Boart Longyear braces for more pain
Drilling contractor Boart Longyear has flagged continued weak earnings, with demand for its services from the mining sector yet to bottom amid ongoing pricing pressure.
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.