As we said two days ago when looking at the paltry recoveries on their total debt that bankrupt energy debtors are generating in liquidation and bankruptcy asset sales, “the energy bankruptcy party is only just starting.” And sure enough, overnight we learned that another company is preparing to throw in the towel following a Reuters report that SandRidge Energy – a shale oil and gas producer in the Mid-Continent region of the U.S. – is exploring debt restructuring options, “as the heavily indebted U.S. oil and gas exploration and production company struggles with the fallout from plunging energy prices.”
In reviewing the company’s options, Reuters writes that one choice is a pre-packaged bankruptcy. However, a decision on a way forward is not imminent and that the company has access to enough cash to continue doing business for at least several more months under its current structure. Other avenues SandRidge could pursue would include a debt exchange or filing for bankruptcy protection without any agreement with its creditors.
What this really means is that having struggled to come to a prepackaged bankruptcy agreement for the past few weeks with its various stakeholders (Debtwire reported on Jan. 13 that Sandridge hired Houlihan Lokey to craft a restructuring plan), the company will likely have no choice but to file a “freefall” Chapter 11 and let a bankruptcy judge decide the fate of its $4 billion in debt.
According to Reuters, the vast majority of the company’s debt is in the form of bonds owned by a plethora of mutual funds, hedge funds, and other institutional investors. They do not yet have a single representative who could be reached for comment. They will soon, and shortly thereafter the official creditor committee will become very familiar with recovery matrices that see it getting as much as 15 cents on each dollar it gave to the soon to be bankrupt energy company.
A little bit of history on SandRidge, “which made risky bets in the Mississippi Lime formation in northern Oklahoma and southern Kansas, is particularly vulnerable.”
For months, SandRidge has been caught in a bind, having just enough money to pay interest on its debt, but not enough to drill new wells or replace older ones.
Mississippi Lime wells typically do not produce as much oil as some other shale formations, and the rock also contains a lot of water, which is costly to haul away.
After an initially encouraging exploration phase, the shale play has not delivered the low cost production gains that SandRidge and Wall Street analysts expected.
About 40 energy companies entered bankruptcy in 2015 and more are expected in the next few months as oil prices have dropped by 75 percent since mid-2014.
Oklahoma-based SandRidge was founded in 2006 by former CEO Tom Ward, a previous executive and co-founder of natural gas giant Chesapeake Energy Corp. Perhaps that explains why just as troubled Chesapeake may follow SandRidge into bankruptcy shortly.
Ward was ousted by SandRidge’s board in 2013 after some of SandRidge’s largest investors alleged governance lapses and strategic missteps, including transactions SandRidge had made with entities controlled by the Ward family. His exit package from the firm was worth around $90 million. A request for comment at Ward’s new Oklahoma City-based company, Tapstone Energy, was not immediately returned.
More notably, SandRidge attracted the ire of Oklahoma regulators over its use of wells to dispose of wastewater, an activity that is believed to trigger earthquakes. Last week, the company agreed to shut seven wells in the state and reduce the amount of wastewater injected into roughly 40 others.
For now, the biggest threat facing the company especially as it enters a protracted reorganization and potential bankruptcy, will be to raise cash so it can avoid a liquidation. To do that SandRidge has put its headquarters in Oklahoma City up for sale in May, but has yet to find a buyer. In April, it laid off at least 130 employees, or 20 percent of its workforce based there, public records show. It has also previously used a distressed debt exchange with creditors to lighten its debt load. Had it only waited a little longer, it could have bought its bonds back even cheaper: its Jan. 15 2020 notes at below 5 cents on the dollar.
SandRidge had $790 million in cash and access to undrawn credit facilities that gave it access to capital totaling $1.9 billion, chief financial officer Julian Bott said on the company’s latest quarterly earnings call on Nov. 5. This has given the company breathing room of several more months to decide on a way forward, as well as scope to pursue another debt exchange.
Of course, if it waits the full seven months in desperate hopes that oil rebounds and it doesn’t, instead of a Chapter 11 Sandridge may not pass go and proceed straight to a Chapter 7.
To be sure, a SandRidge bankruptcy will hardly come as a surprise: as of earlier this month, SandRidge’s shares are no longer listed on the New York Stock Exchange, and trade on the OTC Pink marketplace instead with a market capitalization of around $30 million.
Finally, assuming $4 billion in debt SandRidge does file, that would make it the second largest bankruptcy since the default wave started in earnes last year, putting it behind only Samson Resources with its $4.3 billion, and ahead of both Sabine Oil and QuickSilver.