Pacific Drilling has filed for Chapter 11 bankruptcy in the Southern District of Texas. The company is, technically, registered under the laws of Luxembourg, though it has its head office in west Houston. This is the second time in three years that it has filed for bankruptcy.

The company has $1.1 billion in debt, due in 2023 and 2024. Almost 75% of the noteholders have agreed to write off all the debt in exchange for all the equity in the newly-reorganized company and an $80 million exit facility.

The company first filed for bankruptcy in November 2017.  It exited one year later. The company converted $1.85 billion of debt to $500 million of new equity. It also refinanced $1.2 billion of debt with $1 billion of loan notes that are now being written off.

The company was formed in 2006 and went public in 2011. It operates seven ultra deepwater drill ships, capable of operating in 10,000 ft of water. It currently employs 443 people around the world. At its peak in 2013, the market value of its equity was $2.7 billion.

Fleet Status

The current fleet status highlights the sorry state of affairs of the company and the drilling industry generally;

• Four of the seven ships are smart stacked.
• One is finishing a contract with Equinor/Total by early November.
• Due to Covid-19, one is operating on stand-by at 35% of the contractual dayrate, though the customer, Petronas, said the rig would resume January 1, 2021.
• One drillship is idle in the Gulf of Mexico but has a 450-day contract with Murphy Oil, commencing in the second quarter of 2021.

The declaration in support of the Chapter 11 petitions was filed by CFO James Harris. Back in June, he announced his resignation, with his last day expected to be September 14, 2020.

Other drilling bankruptcies

Other drilling contractors that have filed for bankruptcy include Noble Corporation (July 2020), Diamond Offshore (April 2020) and Valaris (August 2020).  Transocean, the biggest drilling contractor, is evaluating strategic alternatives and may yet be forced into bankruptcy by dissident bondholders.

Pacific Drilling – CFO declaration re Chapter 11

Superior Energy Services has filed for Chapter 11 bankruptcy. It expects to convert $1.3 billion of debt into equity and may split into two companies.

Superior has its head office in downtown Houston. It was recently delisted from the NYSE because its market capitalization was below $15 million. The company has two main businesses:

• Remainco : An international business involved in drill pipe rentals, bottom hole assemblies, completion tools and well control services. The business has projected revenues of $550 million.
• NAM : An onshore US business involved in service rigs coiled tubing, wireless, pressure control and fluid management. This business has projected revenues of $260 million in 2021.

Prepackaged bankruptcy agreement

The company has the support of 69% of the company’s senior unsecured noteholders. The noteholders have the right to decide whether or not to split the company into two. If they do, they would get 98.5% of the equity of Remainco and 95% of the equity of NAM. Existing shareholders will get the rest, though a management incentive plan will be put in place. This will dilute the percentages a little bit.

Back in December 2019, Superior announced the merger of its US completions business with Forbes Energy Services, with the combined entity to be spun off. The deal was called off in May due to deteriorating market conditions.

As part of the bankruptcy proceedings, the Board of Directors has agreed pay $7.3 million in retention bonuses to the six executive officers of the company. CEO David Dunlap gets $3.2 million, while CFO Westy Ballard gets $1.1 million.

Retention Plan

In March, Mr Dunlap got an annual cash bonus of $0.9 million. He also got an additional payout of $1.275 million, in cash, for performance stock units (PSU) for the period 2017-2019. This payout was primarily due to Superior being in the top 17% of total stockholder returns of its peer group, over that three year period.  Mr Ballard got a $346,000 annual bonus and $300,000 for the PSUs.

Complete Production Services

The company’s debt problem stems all the way back to October 2011 when it agreed to buy Complete Production Services for $2.9 billion. It paid $553 million in cash and issued stock for the rest. As part of the deal financing, in December 2011, it issued $800 million of unsecured senior notes, due 2021, to repay $650 million of debt that Complete owed. The other $500 million of notes were also, effectively, issued in 2011, though they were refinanced in 2017.

The $2.9 billion price for Complete Production Services included $2.3 billion in goodwill and intangibles. In 2015, the company wrote goodwill down by $1.3 billion. By 2018, all the goodwill had been written off.

Mr Dunlap became CEO of Superior 18 months before the deal with Complete Production Services.

SEC filing – Superior bankruptcy

Noble Corporation has filed for Chapter 11 bankruptcy in the Southern District of Texas. Technically, the company has its head office in London, but, operationally, the company is run from its Sugar Land offices.

Noble has a fleet of 12 drillships and semisubmersibles and 12 jackup rigs, largely focused on ultra deepwater. Of the 12 floaters, five are cold-stacked while four of the jackup rigs are warm-stacked. [Warm-stack means the rig is in port with a crew ready to go, cold-stack means the rig is being stored at minimum expense].

Agreement with Bondholders

Noble has agreement with two ad hoc groups of the largest bondholders. Combined, they represent about 50% of $3.4 billion of unsecured debt outstanding. They need to get approval from two-thirds of the bondholders for the plan to be effective.

Under the proposed plan, the unsecured debt will be cancelled and exchanged for, effectively, 86% of the equity in the reorganized company. The bondholder have also agreed to invest $200 million of new capital in the form of new second lien notes. 10% of the new equity will be reserved for a management incentive plan. Existing shareholders will get 4% of the new equity.

A new $675 million secured revolving credit facility will also be provided by the current syndicate of credit facility lenders. The borrowings on the current facility are $550 million.

Unsecured trade creditors will be paid in full.

CEO and CFO transition

In February, Noble promoted Robert Eifler from Senior VP, Commercial to CEO, replacing Julie Robertson, who became Executive Chairman. Unusually, Ms Robertson (who has been with the company since 1979) got a lump sum payment of $3.75 million as part of the transition, even though she wasn’t leaving the company.

