Kicking the can down the road. Looks like management is trying to coerce the Senior note holders with debt due in 2017 to agree to pushing back maturity date to 2021 with new bonds in exchange for some stock. They are trying to convert the 2021 debt to take the same bonds with same maturity date also in exchange for some bonus stock.
The stock amounts to about a 20% dilution to existing shareholders and, in and of itself, only holds a current value of about $6mm.
I don't get it. Why would a Senior note holder agree to extend maturity date by 4 years, be placed on same field as the 2021 notes for only about $3mm or so in common stock? Yes, they still are owed the total principle amount, but they likely will get less later. Maybe I am not reading the 2017 note holders position versus the 2021 note holders in a default situation.
Assume you bought 2mm shares for $13.50. You signed an agreement that you cannot sell for 1 year. You sense that the company is at least 6 months away from a deal or any event that would provide a positive outcome for the stock.
You immediately short 1mm of those shares to protect your position expecting the stock to pull back over time and cover your positions back under $10.
Why even buy now then just to short? Because you were able to get a deal with a locked in price. Imagine trying to go out on open market just to purchase the 1 or 2mm you wanted.
Another possibility is to loan out the 2mm shares. You are holding long-term and will make some nice money loaning them out to be shorted by those that believe that share price will pull back.
Breathe - I am not so sure. It is possible that any continued rise in inventories could be coming from the supply stored offshore. I suspect that the rise of imports has been the influx of oil from offshore that was delivered once oil climbed into the upper $40s.
This is why I have been contemplating the possibility that offshore storage may be coming down. Nobody wants to talk publicly about it. Are all those ships still sitting out there? Are they all full?
Another problem is that we are not privy to everything oil throughout the world. Hard to know really what is going on as far as production, exporting, demand, and what is being stored globally.
My hunch is that OPEC understands that the balancing is occurring and their freeze considerations is more of a game of chicken between them. Think about it. If SA cannot really realistically produce more than current levels and believe that certain OPEC competitors could push out more oil, why not try to freeze to prevent competition from taking a larger slice of the pie. Obviously some OPEC nations want a freeze because they are in dire straights and need higher prices. Will be interesting to see what happens between this group in this upcoming meeting. A freeze makes total sense for almost all of the players.
The freeze in and of itself will not with oil supply/demand imbalance, but it will help quicken the pace by limiting additional production. At best the freeze could push oil prices up maybe $5 or so. It is the longer term drop in world production that will push oil higher which means oil likely cannot move above $60 anytime soon.
The $40-50 range is likely needed to keep putting pressure on producers to help move demand above production to eat away at these huge supplies both nationally and globally. Cannot see a real move back up until at least Spring of 2017.
Considering the lack of improving fundamentals with oil and the likely inability for OPEC to agree to at least a freeze, DNR is a hold at best right here.
I did sell some this morning and bought some back after prices stabilized - had to protect against a big move down with all the shares I am holding.
If you look at my reasoning to own DNR right now (pullback from highs around $4.70, large price gap with BTE, DNR bonds holding up, and the asset closing announcement), there is still reason to be positive at least with DNR. That may not be the case with AREX that has already made a big move and weaker plays like EPE and NOG. Also, BTE has limited upside just getting back to recent highs compared to the move DNR could make.
In other words, a small purchase of DNR as a building position is OK. Would not go all-in here. Likely, would not sell here now that things have settled out, but you never know what tomorrow will bring. GS may be shouting $35 oil and going short and take DNR back to $2.50 area.
On a more positive note, gasoline stayed even. WTI oil took a hit on the API report and took another one this morning on the EIA report. Oil stocks have been quite stable with only a relatively small decline all things considered.
If this had been a few months ago, I suspect that the oil stocks would have taken a much larger hit. Since it appears that world production is under pressure and that we appear to be close to a balancing of production versus demand overall, the market is likely looking forward.
This means that a return to WTI oil at $26 is unlikely UNLESS world demand takes a hit which would mean all bets are off and one should run from oil as fast as possible. Of course, the overall stock market will take a bath if world oil demand is dropping as it would surely mean that world economies are in trouble.
Also, oil may be supported here by speculation that OPEC will at least agree to some kind of freeze in September informal meeting. The odds of a freeze are still quite low and the argument is that the freeze will do little to affect production as OPEC is already pumping out at historically high levels. Still think oil jumps if the freeze comes to fruition because it would be a signal that OPEC wants higher prices and is finally willing to take steps to get there.
How far away are we from that huge recession that will not only cause oil to hit new lows, but wipe away the gains seen in the stock market over the past several years?
One could interpret that this additional debt would require the big boys to need higher oil prices going forward. In other words, it will be more costly to manage the larger debt load which will require even higher prices to turn a profit and higher prices to pay back debt as opposed to forking out larger dividends.
