Pioneer Energy Services Goes Under, But Leaves Shareholders Something

Summary

• The management team at Pioneer Energy Services filed for Chapter 11 bankruptcy protection for the firm.
• This move has been a long time coming, but the pain cannot be adequately stated for those affected.
• In this rare case, common shareholders can actually walk home with some value, but it's still a bittersweet moment.
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March 2nd brought what appears to have been some much-anticipated news for shareholders of Pioneer Energy Services (PES). The moderately-diversified energy services firm announced that it had decided to file for bankruptcy protection. Generally speaking, this kind of move results in a compete wipe-out for common shareholders, but management was able to strike a deal that keeps existing stockholders of the company with at least a small stake in the firm. It's not much and will more likely than not serve more as a band-aid would a gaping sword wound than it would an alleviation for past pain. Even so, this bittersweet development for shareholders does warrant proper consideration.

The pain has been building

A first look at Pioneer's financials over the past few years illustrates a company that has been struggling, but not necessarily one that was definitively on the way out. The market, though, was especially perceptive. For months, the market has been expecting a bad outcome for the firm. In fact, shares of the firm were trading at less than $0.10 apiece since late September of 2019. That's never a positive sign.

Taken from Pioneer Energy Services

The reason why, from an initial fundamental glance, this looks odd is because the company's financials, while not ever really good, did not show a continued and consistent deterioration over time. In the image above, for instance, you can see that the company's revenue tanked from 2014 through 2016. But its financial condition did improve nicely after that at the top line. Net losses persisted through 2018, but operating cash flow was mostly positive.

Taken from Pioneer Energy Services

Even heading through 2019, the picture in some ways was looking up. As the image above illustrates, revenue had mostly stabilized in the first three quarters of the firm's 2019 fiscal year. Its net loss did worsen, but operating cash flow, while far lower in 2019 than 2018, was still positive. Gross debt remained flat at $475 million, though net debt fell due to decreasing cash balances. As the image below illustrates, the company's drilling services division even started seeing some improvements. Margins on its units improved in 2019 versus 2018. The one pain point here was a continued worsening of the company's utilization rate.

Taken from Pioneer Energy Services

Perhaps the only real sign of impending doom was the leverage. At the end of the business's third quarter last year, it was in compliance with all of its covenants, but its situation was worsening some. While net debt worsened only marginally, the company's EBITDA took a beating. In the 12 months ending in the third quarter last year, EBITDA totaled just $47.64 million. This was down from the $68.88 million seen the same period a year earlier. This brought the firm's net leverage ratio from 6.49 to 9.38 in the matter of 12 months.

Taken from Pioneer Energy Services

Where this leaves investors now

In the vast majority of cases, common shareholders walk away with nothing when a firm files for bankruptcy protection. Perhaps it is good luck, but more likely it's because Pioneer's financial situation was not as obviously horrible as it could have been that this time was different. You see, according to the bankruptcy filing documents issued by the business, all of its secured claims, ABL claims, and pre-petition term loan claims will see a full recovery as a result of the firm's restructuring. The holders of its notes, however, will see a recovery of only 4% to 32%, depending on a variety of factors.

As part of its bankruptcy filing, Pioneer was able to arrange for $75 million in DIP (debt-in-possession) financing. It also has received commitments for $200 million in additional post-emergence financing. New secured bonds issued by the firm will carry a term of five years and they will carry a hefty interest rate of LIBOR plus 9.5% per annum. During this process, the company will see $300 million of its existing notes turn into equity in the new business. The $200 million in post-emergence financing will come from mostly parties that are already tied to the firm.

According to the data provided, certain existing noteholders have agreed to provide $78 million in new debt as part of this arrangement. The firm also intends to hold a rights offering for $125 million, all of which will be convertible into new equity in the future at a rate of 75 shares per $1,000 in principal. $1.795 million of this will come from the firm's existing management team. The largest chunk will come from $116.121 million from the noteholders who are seeing their debt convert into equity. These holders, excluding the $116.121 million in financing that may convert in the future, will also walk away with 94.25% of the new equity in the firm.

This is where common shareholders come in. If they do not fight the restructuring and instead support it, they will walk away with 5.75% of the equity in the new business. If they resist, this will be decreased to nothing, with the noteholders getting all of the equity. None of this includes the dilution associated with the employee incentive plan, the new convertible bonds, and the subscription rights. They will, however, also receive the right to the new convertible bonds in the amount of $7.084 million.

Outside of the $125 million, there's an additional $10 million in value being awarded. The "Ad Hoc Noteholder Group" that elected to backstop the refinancing arrangement will receive, as a reward, 8% of the value of the new convertible bonds, equivalent to $10 million, in the form of a premium. This brings the total value of new convertible bonds up to $135 million. These new convertible bonds, it should be specified, pay out a distribution of 5% per annum during their 5-year, 6-month lifespan. However, these payouts are not in cash. They are instead in the form of additional units.

Takeaway

Pioneer has elected, as part of this restructuring arrangement, to deliver at least a little residual value to existing common shareholders in the business. What this will ultimately mean is too early to tell since there are countless moving parts. At the end of the day, though, as bittersweet as it might sound, at least common shareholders aren't walking away with nothing at all.

Analyst’s 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.