, the offer ended up being oversubscribed by 12x (6.6% proration) and BLDB stock fell down significantly in the following two weeks. Instead of risk-free $200 odd-lot speculators (including me) lost around $300-$600.
  • Aside from cancelling the transaction outright PKD might also change the cash-out price or amend the terms that only shareholders of record (rather than beneficial owners) with less than 100 share ownership would get cashed out.  Monarch Cement deregistered this way back in 2014 by reducing the count of record holders to less than 300. So it seems that this road should be open for PKD as well.

When PKD announced it's intentions to deregister and delist shares dropped to $16 and only bounced back to current levels after odd-lot accounts started piling due to high cash-out price. For the whole August after Q2 result announcement PKD shares traded within $12-$17 range. Thus, if the reverse split terms are amended or transaction is cancelled altogether, PKD shares will likely trade significantly lower - at least 25% downside.

I struggle to understand why would PKD announce such transaction terms. I doubt management (together with bankers/lawyers working on this transaction) did not foresee the spike in odd-lot accounts. One of the possibilities (and I am just purely speculating) is that $30 odd-lot cash-out was announced already with intention to cancel/amend later. In this way liquidity is created in the market that allows larger shareholders (who have no willingness/abilities to own delisted stock  and who might have objected the transaction) to exit their positions at a premium and at a zero cost to the company.

 

Additional points on Parker Drilling

PKD management claims that the company is undervalued as it only recently came out of the bankruptcy (March'19). The company trades at 2.3x LTM EBITDA and 2.5x Forward EBITDA which is materially below peers on both metrics.

Annotation 2019-09-16 203352

PKD wend bankrupt in Dec ‘18 and came out of it in Mar ‘19 with debt reduced by two thirds (from $585m to $210m).The company has also raised an additional $95m through rights offering (at $15/share) and currently sits on $139m of cash. Coming out the bankruptcy and rights offering company was/is mostly owned by previous note-holders.

The bankruptcy was caused by the aftermath of to 2014 oil price crash that affected the whole O&G industry. PKD was operating unprofitably ever since 2014 and managed to turn profit only in the recent quarter ($0.31/share).

CEO portrays this recent improvement coupled with far more flexible balance sheet as a sign of successful turnaround. Despite continued challenging environment in the U.S., he is optimistic about operations in foreign markets (58% of revenues):

The strategic changes we made were timely, as there remains a considerable amount of uncertainty in the marketplace, particularly with respect to North America fundamentals. In the U.S., many EMP companies are reducing their CapEx budgets, slowing drilling activity, and demonstrating a greater focus on shareholder returns, all while production continues to rise. Service pricing also remains challenging, due both to falling rig activity as well as excess capacity in the marketplace. By contrast, the international markets appear to be strengthening and will likely continue to do so throughout the rest of the year and into 2020. There has been a good deal of positive EMP sentiment overseas, with tendering and drilling activity increasing. This healthier market environment is evidenced by our year-over-year improvement in revenues and growth margin, both in our international rental and drilling segments.

 

20 COMMENTS

  1. nuggy5

    Dynasil did a similar transaction in August but was for anyone under 8000 shares (however the spread between buyout price and current was much smaller). Odd lot shareholders went from 1.4mm at original announcement to 2.8mm at finish. This got a lot more traction and once it became public on SA I am worried it will get cut off or reduced. Even down to $25 / share isn’t horrible though. A full cancellation would be interesting – on the 5th through 9th the stock traded around 18-20 per share. After the announcement there was a quick drop in the price assuming non-odd lot holders got down to odd lot levels and other owners who did not want to be invested in a OTC company sold. If they cancelled this entire process – where would the stock go to? BLBD cancellation saw the price fall far below the pre-tender price so I am not sure where this one falls to. It was as low as $11 a share just a month ago which would be a huge loss (although about the same as the potential gain).

  2. nuggy5

    Also – if this was done to allow shareholders to sell, wouldn’t we see these large shareholders filling out SEC forms regarding their transactions?

  3. work 22

    thanks for mentioning the risks on this PKD. I agree- if it works, great for those who try, but if treasurer is trying to save money, as opposed to ladle it out to hungry odd lot holders, they will probably cancel or modify substantially.

  4. nmeile

    “We estimate that the Cash Payment to Cashed Out Stockholders, professional fees and other expenses will total approximately $1.9 million. As a result, our cash balances on hand will be reduced by the costs incurred in the Transaction.”

    Even if assuming that professional fees/expenses would only be $100k and no “real” odd-lot holders (owing few shares already before the offer got public) exist their assumption is that only ~600 (greedy) odd-lot shareholders would participate (greedy odd-lot shareholders being defined as owing 99 stocks). ($1.800.000 / ($30 x 99 Stocks) = 606 Odd-lots

    To put it mildly, 606 participants seems low!

      1. nmeile

        It’s one of those opportunities that is really tempting due to high reward, but it sure seems like a significant risk attached to it…

  5. Terence

    No final proxy statement yet. Still preliminary one dated sept 11, with special meeting date blank.

      1. dt

        The process could easily take half a year or more if it goes through at all.

  6. Ilja

    Yes, so the company has proposed an amendment for the offer – now instead of exchanging 1 share for the 100, the board will choose the size of a reverse split from a ratio of 1-for-5 to 1-for-100. It was also noted that “the Company believes that any Reverse Stock Split Ratio within the proposed range would reduce the number of record holders below 300″, so definitely it will be in the lower range.

  7. ChrisM

    I don’t get that sentence that you quoted. If PKD did a reverse stock split in the ratio of 1-for-5, there is no way that there would be fewer than 300 remaining shareholders, given how many people piled into this odd lot trade. Any thoughts?

    1. dt

      PKD needs to reduce the number of stockholders of RECORD below 300.

      Most shareholders are beneficial owners and their shares are held in ‘street name’.

    2. nostradamus

      oddly enough “remaining shareholders” doesn’t mean what you think it means. it counts shares held in a street name (through a broker) as one, instead of the actual number of shareholders. see for example: https://www.sec.gov/comments/s7-06-16/s70616-12.htm

      it’s an easy loophole for companies to deregister which the SEC should fix, but still hasn’t.

    3. mcg

      All the odd loters are going to pile out when this is done so even beneficial shareholders will get significantly reduced

  8. MCD

    Why would many of the odd-lot shareholders not just register their shares in their own names and not in the street name? This would at least stop management from taking the company dark on the cheap.

    1. dt

      At the moment company is offering to cash-out both record and beneficial odd-lot holders. So there is no need to register shares in your own name to take advantage of the reverse split (but PKD might easily change it again).

      However, a broader answer is that registering shares in your own name is a hassle and might be costly – have not tried it myself, but couple years ago inquired IB about it and decided it is not worth the hassle.

      Also if the company will see too many odd-lot record holders they might easily amend the cash out terms again.

      1. Ratel

        Correct beneficial owners would get cashed out, this is more about blocking the going dark transaction.

        You are probably under-water on this if you went for the 99 odd-lot position. So you can either sell at a loss or hold on and hope that the market price improves. Clearly it is undervalued right now and that is why they have to follow the valuation of the advisers (HL) and cash you out at $30. If they go dark your shares are going to be worth substantially less. A coordinated effort could block the going dark transaction. The other option is to sell now – can’t win them all. Just an option worth considering, I think it may just force their hand if they see a whole bunch of 99 shareholders showing up on the register.

        I think if you go to transfer in the IB menu there is an option to transfer into your name for a small fee.

Leave a Reply

Your email address will not be published. Required fields are marked *