A positive in longer term to cause a return to higher prices.
Very nicely stated. Vladdy has been saying this for some time now, but just not so eloquently.
Although I lack expertise in a full understanding of economics, I am always watchful of how supply and demand play a powerful role within a sector. This helped identify some moves in the U sector that helped return some very nice profits.
I believe and expect there will be a violent upward move in oil due to the lack of production to meet demand needs at some point in the near future. I keep waiting for the announcement that the offshore storage has withered. When? No idea. That announcement may be the start of the paradigm shift. Of course, it may also take a move by OPEC to constrain supply when it is determined that production cannot be replaced by other nations in short order.
Well ... still thinking I should not bought up all those shares a couple of days ago on your recommendation. Down HUGE in just two days now losing my shirt. And, here you are, still promising riches.
API likely going to be OK since they already reported a build in gas last week and not much of an oil draw. Thinking EIA could show negative results (if you are long.)
May lighten up on long positions at open tomorrow after API report.
Not good to hold USO unless you are short. If Kingly has been long USO, he has been a big loser over time.
Glad he is not posting anymore.
Going to be interesting to see what Yahoo does with this board and the new conversations board. Looks like most are finding their way back to the old board while all the junk is getting posted on the new board. Most of the DNR posters have made their way back over there and none are posting on the new board now. Funny stuff.
Has not been a good sign for oil longs in that many oil stocks have not had the same upward move as oil. Would appear that the traders do not believe that oil is in recovery mode and are not willing to support the oil stocks here. This would lead one to believe that oil is poised to drop again and likely pretty soon.
Numbers for EIA Wednesday are going to be critical to support current oil price. In other words, good EIA numbers will likely only cause oil prices to hold and bad EIA numbers are likely going to cause a large drop in oil. So, as a trader, risk/reward would appear to be strong for somebody going short on Monday/Tuesday. Thoughts?
Tara - Actually, I majored in accounting and have prepared my books over the years. I am pretty good at reading financial statements and understanding where problems lie, but mostly concentrate on a company's cash flow and ability to manage debt going forward. I like to select depressed companies that offer the highest return if and when things turn around. It is a tricky game because there are other variables that can alter the outcome. Over the years, I have done quite well selecting depressed stocks like TRW, TEN, PLD, HIG, DEXO, XTXI, XTEX, URZ, USU, ATLS, PACR, SMOD, and on and on. I made mistakes with OTT, LEA and WM, for example, whereby LEA filed for BK and WM was seized by the gov't.
The key is finding those stocks that offer a great opportunity that can survive bad times and offer a nice return when the market turns. Still, that does not mean you hold those stocks for the long term. DEXO became DXM and returned to bankruptcy. OTT surged on BK emergence only to drop back on its face over time as OTEL.
Here is an interesting fact: More than 50% of the stocks I trade either merge or get bought out. To me, this means that I am selecting undervalued stocks that are poised to do well in the future. DVN bought XTXI/XTEX to form ENLC/ENLK. URZ, PACR, SMOD all bought out. PLD became part of another group, but kept the trading name. There have been several others over the years. This could mean that DNR or BTE may be poised for being acquired as time moves forward as the oil sector recovers.
Eb - we are more similar than you know. Have always been self-employed and am in the same sector as you with most of my business in residential. However, I am not on the side of cable/satellite systems. My self-employed stature offers the opportunity to get in front of the computer and spend time enjoying my passion which is financial analysis and trading.
Good luck to everyone here. Denbury and Baytex could do really well.
DNR management mentioned more than once that they are able to maintain expected capex levels within existing cash flow. I really liked that they expected to end the year with less drawn down on their facility considering their lack of respectable hedging over these two upcoming quarters. This is likely due to the injection of cash from the asset sale.
Obviously, DNR needs higher oil prices to return to profitability and to properly manage its debt load. The factor that is most important during depressed oil prices is liquidity directly affected by cash flow. Of course, near-term maturing debt and any covenant issues can supersede cash flow levels. DNR obviously debt maturities start in 2021 and management has taken steps to adjust and relax covenants.
It is highly likely that DNR can get to Q2 2017 with low oil prices before a potential strain on liquidity with a turn to negative cash flow. Even then, DNR could tap its facility at a pace of $50mm a quarter and survive for another year or so before reorganization.
Hard not to like DNR at around $3 considering the upside potential and limited risk of failure in the short to mid term. What is surprising is that the DNR bonds recovered $12 (+20%) over past couple of weeks with WTI surging back up by around $8 (+20%). DNR stock has moved up the same 20%, but should be up much more considering how much it pulled back recently and its stable financial condition at current oil prices.
Management is to be commended for how they have weathered the storm even though they could have made some hedges at higher prices.
