During the last several years, I have traded or invested in Bonanza Creek Energy Inc (NYSE:BCEI) a few times. Mostly recently, I have been monitoring the BCEI's bankruptcy case, particularly after Bill Barrett Group (BBG) expressed an interest in purchasing BCEI and subsequently when the ad hoc equity committee attempted to fight the pre-packaged bankruptcy negotiated by Management with holders of the majority of Unsecured Notes.
On April 7th, the Bankruptcy Court issued a Confirmation Order for Bonanza Creek Energy's Third Amended Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code ("Bankruptcy Reorg"). This warranted a closer look at the BCEI to see if there was any value in the Existing Equity.
The Bankruptcy Reorg allocates 4.5% of the New Common Stock and 7.5% warrants to the existing equity holders. This sounds good on the surface, but the devil is in the details and the details are not kind to the Existing Equity. The value of the New Common Stock and the Warrants is significantly below the current Equity Market Value of BCEI stock.
BCEI's stock initially spiked to an intraday high of $1.25 on April 7th after the Confirmation Order was announced, but settled at $.96, equal to an equity market value of $48.44 million. The stock continued to trade in that area on April 10th but is drifting lower on April 11th. For analytical purposes, I will assume the value of the New Common Stock and Warrants received must be in excess of $48 million for it to be a buy or hold. Anything meaningfully below this amount means the stock is a sell. Let's take a look.
Bankruptcy Reorg Terms
The Bankruptcy Reorg Terms may be found in the various document included in the 8-K filed on December 23, 2016 and the 8-K filed on April 7th containing the Confirmation Order and the Third Amended Joint Prepackaged Plan of Reorganization Under Chapter 11 of the Bankruptcy Code. The pertinent terms in calculating the value of the Bankruptcy Reorg to the Existing Equity are as follows:
- Existing equity receives 4.5% of the New Common Stock PRIOR to the dilution for the Warrants, the Management Incentive Plan ("MIP"), the Backstop Fee, and the Rights Offering.
- The General Unsecured Creditors of BCEI and its subsidiaries (the holders of the $800 million of Unsecured Notes) receive 95.5% of the New Common Stock PRIOR to the dilution for the Warrants, the MIP, the Backstop Fee, and the Rights Offering.
- The Warrants are for 7.5% of the New Common Stock PRIOR to the dilution for the MIP, the Backstop Fee, and the Rights Offering. The strike price for the Warrants is a post Bankruptcy Reorg equity value of $1.45 billion. These Warrants are well out of the money (see below).
- Management receives 10% of the New Common Stock post-dilution for the MIP and for the Backstop Fee but PRIOR to dilution for the Warrants and the Rights Offering.
- The Backstop Fee equals 6% of the Rights Offering amount of $200 million, or $12 million, based on a post Rights Offering ("Post-money") enterprise valuation of $500 million (see below) and is calculated PRIOR to dilution for the MIP and the Warrants.
- The Rights Offering will result in an equity raise of $200 million from the investors currently holding the Unsecured Notes. The New Common Stock issued under the Rights Offering will be priced at a 25% discount to the LESSER of A) the Plan value of equity or B) the implied post-money equity value assuming a $500 million enterprise value. Based on the valuation provided in the Bankruptcy Plan, the LESSER value will be B). Since there will be no debt post Bankruptcy Reorg (the new revolver is not drawn upon per the Plan projections) the Equity Value should roughly equal the Enterprise Value (ignoring the modest amount of cash on the balance sheet). Therefore, the Rights Offering would equal 40% of the Post-money Equity Value prior to the 25% discount. Factoring in the 25% discount, the shares issued under the Rights Offering would equal 53.33% of New Common Stock prior to the dilution for the Warrants.
The following table calculates the Post-money ownership of the New Common Stock.
|Bonanza Creek Energy Inc|
|Post Bankruptcy Reorg Ownership|
|Rights Offering - Post-money Ownership|
|Equity Market Value Assumption Per Plan (millions)||$500|
|Rights Offering Proceeds (millions)||$200|
|Remaining Ownership Available for Allocation||46.67%|
|Pre-dilution Backstop Fee and MIP||Pre-Dilution||Backstop Fee Dilution||Post Backstop Fee||MIP Dilution||Post-MIP Dilution||Percentage Available for Allocation||Post Rights Offering Ownership|
|General Unsecured Creditors||95.5%||5.14%||90.83%||10%||82.57%||46.67%||38.53%|
|Backstop Fee - % of Rights Offering Proceeds||6%|
|Backstop Fee Allocation||$12|
|% of Remaining Ownership||5.14%|
As detailed in the table, 53.33% of the Post Bankruptcy Reorg New Common will be owned by the entities participating in the Rights Offering. These entities mostly purchased the Unsecured Notes well below par in the open market and then controlled the negotiation of terms with Management. Their willingness to enter a Backstop Agreement for the Rights Offering gave them significant leverage in the negotiations and the Bankruptcy Reorg Terms are very generous to them.
Although the ad hoc Equity Committee argued that the terms negotiated by Management were unfair to Existing Equity, the Bankruptcy Court disagreed and issued the Confirmation Order. It is not surprising, therefore, that the owners of the Unsecured Notes and participants in the Rights Offering secured almost 92% of the New Common Stock when the shares from the conversion to equity of the Unsecured Notes is included.
Valuation of the Existing Equity Post Bankruptcy Reorg
The Financial Projections for BCEI post Bankruptcy Reorg estimate 2018 EBITDAX at $182.6 million. This is used as a basis to calculate the equity value for BCEI in the table below. Please note the projections assume no debt outstanding at December 31, 2018, so the enterprise value is used as the projected equity value.
|Existing Equity Ownership Current Market Value (millions)||$48|
|Equity Market Value Post Bankruptcy Reorg|
|2018 EBITDAX Estimate||$182.6|
|Equity Value @ 15% Discount||$776|
|Existing Equity Post Bankruptcy Reorg Ownership||1.82%|
|Post Bankruptcy Reorg Value for Existing Equity (millions)||$14.09|
Because the strike price on the warrants is almost 2x the projected equity value of BCEI and the warrants have a term of only three years, I have not assigned any value to them. The conclusion is pretty stark. Even doubling the EBITDAX multiple to 10x (or alternatively doubling the EBITDAX assumption) would still result in BCEI being overvalued by more than 40% based on the current equity market value. BCEI is pretty clearly a sell at today's equity market value.
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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