Goodrich Petroleum Is Running Out Of Time

| About: Goodrich Petroleum (GDP)

Summary

Goodrich needs the exchange offers to go through to avoid bankruptcy. Its interest costs are estimated at over 50% of revenue currently.

Even with 100% participation for the exchange offers (including the new second-lien notes allowing interest deferral), Goodrich may need $63 oil to break even and maintain production in 2017.

It is in a challenging position with no hedges and limited liquidity. Production is likely to decrease significantly as there is likely minimal or no capital expenditures in 2016.

Common shares probably need $80+ oil to see $1+ again even with successful exchange offers due to the dilution combined with falling production levels.

Despite the limited potential value of the common shares, it appears to make sense for the unsecured holders to tender. Current asset valuation probably won't cover more than secured debt.

Goodrich Petroleum (NYSE:GDP) has made a concerted effort to avoid bankruptcy via a series of debt and preferred exchange offers. However, it appears that time is running out for it. The current exchange offers are falling well short of the participation rates that Goodrich needs. Without the exchange offers going through, a bankruptcy filing appears inevitable as interest costs are over 50% of Goodrich's revenues at $40 oil. Even if the exchange offers do pass, Goodrich still will be in a challenging position without an oil recovery to around $60+.

Goodrich's common shares now trade under the ticker GDPM.

Exchange Offer Is Stalling Out

Goodrich's exchange offer appears to be falling short of the minimum participation levels that it required. Goodrich required 95% of its unsecured notes to be tendered, along with 50% of its preferred shares. Approximately 60% of the unsecured notes were tendered by February 25 and there has been no additional progress (actually slightly negative progress) by March 16. This leaves Goodrich well short of 95%. There has been some progress with the preferred share exchange offer, although with only 40% tendered by March 16; that exchange offer is also short of its target.

% Tendered

Feb 25

Mar 2

Mar 16

Unsecured Notes

60%

60%

59%

Preferred Shares

35%

36%

40%

The decision not to make interest payments has not resulted in an increase in participation levels, and I would have to consider it unlikely that 95% of the unsecured notes will be tendered at this point.

Goodrich At $40 Oil And Maintaining Production Levels In 2016

As an exercise, I have modeled out what Goodrich's 2016 might look like if it maintains production levels and manages to get full participation on its various exchange offers.

Goodrich's Q3 2015 production was lower than its previous guidance by around 725 Barrels of Oil Equivalent Per Day (BOEPD), so I'm revising its production levels downward to 5,500 BOEPD as the base level entering 2016. Previous guidance indicated that Q4 2015 production might average around 6,100 BOEPD.

At 5,500 BOEPD, Goodrich would generate approximately $55 million in revenue with $40 WTI oil and $2.50 Henry Hub natural gas in 2016. I've assumed that Goodrich's production becomes somewhat more heavily oil-weighted in the future, if it concentrates on drilling in the Tuscaloosa Marine Shale [TMS].

Type

Barrels/Mcf

Realized $ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

1,207,800

$40.00

$48

Natural Gas [MCF]

4,831,200

$1.50

$7

Total

$55

Goodrich would still end up burning $25 million in 2016 at $40 oil if it wanted to maintain production levels at 5,500 BOEPD, even if it only paid interest on its credit facility (with 100% of unsecured notes exchanged in the offer and the second-lien interest deferred). I've also assumed a 15% reduction in cash G&A from the Q3 2015 run rate. There were some comments in past articles that indicated a belief that mid-$40s oil would be okay for Goodrich, but I believe that number assumes relatively favorable well results and also doesn't include G&A. Goodrich as a company probably still needs close to $60 oil to break even and maintain production levels, even if it can eliminate most of its interest costs.

$ Million

Lease Operating Expense

$12

Production and Other Taxes

$3

Transportation and Processing

$4

Cash G&A

$15

Cash Interest

$1

Maintenance CapEx

$45

Total Expenses

$80

Goodrich's credit facility has a covenant that limits first lien debt to 1.25x EBITDAX, so with EBITDAX estimated at $21 million at $40 oil in 2016 and $27 million already borrowed under the credit facility, Goodrich would potentially violate that covenant by the end of 2016 even without any additional borrowings. Thus, maintaining production doesn't appear to be an option.

