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Why McDermott International Shares Went Up 70% Friday

By Jason Hall – Sep 20, 2019 at 12:09PM

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The potential sale of a high-value subsidiary has investors hopeful McDermott can stave off bankruptcy.

What happened

Shares of energy industry construction and engineering specialist McDermott International (MDR) surged as much as 70% on September 20; as of 12:10 p.m. EDT, shares were up more than 60%.  

So what

To explain today's jump, we must go back a couple of days. On Sept. 18, McDermott shares fell 61% on news that the company had engaged a consulting firm with a background in turnarounds, often involving bankruptcy. McDermott's stock continued to fall on Sept. 19 as uncertainty surrounding the company's ability to survive without filing for bankruptcy drove investors away. 

Energy pipeline project during construction.

Image source: Getty Images.

Today it's looking a little less likely that the company will have to go through bankruptcy to fix its debt-laden balance sheet and begin the process of turning around its business. This morning the company issued a press release saying that it would "explore strategic alternatives for Lummus Technology," a subsidiary business it says is worth over $2.5 billion. 

Now what

If McDermott can reach a multibillion-dollar deal to sell Lummus Technology, that influx of capital would go a long way toward fueling a turnaround. At last report the company had $3.8 billion in long-term debt and $455 million in cash and equivalents, and it had burned $955 million in operating cash over the past 12 months. 

MDR Total Long Term Debt (Quarterly) Chart

MDR Total Long Term Debt (Quarterly) data by YCharts

Moreover, it's important to consider today's news and stock price rebound within the greater context. Even after bouncing back, McDermott's stock still trades in the range of $2 per share; this is a stock that was worth more than $24 per share less than three years ago, when the company was valued at more than $4 billion. Today its market cap is below $400 million. 

Even if the company is able to realize a big cash infusion by selling off this asset, it's still a troubled company that's consuming a lot of cash, and it will have sold off one of its better assets to simply survive. I wouldn't count the company out, but it has a lot of problems, and selling Lummus Technology wouldn't really solve any of them -- it would only give the company capital to buy time to start fixing what's broken. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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