#technicaltuesday! BCEI and HPR
In #technicaltuesday, we are going to do a warmup for the YE20 reports that are coming in February and there will be A LOT to talk about so today we tackle a nuanced and complicated deal that was announced in November but will see all the fireworks this month. Of course, I’m talking about the DJ roll up of Bonanza Creek and Highpoint Energy.
What’s happening: Bonanza made an offer to purchase HighPoint…. but with a twist.
Option 1: The HPR bondholders agree to convert their notes to BCEI shares with in excess of 97.5% of bond holders. If successful on the conversion this month (at last check they were at ~83% approval), existing HPR shareholders will get 1.6% of the equity in the combined company.
Option 2: Bondholders fail to agree to merger at the 97.5% approval threshold at which point, HPR enters a prepackaged bankruptcy, effectively wiping out any existing equity (along with any duty of the board to the shareholders that held that equity) and commencing an Animal Planet like struggle amongst the bondholders, bankers, lawyers and court to determine control of whatever value may be left.
Now, Bonanza Creek might be ringing a bell to you…. hold on, Dec 23, 2016… didn’t they enter bankruptcy themselves? Quite right you are, they did. They emerged April 28, 2017 as a new company, with a fresh balance sheet and repentant management who would do so much better than the last folks. By November of 2017, they realized how much better of a company they would be if only they merged with Sandridge for $36/share in cash and stock. Alas… Sandridge, who had gone through bankruptcy themselves in 2016, had numerous shareholders object to the merger and cancelled it to end 2017 (Sandridge now being on their 5th CEO since emerging so they are really close to having the strategy right… but I digress).
The point? Bonanza is no stranger to debt, bankruptcy, shareholder opposition, mergers and forced mergers. Me? I like their approach. Bonanza needs the deal because like many companies, they need the inventory. The north acreage is suspect at lower commodity prices and spacing across the United States, in every basin, has been overestimated by companies. When you widen spacing and lengthen laterals, inventory drops and no one likes to press release that. So, enter High Point and the challenge to bondholders: Approve this…. or your only lifeline is gone and you can fight it out in court where bondholders will be drained by the DIP financiers, the lawyers (even more) and the bankers (fees!!!!!! Weeeeeeee!!!!!!!).
And while the existing High Point board approved the deal, board loyalty is a funny thing… remember in March, four days before Whiting declared bankruptcy, the board granted their executives a substantial pay package “because the management was so essential” and then when the creditors took over, the very same management was somehow less essential…
The reality of the business today is share prices are reflecting commodity prices not reflected by the strip. They reflect inflation, under capitalization of assets, deflation of the USD, and all forms of monetary policy bets… but they don’t reflect the NAV of the underlying assets and I say this about every oil and gas company- not just these two. Want proof? Have a look at Samson’s sale to “undisclosed” (DM me if you want in on the pool as to who it is) and look at the metrics. 8,500 boe/d and 132,000 acres for $215 mm. Translation? There are no cash buyers unless they rip your face off and spend the weekend with a loved one of yours, and execution of any non-cash deal requires someone to bend over and accept punishment.
So, HPR bondholders have a choice: The belt, or the wrench. Anyone else feel like popcorn? It will be an interesting month… starting with the Georgia senate run off tonight.
https://investor.hpres.com/static-files/fded483d-002a-43bd-8fc0-afef6e4c69f0
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