Please ensure Javascript is enabled for purposes of website accessibility
Turnaround Letter
Out-of-Favor Stocks with Real Value

Moving MDR to Sell

We are moving McDermott International (MDR) to a Sell. The company is highly unlikely to overcome the debilitating and seemingly unending cash flow drains in the two liquified natural gas (LNG) facilities projects that it inherited from its Chicago Bridge & Iron acquisition last year, other project-related cash outflows, costs related to implementing the One McDermott Way initiatives and other expenses.

In mid-October, in conjunction with its $1.7 billion refinancing, the company updated its 2019 guidance. For 2019, the company guided that it’s negative free cash flow will be $550 million larger than, or nearly double, its prior guidance given only three months ago. This indicates to us that it still is not in control of its operations. We have little confidence in its future forecasts.

We were also disturbed by the large retention bonuses, more than $4 million in total, related to the refinancing, that will be paid to the top three executives. While perhaps understandable from the career-risk perspective of the management, it created an incentive adverse to shareholders’ interests to complete the perhaps necessary but very expensive and collateral-claiming refinancing.

McDermott’s new projects contracts may be much better written than in the past (although we will have to wait years to know for sure). With few competitors, they are in a stronger negotiating position to construct critical energy infrastructure projects. Nevertheless, the current financial hole is so deep that bondholders, not current shareholders, would get to participate in this potentially more prosperous future.

For intrepid investors, McDermott’s bonds are trading at very low prices. In a bankruptcy, these bonds may have a sizeable recovery but we offer no specific opinion on them.

For shareholders, the likely upcoming bankruptcy would provide zero recovery, and the shares would likely trade essentially at zero.

McDermott International Press Release: 3Q Earnings

We move shares of McDermott International (MDR) to a Sell.

Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks including MDR shares.