On Friday night, C&J Services (NYSE:CJES) put out a press release that the company had entered into their previously announced restructuring support agreement with lenders and would be going through a prepackaged chapter 11 bankruptcy process. This morning the company put out an 8-K and associated EX-10.1 disclosing some, but not all, of the terms of the restructuring. The remaining terms are subject to negotiation which should then comprise the company's "Definitive Documentation."
C&J's restructuring contemplates that substantially all of the company's $1.4 billion in debt will be converted into equity, that $200 million will be raised through a rights offering, that $100 million Debtor-in-Possession financing will be provided through a senior secured term loan facility and that an additional $100 million loan will be sought upon exit of the bankruptcy process.
Under the currently disclosed terms, the existing common shareholders' interests will be extinguished. The equity rights to raise $200 million are rights to be issued pro rata to the debt holders, not issued to existing common shareholders.
Subject to approval, however, existing common shareholders will receive warrants for "up to 6%" of the reorganized company. The term of the warrants is seven years and the strike price is at a $1.55 billion market cap.
The details aren't complete yet but it's still possible to put an approximate dollar figure on the current value of the common shares. To do that, it's noteworthy that less than two weeks ago, Streetinsider reported that Standard & Poors put a 'D' rating on C&J services' debt with recovery of the debt estimated at the higher end of the range of 50%-70%. That would indicate, roughly, that the total value of the company, once re-organized, would be maybe 65% of the $1.4 billion of debt converted ($900M), plus the current market cap ($60M) plus the $200 million from the rights offering. In total, the best guess for a post-reorg market cap of C&J Services may be in the ballpark of $1.2 billion.
Since the current common shares will likely be only exchanged for warrants, those warrants are in total worth C&J's current market cap of $60 million. The asset underlying the warrants is 6% of the $1.2 billion post-reorg company, or $72 million, and the strike is 6% of $1.55 billion, or $93 million.
For a Black-Scholes calculation to estimate the current value of the shares, I'm going to wildly estimate the future volatility at 60% based on C&J's past volatility, the de-levering of the balance sheet and the price of oil being in flux. Based on that, C&J's current market cap should be about 38 million or about $0.32/share vs. the current $0.50/share. I'll also note that the current $60 million value of the warrants would only be about 15% less than actually buying the same stake in the underlying shares once the re-org is completed. C&J Services common stock currently appears overvalued based on the current details available, but the re-org and associated uncertainty might make the shares volatile in the short term. Comments and differing opinions are certainly welcome.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: As always, while I have no current position in CJES nor plans to initiate a position within 72 hours, I reserve the right to take any position at any time.
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