Drilling services company Boart Longyear Ltd (ASX: BLY), has seen its shares surge an astonishing 176% since July 22, perhaps as investors become more comfortable with the company's long-term survival.
Today, Boart's shares are up over 5% to 23.7 cents, after the equipment supplier announced revenues of US$224 million and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of US$14 million in the June quarter.
Both revenues and earnings are down compared to the corresponding period last year, with drilling rig utilisation at 39% for the quarter. Boart says there is substantial excess global supply of drilling rigs, and it continues to experience significant price pressure.
But perhaps the major concern for existing investors is the company's debt and cashflow situation. At the end of June, Boart had US$624 million in gross debt, up from $585 million at the end of December 2013. Despite the large debt, Boart says it is compliant with all of its bank covenants, and that it will remain covenant compliant at least until the end of this year, allowing the company to identify and implement a recapitalisation solution.
Unfortunately for shareholders, that is looking more and more like an equity capital raising – especially after the recent price recovery. Of more concern is the fact that private equity firms are buying the debt and equity of the company, and could pull the rug out from under Boart with very little warning. On that basis alone, Boart would be an extremely high-risk buy.
And it's not just Boart…
Analysts are still concerned there's little in the way to be positive about in the engineering and contracting sector. Although Ausdrill Limited (ASX: ASL) has contradicted that view, and says it is expecting a substantially improved result next year, and excess capacity should diminish towards the end of the 2015 financial year.
Emeco Holdings Limited (ASX: EHL) has also released a positive view of 2015, as has Cardno Limited (ASX: CDD), which expects double digit earnings growth, but mining services company Lycopodium Limited (ASX: LYL) say it expects subdued conditions for 12 to 18 months.
That suggests results in the mining services sector over the next year or so will be mixed.
