Noble Corp. (NYSE:NE) has just filed an 8-K, where it shared important news on the ongoing reorganization of Paragon Offshore (OTCPK:PGNPQ) and its potential impact on the company. As a reminder, Noble Corp. span off Paragon Offshore back in 2014. Paragon Offshore started with a fleet of mostly older jack-ups, whose contracts ended in 2014 - 2016. Oil collapse followed, and Paragon Offshore was not able to recontract its rigs. As a result, Paragon Offshore had to enter restructuring negotiations with its creditors. <\/p>\n
As a part of the previous reorganization plan of Paragon Offshore, Noble Corp. entered into a settlement agreement with Paragon, which released Noble Corp. of any claims in connection with the spin-off in exchange of providing certain bonding required in connection with Paragon's Mexican tax obligations. Under the new reorganization plan, Paragon does not need Mexican tax bonding. Therefore, the previous settlement agreement was terminated on April 21. <\/p>\n
This is what Noble Corp. had to say about the situation: <\/p>\n
Noble continues to discuss its continuing relationship with Paragon, including the possibility of entering into a new settlement agreement. There can be no assurance that the Company will reach any settlement agreement with Paragon. If we do not enter into a settlement agreement with Paragon, we expect Paragon or its creditors would pursue claims against Noble in litigation relating to the spin-off, including any alleged fraudulent conveyance claims. <\/p>\n
The Company continues to believe that Paragon, at the time of the spin-off, was properly funded, solvent, and with appropriate liquidity and that any fraudulent conveyance claim or other claim related to the spin-off that may be brought by Paragon or its creditors would be without merit and would be contested vigorously by the Company. <\/p>\n
Put simply, Noble Corp. tells investors that Paragon or its creditors may try to prove in court that Paragon was underfunded at the time of the spin-off. In case creditors or Paragon are able to prove this claim, Noble will face significant obligations. <\/p>\n
The timing of the spin-off was truly unfortunate. If we travel back in time and look at the 2014 annual report, we will see significant problems. At the end of December 2014, Paragon had $56 million in cash and was facing $272 million of maturities in 2015. The long-term debt stood at $1.9 billion. If we look at the fleet status report of January 2015, we will see a backlog cliff. <\/p>\n
As we know now, Paragon Offshore had absolutely no chance to survive the downturn with the asset mix, the backlog and the debt that it had at that time. However, creditors will have to prove that Paragon Offshore was doomed right from the start. <\/p>\n
I am not a lawyer and I cannot predict the outcome of such a lawsuit with any degree of certainty. However, I definitely expect that Paragon creditors will give it a try unless Noble is able to reach a new settlement agreement with Paragon. <\/p>\n
Please note that Paragon spin-off happened in-sync with the beginning of the oil price slump, so creditors will have to prove that Paragon was not a viable enterprise at $100+ oil as nobody could foresee oil dropping below $50 so fast at that time. I would argue that Paragon was not tailored to any significant negative change in the offshore drilling market, but the lack of downside protection does not necessarily mean that Noble Corp. crossed the red line with the spin-off of Paragon Offshore. <\/p>\n
One thing is certain: Noble Corp. shares will see more short-term pressure because of the news. While it is too early to say that Noble Corp. may incur any material damage as a result of the lawsuit that does not even exist at this time, any additional uncertainty is bad for its shares. The offshore drilling market does not get better, and oil prices are picking downside momentum once again. I continue to expect that a test of November 2016 lows may be on cards for Noble Corp. stock. <\/p>\n
Disclosure: I\/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. <\/p>\n
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. <\/p>\n
Additional disclosure: I may trade NE. <\/p>\n
Editor's Note: This article covers one or more stocks trading at less than $1 per share and\/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. <\/p>\n
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Paragon Offshore Creditors May Pursue Claims Against Noble Corporation - Seeking Alpha<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Noble Corp. (NYSE:NE) has just filed an 8-K, where it shared important news on the ongoing reorganization of Paragon Offshore (OTCPK:PGNPQ) and its potential impact on the company. Continue reading