WHY would they want to do this? I have just started looking into BKR, but to my naive view, energy seems to be a strength for the company. It does not appear to make sense to sell this off, so what is the advantage?
When you look deeper, you'll find that Energy has been a drag on their earnings for some time. They once had a deal to sell Energy, but when it fell through, and there were questions about Energy's accounting, the company fell from the low 40s to the low 20s.
Did I read this right, Energy has $7.3 million that they are owed by Storm Cat Energy who is in bankruptcy?
Credit Risk. On November 10, 2008, Storm Cat Energy (“Storm Cat”), an Energy segment client previously identified as experiencing liquidity problems, filed for Chapter 11 bankruptcy protection. Shortly before the bankruptcy filing, on October 29, 2008, in an effort to assist Storm Cat through its liquidity issues and protect the Company’s interests, the Company amended its ongoing contract with Storm Cat to provide for (i) the payment to the Company of $1.3 million of outstanding Storm Cat receivables and prepayment for future services under the contract, (ii) the conversion of remaining receivables (plus additional charges that may accrue) equal to $7.6 million as of November 10, 2008 into an unsecured promissory note at 6% interest to mature on April 30, 2009, and (iii) the subordination of the Company’s liens to those of the principal lenders provided that the monthly payments remain current. As a result of the bankruptcy, the promissory note was never executed, although the Company received the $1.3 million payment and has received prepayments for the work it continues to perform.
At the time of the bankruptcy, Storm Cat had $65 million in prepetition debt outstanding. Following the bankruptcy, $14 million in debtor in possession (“DIP”) financing was established to continue Storm Cat operations and pursue a liquidity event, including the potential sale of Storm Cat properties. The terms of the DIP financing provide that it shall have priority over the prepetition debt and share pro-rata with valid mechanics’ lien holders. The Company has filed valid mechanics’ liens totaling approximately $7.3 million, while the remaining $0.3 million of its outstanding receivables do not qualify for liens. Under applicable law and absent any subordination, valid mechanics’ liens may have priority over prepetition debt.
Storm Cat marketed their properties and bids were received in February 2009. Although different bids were received for different properties or groups of properties, none of the bids received were deemed acceptable by the prepetition lenders, and all the bids were rejected. Alternatives are now being considered, including further marketing of the properties and a second round of bids or a recapitalization of Storm Cat.
The Company has a representative on the Storm Cat Creditors’ Committee and is carefully monitoring developments. Based on the Company’s most recent analysis of its position regarding this matter, the Company has determined that some amount of loss was probable in this matter and a range of loss of $1.6 million to $8.9 million was established through discussions with the Company’s attorneys. As no amount in that range was determined to be a better estimate than any other amount in that range, the minimum amount in that range of $1.6 million was established as the reserve in the fourth quarter of 2008 in accordance with FIN 14, “Reasonable Estimation of the Amount of a Loss — An interpretation of FASB Statement No. 5.” The realizability of the Company’s remaining $7.3 million exposure is dependent upon a number of complex, inter-related factors which are uncertain in outcome, and cannot presently be predicted. Such factors include, but are not limited to, the possibility of a future sale of the Storm Cat’s properties and the price obtained, the possibility of recapitalization of the Storm Cat debt, a determination of the validity of the agreement regarding subordination of the Company’s lien rights, and the assumption or rejection of the Company’s contract.