Monday, August 1, 2016

Bonanza Creek Energy Elects to Not Make Interest Payment on 5.75% Senior Unsecured Note $BCEI

While the operating assets continue to perform, our balance sheet and access to capital remain a major headwind. In an effort to enhance the liquidity position of the Company, in the first and second quarter of 2016 we targeted divestitures of both our RMI and MidCon assets. Although we received strong economic bids for both of these asset packages, conditions included in the bid proposals require that the Company improve its liquidity and its balance sheet. As a result, we have suspended the divestiture efforts to focus on other liquidity enhancing and debt restructuring options. To assist in evaluating all alternatives, we have retained (as previously announced) Perella Weinberg Partners as restructuring advisors and Davis Polk & Wardwell as legal advisors.

Debt and Liquidity

The Company has a $1.0 billion revolving credit facility, which was redetermined in May of 2016 to an approved borrowing base and commitment amount of $200 million. As of June 30, 2016, the Company had borrowings under its credit facility of $273.3 million and cash totaling $170.2 million. Upon redetermination of the Company's credit facility, its borrowings exceeded its borrowing base by $88 million. The Company has elected to pay this deficiency in six monthly installments as allowed under the terms of the credit facility agreement. During the quarter the Company paid off its remaining $12.0 million letter of credit and made its first credit facility deficiency payment of $14.7 million. The Company has subsequently paid its second deficiency payment of $14.7 million in July and has four remaining payments to be made on a monthly basis to remedy its credit facility deficiency. The Company's next redetermination is expected to happen in the fourth quarter of 2016.  As of June 30, 2016, the Company was in compliance with all financial covenants under its credit facility, with a senior secured debt to TTM EBITDAX ratio of 1.5x, an interest coverage ratio of 3.2x, and a current ratio of 2.7x.

In addition to the credit facility, Bonanza Creek has two outstanding issues of unsecured high-yield bonds which consist of $500 million of 6.75% senior notes due in 2021 and $300 million of 5.75% senior notes due in 2023. The Company is subject to certain covenants under the respective indentures governing the senior notes that, among other things, limit its ability to incur additional indebtedness. Specifically, the incurrence by the Company (or any of the guarantors under the indentures) of additional indebtedness and letters of credit under the revolving credit facility in an aggregate principal amount at any one time outstanding is not to exceed the greater of (a) $300.0 million or (b) 35% of the Company's Adjusted Consolidated Net Tangible Assets (“ACNTA”) determined as of the date of the incurrence of such indebtedness. ACNTA is defined as the Company's PV-10 value plus capitalized costs for unproved properties plus consolidated net working capital and other tangible assets.  At June 30, 2016, 35% of the Company’s ACNTA was equal to approximately $380 million.

While the Company currently has sufficient cash on hand to make its upcoming bond interest payment, it has made the election to not pay the interest payment for its $300 million 5.75% senior unsecured notes, which was due on August 1, 2016. By not paying the interest due, the Company has entered into a 30-day grace period during which it retains the right to pay the interest due to the holders of its 5.75% notes and thereby remain within compliance of the bond indenture. The 30-day grace period also applies to any potential cross-default under the Company's credit facility with respect to the bond interest payment.

7 comments:

CP said...

The revolving credit facility restricts, among other items, certain dividend payments, additional indebtedness, asset sales, loans, investments and mergers. The revolving credit facility also contains certain financial covenants, which require the maintenance of certain financial and leverage ratios, as defined by the revolving credit facility. The revolving credit facility contains a ratio of maximum senior secured debt to trailing twelve-month EBITDAX that must not exceed 2.50 to 1.00 and a minimum interest coverage ratio that must exceed 2.50 to 1.00. The maximum senior secured debt ratio is calculated by dividing borrowings under the revolving credit facility, balances drawn under letters of credit, and any outstanding second lien debt divided by trailing twelve-month EBITDAX (defined as earnings before interest expense, income tax expense, depreciation, depletion and amortization expense, and exploration expense and other non-cash charges). The minimum interest coverage ratio is calculated by dividing trailing twelve-month EBITDAX by trailing twelve-month interest expense. The revolving credit facility also contains a minimum current ratio covenant of 1.00 to 1.00. The revolving credit facility agreement states that the current ratio is to exclude the current portion of long-term debt, as such the classification of our long-term debt to current liabilities did not impact the current ratio. The Company was in compliance with all financial and non-financial covenants as of June 30, 2016, and through the filing date of this report. The Company believes that it will be out of compliance by the end of third quarter 2016.

