Is Boart Longyear Ltd worth the punt for contrarian investors?

Boart Longyear Ltd. (ASX:BLY) has warned shareholders it faces "material uncertainty."

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Just to be clear, I wouldn't touch Boart Longyear Ltd. (ASX: BLY) with a barge pole! Don't get me wrong, I'm very partial to investing in beaten-up stocks that offer deep value, contrarian opportunities. It's just that it's far too uncertain that this is one of those opportunities.

On Tuesday, drilling contractor Boart Longyear reported its half-year results to the market and its share price fell 12.8%. The stock has now lost 94% of its value in the past 12 months – it makes the 10% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) look mighty appealing!

The results showed the painful effects of the ongoing contraction of the resources sector. For the half, revenue slumped to $421 million from $719 million in the prior corresponding period and the adjusted net loss after tax widened from $24 million to $68 million.

While these results are obviously bad and once again shareholders won't be receiving a dividend, much more worrying is the net debt level which remains stubbornly high at $556 million. This situation has led management to use terms such as, "expect to be covenant compliant through March 2015 testing date", and "material uncertainty but anticipated liquidity and financial resources available to meet business needs during pendency of Strategic Review."

While management obviously has first-hand knowledge of the liquidity situation and believes the company can trade through, in my experience once debt levels reach these heights and managers start talking in these terms, it's touch and go whether a company survives. What's more, without knowledge of the re-capitalisation process investors may struggle to get an adequate return even if the company does survive.

Those buying into Boart Longyear at current levels could make a huge return – after such a large fall a big profit is certainly possible – however there are significant risks that they won't get any return.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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