DNR liquidity includes $671mm on its borrowing base and $385mm in junior lien debt. $615mm of junior lien debt already issued replacing existing debt creating a net reduction. Denbury has reduced total debt by $465mm in 2016 and by another $261mm in 2015. Total reduction: $726mm.
As far as revenues, expect that realized price per barrel could be about $45. Overall hedging will likely put realized price at about $44. Q1 2016 had Denbury at about $43 in Q1 and $53 in Q2. So, Q3 should be similar to Q1 overall even though hedging was at much lower prices. This is due to spot prices being quite a bit higher.
It is challenging to determine overall cash flow due to all the variables at play, but DNR still managed positive cash flow of $2mm in Q1. If Q3 results closely match Q1, cash flow could still remain positive considering the lack of hedging at higher prices. This is largely due to oil prices averaging in the mid $40s or higher. That could change, of course, over the next 6 weeks.
Figuring that DNR will receive at least $55mm from the sale of Williston assets, this will generate additional cash for the company. Even if DNR was cash flow neutral this quarter, there will now be $55mm available to avoid tapping the credit facility. One positive development is that DNR management is expected to reduce its overall facility by the end of the year rather than tap it further. Like I said, this asset sale will be very helpful for next couple of quarters even though it is not a large sum.
DNR risk going forward is a collapse of oil prices below $40 for an extended period of time. Based on the lack of replacement of production throughout the world going forward, prolonged prices below $40 are unlikely. Considering that most nations cannot survive on $40 oil or lower, this cycle will work itself out and that spike in prices will come. Still thinking sometime in early 2017, but too many variables can affect the timing of such an event.
Read the section on DNR in the Street article about 7 stocks.
Discusses some technical moves that could help take DNR higher. In my post above, that area of resistance is at $3.74 (not $3.64 - typed it wrong above.) Also, article mentions the 50 day. The 100 day is close also.
Of course, the article discusses PQ which is very bad shape. PQ was a stock I used to trade when it had a very consistent trading range. Have not traded in a few years. Now, the company is poised for reorganization without a huge turn in energy sector. So, I would not trade that one on that premise.
Dak, going to throw you another bone.
You should read what this guy has to say. Just read his past couple of articles including the one I just read a few minutes ago. He is discussing some of the same things I have been pointing out. If I didn't know any better, I would have thought I wrote some of it! LOL
He is a market analyst for Forex. I have been finding his articles from another website which would be another bone for you.
I am not an expert in oil, so I am relying on my own expertise, experience, and logical thought process.
I am trying to wrap my head around how a lack of hedges in place in the oil sector will affect the move in oil going forward. It suggests that a lack of hedges would imply more volatility because of the lack of controlled prices though a large number of contracts. This may have played a role in why oil dropped so low a few months back as so many hedges rolled off and much of the oil had to be sold at spot.
Going forward, I expect that the lack of hedges and reliance on spot will cause more abrupt movements in the price of oil kind of like what we have just seen in the last few weeks. This could mean that oil could move dramatically higher or lower even faster than in a normal market which puts additional pressure on traders to have to be prepared to make moves more suddenly which actually creates even more volatility.
Remember, I recently thought that oil was heading even lower only to see a minimal change in dynamics force a quick change of opinion. In other words, don't get your panties in a wad (like Anil) if I have to turn negative again depending on the information dealt at the time.
Ultimately, I am trying to get across the fact that there is going to be an upward move in oil that is going to be dramatic. It is going to move DNR back up in dollar moves instead of penny moves. You do not want to miss this move. Be watchful, be prepared, and have your cash ready when it starts to happen. Cannot begin to tell whether we are talking later this fall, spring next year, or sometime later. But, in agreement with Vladdy's opinion on how the market works and the lack of oil available in the near future due to the inability to replace production, there is going to be an abrupt move higher. DNR is going to go back to double digits when that happens.
Remember, there were some here including myself that were hoping for DNR to retrace back to $3.30 to purchase shares. The stock sank to $2.60 and the uncertainty in oil prices suggested that it could go lower even though the stock appeared oversold. Once oil turned back north including some positive data and the possibility of OPEC trying to support prices, it was a clear signal that DNR may be moving back higher even though their quality hedges were all but gone.
So, my question is that if one was hoping to purchase at $3.30, why not at least start accumulating some shares when oil appeared to be headed higher? I even started a couple of threads that supported a positive move in WTI oil and in DNR.
Now that DNR has surpassed $3.30, it could move up to $3.64 area and then retrace back to $3.30 on an oil pullback. Of course, from here, it could retrace to $3.00 on a pullback in oil. My point is that DNR continues to be poised to go higher.
When will real short-covering come into play with DNR? I originally expected that it would take a move close to $5 with no resistance to mid $6 area. Looks like it will take oil moving toward $60 for this to occur. Looks like it will take oil testing highs above $51 to get DNR back to mid $4s in consideration of the closing of the sale generating needed capital.