Investors responded enthusiastically to Ultra Petroleum Corp's (OTCPK: UPLMQ) plan support agreement released on Nov.21. Shareholders and unsecured HoldCo noteholders will get equity and rights, while the holders of the privately placed notes and revolving credit facility will get newly issued debt and some cash. The new company will still be highly leveraged. Shareholders seem happy that they are getting the first step to a major recovery. Now they need higher energy prices.
Milestones Under the PSA
*Dec. 6-file reorganization plan and disclosure statement
*Jan. 20-court approves adequacy of the disclosure statement
*Mar. 17-court confirms the reorganization plan
*April 15-consumation of plan and exit Ch.11
The plan support agreement-PSA-has three different allocation equity and rights amounts based on the average closing price of the 12-month forward Henry Hub natural gas strip price the seven days prior to the rights offering. There is an allocation based upon Henry Hub price of above $3.65, between $3.25 to $3.65, and below $3.25. The unsecured HoldCo noteholders (6.25%'24 and 5.75%'18) get $1.412 billion worth of equity at all three price levels and current shareholders get the residual amount, which is diluted by the impact of the rights and the management incentive plan. The number of shares paid to shareholders varies at each of these three price points, but there no additional shares paid nor fewer shares paid, if the prices get further above or below $3.65 and $3.25. They also get rights. (See below).
As can be seen from the term sheet below, the plan value at a price of above $3.65 is $6.25 billion ($4.15 implied equity value), $3.25-$3.65 it is $6.0 billion ($3.9 billion equity), and below $3.25 it is $5.5 billion ($3.4 billion equity).
Since the current 12-month forward Henry Hub strip price is below $3.25, I will use the implied equity value from the table of $3.4 billion in determining the equity value per current share (Note: does not the value of the rights). The impact of the management incentive plan must also be factored in, which gives current management 3% of the new stock on the effective date of the plan. Using 31.8% as per table and 153.4 million shares outstanding, the equity value per current share is $6.83. [($3.400 billion x 0.97 x 0.318)/153.4 million] The current 12-month forward Henry Hub strip price is $3.079 (Dec'16-Nov'17), that would mean the equity received would worth less than using the valuation methods and assumptions from the company's analysis.
Using the implied plan equity value of $3.9 billion ($3.25-$3.65) the equity value per current share is $10.11 [($3.9 billion x 0.97 x 0.41)/ 153.4 million] and using $4.15 billion (above $3.65) it is $11.76. Of course, if the actual price for natural gas is much above $3.65, it would be worth.
In order to raise money to pay creditors, the plan includes a rights offer that will raise $580 million. The number of rights issued will be based upon the three price points, but the dollar amount raised remains the same. At each of the three price points, the price of the rights will be at a 20% discount from the plan value. In other words, at a price above $3.65, the aggregate rights holders will pay $455 million for $580 million worth of equity[$580 million-($625 million x 0.20)]; $3.25-$3.65, pay $460 million; below $3.25, pay $470 million.
Shareholders are getting 25% of the rights and HoldCo holders are getting 75%. At $3.65, the value of the rights per current share is just over $0.20 [($625 million x 0.20) x 0.25]/153.4 million shares; at $3.25-$3.65 the value is about $0.19; at below $3.25 it is $0.18. Of course if the price of natural gas is too low, the rights would have no value.
There is a backstop agreement. The parties to the agreement may get stuck if the price of natural gas and/or oil drops too far below $3.25. One of the reasons that the Henry Hub prices were used was to enable the backstop parties to hedge their potential liability.
The holders of the revolving credit facility with a $1.0 billion plus unpaid interest claims and the holders of the privately placed unsecured notes with a $1.46 billion plus unpaid interest claims are getting a pro rata share of $2 billion unsecured notes and cash to give them full recovery. The interest rates on the new notes with be set in the attempt to have them trade at par, which could mean a high coupon. If they trade at a discount to par, addition notes will be issued to give them full recovery. This explains why the term sheet uses $2.1 billion in post-petition debt instead of $2.0 billion.
