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Energy Sector Advisory Insights: Drill into the data

Selected highlights of sector-specific advisory activity happening across North America right now.

Gulfport Energy adds operational advisor

Gulfport Energy is working with Alvarez & Marsal to help turn around operations, according to three sources familiar with the matter.

The latest mandate complements the roles of banker Perella Weinberg Partners and legal counsel Kirkland & Ellis, which were brought on to pursue a balance sheet fix.

Certain unsecured bondholders recently went restricted to advance negotiations with management, as reported.

The company could do a debt-for-equity swap through an in-court restructuring or an uptiering exchange through its second lien basket.

The US$375 million 6.375% unsecured notes due 2026 changed hands at 62.875 with a 17.45% yield, down from 64 on 13 October, MarketAxess shows. Meanwhile, the US$330 million 6.625% unsecured notes due 2023, US$580 million 6% unsecured notes due 2024, and US$508 million 6.375% unsecured notes due 2025 last traded at 63 on 13 October.

An ad hoc group of unsecured bondholders have organized with counsel Paul Weiss and advisor Houlihan Lokey.

In its Q2 2020 filings, Gulfport noted that “the depressed state of energy capital markets and the extraordinarily low commodity price environments present significant risks to the company's ability to fund its operations going forward. Accordingly, management has determined there is substantial doubt about its ability to continue as a going concern over the next 12 months from the issuance of these financial statements.”

Gulfport’s revolver is set to go current at year-end and refinancing risks are high, considering its bloated leverage and the overall conservative stance of lenders across the E&P space.

As of 30 June, the company had US$253 million of revolver availability and US$2.8 million of cash on hand. Leverage as of 30 June reached 4.4x, based on US$2.26 billion of total debt and US$518 million of LTM EBITDA.

Sundance Energy retains banker for restructuring talks

Sundance Energy is working with Stifel to examine balance sheet options, according to three sources familiar with the matter.

The E&P company agreed in a June amendment to its second lien term loan that it would “negotiate in good faith with its lenders by 30 September to reduce its total debt and leverage” and that it would explore asset sales as well as raising debt or equity. Restructuring talks are ongoing, according to sources.

Sundance has been sounding out potential buyers for its assets over the past few months, but struggled to fetch a valuation attractive to its second lien lenders, one of the sources and a fourth source said.

The company doubled its footprint in the Eagle Ford after it acquired 22,000 net acres from Pioneer Natural Resources for US$220 million.

“Their assets are mostly harvesting cash flow, so they can’t drill,” the fourth source said. “They are getting low bids on PDP value only.”

The operator reported US$752.6 million in PV-10 value at YE19, including US$364.6 million in proved developed producing (PDP), based on roughly US$56/barrel oil and US$2.6/MMBtu gas prices. For comparison, its PV-10 stood at US$1.1 billion at YE18.

The company’s reserves value is set to further deteriorate due to the current price environment and sustained decline in its drilling activity, a fifth source said.

WTI futures are currently at around US$40/barrel, while NYMEX futures are at US$3/MMBtu.

Sundance said it may not remain compliant with its 1.5x asset coverage test under its term loan in the next 12 months, citing the decline in commodity prices, according to Q2 2020 filings. Per the June amendment, the term loan lenders agreed to waive the asset coverage ratio for Q1 ended 31 March. The lenders received an increased interest rate of 10%, from 8%, and capped the company’s capital expenditures and G&A costs through Q3 2020.

As of 30 June, Sundance had US$115 million drawn on its revolver due October 2022 and a US$250 million second lien term loan with Morgan Stanley Energy Capital due 2023. Bank lenders led by Natixis slashed the borrowing base in June to US$170 million, from US$190 million, and raised the interest rate margin to the 2.5%-3.5% range.

The company unwound some of its hedges for US$1.4 million at quarter-end, and used those proceeds to pay down its revolver in July. It then drew an additional US$5m on the facility to support working capital needs. The borrowing base was subsequently reduced to US$168.6 million, with US$118.6 million outstanding and US$33.6 million of availability.

