Third Avenue Management Comments on Petroleum Geo-Services ASA

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Dec 14, 2016

We have in previous quarters spoken of our equity and credit investments in PGS (PGS), which is a leader in the offshore seismic survey industry. The industry and PGS with it have faced an oil and gas exploration recession of extraordinary severity. The seismic industry, as well as the broader oil services industry, has seen many bankruptcies of late. Few offshore seismic companies have been able to remain solvent. PGS is among those few. In November the company announced a package of refinancing actions that will further entrench it in the camp of survivors. PGS's primary financing consideration was its ability to deal with a USD 450 million bond maturing in June 2018, the very same bonds owned by the Fund. With regard to PGS equity, lately there has been a growing consensus that the company is grossly undervalued, particularly if one expects an industry recovery. Yet those considerations have been overwhelmed by the above-mentioned financing considerations. Availing itself of its acute undervaluation and a very supportive, long-term oriented shareholder base including the Fund, the company has conducted a private placement of equity for the purpose of refinancing the 2018 bonds. We have subscribed to the equity offering and the company has simultaneously tendered for the 2018 bonds at a considerable premium to the previous trading price, furthering what had already been a successful credit investment for the Fund. Our bonds will be partly cashed-out and partly termed-out, with our equity and remaining bond position both materially "credit-enhanced" as a result. The equity offering was so well received that it was significantly oversubscribed at a mere 2.5% discount to the previous day's closing price and the share price appreciated considerably in response to the capital raise providing early validation that a financing consideration was standing in the way of appreciation. We expect the seismic industry to show gradual improvement as the oil industry's patently unsustainable exploration frugality inevitably abates. PGS is likely to emerge from this recession in a very strong position.

From the Third Avenue International Fund third quarter 2016 commentary.