Potentially No Drilling In 2016

Goodrich hasn't disclosed its 2016 capital expenditure plans, but there is probably a decent chance of there being no current plans for any drilling in 2016. The IRRs that it estimates for its Tuscaloosa Marine Shale wells (700 MBOE type curve) range from 10% to 14% at $45 oil and are likely 10% and under with $40 oil. Goodrich claims decent returns on its Haynesville Shale wells at strip prices, but the payback period is still 2+ years, which would be too lengthy for a liquidity challenged company. The challenge for Goodrich is that without drilling in 2016, its debt per flowing barrel will probably end up in the $40,000 to $50,000 range by the end of the year even if it manages to clear out 100% of its unsecured debt.

2017 Outlook

Without a very near-term recovery in oil prices, Goodrich is likely facing a significant reduction in production levels. No drilling in 2016 may lead to its 2016 exit rate falling significantly below 5,000 BOEPD. If spends a limited amount of capital expenditures in 2016 (such as $20 million), perhaps its 2016 exit rate will be close to 5,000 BOEPD.

I've therefore modeled 2017 at 4,800 BOEPD and assumed minimal interest costs, since it will very likely have restructured if its exchange offers do not get consummated. At that level of production, Goodrich may be able to reach $69 million in revenue at $60 oil and $3 natural gas.

Type

Barrels/Mcf

$ Per Barrel/Mcf

Revenue ($ Million)

Oil (Barrels)

998,640

$60.00

$60

Natural Gas [MCF]

4,520,160

$2.00

$9

Total

$69

Goodrich would appear to have $3 million in negative cash flow at $60 oil if it wants to maintain production at 4,800 BOEPD. Its breakeven point would be roughly $63 oil in this case.

$ Million

Lease Operating Expense

$11

Production and Other Taxes

$4

Transportation and Processing

$3

Cash G&A

$15

Cash Interest

$1

Maintenance CapEx

$38

Total Expenses

$72

This does show that it is rather essential for Goodrich to get near full participation on its exchange offers. If it decides to retender the offer and accept a lower participation rate that results in its interest costs being reduced by around 75% from current levels, Goodrich would require around $70 oil to reach breakeven.

Valuation With A Successful Exchange Offer

If there is 100% participation of the unsecured bonds, it will result in another 184.4 million common shares being added. Full participation of the preferred shares would result in an additional 59.7 million common shares being added. This would result in Goodrich having approximately 305 million common shares outstanding along with $202 million in debt.

Goodrich at $65 oil and $3 natural gas would produce around $41 million EBITDA, which would make its common shares worth around $0.14 each based on a 6x EV/EBITDA multiple. Goodrich would probably trade higher if it survives and oil then reaches $65, but this does show that it would still have a substantial amount of debt to EBITDA after the exchange offers.

At $75 oil, Goodrich may be able to start growing production again, and its shares would be worth around $0.34 based on a 6x EV/EBITDA multiple. I think Goodrich probably needs $80+ oil for its common stock to have substantial value. At that level, we may see renewed interest in the TMS, which has been essentially abandoned in terms of new wells since mid-2015. Much of Goodrich's potential value is tied to its undeveloped TMS acreage.

Conclusion

Goodrich Petroleum appears to have a high chance of a near-term restructuring as its exchange offers are falling short of the required participation levels. Even with 100% participation, Goodrich faces the prospect of burning $25 million cash in 2016 if it wants to maintain production levels at $40 oil. With its current interest costs, Goodrich would burn cash even if it has zero capital expenditures.

Therefore, it is likely to file for restructuring if the exchange offers don't meet the required participation levels. If the exchange offers do go through, it is still likely to have limited capital expenditures in 2016 and have significantly reduced production levels entering 2017. Goodrich's 2017 breakeven point in such a case is estimated at $63 oil. The common shares probably need $80+ oil to start having substantial ($1+) value, as then Goodrich's TMS holdings will have some potential value again.

Despite Goodrich's common shares having relatively modest potential value (absent $80 oil) even with successful exchange offers, I think unsecured noteholders would probably be better off tendering their notes. In the current environment, there is a good chance that Goodrich's assets would be valued at less than its secured debt, which would leave nothing (or a token amount) for the unsecured debt. For the unsecured debt to get more than a minimal return would require Goodrich's undeveloped TMS acreage to have some value. With essentially no activity taking place in the TMS at this point, undeveloped TMS acreage only has a minimal amount of speculative value currently.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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