Triangle Petroleum's (NYSEMKT:TPLM) bid to survive the current commodity price downturn may fall short, based on disclosures in the company's latest filing. Triangle's recent 10-K filing confirms many concerns highlighted by Richard Zeits's piece on March 30, 2016. A few key disclosures are discussed below.
Cash Flows Sufficient For Two Years
Triangle believes cash on hand and cash flows from its business units will be sufficient to fund operations for the next two years. This reiterates the plan conveyed in the company's Q3 earnings call that will draw on its drilled but uncompleted backlog of 18 wells to hold production steady enough to get through the commodity downcycle. The actual execution of this plan will depend on the company's ability to avoid credit facility defaults that would accelerate the maturities of its debt balance.
Severe Covenant Stress At TUSA May Cut This Timeline Short
Triangle's E&P business, TUSA, was compliant with all covenants as of its fiscal year end. However, TUSA expects to breach either its senior secured debt to EBITDA (2.75x) or interest coverage (2.50x) covenants within the next year without the help of materially higher commodity prices. A breach of the company's senior secured covenants may accelerate the maturity of its $244 million senior secured loans and would create a cross-default on its $400 million 6.75% notes. Triangle has the ability to cure any defaults under the credit facility with an equity cure. However, the lack of current liquidity and uncertainty of an external equity source cast doubt on the company's ability to fund the deficiency. Triangle does have well-funded private equity partners in NGP, First Reserve and TIAA Oil & Gas Investments, but their ability or appetite to step in is uncertain.
Reserves Disclosures Do Not Indicate Equity Recovery
Triangle's PV-10 proved reserves value was $329 million as of January 31, 2016, based on SEC parameters of $48.93/bbl for oil and $2.53/mmbtu for gas. The company's current SEC asset valuation would not be sufficient to cover the nearly $650 million in debt mentioned above that may become due in the event of a covenant breach. Any prospect of equity recovery would also require an asset valuation in excess of the company's $142 million of 5% convertible notes, and $14 million of other notes payable. Its nearly $800 million of debt obligations and $329 million of asset value does not create much hope of value in the equity, if any.
Strategic Advisors and Revolver Draw
On March 24, 2016, Triangle announced that it had hired PJT Partners, AlixPartners and Skadden, Arps, Slate, Meagher & Flom LLP to assist in reviewing strategic alternatives. Its recent filing lists a few alternatives that may be considered.
- Obtaining waivers or amendments from current lenders at TUSA and RockPile.
- Obtaining additional sources of capital from asset sales, issuances of debt or equity, or debt for equity swaps.
- Pursuing in- and out-of-court restructuring transactions.
Given the company's asset value noted above, asset sales do not appear to be a viable solution for the company's debt problems. It appears that Triangle will need to either obtain the good graces of its banking partners or file for bankruptcy protection, as noted in point three.
On March 31, 2016, TUSA drew the remaining $104 million availability on its $350 million credit facility ahead of its upcoming borrowing base redetermination. This move is often a precursor to either an upcoming credit line cut or a bankruptcy filing to avoid the need for DIP financing. This move was also used by Linn Energy (LINN) earlier this year. The revolver draw points to a high risk of bankruptcy within the next year if commodity prices do not improve.
May Borrowing Base Redetermination
Triangle's next borrowing base redetermination is scheduled for May 1st, and it is very likely the company's $350 million facility will be cut. Given that the revolver is now fully drawn, any cut to the facility will require repayment of the excess within three months. Considering the lack of liquidity at the company, a significant reduction in the borrowing base will create an insurmountable obstacle to continued operations, similar to what happened to the company's bankrupt Bakken peer, Emerald Oil (NYSEMKT:EOX).
RockPile Subsidiary In Default
Triangle's pressure pumping subsidiary, RockPile, was in default of its credit agreement as of the fiscal year ending January 31, 2016. The good news is the creditors provided the subsidiary a waiver for its January 31, 2016 default and any possible defaults as of April 30, 2016. RockPile will be unable to draw any funds from its revolver for the foreseeable future, as it does not expect to comply with financial covenants for fiscal year 2017.
RockPile is currently exploring alternative financing or equity cures, but if it is unsuccessful, its $112 million debt balance may be due in full as early as this year, which it will have insufficient cash to repay. In this scenario, the banks would take control of RockPile, and the consolidated Triangle entity would lose its interest in the unit.
The only good news here is there are no cross-default provisions between RockPile and Triangle's E&P subsidiary. However, given the discussion of TUSA above, the situation remains dire.
The excessive pressures from a high debt load, fringe acreage profile, low commodity prices and punitive Bakken differentials, and a low capital spend in the Bakken have come to a head for Triangle Petroleum and its RockPile subsidiary. While the company does have a positive lever in its Caliber Midstream unit, this cannot outweigh the concerns at TUSA and RockPile. Barring a significant recovery in oil and gas prices in the next few months, it seems Triangle may be up next to file for bankruptcy protection.
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