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  • NAVigating Through The B.S. At SandRidge Energy [View article]
    ""From Raw's link above I went to MPO "

    I have not looked deeply but it looks like the banks forced MPO to "term out" it's credit line. This is becoming standard for small firms. Bank syndicates for credit lines are not set up to for distressed assets. They are money market desks basically. So banks have been vastly reducing credit lines and force energy firms to selling 2-3rd lien debt to higher risk buyers. In the end the net to firm in extra capital is not a lot I have found...
    May 24, 2015. 12:32 PM | 1 Like Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]
    ""In a BK, all stakeholders submit claims and the court decides how to allocate ownership for the restructured entity, assuming it was allowed to reorganize under Chapter 11 rather than be actually liquidated under Chapter 7. The bank, which is secured, would foreclose on the properties they have loaned against, and that would reduce the proceeds/shares to the unsecured creditors, preferred shareholders and common shareholders.""

    Just to get a bit deeper into this, if a firm decides to continue to PAY the secured creditors in Chap 11, and they can, they are not considered "impaired". If you are not impaired you are not part of the creditors committee to decide the exit plan of the firm. This falls to what's called the fulcrum security, in SD's case would be the unsecured debt class. Contracts can and are honored in CHap 11. If the secured bank line is large many times it is converted to DIP loan and has super priority. But SD likely would have a DIP outside of bank lines.

    Management then has an 18 month exclusivity period to present a plan of recovery. Creditors vote on that of other options. Courts favor plans of normal exit.

    Importantly the valuation period (cutting up the pie) is not done until the very end. In some cases years afterward. A lot can happen in that period. But a full blown Chap 11 is very expensive and eat up the lower classes worth first, so out of court transactions are a fraction of the costs UNLESS then is enough benefit to void and cancel high cost contracts.

    In SD's case, not that I think they are a full blown BK candidate at this point, would not serve them and creditors any good from a full blown Chap 11 unless there is problem in doing debt swaps if that is decided. These days PE funds like Blackstone etc, have excellent work out areas versus banks that rarely do. Sometimes a pre-pack is needed because a vote to change the indenture takes a 90% out of court and only 66% in court. It is almost impossible to get a 90% vote. A 66% vote forces laggers into the new indenture agreement.

    I will say most swaps of tender nature into a new higher class don't offer a large change in the coupon or principle reduction. So it's unlikely a swap of this nature would not save SD a lot in interest costs. What it does do is generally is relief total debt covenant pressures or push maturities out Firms like Arch coal with bonds at $15 can get large principle reductions, but SD bonds are $63.

    In the end it is going to take a pick up in cash flow and more equity somehow. It will be mostly band aids until then it seems to me. But at least they do have band-aids.
    May 24, 2015. 12:18 PM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]
    Arch Coal is also in the middle of trying to organize a debt swap out of court. Management of all these firms should be encouraging ad hoc committees if they are serious about surviving.

    I have been involved in a few of these over the years. I take them every time since I usually am late and have a better cost basis. Being the "biggest stick" if a firm files in not a small issue I have found and I follow the "big guys" every time on these swaps that put their own capital up in legal fees.

    ""Their new CEO is former Goldman so also should be very familiar with presentation as well as corporate finance""

    Then he clearly should have known a $50m swap would downgrade the debt and kill the stock in the process. This swap is 1% of debt and the effects were worse than the results and drove down debt levels, possibly not unintended. It sets up a cheaper future possible deal for SD.

    ""I have no idea why management does not report all of its numbers net of the royalty trusts since that is the economic reality.""

    There is so much within GAAP that is counter to really understanding the viability of a company as you know. Warren Buffett understood this 40 years ago and rarely uses it as a guide.
    May 24, 2015. 11:57 AM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    The tide is out and "liars standing over holes" is becoming quite clear...Richard Ziets addressed the problem on some quick math:

    ""The company's capex in 2014 (including the drilling carries) exceeded $1.6 billion. This represents an outspending of approximately $0.8 billion relative to the company's Adjusted EBITDA over the same period.

    One would expect that the outspending of ~$0.8 billion, combined with a ~55% rate of return on the $1.6 billion investment, would generate a substantial increase in the company's PV-10 value from year-end 2013 to year-end 2014. (I am using 55% as SandRidge has recently indicated that the IRR estimate should be reduced by ~10% to reflect the cost of saltwater disposal). In total, the increase in the PV-10 should be over $1.6 billion.

    However, the actual increase in the PV-10 was much lower. After adjusting for the change in commodity prices and future producton costs, net asset sales, revisions of previous estimates, and cash G&A, the PV-10 increased by only $910 million over the year (table below).