I was surprised that the creditors would accept so much unsecured debt for recovery of their claims. I am also surprised that Ultra did not try to eliminate more debt and lower future interest expenses during bankruptcy. It will emerge from bankruptcy highly leveraged. At the below $3.25 price, the shareholder equity would be $3.4 billion and debt would be least $2 billion. In addition, there could be some new debt associated with a revolver that is to be determined under the reorganization plan.
The valuations assigned to prices below $3.25 and above $3.25 are metrics used to allocate stock and rights. They are not the actual estimated values. Clearly if natural gas is trading at $4.50 the valuation would be much higher and the valuation would be much lower if natural gas was at $1.75. It is interesting to note that the price of oil is not factored into allocation. It would be interesting to see in the disclosure statement what oil prices were assumed in the valuation.
Using a very crude analysis to determine a possible current value for the equity received (not including the value of the rights) I am assuming that the $3.4 billion is the valuation based upon a price just below $3.25 and the current 12-month forward Henry Hub strip price $3.079. The plan value per one cent change in gas price between the above $3.65 and below $3.25 is $18.75 million. [($4.15 billion-$3.4 billion)/($3.65-$3.25)]. At current forward prices, the valuation would be reduced by $319 million. Therefore, instead of the current equity value received per current shareholder of $6.83 it would be $6.20 [($3.4 billion-$319 million) x 0.97 x 0.318]/153.4 million.
Using the latest 3rd Q. EBITDA of $131million and using a back of the envelope valuation of 4 quarters of the same EBITDA and multiples of 5x and 7x, I would estimate the value at only $2.62 billion-$3.67 billion. Using latest monthly operating report EBITDA of $46.9 million and assuming the same EBITDA for 12 months and multiples of 5x and 7x, I would estimate the value at $2.814 billion to $3.94 billion. (Natural gas prices so far have averaged less in November compared to October.)
Clearly Ultra's management places a much higher value on the company. One has to wonder if the fact that the CEO, Michael Watford, owns 3,981,265 shares influenced the valuation. Unlike some other bankruptcy cases where shareholders assert that management is siding with creditors, is Ultra's management trying to issue fewer shares to the HoldCo unsecured noteholders and more to shareholders by establishing a very high value for the company?
October Monthly Operating Report
On Nov. 21, they filed their monthly operating report (docket 733) with court. These reports do not follow GAAP and are often poor quality.
Natural Gas Prices
There continues to be wide swings in the price of natural gas at both the Henry Hub, which is being used in the PSA, and the Opal Hub, where most of their operations use.
On Nov. 11 Ultra Petroleum and Corenergy Infrastructure Trust Inc. (NYSE: CORR) agreed to a settlement (docket 710 ). Ultra agreed to assume the lease of the Pinedale liquids gathering system, which Ultra was trying cancel in bankruptcy court in an attempt to save money.
Clearly shareholders are being helped by having a CEO with a major equity stake in a company and the fact that there are no secured creditors trying to use a credit bid to buy assets under a forced sale of their collateral.
Earlier in the year, I suggested a sale UPLMQ based on the extremely low price of natural gas at that time. The unseasonably hot early June caused energy prices to soar, which came just in time for UPLMQ. Natural gas and oil prices have had some wide swings since then. When the price UPLMQ soared higher than, in my opinion, was justified by the level natural gas prices, I started shorting UPLMQ around $4.50 and continued shorting the stock, including on Nov. 22.
I think that the company is unrealistic with their valuation, especially since the new company will have very high leverage and interest expenses. Using a crude valuation of the $6.20 for the new equity received and $0.18 for the value of rights received per share based upon current natural gas prices and the company's valuation projections, UPLMQ is over-priced. I would recommend selling UPLMQ unless an investor expects higher natural gas and oil prices in the near future.
Disclosure: I am/we are short UPLMQ.
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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