Jones Energy: High Chance Of Restructuring Within Several Months

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About: Jones Energy, Inc. (JONE)
by: Elephant Analytics

Summary

Jones Energy's Q3 2018 results were decent, with production at the high end of guidance (although with a lower oil percentage).

Cash burn remains substantial, with Jones's cash balance dropping $54 million to $94 million during the quarter.

With $42 million in cash interest payments due on March 15 and April 1, it may restructure before then, and is unlikely to make those interest payments.

Jones has appointed a new independent director with expertise in bankruptcy and restructuring.

Jones Energy (JONE) appears to have a high chance of restructuring during the next few months. Its cash position has gone from $231 million at the end of Q1 2018 to $94 million at the end of Q3 2018 (including $25 million going towards paying down its revolver). It is expected to burn a significant amount of cash in Q4 2018 as well, and probably won't make its March 15, 2019 interest payments. There may be a restructuring agreement before then as Jones continues to have discussions with unsecured noteholders.

Q3 2018 Results

At the midpoint of Jones's Q3 2018 guidance, it expected approximately 20,600 BOEPD in production, with oil representing 29% of that total production. I estimated that Jones would generate $57 million in revenue before hedges (and $41 million net of hedges) based on that production level.

Jones's actual results ended up at 21,750 BOEPD in production, but only 26% oil. Total production was around 6% higher than the midpoint of guidance, but oil production was around 5% lower than the midpoint of its oil production guidance.

Jones's realised prices for oil, NGLs and natural gas were a bit higher than I estimated, so it ended up with around $60 million in oil and gas revenue before hedges, and $44 million net of hedges.

It appears that Jones's costs (such as lease operating expenses and G&A) were also a few million higher than I anticipated, so the result was $20 million EBITDAX (including the impact of hedges) for the quarter, in line with my expectations.

Declining Cash Balance

The challenge for Jones Energy is that $20 million EBITDAX for a quarter isn't very much when dealing with just over $1 billion in outstanding debt. That EBITDAX number is also before capital expenditures ($39 million impact on cash flow) and cash paid for interest ($32 million) for the quarter, which contributed (along with working capital changes) to Jones's cash balance declining $54 million from $148 million at the end of Q2 2018 to $94 million at the end of Q3 2018.

Q4 2018 Outlook

Based on current strip prices and Jones's Q4 2018 production guidance, I estimate that it will generate around $52 million in revenue before hedges and $38 million in revenue net of hedges.

Jones is expecting total production in Q4 2018 to decline around 8% compared to Q3 2018 and its oil production to decline around 12%, although some of its Q4 2018 completions will mostly affect 2019 production.

Barrels/Mcf $ Per Barrel/Mcf (Realized) $ Million
Oil 450,800 $63.00 $28
NGLs 565,800 $24.00 $14
Natural Gas 4,871,400 $2.00 $10
Hedge Value -$14
Total Revenue $38

Partly due to the decrease in production volumes, Jones's EBITDAX may decline to around $16 million in Q4 2018. With around $40 million in capital expenditures, it will have around $76 million in cash expenditures, leading to $38 million in estimated cash burn.

A smaller proportion of Jones's interest payments are scheduled for Q2 and Q4, so its estimated interest costs are reduced compared to Q3.

$ Million $ Million
Lease Operating Expense $10
Production and Ad Valorem Taxes $3
Transportation And Processing $1
Cash G&A $8
Cash Interest $14
Capital Expenditures $40
Total Expenses $76

With $38 million in estimated cash burn, Jones's cash balance is expected to be reduced to $56 million.

Notes On Restructuring

With Jones's projected cash balance declining to fairly low levels by the end of the year, I believe there is a high chance of restructuring by early 2019. Jones has around $42 million in cash interest payments due on March 15 and April 1, and I think that it is unlikely to make those payments.

As another sign that Jones Energy may restructure soon, it recently appointed L. Spencer Wells as a one of its new independent directors. Wells is a founding partner of Drivetrain Advisors with bankruptcy and restructuring expertise.

Conclusion

Jones Energy has been dealing with substantial cash burn, with its cash position declining from $231 million at the end of Q1 2018 to $94 million at the end of Q3 2018 (although it paid down the $25 million remaining on its revolver during that time). It is projected to have substantial additional cash burn in Q4 2018 and looks unlikely to make its next bond interest payments on March 15, 2019. It may come to a restructuring agreement before that, likely wiping out the common and preferred shares (last trade on the preferred shares was at 4% of par).

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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