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Bonanza Creek: Yes It Is Still Bankrupt

|About: Bonanza Creek Energy, Inc. (BCEI)
Summary

BCEI is currently trading like a company that is not bankrupt and subject to equity cancellation. Investors need to be warned that the company is in bankruptcy.

The trading price is beyond the soon to be approved court value of .42 cent per share and presents a danger with the 2% after dilution conversion rate.

Certain stakeholders are trying to prevent equity from receiving anything.

Bonanza Creek: Yes it is a bankrupt company

Bonanza creek (NYSE:BCEI) has been trading like it is a company that is not bankrupt. Make no mistake, the company filed for bankruptcy, and investors need to understand the implications of this before they potentially lose a large amount of their investment. The plan can be found here: cases.primeclerk.com/bcei/Home-DocketInfo

When a company goes bankrupt, common equity is usually canceled. In the case of BCEI, the company is awarding 4.5 percent of the company to new equity plus out of the money warrants based on a strike price of a $1.45 billion market cap. Beyond the 4.5 percent, the company is doing a rights offering of $200 million which will further dilute equity down to 2%.

Below is a table directly from the bankruptcy plan that details this dilution

As part of the plan, a third party auditor Perella Weinberg (PWP) was hired to determine the value of the company. PWP is a well-respected investment bank. They worked alongside third party reserve auditing firms CG&A and NSAI to determine the oil and gas reserves of the company. Oil & Gas reserves are the lifeblood of how you value E&P companies. They are also regulated by the SEC, so they provide some standard measure of the value of an E&P.

Perella states plainly that the value of the company is $690 million in the disclosure statement. More importantly, Perella values the warrants equity is getting at only $3 million. The company has to almost double in value for the warrants to be worth anything. Including the value of the rights offering of $200 million which is dilutive, the total market cap of the reorganized company is $890 million per the plan.

Below is the analysis by Perella

Using the plan value, equity will receive 2% of $890 Million so $17.8 million or ~$.36/share.

If you include warrants valued at roughly $3 Million, the common is worth ~$.42/share

Beyond this, per the plan, equity is out of the money and being canceled. It is getting shares in return for releases.

Due to this violating the absolute priority rule in bankruptcy, there are already objections to the plan demanding that equity receive nothing.

Absolute priority in bankruptcy is the concept that senior creditors should always receive money ahead of junior ones until they receive their outstanding claim. There are a number of creditors ahead of equity that are impaired. Note below from an objection filed by Silo Energy

"The Plan states that holders of Existing Equity according to the Debtors receive "no distribution" and are deemed to reject the Plan. Plan ยง 3.1. Notwithstanding, holders of Existing Equity Interests receive their Ratable Share of the Settlement Consideration consisting of (NYSE:I) 4.5% of the New Common Stock, subject to dilution by the Management Incentive plan, warrants and the Rights Offering and (ii) the Warrants entitled holders upon exercise thereof, on a pro-rata basis, up to 7.5% off the total outstanding New Common Stock at a per share price based upon a total equity value of $1.45 billion. Post-confirmation and after the Rights Offering, Management Incentive Plan and Warrants, Existing Equity Holders and insiders will hold more than 13% of the New Common Shares. There is no justification for such a violation of the absolute priority rule or disparate and discriminatory treatment."

In conclusion, when BCEI converts, the current stock price will drop precipitously. The stock is trading at a market cap of $86 million which implies a converted value at 2% of $4.3 Billion. This is a price beyond BCEI was ever worth at $100 oil and is many times greater than the plan value with rights offering of $890 Million

Supporting Documents

  1. plan_of_reorg.pdf
  2. silo_objection.pdf
  3. disclosure_statement.pdf

Disclosure: I am/we are short BCEI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.