Warren Resources: Assets May Be Worth $250 Million To $300 Million

| About: Warren Resources, (WRES)

Summary

Restructuring plan indicates that 82.5% of the new equity will go to the first-lien lenders. The remainder will go to junior debtholders, with the current equity receiving nothing.

Warren's value is estimated at $250 million to $300 million compared to $248 million in first-lien debt and $472 million in total debt claims.

Equity probably needs oil to go up $20 and natural gas to go up $1 before it would possibly have intrinsic value.

Restructuring may bring Warren's break-even point down to $62 oil and $3.50 natural gas.

Warren is also contemplating turning itself into a pure play Marcellus producer with no debt after other asset sales.

Warren Resources (NASDAQ:WRES) filed for bankruptcy protection under Chapter 11 on June 2. This was not surprising as Warren had hired a Chief Restructuring Officer in early April. Warren previously mentioned that its first-lien lenders had made a restructuring proposal, but that the second-lien and unsecured lenders had not agreed to it yet. This time the first-lien, second-lien and unsecured lenders are all on board with the restructuring agreement, although I am uncertain how much (if at all) it differs from the earlier proposal.

As anticipated, the equity is likely worthless as the restructuring plan contemplates the equity being wiped out as part of the restructuring. New equity will be issued to the creditors, with 82.5% going to the first-lien debtholders and the remaining going to the second-lien and unsecureds.

Valuation Based On EBITDA

I've discussed bankruptcy valuation methods as part of another article before. One way to calculate Warren's potential value is to look at what comparable companies are trading for, as bankruptcy courts prefer to use market data in their assessments. Some other upstream companies are trading at around 6x EV/EBITDA based on $60 to $65 oil now and roughly $3 to $3.25 natural gas. Using the upper end oil price and natural gas price would result in Warren Resources generating an estimated $102 million in revenue based on 2016 production guidance.

Units

$ Per Barrel/Mcf

$ Million

Oil (MMbl)

803

$58.00

$47

Natural Gas (Bcf)

22.4

$2.25

$50

Atlantic Rim Pipeline Revenue

$5

Total

$102

Click to enlarge

This can probably be considered the high end of Warren's value since it uses the upper end of the mentioned oil and gas price ranges as well as production that is likely to be higher than what Warren's production is trending towards in the second half of the year. From this we would subtract $50 million in lease operating expenses, gathering fees, production taxes and G&A to get an estimated $52 million EBITDA. An EV/EBITDA multiple of 6.0x would result in Warren's enterprise value being estimated at $312 million.

Using lower production levels and the lower end of the oil and gas price ranges would result in an estimated $40 million EBITDA and an enterprise value of $240 million.

On the other hand, Warren's restructuring agreement contemplates an enterprise value of $160 million to $180 million. I believe that the difference is due to a fair amount of optimism being priced into the equity of upstream equities, while restructuring agreements often mention a more conservative valuation that benefits the creditors.

Valuation Based On Assets

Another way to look at Warren's value would be to look at its asset value. Warren mentioned in its SEC filing that it was looking to sell its California and Wyoming properties for $145 million as part of one post-restructuring scenario. That would leave Warren with the Marcellus assets that it purchased from Citrus Energy in July 2014 for $352.5 million. However, that purchase was made at a time when natural gas was at around $4.31, so the assets are worth significantly less now. Various 2016 Marcellus transactions indicate that Warren's Marcellus assets may be worth $100 million to $150 million. Warren's combined asset valuation is estimated at around $245 million to $295 million then.

Equity Remains Out Of The Money

The two valuation methods mentioned above give relatively similar results, with Warren's value estimated at around $250 million to $300 million. Warren has around $248 million in first-lien claims and $472 million in total debt claims, so it appears that the equity is well out of the money. Warren's value doesn't appear to cover much more than the first-lien claims, so the restructuring agreement that results in most of the new equity going to the first-lien debtholders doesn't appear unreasonable.

Post Restructuring Financials

Warren Resources did manage to get its interest costs reduced substantially as a result of the restructuring, although the interest rate on its new first lien facility is very high with cash interest at LIBOR + 900 basis points with a 1% LIBOR floor, plus another 1% to be added to the principal. The DIP loan may be rolled into this facility, so $150 million outstanding in first-lien loans would result in $15 million in cash interest.

Warren's projected break-even point comes down from $75 WTI oil and $4 Henry Hub natural gas to around $66 oil and $3.35 natural gas or $62 oil and $3.50 natural gas.

Units

$ Per Barrel/Mcf

$ Million

Oil (MMbl)

803

$59.00

$47

Natural Gas (Bcf)

22.4

$2.35

$53

Atlantic Rim Pipeline Revenue

$5

Total

$105

Click to enlarge

This assumes the same $40 million in maintenance capital expenditures that I used before.

$ Million

LOE, Gathering Fees and Taxes

$39

Cash G&A

$11

Cash Interest

$15

Maintenance CapEx

$40

Total

$105

Click to enlarge

Warren does need higher oil and gas prices to be able to maintain production levels post-restructuring without asset sales. This is acknowledged in the SEC filing, with one potential solution involving becoming a Marcellus pure play with no debt after selling its other assets.

Conclusion

Warren's restructuring will significantly reduce its debt and interest costs. However, additional steps may be needed to address the company's long-term viability if oil and gas prices don't improve by a fair bit. Thus, we may end up seeing Warren become a pure play Marcellus company if it sells its other assets to pay off its debt.

Warren's current estimated value is enough to cover off its first-lien debt, but not much more than that. The common equity is around $200 million out of the money, indicating that the final restructuring results will likely still result in no recovery for it. I'd estimate that it would probably take a $20 increase in the price of oil and a $1 increase in the price of natural gas for the common equity to start having value.

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