Fri 08/07/2020 07:30 AM
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Relevant Items:
Amended Plan
Revised Disclosure Statement
Link to Waterfall Model on Reorg Analysis Page

The above relevant items related to the Whiting Petroleum plan of reorganization are available only to current Americas Core Credit by Reorg clients and trialists. Please request access to continue following this and other bankruptcy filings in the Americas

Reorg has published a waterfall analysis for Whiting Petroleum’s revised plan of reorganization, which provides 97% of reorganized equity to unsecured creditors and 3% of equity plus warrants to prepetition shareholders, all subject to dilution from a management incentive plan. On June 29, the debtors filed a revised plan and disclosure statement incorporating an agreement in principle reached with prepetition RBL lenders in which lenders would receive a new exit facility and a paydown of approximately 40% of their $914.2 million claim. The DS was approved on June 30, and a confirmation hearing is set for Aug. 10.

The model calculates recoveries based on the debtors’ valuation range, which estimated the enterprise value of the reorganized debtors to be $1.35 billion to $1.75 billion, implying an EV/2021 EBITDA multiple of 4.5x to 5.8x, based on the debtors’ projected 2021 EBITDA. The model, including a waterfall and financial projections, can be downloaded HERE, and 2021 EBITDA can be adjusted on the basis of commodity price and realized spread assumptions.

Financial Projections

The company’s financial projections assume approximately $200 million of unlevered free cash flow annually from 2021 through 2025. The debtors forecast EBITDA improving to $340 million in 2025, up from $271.4 million in 2020, driven by higher commodity pricing, offset by lower production. Capital expenditures are projected to increase to $136 million in 2025 from a low of $51 million in 2021. However, capital spending in 2025 is projected to be significantly lower than the $300 million expected to be spent in 2020 and $793 million spent in 2019, leading to lower production.

The debtors’ projections and the underlying assumptions are shown below:

 

Spreads and Pipeline Shutdown

Further supporting results is the assumption that spreads relative to Nymex oil will improve to a negative differential of $4 per barrel in 2021 through 2025 from approximately $7 per barrel in 2019 and 2020. On the basis of approximately 15 Mbbl of production, the $3 improvement in spread would contribute $45 million in annual cash flow. Whiting had stated that approximately 30% to 35% of its production was shipped on the Dakota Access Pipeline.

The projections were included in the debtors’ revised DS which was filed June 29. On July 6, Judge James E. Boasberg ordered that the Dakota Access Pipeline be shut, pending an environmental review, by Aug. 5. That decision was appealed to the United States Court of Appeals for the District of Columbia, which stayed the shutdown order during the appeal process. The stay order set an expedited briefing schedule culminating with reply briefs due Sept. 30, after which oral argument, which remains to be scheduled, will be heard.

According to the motion for stay filed by the United States Army Corps of Engineers, the pipeline has capacity of over 570,000 barrels per day and is the largest pipeline running out of North Dakota. The pipeline has been in service since 2017. It is unclear what the effect would be on prices if the pipeline is forced to shut, but Bruin E&P, which filed for chapter 11 on July 16, stated in its disclosure statement that a shutdown could reduce realized oil prices by $3 to $4 per barrel. The Bruin E&P debtors said: “The Projections assume that the Debtors do not have access to DAPL and include Differentials of $9.00/bbl in Q4 2020 and $8.10/bbl in FY 2021 and for all future periods. If the Debtors had access to DAPL during the Projection Period, management estimates that this would result in lower transportation costs, decreasing Differentials to $6.13/bbl in Q4 2020 and $4.10/bbl in FY 2021 and for all future periods.”

As noted above, the pipeline entered service in 2017. Historical results, as shown below, indicate that Whiting’s spreads to benchmark oil actually widened after the pipeline entered service in 2017.

Claims and Treatment

The debtors’ capital structure at petition is shown below:

At petition, according to the CRO declaration, $1.072 billion was outstanding under the debtors’ prepetition RBL. However, according to the DS, the RBL claim totals $914.2 million. A footnote in the DS states that the RBL claim amount “accounts for certain setoffs effectuated after the Petition Date under terminated Hedging Arrangements.” At petition, the mark to market value of the debtors hedge portfolio totaled $216.7 million. The debtors add in the DS that certain hedge counterparties that were also lenders of the RBL exercised their rights to set off hedge proceeds in an aggregate amount of approximately $137.5 million “resulting in an outstanding balance under the RBL Facility of approximately $934.4 million.”

It is unclear what accounts for the difference between the outstanding balance amount of $934.4 million and the claim amount of $914.2 million.

The debtors list $89.1 million of other secured claims and $16.7 million of other priority claims, each class of which would have the choice of receiving cash or other such treatment rendering the claim unimpaired. For each, we assume the claims would receive an alternate recovery to cash, and as such these are not included in the sources and uses table or exit capital structure.

According to the DS, the general unsecured claims pool includes:

  • Notes claims;

  • Claims resulting from the rejection of executory contracts and unexpired leases; and

  • Other claims that are not secured resulting from litigation against one or more of the debtors are general unsecured claims.


The debtors provide an estimate for total GUCs of $2.579 billion in the DS, which implies $177.4 million of GUCs other than bond principal and accrued. Those claim amounts and the associated percentage of post-dilution reorganized equity that each series of unsecured notes and the non-bond GUC claims pool would receive are shown below.

In total, unsecured claims would be entitled to receive 90.8% of diluted equity after accounting for a 6.4% allocation to management. The management incentive plan provides for 7.7% of the aggregate amount of new common stock to be reserved for management, “reduced by subtracting a percentage equal to the quotient of $13.5 million divided by 7.70% of the stipulated equity value.”

Under the plan, prepetition equity would receive 3% of the new common stock, subject to dilution, and two series of warrants. Warrants-A would allow holders to purchase up to 10% of the new common stock (subject to dilution only by the New Common Stock issued pursuant to the management incentive plan), exercisable on a noncash basis for a four-year period after the effective date, in an amount equal to an implied 110% recovery to senior notes claims. Warrants-B would allow holders to purchase up to 5% of the new common stock (subject to dilution only by the MIP), exercisable on a noncash basis for a five-year period after the effective date, in an amount equal to an implied 125% recovery to senior notes claims.

A description of the reorganized equity and warrant allocation is below:

Recovery

In determining recoveries implied by the debtors’ plan, Reorg uses 2021 EBITDA and applies a range of multiples implied by the reorganized enterprise valuation range provided by Moelis, the debtors’ financial advisor. The multiples of EV to EBITDA are 4.49x to 5.81x, implied by the enterprise value range of $1.35 billion to $1.75 billion relative to $301 million of expected EBITDA in 2021.

The waterfall model allows users to adjust 2021 Nymex strip pricing and spreads relative to those prices in order to change EBITDA.

As shown below, on the basis of the debtors’ plan valuation and including dilution from the management incentive plan equity, the plan would result in recoveries of 30 cents to 45 cents for notes and between 26 cents and 38 cents per share for prepetition equity.
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