CP said...

As previously disclosed in the 2015 Form 10-K, the Company has two purchase and transportation agreements to deliver fixed determinable quantities of crude oil. The first agreement went into effect during the second quarter of 2015 for 12,580 barrels per day over an initial five year term. Based on current production estimates, the Company anticipates shortfalls in delivering the minimum volume commitments as early as September 2016. Under the current terms of the contract, the anticipated shortfall in delivering the minimum volume commitments could result in potential deficiency payments of $2.3 million for the remainder of 2016 and an aggregate $44.8 million in deficiency payments for 2017 through April 2020, when the agreement expires.

The second agreement is currently scheduled to take effect on the later of November 1, 2016 or the pipeline completion date for 15,000 barrels per day over an initial seven year term. Based on current production volumes, the Company believes that it will not be able to designate any barrels to this commitment. Under the current terms of the contract, the anticipated shortfall in delivering the minimum volume commitments could result in potential maximum deficiency payments of $4.8 million in 2016, assuming the pipeline is complete by November 1, 2016, and an aggregate $196.4 million in deficiency payments for 2017 through October 2023, when the agreement expires.

The actual amount of deficiency payments could vary depending on the outcome of the Company's ability to execute on one or more of its current liquidity strategies and future drilling. The Company intends to aggressively pursue restructuring these contracts due to continued low commodity prices, the cessation of the Company's drilling program and the Company's current financial condition, which could possibly include altering the volumes, the term of the contracts, and the deficiency fees. The Company expects to have more clarity around its liquidity strategies and restructuring of its purchase and transportation agreements in the third and forth quarters of 2016.

CP said...

We ceased our drilling program at the end of the first quarter of 2016 and do not have any active drilling planned for the remainder of 2016. Consequently our production will decline in line with our normal decline curves, and we will experience further reductions in revenues, profitability and cash flows.

CP said...

The Company is currently in discussions with various stakeholders and is considering pursuing a number of actions including: (i) private issuances of equity or equity-linked securities, debt for equity swaps, or any combination thereof; (ii) in- and out-of-court restructuring transactions; (iii) obtaining waivers or amendments from its lenders; and (iv) continuing to minimize its capital expenditures, reduce costs and maximize cash flows from operations. There can be no assurance that sufficient liquidity can be obtained from one or more of these actions or that these actions can be consummated within the period needed.

Anonymous said...

Very interesting, and of interest to those looking at the once allegedly protected midstream...

Though very different beasts, the income trusts carved out during the bubble provide interesting expressions of its burst, as they're fairly passive entities with relatively simple economics. The BP Prudhoe Bay Trust (BPT) is relatively large as these things go, trades well above its PV-10 at $50.28/bbl, and has grown increasingly unmoored from the oil price of late. As with all these, time is not on holders' side; the formula for expense deductions increases at ~$4/bbl per year (possibly more), and with the potential for declining production in the fairly high-cost field from which it's carved, distributions may dwindle quite rapidly. Not a thought that's original to me, though one disputed by many!

CP said...

Good comment, obviously the pipeline commitments have their bearish implications for BCEI but the real story may be the effect of these distressed E&P restructurings on the midstream firms that have capitalized these pipeline earnings at very low discount rates!

Anonymous said...

Quite so, and this may be a circumstance where those midstreamers forced to reckon first and most with such restructurings end up in much better shape than those hitherto "spared" (if such divisions exist).