“End of the line:” Norwegian Air stock plunges on last-ditch debt deal

Norwegian Air Shuttle ASA is fighting for survival, with a last-ditch plan to convert debt to equity driving its share price down as much as 63% during the first frantic moments of trading on Tuesday.

Norwegian Air’s proposal will dilute shareholders already counting their losses after Covid-19 ruined the company’s efforts to return to profitability. The plan calls for creditors, including aircraft lessors and suppliers, to convert as much as 44.5 billion kroner ($4.3 billion) in debt in order to meet government terms for the carrier to access a state aid package, and for a private placement.

In the first trading in Oslo since the plan was announced last week, the shares suffered their biggest drop and fell to the lowest level since Norwegian Air’s listing in 2003. The decline was 37% by 10:56 a.m. local time. The company was placed under special observation, a move used when a security’s valuation is particularly uncertain.

“Norwegian is at the end of the line,” Sanford C. Bernstein Ltd. analyst Daniel Roeska said in a note to clients before the market opened. Though there’s still hope for the airline, the situation is “lose-lose” for shareholders, he said, downgrading the stock to underperform with a target price of zero.

Widespread restrictions on travel due to the novel coronavirus destroyed Norwegian’s target of returning to profitability this year, after it deployed sweeping measures to cut costs and reduce capacity following years of debt-fueled growth. The company’s fleet is now largely grounded.

Norway’s government last month offered loan guarantees to airlines, including 3 billion kroner for Norwegian Air. But the aid came with strict terms: the company has only qualified for a tenth of it for now, and needs to improve its equity ratio to access the rest. While the government views airlines as important infrastructure, it pointed to Norwegian’s high indebtedness before the crisis and said it doesn’t see state support as an option unless other stakeholders also make an effort.

Norwegian had total debt of about $7.5 billion at year end, with more than $800 million coming due this year. The company is now negotiating conversion of more than half of its debt before putting the plan to a vote at an extraordinary general meeting on May 4.

The company is also asking shareholders to approve a private placement of as much as 400 million kroner, which would be the fourth in two years. In interviews in local media this week, Chief Executive Officer Jacob Schram asked equity investors to stick with the company, arguing there was “significant upside” ahead.

Mexico Holds Up Deal on Oil Cuts

The Opec-plus alliance came close on Thursday to agreeing a deal to cut oil production by an unprecedented 10 million barrels per day in May and June, and then continue reductions at lower levels for two years.

Thursday's discussions went surprisingly smoothly for the most part but an agreement was held up late in the day when Mexico was left as the lone producer rejecting the proposed deal.

Mexico's objections centered around the baseline for their cuts, with the Latin American oil producer arguing for a higher figure that would have resulted in little, if any, decrease in current production.

Sources indicated that many Opec members supported simply leaving Mexico - which is not an official Opec member - out of the deal. However, Energy Intelligence understands that Saudi Arabia was insisting that Mexico participate in the cuts.

Opec-plus has also been looking for additional cuts of 5 million b/d from producers outside the alliance, including the US, Canada, Brazil and Norway. Some of these producers were expected to take part in follow-up talks on Friday.

In an important new development, sources told Energy Intelligence that the Opec-plus cuts would go ahead regardless of what producers outside the alliance decide to do.

Opec-plus -- and Russia in particular -- had previously made cuts of their own conditional on significant cuts in oil output by other countries -- especially the US, which has emerged as the world's top oil producer in recent years.

The proposed Opec-plus cuts would fall from an initial 10 million b/d in May and June to 8 million b/d during the second half of this year and to 6 million b/d next year. They would be held at 6 million b/d through all of 2021 and the first four months of 2022.

The unprecedented two-year duration of the proposed deal appeared to signal the group's resolve to rein in production for as long as the coronavirus pandemic continues to hammer global demand for oil.

Because of the pandemic, Thursday's Opec-plus negotiations were conducted in a video conference call.

The agreement that took shape was largely the result of bilateral talks between the Saudis and Russia and represented a major feat of petro-diplomacy.

The two major producers had previously collaborated for more than three years to support oil prices with much smaller production cuts, but their relationship collapsed in acrimony last month (IOD Mar.9'20).

As recently as two days ago the two countries remained at loggerheads, but on Wednesday there was a major shift in Moscow's position, as it indicated that it was willing to make a significant cut in its production.

Washington's refusal to participate in top-down, government-mandated production cuts had also looked like a potential deal-breaker, although US officials had argued that US shale producers were already scaling back activity in response to low prices and that this would lead to a big drop in their output (IOD Apr.9'20).

After the main deliberations, Russian President Vladimir Putin, US President Donald Trump and Saudi Arabia's King Salman held a conference call.

After the call, Trump said during a nightly news conference that he believed Opec would announce a deal “today or tomorrow."
“It could be good, could be not so good,” he said of the potential deal.

Russia, backing down from its previous stance, seemed happy to accept the US position on Thursday.

"I think the US has been working very positively on this, definitely working very positively with Russia," Kirill Dmitriyev, head of the Russian Direct Investment Fund, told Bloomberg TV.

At the start of Thursday's meeting, Opec Secretary General Mohammed Barkindo delivered a call to "urgent action" to counter the recent collapse in demand for oil caused by the pandemic.

"Even in the first week of March the outlook looked relatively bleak, but in just over one month it has changed beyond all recognition. The supply and demand fundamentals are horrifying," he said.

If producers failed to take decisive measures, the coronavirus would have a "crushing and long-term impact" on the global oil industry, he warned.

In addition to Mexico, Kazakhstan and Brunei had also held out against the proposed deal, but they later fell into line after Saudi Arabia threatened to stick with its recent policy of flooding the market with oil (IOD Mar.10'20).

Mexico was ultimately the lone producer unwilling to sign off on the agreement because President Andres Manuel Lopez Obrador has made increasing the production of national oil company Pemex a cornerstone of his economic program.

mexico walked out of the cut deal. opec+ meeting still on-going.

the OPEC+ meeting has yet to conclude after more than 10 hours