Goodrich Petroleum (OTCPK:GDPM) filed for Chapter 11 after its various exchange offers failed to meet their participation targets. Only 62% of the unsecured notes and 43% of the preferred shares were tendered, compared to the 95% and 50% respective minimum targets. As a result, Goodrich filed for Chapter 11 with a plan to keep its credit facility as is, convert its second-lien debt into new equity and wipe out the unsecured debt (except for convenience claims), preferred shares and common equity. The restructuring support agreement was automatically terminated in late May though since the bankruptcy court didn't approve it within the specified timeframe. Goodrich is continuing negotiations with secured and unsecured noteholders as a result.
I think that Goodrich's restructuring plan contains valuation estimates that are too low since they appear to assign no value to its undeveloped acreage. However, even if the undeveloped acreage is assigned some value, the second-lien notes are probably impaired. Unsecured noteholders were originally slated to receive nothing and I think will probably find it challenging to receive more than warrants in the end. There is little hope for the equity.
I had previously looked at Goodrich's potential valuation and concluded that the unsecured noteholders would likely be best served by tendering their notes for the exchange offer. Goodrich's value was estimated at $162 million if no value was assigned to its more speculative (in areas where drilling has essentially ceased) undeveloped acreage. This would still not result in full coverage for the second-lien notes, but it appears that Goodrich's own valuation estimates are significantly lower.
Below is a table showing Goodrich's own estimates of claims recovery using liquidation analysis.
Goodrich provided a variety of financial information to support its valuation estimates. These included a liquidation analysis that indicated a $55.4 million recovery, and a valuation analysis that estimated that the reorganized company would have an enterprise value of $50 million to $100 million with a $75 million midpoint. Goodrich also forecasted its EBITDAX to be $7.4 million between Q3 2016 and Q2 2017. Goodrich's valuation numbers were calculated in March, so the subsequent improvement in oil and gas prices would increase the valuation numbers. However, even a substantial increase from $75 million would not cover the second-lien notes, as that would take a valuation of approximately $234 million.
I had previously estimated Goodrich's producing assets to be worth around $91 million, while Goodrich valued those assets at approximately $71 million (before some discounting for the distressed nature of the liquidation analysis). The main difference is probably due to the decline rate for Goodrich's production being steeper than anticipated. Oil production is projected by Goodrich to average 1,350 BOEPD in Q3 2016, while natural gas production is projected at around 14,940 Mcf per day. Using those production figures would have reduced my valuation estimate to $78 million for Goodrich's producing assets, fairly close to Goodrich's estimates.
The main contention appears to be whether the undeveloped assets are worth anything. Goodrich's value has always been primarily in its undeveloped assets, so whether any value is assigned to them or not makes a very significant difference in Goodrich's estimated value. I had previously estimated Goodrich's core Haynesville undeveloped acreage to be worth $71 million, while its other acreage could be worth anywhere from $0 to $97 million depending on whether there was any interest in speculative acreage. That other undeveloped acreage includes its position in the Tuscaloosa Marine Shale [TMS], which was Goodrich's primarily development focus before, but the area is said to be "as dead as can be" now. The TMS is said to require steady $70 or $75 oil before activity picks up again, so it is uncertain what sort of bids it would attract if put up for sale. Most likely any bids (if there were any) would be low and for only a portion of the acreage.
Various insiders have been selling their shares of Goodrich Petroleum since Goodrich filed for Chapter 11. By my count insider sales have reached nearly 885,000 shares with an average sale price of under $0.03 per share. Since Goodrich is a corporation, there is no risk of CODI being passed onto shareholders due to the restructuring. The reason for the heavy selling appears to be that those insiders believe that the final restructuring result will wipe out the common shares and thus a return of a couple cents per share is better than nothing.
I think Goodrich's valuation estimates are underestimated since it apparently assigned no value to its undeveloped acreage when making the case that the second liens should get all of the new equity. I believe that its core Haynesville undeveloped acreage should still have value even in a distressed scenario. However, that doesn't change the situation for the unsecured noteholders by itself. Including the value of the core Haynesville acreage only improves the recovery for the second-liens from extremely impaired to moderately impaired. To make a case for a recovery, unsecured noteholders probably need to find a way to support a valuation of over $70 million for the undeveloped acreage in the TMS, non-core Eagle Ford and non-core Haynesville Shale. That could be challenging given the lack of drilling interest in those areas. Unsecured noteholders may be offered some warrants to attempt to get their approval, but more recovery would probably require a strong effort to attribute substantial value to that other undeveloped acreage.
Given the challenges that unsecured noteholders face, it is exceptionally unlikely that the preferred and common equity will see a recovery in the end. There are $282 million in unsecured claims ahead of the preferred and $296 million in preferred claims ahead of the common equity. The poor recovery prospects for the common equity is reinforced by the wave of insider selling at under 3 cents per share.
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