What: Shares of NOW Inc (NYSE:DNOW) have declined as much as 10% today and are down more than 9% in mid-afternoon trading following a pre-Christmas SEC disclosure that it may not be able to meet some of its debt covenants.
So what: I have no scientific evidence to back this up, so don't quote me. But, whenever a company makes an announcement before the market closes for a while, like a Friday after trading has closed, or the day before a holiday, chances are, that news isn't good.
In NOW's -- which more commonly goes by DistributionNOW -- case, the company disclosed in an 8-K disclosure to the SEC that it may not be able to meet the interest ratio coverage covenant on its debt. As part of this notification, the company also mentioned that it was granted a waiver from its creditors to continue borrowing under the credit agreement in question, and that it was looking to renegotiate that covenant such that it would be tied to the company's assets.
Now what: It shouldn't be too surprising to investors that DistributionNOW's business is struggling in the market today. With so many companies scaling back drilling activity, there isn't a whole lot of drilling equipment and spare parts to sell. So, that decline in operational earnings is going to put any sort of earnings-related debt covenants into question.
Investors shouldn't necessarily take this as a doom and gloom announcement, like so many other oil and gas companies, though. The company still has more cash on the balance sheet than long-term debt, and its current ratio suggests there are more than enough liquid assets at its disposal to take care of any liquidity issues. So, rather than getting spooked by this recent announcement, investors should stay the course with this stock and wait out the rough market.