Boart Longyear braces for more pain
Even so, it has expressed confidence it can rebuild operations without turning to shareholders for funds following the completion of a $300 million financing earlier this week which carries a high 10 per cent interest rate.
"It allows us to absorb a more protracted downturn ... without using more equity," chief executive Richard O'Brien told analysts on Tuesday when discussing the refinancing. "As our business gets more efficient and conditions improve ... we will not have to access equity markets or sell assets."
Executive vice-president Kent Hoots told the analysts: "It feels like the pace of the decline has slowed. We're not calling the botdtom of the market - we are seeing a flattening."
Boart Longyear has already slashed its workforce - 3000 jobs were cut last year and another 2000 in the first six months of this year, with further cuts since - as it seeks to revive margins, which lag its competitors.
In the June half Boart Longyear lost $US329 million, down from the net profit of $US98 million a year earlier, largely due to heavy write-offs and provisions, as revenue slumped to $US719 million from $US1.1 billion.
Despite management optimism, analysts warned the loan terms were restrictive, since lenders have first priority security interest over various assets together with placing additional limits over Boart's ability to raise further debt and over capital spending plans.
Boart told analysts that capital spending will be capped at $US50 million a year over the next few years, which partly reflects the high level of spending in recent years coupled with the more limited demand to upgrade equipment during the downturn.
The key indicator of the group's prospects is its drilling rig utilisation rate, which has continued to fall. In mid-September, rig utilisation fell to 45 per cent from 50 per cent in mid-August and 60 per cent in mid-May.
"It will continue to bump along at low to mid-high 40s [per cent] until November and then dip through year end," the company told analysts. "And by February return around where we are now."
Rig utilisation in Australia and North America "appears to have bottomed", with utilisation in Africa, the Middle East and Europe expected to weaken heading into next year.
In mid-September the group had 1035 rigs in operation, down from 1065 in mid-February.
However, pricing pressures remain. "It doesn't take a big uptick to see a recovery," management told analysts, while stating that fixed costs will be held in check during any upswing.
Frequently Asked Questions about this Article…
Boart Longyear has flagged continued weak earnings as demand from the mining sector remains soft. In the June half the company reported a loss of US$329 million, down from a net profit of US$98 million a year earlier, and revenue fell to US$719 million from US$1.1 billion.
Boart Longyear completed a US$300 million refinancing that carries a relatively high 10 per cent interest rate. Management says the loan lets the company absorb a more protracted downturn without issuing more equity, but the higher interest cost is an important factor for investors to note.
Yes. Analysts warned the loan terms are restrictive: lenders have first-priority security interests over various assets, and the financing places limits on Boart Longyear's ability to raise further debt and on capital spending plans.
Boart Longyear told analysts it will cap capital spending at US$50 million a year over the next few years, reflecting heavy recent spending and weaker demand to upgrade equipment during the downturn.
The company has already cut thousands of jobs — about 3,000 last year and around 2,000 in the first six months of this year, with further cuts since — as it attempts to revive margins, which currently lag competitors. Management also plans to hold fixed costs in check during any market upswing.
Rig utilisation — the percentage of Boart Longyear's rigs in use — is a key indicator of demand. It fell from about 60% in mid-May to 50% in mid-August and then to 45% in mid-September. The company expects utilisation to sit in the low to mid-high 40s until November, dip through year end, and return around current levels by February.
Management said rig utilisation in Australia and North America 'appears to have bottomed.' However, utilisation in Africa, the Middle East and Europe is expected to weaken heading into next year.
Management expressed cautious optimism: the refinancing should let the company rebuild operations without tapping shareholders, and small pricing improvements could prompt recovery. Everyday investors should watch rig utilisation rates, capex limits (US$50m pa), loan covenants and interest costs (10%), and regional demand trends for signs of a sustained turnaround.
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