Natural gas driller Samson Resources is planning to file for Chapter 11 bankruptcy by August 15, when a $110 million interest payment comes due on $2.25 billion of senior unsecured junk bonds, Bloomberg reported, citing “two people with knowledge of the matter.” Samson doesn’t have the money, can’t pay, and won’t pay.
The 9.75% bonds maturing February 2020 aren’t traded anymore. The last trade was on July 29 for a quarter of a cent on the dollar. They’re part of the vast high-yield bond pile, and they have become worthless. These kinds of bonds are nicknamed “junk” for a reason.
Stockholders – private equity firms, the ultimate “smart money” – are getting wiped out too.
Samson was acquired in 2011 by a KKR-led group of private equity firms for $7.2 billion. They invested $4.1 billion of equity in the deal. Debt piled on the company made up the rest. Then Samson went on to drill this cash into the ground to produce lots of natural gas and sell it below cost, losing money all along. Now its cash is running out, and new cash to drill into the ground isn’t readily forthcoming.
In the pre-packaged bankruptcy filing, these stockholders would lose their equity stakes in the company, and their shares would become worthless.
Then there are the holders of $1 billion of second-lien covenant-lite term loans. “Covenant-lite” because the debt doesn’t provide creditors the classic protections. During the credit bubble, purposefully constructed by the Fed via its zero-interest rate policy, yield-hungry investors take on just about any risk to earn a discernable yield. Borrowers gobble up the fresh cash and set the terms. And when realty hits, this “covenant-lite” debt leaves investors twisting in the wind.
Holders of these second-lien covenant-lite term loans won’t get their money back either. But their proposal to restructure the company in court and gain control over the company is beating out a competing proposal by holders of the $2.25 billion of unsecured junk bonds that are now going up in smoke.
Relatively unscathed will be a group of lenders, led by JPMorgan, which holds a $1 billion revolving line of credit. In the spring, it granted Samson a waiver for an expected covenant breach to avert default. But the group reduced the size of the revolver. Last year, the same group had already reduced the credit line down from $1.8 billion and had waived a covenant breach.
This act of gradually turning off the cash spigot, this principle by banks to whittle down the size of the loan as the company runs deeper into trouble, is what S&P Capital IQ called “Liquidity death spiral.”
It starts when the most secured lenders – banks whose regulators are softly breathing down their necks – get the willies. And it eventually ends in bankruptcy.
Just to get through the bankruptcy proceedings and keep operating, Samson needs new cash to drill into the ground. Natural gas prices are still wallowing below the cost of production, and oil prices have re-plunged, with WTI approaching $43 a barrel. At these prices, fracking remains cash-flow negative. It’s just a matter of time before the new money is gone too.
And yet, according to Bloomberg, “The company is talking with loan holders led by Silver Point Capital LP and Cerberus Capital Management LP to iron out details on a proposal that would give the company a loan of about $300 million to fund operations during Chapter 11 proceedings….”
Surely, that new $300 million loan will offer a hefty yield, and it won’t be covenant-lite, but will come with protections that prior lenders can only dream of.
If the details can’t be worked out by August 15, Samson will default on the $110 million interest payment due that day and use its 30-day grace period to continue the horse-trading with its creditors.
Samson isn’t the first natural gas producer to hit the money wall, but it’s the biggest one: Quicksilver Resources filed Chapter 11 in March, listing $2.35 billion in debts and only $1.21 billion in assets. The rest was drilled into the ground to never be seen again.
Back in March, after Samson had already threatened it might resort to bankruptcy to restructure its debt, Moody’s downgraded the company to Caa3, belatedly invoked “a high risk of default,” and pointed at the real reasons for the fiasco, “chronically low natural gas prices.”
Because fracking is expensive, and fracking profitably and in a cash-flow positive manner requires natural gas prices that are much higher than the prices that have been prevailing for the past six years since fracking took off to create the natural gas “glut.”
Industry soothsayers have claimed over the years – and some still claim – that natural gas drillers can make money at these prices due to new technologies and efficiencies. And they have fancy charts and diagrams to support their claims. They say this to attract new money so that it too can be drilled into the ground to keep the charade going for as long as possible.
But Samson and Quicksilver are proof that natural gas producers have been drilling below the cost of production for years, that they’d been bleeding cash every step along the way, and that the cash is gone for good.
This business model can last only as long as new investors are willing to bail out existing investors. Now all eyes are on other natural-gas-focused drillers, particularly Chesapeake, the second largest natural-gas driller in the US, behind Exxon, and on whether or not these drillers can continue to get fresh money to keep the charade going. When their bonds start selling off – and they have – it’s a sign that bond investors fear that banks are getting the willies and might trigger the “liquidity death spiral.”
It’s been tough for oil & gas companies and their investors. But it’s been even tougher for workers. And it’s far from over. Read… A True Jobs Massacre Spreads in US Oil & Gas