That CEO transition promptly triggered a CFO transition. Stephen Butz, who had only joined the company in December 2019, resigned in March. He got to keep $450,000 of his $1.1 million sign-on bonus. Mr Butz had replaced Adam Peakes who had left in September 2019 with a $1 million severance.

The current CFO is Richard Barker, who joined from Moelis & Company, an investment bank. He was awarded cash retention bonuses of $725,000 and $575,000, to be paid in December 2020 and December 2021 respectively.

SEC filing – Noble Corp bankruptcy

BJ Services, which has its head office in Tomball, TX has filed for Chapter 11 bankruptcy. There is no pre-packaged plan in place. If agreement can’t be reached with the lenders in the next few days, the company may have to liquidate. The company has laid off 800 employees since March and a further 1,250 jobs are at risk.

BJ Services currently operates 42 pressure pumping fleets (2.1 million hydraulic horsepower) and 180 cementing pumps.

History of the company

The company has one of the most well-known brand names in oilfield services. Byron Jackson, an inventory of pumps for farmers and miners in California, founded the original company in 1872. Hughes Tool acquired the company in 1974. Hughes merged with Baker International to form Baker Hughes in 1987. In 1990 Baker Hughes spun off BJ Services into a public company only to acquire it again in 2010 in a $5.5 billion transaction.

The current incarnation was created in November 2016 when Baker Hughes contributed its pressure pumping assets into a new joint venture with Allied Completion Holdings, another pressure pumping company that is backed by CSL, a private equity firm based in Houston.  Baker Hughes ended up owning 47% of the joint venture and its share was valued at $566 million. That investment has been written down to zero due to losses incurred by BJ since 2016.

BJ Services filed for an Initial Public Offering in June 2017 though at the time the company was losing money, even at the EBITDA level. It never completed its offering and eventually withdrew its registration statement in March 2019.

Current debt load

BJ Services currently has $357 million of debt. This comprises $102 million of an asset-based loan, $190 million in equipment term loans and $65 million for real estate term loans. These loans are held by different lender groups.

The drastic downturn in drilling and completions caused by the collapse in oil prices in March 2020 caused the company to engage Kirkland & Ellis and PJT Partners as restructuring partners.

CSL offered to invest an additional $75 million in new-money in exchange for the vast majority of the equity in the reorganized company. However, the deal was contingent on generating $120 million from the sale or liquidation of certain non-core assets. That money would go to the equipment lenders.

The company also expected to sell the cementing business for $30 million or more, on a going-concern basis.  On the pressure pumping side, CSL has bid for 3 of the 42 frac fleets on a going-concern basis. CSL has also offered to buy the research and development for the next generation of pressure pumping units.

Proposed deals fall through

The proposed deals fell through because the company, CSL and the various lenders couldn’t agree on terms of the proposed write-downs to be shared by the parties and how the businesses being sold would be funded on a going-concern basis. Given the potential conflicts that CSL has and that the equipment lenders have collateral in the pressure pumping and cementation fleets but not in the R&D, I am not surprised.

The company is trying to get all parties to agree a reorganization plan in the next 7 days. If not, the company may not have funds to operate on a going-concern basis and may be forced to liquidate its assets in an orderly wind-down.

Declaration by BJ Services CEO in support of Chapter 11 filing

Hi-Crush, a frac sand supplier, has filed for Chapter 11 bankruptcy. The company, which is based in the Galleria, has been hard hit by the downtown in completion activity following the COVID-19 pandemic.

It’s a pre-packaged bankruptcy as the company has agreement of 94% of the senior unsecured noteholders. The main terms are;

• $450 million senior loan noteholders get 100% of the new common stock to be issued by the company.
• Existing shareholders will be wiped out
• There will be a $43.3 million rights offering whereby existing noteholders and other eligible holders of unsecured claims will be granted rights to purchase new secured convertible notes.
• Debtor-in-financing facilities including a $25 million asset-based revolving loan facility and a $40 million delayed-draw term loan. The latter will convert into new senior secured convertible notes upon exit from Chapter 11.

Retention Bonuses

Of course, it’s not a Energy bankruptcy without retention bonuses for senior management.  These were paid on Friday 10 July. CEO Robert Rasmus got a $1.35 million retention payment (more than 2x base salary), COO Michael Oehlert was paid $693,750 while General Counsel Mark Skolos got $552,750.  CFO Phil McCormick got a $360,000 bonus. This replaces the $250,000 retention bonus that was promised when Mr McCormick promoted to the CFO position in December 2019.

The bonuses will be considered earned and therefore not repayable once the company exits Chapter 11.  That is expected within 60 to 90 days. The executives are not eligible for any annual bonus in 2020.

$2.5 billion market cap in 2014

Hi-Crush went public in 2012 and, initially, was primarily a supplier of ‘Northern White’ sand from Wisconsin, a premium sand used in fracking. The company had a peak market capitalization of over $2.5 billion in the middle of 2014. In recent years, E&P operators began seeking cheaper alternatives and the company made acquisitions of mines in the Permian Basin.

The company was originally a limited partnership before converting to a C-Corp in 2019. However a partnership structure is not ideal when the underlying business is so volatile.

Excessive distributions

The company paid out $82 million in distributions in 2017 and $167 million in 2018. These figures approximate to net income for those years. However the company also had heavy capital expenditures in each of those years of about $100 million in excess of the depreciation charge. The large cash outflow was funded by an additional $250 million in debt, at 9.5% interest, in 2018.

Even though that debt was not due to be repaid until 2026, the debt burden was too much for the company to bear.

SEC filing – Hi-Crush bankruptcy