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Sunday, October 25, 2020

C&J ENERGY SRV LTD COM USD0.01 (OTCMKTS:CJESQ) – Seeing the Silver Lining

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C&J ENERGY SRV LTD COM USD0.01 (OTCMKTS:CJESQ) is another voluntary restructuring play in the oil patch that has lately been trying to make a comeback as money flows back into the space. The stock looks to have exhausted its supply of bankruptcy-related sellers and then started back higher.

We often see this process unfold when there is a clear train of specific bad news coming down the track for a company. The big selling generally comes in anticipation. Then, once the train hits, we have a dump and a sideways range, and then a large price squeeze. CJESQ is going through this now. And today’s announcement by OPEC of a coming production cut for major oil exporters will quite possibly foment the situation.

C&J ENERGY SRV LTD COM USD0.01 (OTCMKTS:CJESQ) trumpets itself as a completion and production services play in the oil and gas industry primarily in North America.

The company provides well construction, well completions, well support, and other oilfield services to oil and gas exploration and production companies. It operates in three segments: Completion Services, Well Support Services, and Other Services.

The Completion Services segment provides hydraulic fracturing, coiled tubing, cased-hole wireline, and other well stimulation services, including nitrogen, pressure pumping, and thru-tubing services.

The Well Support segment offers rig services, such as providing workover and well servicing rigs that are involved in repair and maintenance, completions, re-drilling, and plug and abandonment operations; fluid management services comprising manufacturing, transportation, storage, and disposal services for fluids used in the drilling, completion, and workover of oil and gas wells; and other well site services.

The Other Services segment provides cementing, directional drilling, equipment manufacturing, specialty chemical supply, and research and technology.

The company operates in oil and natural gas producing regions of the continental United States and Western Canada. C&J Energy Services, Ltd. was founded in 1997 and is headquartered in Houston, Texas. C&J Energy Services, Ltd. is a subsidiary of Nabors Industries Ltd.

As noted above, on July 20, 2016, C&J Energy Services, Ltd. filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas. It is in joint administration with Nabors Industries Ltd.

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As with any restructuring, the devil is firmly in the details. So let’s dig in.

According to the Company’s filings and presentations, certain of the Supporting Lenders have agreed to provide an equity rights offering for an investment in the Company in an amount of up to $200 million as part of the approved Restructuring Plan.

The Company also negotiated a superpriority secured delayed draw term loan facility in an aggregate principal amount of up to $100 million (DIP facility)

On July 29, 2016, CJESQ entered into a superpriority secured debtor-in-possession credit agreement, among the Debtors, the DIP Lenders and Cortland Capital Market Services LLC, as Administrative Agent (the “DIP Credit Agreement”), which sets forth the terms and conditions of the DIP Facility.

But, perhaps this is the most important part: Subject to the conditions set forth in the Restructuring Support Agreement, the Company or the reorganized Company, as applicable, intends to raise up to $100 million through a senior secured revolving asset-based lending credit facility to be arranged and provided by one or more commercial lending institutions. Provided that investment produces a strong return in the core business, an exit from the Chapter 11 can potentially be managed without wiping out the equity entirely.

However, there will be significant dilution. For example, under the Restructuring Plan, the Company will issue 7-year warrants convertible into up to 6% of New Equity at a strike price of $1.55 billion to holders of C&J common equity, provided that such class of holders votes to accept the Restructuring Plan.

As always, the disclaimers are a critical reminder: “The Restructuring Plan and any other proposed Chapter 11 plan could result in holders of certain liabilities and/or securities, including common shares, receiving no distribution on account of their interests. Because of such possibilities, there is significant uncertainty regarding the value of the Company’s liabilities and securities, including its common shares.”

OPEC’s production cut agreement out this week may help to foster some new hope here for legacy equity stakeholders. The commodity itself is still the primary obstacle.

At this time, CJESQ has a battle in front of it, but not a hopeless one. A dive in sales last quarter of over 50% is not the best start on the road to winning that battle. But this is still a significant player in the space, and further strength in the oil recovery could flip the script on this one. Please use very conservative judgment as there is still significant risk that the equity is not at all recoverable. But, as far as Chapter 11 cases go, we’ve seen a whole lot worse. We will be updating this one as events dictate. For continuing coverage on $CJESQ and our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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