With West Texas Intermediate crude now below $42 a barrel, the edifice of America's oil and gas boom is finally crumbling. The number of companies in bankruptcy or restructuring has increased, and the clouds will only grow darker in the months ahead. Declining revenues, evaporating earnings and shrinking values of oil and gas reserves will put the crunch on oil companies' ability to refinance loans, let alone borrow new cash or sell shares.
Last week two companies showed that having a heroic name is no defense. Hercules Offshore, a Gulf of Mexico drilling contractor, announced it had reached a prepackaged bankruptcy with creditors to convert $1.2 billion in debt into equity and raise $450 million in new capital. While Samson Resources on Friday said it is negotiating a restructuring that will see second lien holders inject another $450 million into the company in return for all the equity in the reorganized company.
Samson is the biggest bankruptcy of the oil bust so far, and a huge black eye to private equity giant KKR, which in 2011 led a $7.2 billion leveraged buyout of the company. The deal was a classic LBO: about $3 billion in equity backed by more than $4 billion in debt. It seemed like a good idea at the time. Tulsa, Oklahoma-based Samson, founded in the 1970s by Charles Schusterman, had grown to be one of the biggest privately owned oil companies in the nation. It held vast swaths of acreage in North Dakota, Texas and Louisiana seemingly ripe for redevelopment. The sophisticated KKR team assumed it could squeeze a lot of value out of Samson, which since Schusterman's death in 2001 had been run by his daughter Stacy. Charles would be proud of her for inking the deal of a lifetime, selling the family jewels at what turned out to be the top of the market for shale-y acreage. It didn't take long for KKR and its equity partners to realize they had overpaid tremendously. The pain has been spread around. Japan's Itochu Corp. put up $1 billion in the LBO for a 25% equity stake. Two months ago it sold back its shares to Samson for $1.
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Sunset over the oilpatch. AFP PHOTO / Karen BLEIER
KKR and its partners might at least feel cold comfort that some of their cash is going to a good cause. The Schusterman family, led by matriarch Lynn, contributed $2.3 billion of their windfall to the Charles & Lynn Schusterman Foundation, which is devoted to Jewish charities and education projects in Tulsa.
KKR and its partners are far from the only ones who have taken a bath on oil investments. The energy companies in the S&P 500 have fallen 27% in the past year. The broader collection of energy companies in the S&P Total Market Index (which also includes beleaguered coal miners) is off 46%. Holders of energy company debt have suffered as well. The average yield on $212 billion in high yield energy debt is 11.8%, reports Bloomberg. Fitch Ratings said in a note last week that the default rate on energy debt is already at 3% on the year and likely heading to 4%. The average default rate for the sector is 1.9% per year. According to Fitch, after a company has done an equity-for-debt exchange there's a 66% probability of it ultimately being forced into bankruptcy restructuring.
So who will be next to fall? The list of troubled companies slumping toward Chapter 11 is growing. SandRidge Energy, Goodrich Petroleum, Swift Energy, Energy XXI, and Halcon Resources have all lost more than 90% of their market value since 2014, are larded up with too much debt, and would be lucky to survive the bust.
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SandRidge Energy's $825 million 2012 7.5% bonds were yielding just 5.3% in July 2014. By last week that yield had soared to 40%, their price having plunged from 109 cents to 23 cents. Last Friday SandRidge CEO James Bennett announced that he had made a deal with lenders to refinance $525 million in debt. SandRidge will buy back $250 million face value in senior unsecured notes for $94.5 million, and exchange another $275 million for convertible bonds that mature in 2022 and 2023. The move pares SandRidge's debt, removing $19 million in annual interest expense. But this feels akin to treating a heart attack with a Band-Aid; SandRidge is still saddled with more than $4 billion in debt. In the most recent quarter, interest and preferred stock dividends ate up $80 million of SandRidge's $230 million in revenue.
It's hard to see how Goodrich Petroleum avoids bankruptcy. According to FINRA data the last trade on its 2012 issue of $275 million in 8.875% bonds was at $28.42 for a yield of 58.66%. In the first half the company had revenues of $50 million while its interest expense on $622 million in long-term debt was $27 million. Back in February, Goodrich managed to sell $100 million in second lien notes. In March it convinced investors to pump $50 million of fresh money into new common stock at $4.15 per share. The stock is now down to 88 cents. It was $29 in June 2014. Since the end of the quarter Goodrich sold off its Eagle Ford position for $118 million. That leaves virtually all of its debt backed by acreage in the Haynesville gas play and the woefully unprofitable Tuscaloosa Marine Shale. Does Goodrich have any more lifelines? Highly doubtful.
It's impressive that Swift Energy has survived this long. Its 7.875% senior debt was trading at $104.5 a year ago. Then hedge fund Baker Street Capital Management began complaining about poor capital allocation and heavy indebtedness and began agitating for change at the top. CEO Bruce Vincent departed early this year and the company hired Lazard & Co. to advise of restructuring options. A month ago Swift was trying to find buyers for a $640 million bond offering that would help repay loans. That looks unlikely. Today Swift's debt changed hands at $23, for a 45% yield. Swift shares were at $46 in 2011; by mid 2014 they had fallen to $13 and today closed at 58 cents. Swift's equity market cap is $27 million against long-term debt of $1.1 billion.
Gulf of Mexico producer Energy XXI surprised the market last May when it managed to find buyers for $650 million in new debt. Yields on the issue have since surged to 46%, according to FINRA data. EXXI is staggering under $4.6 billion in debt, much of it incurred from the acquisition of rival EPL in 2014. It is reportedly negotiating with creditors on debt swaps that would extend maturities. In an operations update last week EXXI said it expends $52 in cash for every BOE (barrel of oil or natural gas equivalent) it produces. At current commodity prices it's losing at least $10 per BOE, of which it produces more than 55,000 per day. Interest payments and preferred dividends amount to $19 per BOE. That's a lot of cash burn. Shares closed today at $1.70; in early 2012 they got as high as $38.
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Halcon Resources also is in trouble, with yields on senior unsecured debt surging from 14% in May to 27% today, according to FINRA data. Halcon did two equity-for-debt swaps earlier this year, and in April sold $700 million in new debt. Interest payments on its $3.7 billion in debt have eaten up 40% of revenues so far this year. A couple weeks ago S&P improbably raised its rating on Halcon from "SD" for selective default, to B-. Their reasoning? Halcon is unlikely to enter into further debt-for-equity deal. Why? Because Halcon's stock price has fallen so far that no bond holders would even be interested. Halcon's senior unsecured notes are rated CCC, meaning holders would be lucky to recover 10% of face value in a conventional default. The biggest loser on Halcon so far looks to be Dallas billionaire W. Herbert Hunt. In late 2012 his Petro-Hunt sold to Halcon it assets in the Bakken for $700 million cash plus about 100 million shares, then trading at $7.45. Hunt has ridden those shares all the way down, losing about $650 million. Could have been worse though -- he could have invested in Samson.
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