Denbury Resources (NYSE: DNR) appears poised for another energy bankruptcy after failing to pay $8 million in interest on June 30 for its 6.375% convertible senior bonds due 2024.

With $636 million in debt maturing in 2021, Denbury had little opportunity to escape restructuring, especially with oil still around $40. The restructuring will likely result in substantially all (if not all) of its new equity going to its junior bondholders. Denbury appears to be in relatively good shape after the restructuring, as it has only a modest amount of debt related to the credit facilities and its estimated breakeven point would be reduced to about $45 of WTI oil after the elimination of most of its interest costs.

Denbury’s current common share would be worth at best a few cents per share after restructuring and has a high probability of being worthless.

The Denbury Credit Facility

Denbury’s credit facility is in relatively good shape. The borrowing base for its credit facility was reaffirmed at $615 million on June 26, although there is a temporary borrowing limit of $275 million plus up to $100 million in outstanding letters of credit. This limit is in place until the borrowing base is redefined in the fall of 2020 and appears to be an attempt to prevent Denbury from over-borrowing under its credit facility prior to its restructuring.

Denbury subsequently drew $200 million on its credit facility on June 29, resulting in $265 million in borrowings outstanding. The additional $200 million in cash is expected to allow Denbury to complete the restructuring without the need for additional DIP financing. Due to the relatively small amount of debt under the credit facility (net of cash), Denbury likely does not need to seek new money to repay this debt.

Overall debt position

Denbury now has $265 million of debt under the credit facility, as well as $200 million of newly raised cash and a working capital deficiency of $29 million as of the end of the first quarter of 2020 (excluding derivatives and current long-term debt maturities).

Denbury also has $164 million of pipeline financing debt that I assume will remain as is through the restructuring.

Other long-term debt consists primarily of its Senior Notes, which represent 76% of its long-term debt.

 

Millions of dollars
Second level notes $1,593
Convertible notes $246
Subordinated Notes $245
Total $2,084

 

Given both the significant maturity size of the Senior Notes and their senior position in the capital structure, the Senior Notes are expected to represent substantially all (more than 95%) of the New Denbury Shares.

Recoveries for the lower tiers in the capital structure are likely to consist primarily of warrants with exercise prices equivalent to a full recovery of the Senior Notes.

Notes to the Balance Sheet

With minimal interest costs in the future, it appears that Denbury could break even while maintaining production at about $45 of WTI oil. In this case, Denbury may need $40 WTI oil to be able to devote funds to its CCA project.

Denbury’s breakeven point after restructuring would be significantly improved by eliminating most of its interest costs. The estimated reduction in interest costs would reduce Denbury’s breakeven point by approximately $10.

Conclusion

Denbury Resources appears very likely to restructure after skipping a small $8 million interest payment on its convertible bonds. It also drew $200 million on its credit facility just before skipping that payment to give itself a large amount of cash to complete the restructuring process.

Denbury’s restructuring is expected to result in the senior notes becoming substantially all of Denbury’s new equity. Denbury would be relatively healthy after the restructuring, with only a modest amount of debt financing through the credit facility and pipeline. Lower interest costs would reduce the estimated oil break-even point to approximately $45 of WTI oil.

The Denbury common shares are a sale at current levels. As part of the restructuring, the Company’s current equity is expected to receive between 0% and 3% new equity (0% being a significant probability). The receipt of 3% new equity would result in its current shares being worth approximately $0.04 per share.

 

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Disclosure: I/we have no position on the actions mentioned and I/we do not plan to take any action within 72 hours. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

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2020-07-04