It is reliant on its revolver for liquidity, given only US$347,000 of cash on hand as of 30 June.

To alleviate its cash flow pressures, Sundance has been renegotiating prices with vendors and has agreements in place for reduced rates from several providers, Q2 filings show. The company expects its existing hedge book will help lessen the impact of recent commodity price declines.

Management also reined in the capital budget to US$40 million-US$45 million this year, from approximately US$150 million in 2019.

The company is aiming to generate free cash flow in the near term, and is not currently engaged in any drilling activity nor completing any wells, according to its Q2 announcement.

“In a do-nothing situation where they shrink capex and drilling, and their liquidity dries up,” the fifth source said. “They can’t support their G&A and interest burden, and they can’t drill their way out of it.”

The company will likely book US$25.5 million of free cash flow this year, based on street estimates of US$95 million in EBITDA, less US$37.5 million in capex and US$32 million of interest expense.

Its Q2 revenue tanked 71% year-over-year to US$15.1 million, while average daily production slumped 39% YoY to 8,501 Boe/d.

Adjusted EBITDAX came in at US$25 million, down nearly 24% YoY from US$32.7 million.

Peabody Energy revolver lenders organize with counsel

Holders of Peabody Energy’s revolving credit facility due 2023 have organized and retained Freshfields Bruckhaus Deringer as legal counsel amid looming covenant breach, according to two sources familiar with the matter.

Peabody has a maintenance covenant attached to its revolving credit facility, which could be a potential near-term trigger that sparks balance sheet talks. The company may have breached the 2x first lien leverage covenant during Q3 2020, a risk that the company foreshadowed in its Q2 2020 filings, as reported.

A covenant breach could shift negotiating dynamics bringing the revolver group into the fold, given several investor classes have already organized and begun talks with the company. If Peabody seeks an amendment to cure a covenant breach, lenders could ask for a paydown or a coupon bump. But on the flip side, given the deeply distressed trading levels of the facility, revolver banks take a lenient approach to avoid value destruction, rather than push for a rushed restructuring.

As part of an amendment process, the company could also attempt to construct a more encompassing deal to address the 2022 notes along with the revolver lenders, as reported.

A group of Peabody’s US$390 million Libor+ 292bps first lien TL due 2025 is working with Proskauer and Evercore while holders of the company’s US$460 million 6% first lien notes due 2022 have regrouped with Davis Polk and Houlihan Lokey following the asset transfer.

The notes rallied throughout September on the expectation Peabody could address the maturity with a potential capital raise secured by the newly created subsidiary—but trading levels cratered after the Arch Coal JV cancellation and the closure of Peabody’s Shoal Creek mine on 5 October.

The company’s 6% senior secured notes, due 2022, changed hands at 48.5 yielding 66.25% down significantly from trades at 64.5 on 28 September prior to the JV cancellation, according to MarketAxess. Its US$500 million 6.375% first lien notes due 2025 last changed hands at 37.5 on 8 October.

Peabody’s liquidity consists of US$848.5 million in cash and US$67 million available under its US$565 million revolving credit facility, which had US$300 million outstanding, as of 30 June. 

However, the energy company’s continued cash burn and need to provide another US$50 million to US$100 million of surety bonding collateral during the third quarter, could cause strain on the liquidity, as reported.

To free up financial flexibility, Peabody announced in its 5 August earnings release that it was evaluating strategic financing alternatives and designated its Australia-based Wilpinjong mine an unrestricted subsidiary.

A deal to raise capital at the newly created entity could help address revolver borrowings and the 2022 maturity as well as add cash to the balance sheet. But such deals—similar to what Peabody shareholder Elliott Management pursued at Travelport—have been controversial and hotly contested by debt holders.

Pacific Drilling working with turnaround advisor, as grace period expiration nears

Pacific Drilling has engaged AlixPartners to help develop a turnaround plan for its operations, according to two sources familiar with the matter. The company is trying to hammer out a restructuring support agreement before a coupon payment-related grace period ends on 31 October, sources continued.

