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Sandridge Vs. Halcon, Part II - Who's Getting The Better Deal During Refinancing Of Long-Term Debt?

Sandridge Energy is in a position to eliminate nearly a billion dollars of long term debt. Most of that debt will be converted to equity.

Shareholders will have to verify the statements of management by reviewing the next Sandridge Energy Quarterly Report.

Halcon has one large deal that eliminated $584 million in long term debt and saved $19 million in interest charges.

Sandridge will have added nearly $100 million annually to its cash flow according to management from its debt swaps and latest acquisition.

Halcon is relying upon a bank revolving credit line for its liquidity and that is a very risky move for a distressed company.

There have been numerous articles out about when a leveraged company facing a high probability of bankruptcy has done a fantastic job to make its balance sheet more favorable and reduce financing costs going forward. I continue to believe that this rearrangement goal is a moving target and that target is based upon a future pricing scenario. When it comes to future oil pricing and industry conditions, my crystal ball keeps clouding up or breaking.

Therefore, a company needs to keep as many options open in case repeated refinancing is needed to survive an extended downturn in the industry, and prevent a bankruptcy which could erase the holdings of common and preferred shareholders, as well as the debt of unsecured creditors.

What appears to be unique about the current industry downturn, is the prices to which publicly traded debt have fallen. This has allowed companies to swap debt or purchase debt at considerable discounts. Therefore, the common and preferred shareholders suffer less dilution than would have been expected in previous downturns, and the companies have more less costly alternatives than previously thought.

One rule that appears to have not changed is that bank debt is the least desirable debt for a leveraged company to have. Wesley Kress explores this concept in his excellent article much more and that article is therefore recommended reading for any owner of shares in a leveraged company. This would explain why the two companies have paid their bank debt to a very minimal amount before they really began refinancing the rest of their long term debt.

To recap from my previous article:

"On April 27, Halcon Resources (NYSE:HK) issued a press release stating that it had sold $700 million of 8.625% per annum senior notes with a second priority lien on all the company's assets. The company used this money to pay down its bank line and then had some money left over for general corporate purposes. The problem is by the time the latest quarter was over, the company had very little cash left and was not generating much cash flow. When a company wants to restructure, cash is a key ingredient in the restructuring process, and not having cash can be an extremely damaging flaw in the negotiating process.

On August 27, Halcon Resources issued a press release stating that it had entered into a debt swap agreement. The company agreed to swap of $1.57 billion of various unsecured debt for a new 13% secured $1.02 billion secured bond debt series. The swap would result in the erasure of approximately $548 billion in debt and save $12 million a year in interest. For cash flow purposes that means cash flow would rise $1 million a month due to this transaction. Halcon began the quarter with roughly $3.7 billion in debt and this transaction will reduce the debt to $3.1 billion."

Sandridge Energy

"Sandridge Energy (NYSE:SD) announced on June 10, that it closed on an offering of $1.25 Billion of 8.75% senior secured notes due in 2020. The notes were used to pay down the remaining revolving credit line, which was reduced to $500 million. However, at the end of the second quarter, the company still had $984 million of cash on hand and $1.5 billion of liquidity. This company has paid attention to the cash on the balance sheet, and can survive for a few years at projected cash burn rates even if the bank were to cancel the credit line completely. Here that is not at all likely for the time being as the bankers are reassured by the cash in the bank, that the company will meet is current obligations and bills. This is an extremely important part of creditworthy determination and borrowing base re-determinations. Although it is clearly not the only consideration. Sooner or later the company will have to demonstrate that it can retire the debt.

Sandridge Energy announced on August 14, that it would buy back $250 million dollars of its bonds for $94 million. It further announced that it would swap $275 million more of its debt for $158.4 million of its new 8.125% Convertible Senior Notes due 2022 and 116.6 million of its new 7.5% Convertible Senior Notes due 2023. The company eliminated $19 million in annual interest expense and will have a gain of roughly $156 million in purchasing this debt at a discount.

Sandridge Energy started with roughly $4.4 billion in long term debt at the beginning of the third quarter, and this transaction reduced the debt to roughly $4.1 billion.

This came after it had...


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