What's your take on trading volume over past few weeks, especially past few days?
Considering what current 2016 bond price suggest, I would expect huge, sustained daily share volumes. Instead, equity volume seems pretty moderate---no?
Too, in Chp 11, management gets first dibbs on proposing a plan of reorganization (POR).
Since the main issue is liquidity (IMO), and which might be addressed via development of the Permian acreage but which requires time---one possibility is for KWK to ask for extension/rollover of the 2016s. Of course, to have a solid case, KWK will need to present very clear evidence of asset development and/or monetization and corresponding timeline.
Bond holders may grumble, but if KWK's POR holds water, it is very likely to have the judge's backing for a cram down.
KWK is very interesting--it's a battle of reason over (blind) fear.
Review slide 21 of the September presentation and which gives Permian info----the breakdown by JV, farm outs, unallocated, etc. is not entirely clear, I'm waiting for clarification from IR.
It's all in the packaging and marketing. John Little/DT's $20k/day is cheap if they deliver a good JV.
KWK's Permian acreage has current lower valuations because it isn't producing 30k bpd and the D &C costs is a future capex expense.
Still valuable, though, and not captured on the balance sheet. Maximum value will be realized if KWK can develop this entire property with a JV partner.
KWK has until the end of business on Wednesday, 10/1, to deliver the interest payment.
7.125% semi-annual payments on $350MM face = $12.47MM total.
Too, there's been a general rotation out of high yield sector, flight to safety---no doubt helped along by geopolitical tensions and China economic weakness.
I smell arbitrage opportunity in the 2016 bonds.
I don't care to speculate on Encana's plan.
However, it doesn't make sense for KWK to sell out at a time when ng prices are so low--it'll be giving away the store. To the extent that it can reduce leverage, it makes far better business sense to hang on as it'll see higher valuations as ng prices WILL eventually recover/normalize.
It's important to understand that insufficient infrastructure (pipelines, LNG plants, terminals, etc) is a major reason for current low ng prices----can't get the product overseas to meet demand. This bottleneck will eventually sort itself out, and global prices will normalize.
What does this mean? There's continued realignment away from ng and towards oil/ngls, that oil properties are in demand.
Encana is paying $5.93BB and assuming $1.15BB in debt, or $7.1BB total. It will gain 140k net acres currently producing about 30k bbs oil/day. This works out to ~ $42.36k/acre for partially developed property.
KWK's West Texas property is no where as far along in development and deserves lower valuations at this moment---but, it's clearly still quite valuable.
Look at it this way from the perspective of the JV with Eni: $52MM/52k acreas = $1k/acre. This is clearly a sweetheart deal for this region, even for undeveloped land. As it continues to accumulate drilling data, the value rises.
Chp 11 is extremely expensive and draining to debtor's estate--regular attorney, appraiser, professional fees, etc........before even considering cost/distraction of lawsuits........and, the impact to asset prices.
Everyone knows this, including bond holders/creditors, and that's why they'll chose the sane approach to work out a solution together.
What I've just posted can be illustrated by numerous corporate examples
General Growth Properties (GGP) is clearest to me as I was an investor. In 2008, it had ~$29BB in debt--the problem wasn't so much the debt per se but, rather, the compressed maturity dates (result of a large aquisition few years earlier) at a time in 2008 at the start of the global financial crisis. It had no problem servicing interest on its debt load , but couldn't pay the principal coming due in huge chunks nor re-fi at the time when global capital markets were frozen--which pushed GGP into Chp 11. ie, it had a liquidity problem (couldn't meet the compressed principal payments), but was clearly solvent (cash flow to pay interest, net asset values).
Amazing Chp 11case--GGP called the shots from the get go, securing some new equity capital from outside investors, and got bond holders to extend maturities AND lower interest rates. It had leverage with bond holders and lenders because not only was it strongly cash flow positive but, more importantly, its asset values far exceeded its debt load---significant net book and shareholder equity values (which secured bond extension/rollovers).
Equity holders were not only preserved, but made out 100x (from the lows) over the period during Chp 11 and through emergence and 2 spin offs (HHC and #$%$) over following few years.
Had the capital markets functioned normally in 2008-2009, GGP would NOT have needed to enter Chp 11---it could have easily refinanced its debt portfolio, staggering maturity dates over longer period.
KWK's situation isn't exactly the same, but similar that management will very likely to demonstrate sufficient asset values to draw additional capital and refi its bond portfolio (it partly achieved this in 2012-13).
There's no question that the bond prices reflect distress.
However, to say that the stock is worthless and bankruptcy is a sure thing or only outcome is quite a bit premature at this point.
To stake holders (equity and bond/creditors), there is a huge difference between Solvency and Liquidity problems--although both can cause bond prices to crater (bond holders are uncertain about receiving their interest and/or principal on time in both instances---though the company may eventually pay based on asset monetization).
In my estimation, KWK faces a liquidity challenge, as cash levels and cash flow show.
KWK clearly owns assets that are either not on the balance sheet (e.g., West Texas) or only very minimally booked on the balance sheet (e.g., HRB) because the ng/oil reserves have not been determined yet through drilling. To the extent that management can prove reserve volumes in West Texas, the solvency issue is removed as a threat to equity.
As a practical matter, KWK will need to drill in order to prove reserve size and financial value, and the more drilling data the better. Drilling is in underway in West Texas, and data is being collected. It's a matter of how much drilling and reserve data KWK can collect in the timeframe it has to deal with the 2016 bonds (probably to mid 2015). The hiring of John Little/DT is, in my opinion, tied to the drilling program underway. Among other things, he will be focused on packaging West Texas assets for either a sale or JV to raise capital--that's what he was hired (by management) to do--maximize transactional value.
Darden's very large stake in KWK--this, and reputational risk, makes very clear their motivation to do everything possible to turnaround the company (deleverage) and share price.
Valuation of assets is the central question. It's quite clear that they need outside help to cast the greatest net for shoppers/JV partners, and properly structure a deal. Hence, the hiring of John Little/DT. I view his hiring positively.
The odds are pretty decent given that they're starting well before 2016 bond maturity and waterfall events later in 2015. HRB is clearly a longer term event (obvious now), and West Texas comes to the forefront. The drilling results will be absolutely vital to valuations---not only initial flow, but decline rates which impact the economic value of proved reserves. Ideally, KWK/Eni would drill more than 5 wells.
On the subject of BK/Chp 11--this is certainly possible but not probable, at this time, given KWK's asset base and hiring of Little, and which underlies potential for equity raise, among other options.
Perhaps the moderate volume of the share price decline is an indication?
The process begins with valuations, and crafting strategies to maximize values to potential aquirers.
Given the maturities of the 2016s and time frame of senior bonds/waterfall, KWK appears to be proactively taking action to monetize part of its asset portfolio before crunch time later in 2015. This is a plus.
It's certainly been tough going, but I'm not sure that this is the time to sell----especially today. Let's see how the shares behave in the next few weeks. We'll certainly have crystal clarity by the Q3 CC.
I'm not aware of a single company that doesn't have ongoing turnover.
The openings listed on their website are mostly field based and lower level--quite secure work.
Part of John Little's bio:
A few notable engagements include:
--Advisor to global oil company regarding capacity to pay of several of its global counterparties
Wonder which global oil company he worked with and the results?