On 1 October, Pacific opted to skip a US$31.4 million coupon payment on its 8.375% first lien notes due 2023 and approximately US$19.6 million PIK interest payment on its 11%/12% second lien PIK toggle notes due 2024. The company said it would use the 30-day grace period to continue talks with certain creditors on a consensual and comprehensive restructuring, which could be implemented in a Chapter 11 proceeding. 

“Any such agreement that we may reach may include the equitization of all or certain of the company’s indebtedness, which would place our common shareholders at significant risk of losing all of their interests in the company,” said Pacific CEO Bernie Wolford in the company’s Q2 2020 earnings press release. 

Pacific previously filed for Chapter 11 in November 2017, and exited a year later having equitized US$1.85 billion in debt.

This time around in a potential bankruptcy, Pacific may not need DIP financing due to its existing cash balance, a third and fourth source said. As of 30 September, it had US$218 million of cash on hand, with US$6 million being restricted.

The offshore driller has been working with Greenhill as financial advisor and Latham & Watkins as legal counsel to assist with a balance sheet fix, as reported. Meanwhile, an ad hoc group of first lien bondholders has organized Akin Gump and Houlihan Lokey.

The 8.375% first lien notes last traded at 18, on 13 October, MarketAxess shows.

While oil prices began to rebound during Q2, Pacific’s clients have generally reduced their drilling investments, including two that chose to terminate their contracts, Wolford noted in the quarterly release.

Several contract roll-offs and lower rates dragged down Pacific’s contract drilling revenue to US$39 million in Q2, from US$89.4 million in Q1.

The company is expecting more contract opportunities in 2021, though the durations remain relatively short with day-rates pressured by excess rig supply, Wolford said. 

Management sought to reduce spending in light of the unfavorable demand outlook. The company cut total overhead costs by 35%, or over US$22 million, and also deferred or cancelled planned 2020 capex totaling US$17 million for a 55% reduction in the budget.

Pacific has been contending with negative EBITDA since its 2018 bankruptcy exit.

Earlier this year, Pacific entered into a US$50 million Libor+ 750bps first lien super-priority revolver due 2023 with Angelo Gordon. The facility’s coupon has stirred concerns among investors, given the company’s cash burn and asset coverage implications for the first liens, as reported.

The company burned US$223 million on a LTM basis, based on negative US$84 million of adjusted EBITDA, less US$65 million of cash interest, US$20 million of capex and negative working capital of US$54 million. 

Laramie Energy taps banker ahead of December 2021 maturity

Laramie Energy engaged banker PJT Partners to explore balance sheet options, including the potential restructuring and renegotiation of midstream contracts, according to two sources familiar with the situation. The advisor is also tasked with finding new capital, sources added.

The retention comes as Laramie’s revolver is set to go current by year-end.

As of 30 June, the borrower had US$197.5 million outstanding on a US$202.5 million revolver agented by JPMorgan, according to minority investor Par Pacific Holdings’s SEC filings. 

Par Pacific and its subsidiaries, which held a 46% ownership interest in Laramie, have reduced the investment to zero at 30 June. That followed a US$45.3 million write-down in Q1 2020, owing to the impact of COVID-19, higher weighted-average cost of capital for energy companies and continued decline in natural gas prices during the quarter.

The gas-heavy producer had been shopping for capital even before the coronavirus pandemic hit the US in March, as it sought to address its December 2020 maturity, as reported.
In April, the company extended its revolver maturity by a year to December 2021. 

Laramie mainly operates in the Piceance basin of Western Colorado, with 240 Mmcfe/d of production and 224,000 acres. 

Henry Hub natural gas spot price averaged US$1.92/MMBtu in September, down from average of US$2.3/MMBtu in August, due to declining demand from the power sector and relatively weak demand for LNG exports. 

However, prices will likely reach a monthly average of US$3.38/MMBtu in January 2021, on expectations of reduced production, growing domestic demand and LNG exports heading into the winter, the US Energy Information Administration said.