    While this is obviously a very rough calculation, the massive difference between the expected increase in the PV-10 and the actual increase in the PV-10 is difficult to reconcile. However, it would be reconciled if one were to assume that the drilling program is generating a 0%-10% return at the asset level. It is difficult not to ask oneself whether the IRR had been over-estimated or dissipated somewhere on its way to the corporate bottom line.""
    May 23, 2015. 04:38 PM | 1 Like Like |Link to Comment
  • Peabody Energy: Unfavorable Hedges Obscure A Solid Underlying Business [View article]

    Thanks for the update. BTU has a junior sub bond trading 27% of par that has caught my eye and trying to figure a hedge. Your DD helps to clearly whether BTU is binary or not.
    May 23, 2015. 02:46 PM | Likes Like |Link to Comment
  • Alpha Natural Resources - A Stock Of Choice For Risk-Taking, Long-Term Investors [View article]
    From Barrons on ANR bonds that now sell in the mid teens ($150 per $1000 par):

    Recoveries to ANR fixed income securities seem bleak given the potential size of a DIP [debtor-in-possession financing], the limited list of saleable assets, and no conceivable plan of emergence given negative mine-level unlevered cash flow and large SG&A and legacy expense. However, if the company files with a large cash balance, it could leave open the possibility for recoveries on the term loan and second lien notes to exceed current levels
    May 23, 2015. 02:42 PM | 1 Like Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    SDRXP at 25% of par with the unsecured at 60-65% of par has tipped the risk reward to the preferreds at this point. This is a steep discount as far as parts in the capital structure go. But SD is a tad different in that the unsecured basically makes up it's capital structure and have assets backing them (not totally unsecured). So the bonds will trade stronger than normal.
    May 23, 2015. 12:03 PM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    I had bought the notes some ago and since had sold them. But they seem to be holding up very well trading not far off $70. I am rather surprised. I think the fact there is very little above these unsecured bonds and the fulcrum security at this point is important. It's what I hunt for in distressed bonds. It's nice to be the guys running the credit committee. Ask Eddie Lambert ;-))

    The market cap of the debt (secured at 100% + unsecured at 60%) roughly $2.2b....what's your thought of that valuation?
    May 23, 2015. 11:59 AM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    "The main point that is important for readers to realize at the top is that SD's balance sheet overstates the equity piece by $1 bln + and that everything that flows through their financial statements has to net out the NCI to present an accurate picture."

    The brutal truth.
    May 22, 2015. 08:04 PM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    "'Might be misleading to calculate book value of SD by netting out the preferred and debt at par""

    If you are computing the equity value for the common, this is exactly what you do....assuming all classes above you in the capital structure at par. Since if they file this is the starting framework anyway.
    May 22, 2015. 08:03 PM | Likes Like |Link to Comment
  • NAVigating Through The B.S. At SandRidge Energy [View article]

    Excellent work, thank you.
    May 22, 2015. 09:21 AM | Likes Like |Link to Comment
  • SandRidge Energy: Debt-For-Equity Swaps Are A Trader's Paradise [View article]

    OK...thank you. I was thinking on the industry aggregate but I get your point. I basically was in the habit of taken SEC pricing Proven reserves and hair-cutting it 50% right off the bat....
    May 21, 2015. 04:27 PM | Likes Like |Link to Comment
  • SandRidge Energy: Debt-For-Equity Swaps Are A Trader's Paradise [View article]
    Raw Energy,

    Curious why you would feel Q1 would be the worse...I don't put too much weight on PPE prices they quote in the SEC docs due to stupid $91 pricing. But..

    1) PV10 strip pricing from year end is up 25% now.

    2) Bank reviews have likely happened and most write-downs on done on a year end review (due to cost) and it's back to normal depreciation levels now.

    3) Oct bank reviews likely are not as much a factor if strip remains the same.

    What probably IS a problem is to see if cap ex and costs in general are reduced as promised. I think the name of game now is on the cost side and if energy price get better it's luck, not skill on all our parts. But I don't want to pay for someone else good luck upfront.
    May 21, 2015. 03:42 PM | Likes Like |Link to Comment
  • Linn Energy: The Current Yield Hypnosis [View article]
    Richard thanks again,

    Selling to $200m in stock to retire bonds at 90-95% of par doesn't make a lot of sense to me. Selling $200m to build cash war pile does. Clearly with $10b in debt the firm needs a massive change in fundamentals over the next few years to deal with a debt load that size.

    But you have to assume creditors are starting to organize in the background and managements are starting to get scared.

    What is your feeling on Royalty deals sold? LINN last one was badly priced. But PWE's recent one was better shopped. This of course is "debt" without incurring it on the balance sheet...PWE raised $300m+
    May 21, 2015. 12:41 PM | Likes Like |Link to Comment
  • J.C. Penney's Stock Is Priced For A Recovery, Not Bankruptcy [View article]
    KSS, removing working capital changes, produced about $470m in free cash flow (after cap ex) last year (2.5% FCF yield). They had $19b in sales and gross margins and SGA similar % to JCP (JCP's is higher of course).

    JCP burned about $400m in FCF removing working capital changes (inventory). Which says to me they are going to have to increase sales to $14-$15b to be FCF neutral. I am not sure cutting is going to be effective at this point since they have levered up to a point they are going to have a very difficult time downsizing. Their debt load it too large.

    If it appears to me they will realistically burn cash until the markets shut them off and they will seek bankruptcy......the debt and recovery has bought them time. But it's too little too late and in total was poorly conceived years ago, taking on more than $4b in new debt versus immediately downsizing. To assume their margins are going to be dramatically better than any of their competitors is a bull's pipe dream. Forget $14-$15b in sales I feel, that's long history. $1.2b in EBITDA? It would take a miracle.
    May 19, 2015. 11:52 PM | Likes Like |Link to Comment