Sandridge Energy (OTCPK:SDOC) announced on Monday morning that it has filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Texas. The embattled oil & gas producer comes after a slew of recent peer bankruptcy filings including Linn Energy (LINE), BreitBurn Energy Partners (BBEP) and Goodrich Petroleum (GDPM), formerly trading under (OTC:GDP). Sandridge Energy has had liquidity issues recently and utilized a 30-day grace period in February for outstanding interest payments, although these payments were made before the expiration of the grace period and the firm avoided a default at that time. Now the company is seeking to restructure its massive debt load as the weak oil & gas market combined with a tough credit environment has forced the company into bankruptcy. Along with the bankruptcy filing, Sandridge Energy has announced a rather complex restructuring support agreement in which the current preferred and common stock will be cancelled, amongst other things. The restructuring support agreement has received the approval of a number of creditor groups and likely fares well even in the case of an objection by common or preferred stockholders during the bankruptcy process. This restructuring support agreement allows Sandridge Energy to substantially reduce its debt load and if approved by the court, it should pave the way for the company to emerge from bankruptcy protection as a stronger and better capitalized firm.
Examining the Restructuring Support Agreement
Even while Sandridge Energy's assets substantially exceed its debts, the company is having liquidity issues and the value of its oil & gas assets may be worth a lot less than the carrying value on its balance sheet. The restructuring support agreement that was announced in conjunction with the Sandridge Energy's bankruptcy has been approved by a majority of claims from the company's first lien credit facility (98% approval), senior secured second lien notes due 2020 (79% approval) and the company's senior unsecured notes (55% approval). In its 8-K announcing the restructuring support agreement, Sandridge Energy noted the following treatment of various creditors and equity holders:
"First Lien Credit Agreement Claims. Claims under the First Lien Credit Agreement will receive their proportionate share of (NYSE:A) $35 million in cash and (NYSE:B) participation in a new $425 million reserve-based revolving credit facility (the "New First Lien Exit Facility").
Second Lien Note Claims. The Second Lien Notes will receive their proportionate share of $300 million of new mandatorily convertible debt, on terms described further below (the "New Mandatory Convertible Debt"), and 85% of new common stock in the reorganized Company (the "New Common Stock"), as fully diluted by the New Mandatory Convertible Debt measured through the conversion date, subject to dilution by (NYSE:I) new warrants (the "Warrants"), (ii) a rights offering (the "Rights Offering"), and (NASDAQ:III) a customary employee incentive plan (the "Employee Incentive Plan"). Holders of Second Lien Notes may also be entitled to participate in the Rights Offering under specified circumstances.
General Unsecured Claims. The Company's general unsecured claims, including the Unsecured Senior Notes, will receive their proportionate share of $10 million in cash, 15% of the New Common Stock, as fully diluted by the New Mandatory Convertible Debt measured through the conversion date, subject to dilution by the Employee Incentive Plan, the Rights Offering, and the Warrants, (NYSE:C) the Warrants, and (NYSE:D) the cash proceeds of a new $35 million non-recourse note secured by mortgages on certain real property (the "New Building Note"). Holders of general unsecured claims, including the Unsecured Senior Notes, may also be entitled to participate in the Rights Offering under specified circumstances.
Preferred and Common Stock. The Company's existing 7.0% and 8.5% convertible perpetual preferred stock and common stock will be canceled and released under the Plan without receiving any recovery on account thereof."- Sandridge Energy 8-K filing
This plan has a number of unique aspects, however it is clear that the majority of the equity will be going to the second lien noteholders. While the unsecured creditors would receive a distribution under this plan, it would constitute a major haircut. Sandridge Energy has agreed to mortgage its headquarters with the proceeds being made a distribution to the unsecured creditors. The company has noted that it has received commitments to purchase this $35mm mortgage note for $20mm. Sandridge Energy is also issuing share warrants to the unsecured creditors and plans on holding a rights offering for up to $150mm that should bring in some well-needed capital.
The restructuring support agreement has been approved by a majority of three key parties and while it involves a significant haircut for the unsecured creditors and hard to value equity considerations for both the second lien and unsecured creditors, it stands a high chance of success in front of the bankruptcy court. The firm is past any point of salvaging value for the common or preferred stockholders as its creditors are taking major impairments. In the event of an oil & gas turnaround, Sandridge Energy could be in an interesting position with a reduced debt load, but for now common and preferred stock holders will, in all likelihood, be wiped out.
Jordan Flannery has been a contributor to Seeking Alpha since 2012 and has covered a wide range of companies. To stay up to date with his latest Seeking Alpha articles, please click on the "Follow" button at the top of this article and consider subscribing to real-time alerts. Thanks
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