LGCY has a 6 month pass until next determination, whereas most expect further price recovery 2H 2016. The price of bonds are reflecting that - I think it's more than us on these boards pushing up bonds now. Before we thought it was the company pushing the volume, but it looks like it's professionals now.
wow it's showing 40.8 in my IB account now. I thought it closed lower than that, so maybe this was a post-market large block transaction?
There is a big difference in $50... at $50 it would take until 2020 before LGCY can die (if it can't roll over the 2020 bonds), whereas $25 it can happen real quickly through bank cuts. I don't think anyone believes oil will stay low through 2020 though.
Given your Ch.11 calculations for the bonds, is 40 cents really irrational? Still a good deal I'd say, for $50 oil anyway.
Also remember a bond payment is due June 1, which is worth 4 cents on the dollar. So the exchange to common is not that bad at .45. With interest due, it's really .41, which is only a slight premium to market. It's probably neutral to the old bondholder, as the market impact of selling their common will make up the rest of the difference. It's a win-win deal for both parties, I think. Company gets to reduce debt with no cash, and the bondholder gets liquidity.
Equity holders may not be pleased at the valuation, but this is a good deal for all. The fact is, the company is getting off the hook of 51% of the face value, when they are not in position to use cash to rebuy bonds. But in any case, it makes the bonds and preferreds an even better deal.
You taught a man to fish. I have learned that you have to do the calculations to really understand the situation.
The only upside is that management owns many units and preferreds, and the next redetermination should be much better. They will try to avoid BK rather than an easy route, and just need to limp for another 6 months.
There are already 3 - Linn, Breitburn, and SandRidge.
Good chance ARP will make it unless oil/gas double dips.
Remember ARP had amended this senior notes terms last December, to allow them to issue more notes. With improving energy prices, they should be able to attract enough buyers to cover any shortfall in their revolver.
They will have four months to cure deficiencies, and cutting distributions can go a long way if the gap is not too big.
The next redetermination is very likely to be much better, so I don't think ARP will go under.
ARP does have Eagle Ford territory, which is second to Permian. While overall its cost is high, maybe mid-60's, that could change as they go after sweet spots, or in worst case the bondholders become owners. That would help them weather even past their hedges. So I tihnk ARP bonds are a fair bet.
I take a bullish stance, but 3 counters to your statement:
1. I don't think oil will linger mid-range. It's either rock bottom or sky high, since over and undersupply causes the price to swing to either extreme. It might hang out for a while at $55-60 thanks to shale's marginal oil, but that should be temporary as long as demand is strong. But in any case, a prolonged stall period at that levels would still provide favorable futures strip for preferreds.
2. Bankruptcy is increasingly unlikely, so the preferred payments are as good as yours. Thus I think paying upfront tax is a favorable risk, especially considering that preferreds prices will be much higher when distributions are imminent. Finally, you can avoid all tax issues with a tax-sheltered account.
3. Common is another way to play, but you don't get any distributions, accrued and future, even when oil hits $60. Further, the preferreds are likely to move first, save for short cover runs like we just saw. CODI tax risk is not completely removed either, as LGCY may regain compliance after improving prices or asset sales. CODI tax cannot be sheltered in an IRA either.
I think there is a good chance for $60 WTI this year, and for the preferreds to resume payment in fall or next spring. You have to wait a while, but the payments accrue so they are as good as yours if the oil rally holds.
There's a good argument to buy the preferreds now that they have fallen back a bit, while the bonds have not. In fact, the 2021 bonds actually have gone up from 28 to 32 ask.
I'm thinking Christmas this year is going to send my a very big gift... a lump sum gift.
I don[t think it was ARP related at all. Look at XLE and UNG - they both dropped at the same time. Probably some fund had to liquidate.
I don't have data but it's most certainly lower now than before. IMO, a big part of the drop below 10 was due to Moody's downgrade to junk status, which caused forced selling.
Oil is down today because news reported that winds are blowing Canada's fires away from the oil sands. The fire did not grow as big as expected. So that plus Genscape means all the gains are gone. Still an overall plus long term though, so I expect today's sell off to be temporary.